May An Order Dismissing A Stay Motion Be Appealed?

In Canada, there has been a controversy about appeals from stay motion decisions in the context of arbitration clauses.  The issue is whether a decision of a motion judge denying the stay of an action, when the moving party relies on an arbitration agreement, may be appealed to the Court of Appeal. The controversy arises from a sub-section found in the Uniform Arbitration Act drafted by the Uniform Law Conference of Canada and adopted in many Canadian provinces.

In Hopkins v. Ventura Custom Homes Ltd., the Manitoba Court of Appeal has recently held that such a motion judge’s decision may be appealed if that decision is based upon the motion judge finding that arbitration agreement does not apply to the dispute. This decision is consistent with earlier decisions of the Courts of Appeal of New Brunswick, Ontario and Alberta. These decisions appear to now consistently hold that an appeal is not statutorily barred if the motion judge’s decision to deny the stay is based upon a determination that the arbi

What Is The Priority Between Building Mortgages And Construction Liens In Respect Of Holdback Amounts Greater Than The Statutory Holdback?

The priorities between lienholders and mortgagees under the Construction Lien Act are not easy to understand.  They are even more difficult to understand and apply when the owner holds back more than the statutory minimum, and when the liens are discharged by security provided by the owner or mortgagee.

Under sub-section 44(1) of the Act, the court shall discharge the lien upon the payment into court or the provision of security of the full amount claimed as owing in the claim for lien, and the lesser of $50,000 or 25 per cent of the amount of the claim as security for costs. Under sub-section 44(2), the court may vacate the lien upon the payment into court or provision of security in a reasonable amount.

If the liens are vacated upon payment of the full amount of the liens, who is entitled to the difference between that amount and the 10 percent statutory minimum holdback?  Recently, in Basic Drywall Inc. v. 1539304 Ontario Inc. (Receiver of), the Ontario Divisional Court held that the mortgagee had priority to that disputed amount. The decision raises three important questions relating to the Ontario Construction Lien Act:

  • the priorities established in Section 78
  • the lien notice provisions in Sections 24 and 78
  • and the vacation of lien provisions in Section 44

Background

Basic was a subcontractor on the project and had not been paid. It registered a lien for $312, 859. The amount and timeliness of the lien was not disputed.  Other subcontractors also registered liens. When Basic’s lien was registered, the owner owed the general contractor about $276,000 and this amount was never paid. The work was certified as complete.

ICICI Bank Canada provided the mortgage financing for the project. Its mortgage was what is commonly called a “building mortgage”, and is dealt with under sub-section 78(2) of the Act.   The bank posted letters of credit to vacate the liens of Basic and other lienholders.  The Bank agreed that the amount of work certified as complete was about $506,000.  The Bank asserted that the 10 percent holdback that the owner should have maintained was, therefore, about $50,600. The owner had in fact not paid the contractor a much larger amount.

The issue in the case was this:  what amount was available for distribution to the lienholders out of the security provided by the Bank to discharge the liens?  Were the lienholders correct in asserting that $276,000 should be distributed to the lienholders, being the total amount owing by the owner to the general contractor? Or was the Bank correct in asserting that the lienholders were only entitled to $50,600, being the statutory holdback arrived at by applying 10 percent to the amount or work certified as complete? If it was the latter amount, then the Bank was entitled to the disputed amount, being the difference between the two figures, out of the security it had provided to discharge the liens.

The Decision

The Ontario Divisional Court agreed with the Bank.  It held that the lienholders were only entitled to the amount of the statutory holdback. It arrived at that conclusion for three reasons.

First, it held that no notice of any additional lien claim, over the statutory amount, had been given by the lienholders to the owner under section 24 of the Act.  So that section could not enlarge the lienholders’ rights. In any event, section 24 only applied to a “payer” and the Bank was not a payer, and therefore it was not governed by section 24.

Second, the posting of security by the Bank could neither increase nor diminish the rights of the parties, except to the extent that the Act specifically said so.  But section 44(6) of the Act, the court found, specifically said that that upon payment into court or the provision of security, the owner “shall be in the same position as if the lien had not been preserved or written notice of the lien had not been given.”  The court held that the effect of those words was that the “posting security removes ‘notice holdbacks’ as security for lien claimants by the specific language of s. 44(6).”  The court concluded by saying that “the specific language of s. 44(6) restricts an owner’s ‘notice holdback’ obligation from being extended to the posted security.”

Third, the issue between the parties was “a priority dispute.”  The court heldd that “under section 78(2) of the Act, ICICI, as mortgagee, has priority over all but the 10 per cent holdback of $50, 596.98.”

Discussion

This decision deals with a number of important principles in the Act, most particularly the operation of the priority code established in section 78 of the Act, the role of notice of lien to the owner or mortgagee and the effect of vacating a lien upon the provision of security.

Section 78(2)

The first question relates to the proper interpretation and effect of sub-section 78(2) of the Act. That sub-section states as follows:

“Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage …to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV… “

On its face, that sub-section does not create rights for the mortgagee. It creates a specific right for lienholders. That right is to priority over building mortgages (that is, mortgages taken out to “secure the financing” of the improvement). That right is presumably given to lienholders as against building mortgagees because building mortgagees are akin in interest to the owner and are providing financing for the improvement, knowing that lienholders’ rights will be created by that improvement. In other words, building mortgagees are not like other mortgagees who are loaning based on the value of the land and the strength of the mortgagor’s covenant, and may be totally unconcerned as to whether a building is being built and lien rights are being created. Building mortgagees are loaning with the very expectation that lien rights will be created with the monies they are advancing and the Act contemplates that they should ensure that owners maintain the statutory holdback when the mortgage advances are being made. So their rights, unlike other mortgagees’ rights, are always subject to the statutory holdback provision.

Sub-section 78(1) of the Act provides further context for sub-section 78(2). Sub-section (1) states as follows:

“Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.”

So sub-section 78(1) states the premise for the whole priority code set out in section 78.  That premise is that lienholders have priority unless section 78 states otherwise.  Mortgagees must find their priority in section 78.  Sub-sections 78(3) to (8) do create specific priorities for mortgagees. But otherwise, sub-section (1) says that lienholders have priority.

The Bank’s argument was that the word “only” should be read into section 78(2), so that it would read that the lienholders’ priority over the mortgage would be “…only to the extent of any deficiency in the holdback required to be maintained.”  In effect, the court agreed with that submission because it held that “under s. 78(2) of the Act, ICICI, as mortgagee, has priority over all but the 10 percent holdback…”  The present question is whether that is the proper interpretation of that sub-section.

Sub-section 78(2) does not explicitly establish any rights in the building mortgagee.  It creates rights for lienholders that do not exist against other mortgagees. Interpreting the sub-section as the Divisional Court’s has done creates better rights for building mortgagees than other mortgagees, limiting their maximum exposure to the statutory holdback  when, at least on its face, the subsection sets a minimum exposure to the statutory holdback (presumably so that building mortgagees will ensure that owners maintain that holdback).  Is the inference of rights in favour of the mortgagee reasonable in those circumstances?

The Notice Provisions in the Act:  Sections 24 and 78

The second question relates to the proper interpretation of the notice provisions in the Act.

As the Divisional Court indicated, section 24 permits a lienholder to give notice of its lien to the owner.  If that notice is given, then the owner may no longer pay out 90 percent of the amounts due to the contractor. The Divisional Court said that if lienholders give such notice then “the lien claimant has security against the owner’s interest in the land to the full extent of the amount the owner, as payer, owes to the general contractor.”  The Divisional Court reasoned that the lienholders had not given notice to the owner of their claim but that “there is no time limit in the Act for giving written notice of a lien to an owner, so any notice before actual payment would suffice to create security against the full unpaid amount vis-a vis the owner.”  However, the court said that the Bank was not a “payer” so section 24 did not apply.

The present question is whether the provisions in section 24 of the Act relating to notice to the owner have any application to the priority issues between mortgagees and lienholders arising under section 78 of the Act. Sub-section 78(1) says that, if the mortgagee is to find any priority, it must find it in section 78. There is specific reference in section 78 to a mortgagee’s priority relating to notice given by leinholders and it is set out in sub-sections 78(4) and (6).   Those sub-sections refer to written notice of a lien to “the person making the advance.”  Absent such a notice to the Bank – and there does not appear to have been any – the Bank might well have been entitled to priority. But determining whether the Bank did have priority would require the application of sub-sections 78(4)-(8), not sub-section 78(2) and not section 24 relating to notice to the owner.    Whether the Bank had priority under sub-sections 78(4) and (6) would have depended upon a number of additional facts besides whether notice of the liens was given to the Bank.  Those facts would have included whether the mortgage was registered before the first lien arose or whether the mortgage advances were made before the time that the first lien arose or was registered. None of those facts were considered by the Divisional Court.

In effect, the priority section, section 78, has its own notice provisions.  Those provisions require the lien claimant to notify the mortgagee making the advance, not the owner.  Unless those provisions afford the mortgagee priority, the lienholders have priority. The notice provisions in section 24 apply to the owner and payments by the owner, not to the mortgagee and the payment of advances made by the mortgagee.  The present question is whether  the Divisional Court was correct in inferring into section 78 the notice provisions is section 24, and then using the absence of notice to the owner to find a priority for the mortgagee through sub-section 78(2).

Vacation of Lien under Section 44

The third issue relates to the effect of the vacation of liens upon the granting of security under section 44 of the Act. The Divisional Court appears to have found that, upon such a vacation of lien occurring, sub-section 44(6) has the effect of putting the lienholders in a position as if they had never filed a lien and never given notice of a lien.  That interpretation raises questions about the efficacy of section 44.

The Divisional Court focused on the words in sub-section 44(6) stating that the owner “shall be in the same position as if the lien had not been preserved or written notice of the lien had not been given.” From these words, the court concluded that “posting security removed the ‘notice holdback’ as security for lien claimants.”  If posting security had that effect, then it is hard to see why it would not have the same effect on the lien itself since sub-section 44(6) refers to both.

The words in sub-section 44(6) should be carefully examined to determine whether the Divisional Court’s interpretation is the intended one.  That sub-section states that upon security being given and the lien being discharged:

“…..the lien ceases to attach to the premises and ceases to attach to the holdbacks and other amounts subject to a charge under section 21, and becomes instead a charge upon the amount paid into court or security posted, and the owner or payer shall, in respect of the operation of sections 21, 23 and 24, be in the same position as if the lien had not been preserved or written notice of the lien had not been given.” (emphasis added)

This sub-section has repeatedly been interpreted to mean that the posting of security does not enlarge the rights of lienholders or give them rights of recovery that they did not have against the land itself. All the sub-section does is replace the land with the security or monies in court.

If this is so, the present question is whether the sub-section should be read to diminish the rights of lienholders in the security or monies in court. What could be the reasons for such a conclusion? Section 46 is an aid to the owner or mortgagee, to allow liens to be vacated by paying into court or providing security, so the job can be completed.  Why would lienholders agree to an order vacating their liens upon the provision of security, and why would the court so order, if that order diminishes the lienholders’ priority as against the mortgagee?

Sub-section 44(6) only refers to the rights of the “owner or payer”.  It does not refer to the lienholders. It does not say that the lienholders rights are diminished at all, and does not state that the lienholders’ rights are to be determined as if the lien had not been preserved or notice of the lien had been given.  Nor does sub-section 44(6) refer to mortgagees or to section 78. It does not say that the priority rights established in section 78 do not apply after a lien has been vacated and security has been provided.  Should sub-section 44(6) be interpreted to affect the rights of lienholders and mortgagees when those rights are not mentioned in the sub-section?

Also, sub-section 44(6) says that the owner or payer shall in respect of the operation of section 21, 23 and 24 be in the same position as if the lien had not been preserved or notice of lien not given. Those underlined word appears to mean that, so far as the obligations of the  owner or payer are concerned and since the liens claims are now secured by the monies in court or other security, the lien is no longer a charge against the holdback  (section 21), the owner is not personally liable for those secured amounts (section 23), and the owner  need not retain monies (under section 24) and can resume payment of the contractor.  Can those words be inferred to affect other rights, and in particular the priority rights in section 78?

These sections of the Act relating to priority, notice of lien claims and vacating of liens are some of the most important sections in the Act. It is to be hoped that the three questions raised in the Basic Drywall decision will be given further consideration by the courts in the near future.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 13, parts 2(g) and (h)

Basic Drywall Inc. v. 1539304 Ontario Inc. (Receiver of) (2013), 114 O.R. (3d) 219 (Div.Ct.)

Building Contracts  –  Construction and Builder Liens  –  Hold-back  –  Priorities  – Notice of Lien – Mortgages -Vacating Liens

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                           July 3, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can A Lien Be Sheltered Under A Claim By A Lienholder Further Down The Supply Chain?

 

The sheltering rights under the Construction Lien Act are fundamental protections for contractors, subcontractors and suppliers on a building project. But the definitions of what circumstances give rise to protected sheltering are somewhat vague.  One question is whether the liens of “superior” contractors or suppliers can shelter under an action commenced by an “inferior” contractor. In other words, when a contractor hires a subcontractor or supplier, can the contractor shelter its lien under the claim of the subcontractor or supplier? It may seem odd that the word “shelter” could apply to a contractor in relation to a subcontractor hired by the contractor, and that the subcontractor’s lien could provide shelter for the contractor’s lien. But that was recently held to be valid sheltering in the decision of Master Wiebe of the Ontario Superior Court of Justice in The State Group Inc. v. Quebecor World Inc. and 4307046 Canada Inc.

Background

The applicant, Kemp was a contractor on a project in which 4307046 was the owner. The project included a modification of an existing building and the construction of a new building.  The project was an owner-supervised project in which Kemp acted as a sort of general contractor and supervised other contractors, including Cee Elevator Services Ltd. (“Cee”) and George and Asmussen Limited (“GAL”).

Kemp sought to shelter its lien upon the perfected liens of Cee and GAL. The 90 day period for the perfection of the Kemp lien started to run on January 15, 2008.  So a lien which was perfected between January 15, 2008 and April 15, 2008 in relation to the same lands could potentially shelter the Kemp lien.  The purported perfection of the Cee and GAL liens took place within this time period. So those liens could potentially shelter the Kemp lien.

Reasons of the Court

Master Wiebe said that under section 36 of the Ontario Construction Lien Act the work of the lienholder (being Kemp) seeking to shelter its lien must be in respect to the same alterations, additions and repairs as the work of the lienholders, being Cee and GAL, under whose claim Kemp sought to shelter. The court also noted the Act does not require that “the work of the sheltering liens was in fact connected to the work of the sheltered lien.”  In the court’s view, such a requirement “smacks too much” of the proposition that sheltering must be “vertical”, a proposition which was essentially overturned by the Divisional Court in Sesco Ltd. v. Life Centre Non-Profit Housing Corp. (Ajax), (1998) 37 O.R. (3d) 764, 38 C.L.R. (2d) 66 (Div. Ct.; leave to appeal dismissed 1998 Carswell Ont 1430) (“Sesco”) . There is no need to establish a commonality of “services and materials,” as long as the work was “in respect of the same improvement.”   Master Wiebe said:

“I do not see how a party that supervises the work of the lien claimants under whose liens it purports to shelter can be doing its work on anything other than the same improvement.  To rule otherwise, would lead to the rather bizarre conclusion that the supervision of the work is somehow divorced from the work that is supervised to such an extent as to render them separate improvements.  This is not how the CLA section 36(4) was meant to be interpreted.”

Comments

Section 36(4) (b) of the Ontario Construction Lien Act states that a “sheltered claim for lien is perfected only as to the defendants and the nature of the relief claimed in the statement of claim under which it is sheltered.”  In Sesco, at first instance, Justice Ferguson held that the practical effect of second part of clause (b) was that the claim in the sheltering lien action had to refer to work claimed in the lien seeking to be sheltered.  He held that a lien could not be sheltered under a lien claim in another chain of work and payment on the project (which was the situation in Sesco), at least when that lien claim made no claim in respect of the work referred to in the lien sought to be sheltered.

In that decision, Justice Ferguson said:

 “I agree…that for practical purposes a lien seeking shelter can probably find it only under a perfected lien advanced by someone higher in the same payment stream.”  (emphasis added)

With Justice Ferguson’s decision having been over-turned, the court in State Group v Quebecor has now found that a circumstance is covered under the sheltering section which Justice Ferguson thought would not be covered, namely the sheltering by a higher lienholder under a lienholder’s claim lower in the payment scheme. So, not only is it not necessary that the sheltered lien be in the same payment stream as the sheltering claim (as held in Sesco).  In addition, within the same payment stream a lower claim can provide shelter for a higher lien.

As a result, the remedial reading of the Act in Sesco has resulted in much broader application of the sheltering provisions of the Ontario Act.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 11, part 2(f)

The State Group Inc. v. Quebecor World Inc. and 4307046 Canada Inc. 2013 ONSC 2277, 2013 CanLII 19660 (ON SC).

Building Contracts  –  Construction and Builders Liens  –  Validity of liens  –  Sheltering

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                               June 25, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

When Does An Arbitration Clause Require Arbitration?

Whether an arbitration agreement requires, or only permits, arbitration is a continuing issue under arbitration law. In building contracts, this issue often arises when the agreement states that arbitration will follow mediation or the involvement of the consultant on the project. The questions that can arise is whether arbitration is mandatory if mediation or the consultant’s involvement does not occur.

This issue was recently considered by the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v HOOPP Realty Inc.  In that case, the Alberta Court of Queen’s Bench had concluded that, since the dispute had not been dealt with by the consultant, the parties could proceed to litigation in court, and that arbitration was not mandatory. The Court of Appeal reversed and held that arbitration was mandatory.

The dispute resolution clause in question was a variant of that found in one of the standard forms of building contract used in the Canadian construction industry, namely, the CCDC 2 Stipulated Price contract.  Accordingly, the Alberta Court of Appeal’s decision provides important insight into when and whether a dispute resolution clause similar to that found in the CCDC documents will be held to be mandatory or permissive.

Background

In 1999, Clark Builders and HOOPP had entered into a Design-Build Agreement. Under that agreement, Clark was to design and build a warehouse for HOOPP, the owner. The warehouse was built in 1999 and 2000. As a result of alleged deficiencies in construction, HOOPP commenced an action against Clark in 2002 alleging breach of contract and negligence.

Clark brought a motion to stay the action and require the claim to be dealt with by arbitration. The judge hearing the motion held that the dispute resolution clause in the agreement did not mandate arbitration, and so he dismissed Clark’s motion, and Clark appealed.

The dispute resolution clause in the building contract followed, to some extent, the wording in the standard form CCDC 2 Stipulated Price Contract.  The clause in the contract stated as follows (with less relevant portions excluded, and the most relevant portions emphasized):

 Part 8 Dispute Resolution

GC 8.1 AUTHORITY OF THE CONSULTANT

8.1.1.  Differences between the parties to the Contract as to the interpretation, application, or administration of the Contract or any failure to agree where agreement between the parties is called for, collectively referred to as disputes, which are not resolved in the first instance by findings of the Consultant as provided in GC 2.1 – CONSULTANT, shall be settled in accordance with the requirements of Part 8 of the General Conditions – DISPUTE RESOLUTION. . . .

GC 8.2 NEGOTIATION, MEDIATION AND ARBITRATION. . .

8.2.3 The parties shall make all reasonable efforts to resolve their disputes by amicable negotiations and agree to provide, without prejudice, frank, candid and timely disclosure of relevant facts, information and documents to facilitate these negotiations.

8.2.4 After a period of 10 Working Days following receipt of a responding parties notice in writing of reply under paragraph 8.2.2, the parties shall request the Project Mediator to assist the parties to reach agreement on any unresolved disputes. The mediated negotiations shall be conducted in accordance with the latest edition of the Rules for Mediation of Construction Disputes …

8.2.5 If the dispute has not been resolved within ten (10) Working Days after the appointment of the Project Mediator either party may by notice to the other withdraw from the mediation process.

8.2.6 All disputes, claims and differences not settled as herein provided, arising out of or in connection with the Contract or in respect of any defined legal relationship associated with it or derived from it, shall be referred to and finally resolved by arbitration in accordance with the Alberta Arbitration Act. … [emphasis added]

During negotiation, the parties had discussed a form of dispute resolution clause that read as follows:

8.2.6 By giving notice in writing to the other party, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.5, either party may refer the dispute to be finally resolved by arbitration … .

8.2.7 On expiration of the 10 Working Days, the arbitration agreement under paragraph 8.2.6 is not binding on the parties and, if a notice is not given under paragraph 8.2.6 within the required time, the parties may refer the unresolved dispute to the courts or to any other form of dispute resolution, including arbitration, which they have agreed to use. [emphasis added]

Those familiar with the CCDC 2 Stipulated Price Contract will recognize the latter wording as coming from General Condition 8.2 of that contract.

The Courts’ Decisions

The judge hearing the motion held that Part 8 of the agreement set out a series of steps which must be followed before the arbitration clause became applicable or mandatory. He found that only those disputes “which are not resolved in the first instance by findings of the Consultant” could proceed to the next steps in the process. Since the parties had not referred the dispute to the consultant, the judge held that the arbitration procedure had not been invoked and was not mandatory.

The Court of Appeal disagreed for two reasons:

First, that court found that the wording of Articles 8.1.1 and 8.2.6 were clear and required arbitration whether or not the parties had referred the dispute to the consultant. Article 8 contained a complete dispute resolution regime which did not require either party to refer the dispute to the consultant for it to be applicable.

Second, the Court of Appeal looked at the drafts of Article 8 and held that those drafts demonstrated that the parties had contemplated a permissive arbitration regime and had discarded it in favour of a mandatory regime.  The court held that:

The notion of “Dispute Resolution” could, of course, encompass litigation, as was evident in the original form of the Agreement. The deliberate decision of the parties to remove reference to litigation from the dispute resolution provisions of the Agreement emphasizes that their mutual intention at the time of drafting was to refer disputes to arbitration rather than proceed to litigation. HOOPP’s current position, that it is entitled to bypass arbitration in favour of litigation, is coloured by that earlier decision.

The Court of Appeal effectively held that the dispute resolution clause allowed for two routes to mandatory arbitration, one after consideration by the consultant, and the other without the involvement of the consultant.  In its view, this interpretation was “rational” from two aspects.

First, it recognized that allegations of negligence could not properly be dealt with by the consultant, but could be dealt with by arbitration.

Second, it allowed the parties to go through a mediation type process with the consultant if they wished to, but did not require them to do so before proceeding to arbitration.

How does this decision affect the interpretation of GC 8.2 of the CCDC 2 Stipulated Price Contract? Some might see that provision as an “opt-in” arbitration procedure.  Under that view, arbitration is mandatory once one of the parties elects arbitration under GC 8.2.6, and the meaning of the word “may” in that clause means that one of the parties may choose, but is not required to choose, arbitration, but once chosen, arbitration is binding on both parties.  The other view might be that the word “may” means that arbitration is entirely voluntary.

What does appear clear from GC 8.2.7 of CCDC 2 Stipulated Price Contract is that, if neither of the parties asks for arbitration within the 10 day period referred to in that clause, then either party can go to court. In the Clark v HOOPP case, the Alberta Court of Appeal held that, by their amended form of dispute relation, the parties had eliminated that choice and provided for arbitration to be the only form of dispute adjudication.

Another interesting aspect of the Court of Appeal’s decision is its conclusion that Clark was permitted to appeal the motion judge’s decision. Section 7 of the Alberta Arbitration Act states that the court shall stay an action brought in breach of an arbitration agreement, subject to certain exceptions. Sub-section 7(6) states that “There is no appeal from the court’s decision under this section.” The court held that this prohibition against appeal only applies when the merits of a stay motion are being considered. If the issue is whether the motion judge mis-interpreted his or her jurisdiction to make the stay decision, then the prohibition does not apply.  The Court of Appeal held that this was the situation before it:

Only if that agreement contained a mandatory arbitration clause would s 7 of the Arbitration Act apply. The chambers judge concluded that the agreement did not contain such a clause and he did not, therefore, address the application of s 7 to these parties and this dispute. The chambers judge’s decision on that preliminary issue is subject to appeal.

Accordingly, since dispute resolution, properly interpreted, did give rise to a prohibition of a court action under section 7 of the Act, then there was a right of appeal from the motion judge’s erroneous determination of that issue.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed,, chapter 10, part 6

A.G. Clark Holdings Ltd. v HOOPP Realty Inc., 2013 ABCA 101.

Arbitration  –  Construction law  –  Mediation  –  Mandatory or Permissive arbitration  –  Stay of Arbitration Proceedings –  Appeal from Stay Application

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                 June 9, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

The Mother Of All Tender Cases – The Fifth Issue: Determining Damages In An Unfair Tender Case

The last two articles have dealt with the recent decision of the Ontario Superior Court of Justice in Envoy Relocation Services Inc. v. Canada (Attorney General). That decision concerned a tender by the federal government.  The trial judge awarded $29 million to an unsuccessful bidder due to the court’s findings that the tender had been conducted unfairly.  The prior two articles dealt with four questions:

  • When must a sponsor’s conduct occur for it to be considered unfair?
  • What is the standard of review to be applied to a sponsor’s decision to select one bid over the others?
  • Can the court’s authority to try an action arising from a government tender be ousted by the authority of an administrative tribunal?
  • And when do earlier decisions about a tender amount to res judicata and bar the court from considering the claim?

This article concerns a fifth question arising from the Envoy Relocation Services decision.

How should the bidder’s damages be calculated when the sponsor of a tender wrongly fails to award the contract to the bidder?  And in particular, how does the decision of the Supreme Court of Canada in Hamilton v. Open Window Bakery Ltd., [2004] 1 SCR 303 apply to tenders and procurements?

The Background

Let’s review the facts in this case. They were set out in the last two articles and will be repeated here.

The dispute arose from a 2004 RFP by the Canadian government.  The RFP was for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid on the 2002 RFP showing zero as the ceiling cost for PMS, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider again knew that few individuals used PMS.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified level of projected users of PMS, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS, as the incumbent had done.

These facts about the 2002 and 2004 procurements were subsequently discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The trial judge found that, because of the unfairness with which the Crown had conducted the RFP, the Crown had breached the contract that applied to the bidding process (Contract A in the Ron Engineering analysis) and Envoy Relocation Services was entitled to about $29 million in damages.

Calculation of the Plaintiff’s damages

In arriving at his assessment of Envoy’s damages, the trial judge considered conflicting submissions made by the Crown and Envoy.  Envoy said that, once the trial judge found that if the bid had been properly conducted Envoy would have been awarded the contract for the relocation services, then Envoy’s loss of profit on that contract was the proper measure of damages. Furthermore, Envoy said that, in order for the Crown to carry out the contract most favourably to itself, the Crown would have granted Envoy a two year extension of the contract and therefore, under the Open Window Bakery case, Envoy was entitled to its loss of profit based on those two extra years.

The Crown said that Envoy did not win the tender, that another bidder did, and therefore Envoy was only entitled to nominal damages. In the alternative the Crown said that it was not clear what would have happened if the other bidder had not won the contract.  Accordingly, Envoy had at most a 50 percent chance of winning, so its damages should be calculated at 50 percent of its loss of profits.

The trial judge rejected the Crown’s approach.  He held that “in the tendering context, the measure of damages is loss of profits” of the plaintiff whose bid ought to have been accepted.  He cited the Supreme Court of Canada’s decision in Naylor Group Inc. v. Ellis-Don Construction and M.J.B. Enterprises v. Defence Construction in which loss of profit damages were indeed awarded to the plaintiffs in “unfair tender” cases.  However, those cases were decided before the Open Window Bakery decision of the Supreme Court in 2004.  The Supreme Court has not yet decided how that case might impact the award of damages in an “unfair tender” case.

The trial judge certainly seems to be correct in rejecting the application of the “chance of success” theory of damages.  After all, he had found that the winning bidder was wrongly selected by the Crown, and he had found that Envoy’s bid ought to have been accepted.  With those findings, there was no question of probabilities or chances. On the trial judge’s findings, if a contract was to be awarded, it could only have been awarded to Envoy. And the prior decisions in Naylor and MJB certainly seem to rule out any application of the “chance of success” theory of damages in “unfair tender” cases.

However, the trial judge’s application of the Open Window Bakery decision appears problematic. He held that the most beneficial way for the Crown to perform the relocation contract, assuming it was awarded to Envoy, was for the Crown to extend that contract for two years.  He therefore awarded damages to Envoy for the period of extension but discounted them by 50 percent to take contingencies into account.

It is arguable that this use of Open Window Bakery is contrary to what the Supreme Court actually decided. In that decision, the Supreme Court said that “the non‑breaching party is entitled to be restored to the position they would have been in had the contract been performed….The assessment of damages required only a determination of the minimum performance the plaintiff was entitled to under the contract, i.e., the performance which was least burdensome for the defendant.”

In Open Windows Bakery, the Supreme Court did go on to say (and these words were quoted by the trial judge in Envoy Relocation Services decision)

“This is not to say that the general principle will never require a factual inquiry.  The method of performance that is most advantageous or least costly for the defendant may not always be clear at the outset from the contract’s terms.  A court may have to consider evidence to determine an estimated cost of the various means of performance.  In some cases it will only be after this factual investigation that a court can confidently conclude that a certain mode of performance would have been the least burdensome for the defendant.  That this factual investigation might need to be conducted in some instances does not undermine the general principle.”

But the Supreme Court said these words after holding that a tort-like determination of what the defendant would probably have done was not relevant to contract damages. In making the assessment of damages for breach of contract, the Supreme Court has effectively said that it is not a question of considering how the defendant would have actually conducted its business, and determining what method of actually carrying on its business would have been most profitable.  Rather, it is a question of awarding the plaintiff the least amount that it could expect to receive from the defendant if the defendant had performed the contract, and performed the contract in the manner least onerous to it.  It would seem that not extending the contract was a less onerous way of the Crown performing the contract so far as the calculation of damages was concerned.

The bigger question, which was not addressed in the Envoy Relocation Services decision, is whether the Open Window Bakery decision disentitles the plaintiff to any damages in an “unfair tender” case, if the invitation to tender contains a “privilege clause”. That clause usually says that the sponsor is not obliged to accept the lowest or any tender.  In light of that clause, is the plaintiff entitled to any damages, since the sponsor was entitled to award no contract?

This possibility arises from the peculiar nature of the contract in issue in an “unfair tender” case.  That contract arises from the invitation to tender and the bidder’s tender, and it governs the tender process itself.  The contract is called Contract A in the analysis conducted under the Ron Engineering decision of the Supreme Court of Canada and the decisions which have applied that analysis including MJB, Naylor, Martel, Double N  Earthmovers and Tercon.  Those cases establish that Contract A governing the bidding process contains a duty of good faith.

But if there is a privilege clause in the tender documents, Contract A doesn’t necessarily result in a final contract for services or a building contract, called Contract B in the Ron Engineering analysis. It results in the sponsor deciding whether to award Contract B, or to cancel the tender.  Can the sponsor say to the plaintiff in an “unfair tender” case that one optional method of performing Contract A was to not award Contract B, and therefore the plaintiff has no claim to damages?

Compare Open Window Bakery.  That case concerned an employment contract.  The employer wrongfully terminated the employee but had the right to terminate the employee on giving a certain period of notice. The Supreme Court held that the employer had the option of performing the contract by giving a proper notice of termination.  Therefore the employee was entitled to no more damages than arose under that period of notice.  Could the sponsor under an invitation to tender say that it had the option of performing Contract A by not awarding Contract B?

That result seems unfair to the bidder and would effectively let the sponsor off the hook for unfair tendering practices.  It also is contrary to the actual results in MJB, Naylor , Tercon and many lower court decisions in which substantial damages have been awarded in “unfair tender” cases. The unwillingness of the Supreme Court of Canada to allow such a result is evidenced in its decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 SCR 69.  In that case, the majority held that the sponsor, the Department of Transportation and Highways of British Columbia, could not rely on an exclusion clause to avoid liability for an unfair tender, and substantial damages were awarded against that Department.

This article concludes the analysis of the decision in Envoy Relocation Services, truly the Mother of All Tender cases.  The decision can be filed away for future reference on a wide variety of issues relating to tenders and procurements. And it can be pulled out to be read any time we need to be reminded about the importance of the courts to the impartial resolution of disputes between the government and the private sector.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders and Procurements  –  Damages

 T.G.Heintzman O.C., Q.C., FCIArb                                                                                                                               May 23, 2013

 www.heintzmanadr.com

www.constructionlawcanada.com

The Mother Of All Tender Cases Revisited: Three More Issues

The last article about the decision of the Superior Court of Ontario  in Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034 considered the impact of that case upon the Contract A  –  Contract B principles of tender law.  There are many more interesting issues which emerge from that case.  This article considers three more issues.

The first issue is:  What Standard of review should be applied by the Court to the procurement authority’s decision? Should that decision be over-ruled if the court considers it to be incorrect; or only if it is unreasonable; or only if it was made in bad faith or fraudulently?

The second and third issue concerns the Court’s entitlement to review the procurement decision in the first place.  Was the Court’s authority excluded by federal legislation?  And was a prior decision in this case on this point res judicata and binding on the court?

The fourth issue related to how the plaintiff’s damages should be awarded.  The Open Windows Bakery decision of the Supreme Court of Canada directs that damages for breach of contract are to be calculated according to the least burdensome way for the defendant to perform the contract. But what does this mean in the context of a tender or procurment? That issue will be addressed in my next article about this very interesting case.

The background

The facts were set out in my last article on this case.  Mr. Justice Annis took 1194 paragraphs to set forth the facts, so this article provides just a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified number of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services.

These facts about the 2002 and 2004 procurements were discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The Trial Judge’s decision

As discussed in the prior article, the trial judge found that the Crown breached the express terms of the contract applicable to the invitation to tender, and also breached the implied term that it would conduct the tender fairly.  In addition, the trial judge addressed the following three issues which are of importance to construction and procurement law.

Standard of Review

One of the important issues in tender cases is:  what standard of review should the court apply when considering the sponsor’s evaluation of the tender proposals? Should the sponsor’s decision to accept one tender and reject the others be overturned: if the court believes that the sponsor was incorrect in its assessment; or must the court apply a higher standard and find that the sponsor acted unreasonably before it interferes; or must the court apply an even higher standard and only interfere if the sponsor acted fraudulently, in bad faith, by mistake or unconscionably?

The trial judge appears to have applied a two part test. For those parts of the sponsor’s assessment which were based on its expertise, he concluded that a standard of reasonableness should be applied; for those parts of the assessment where the sponsor’s employees had no expertise or had acted improperly (due to clear error, conflict of interest, or obvious preference for one bidder), a standard of correctness should be applied.  The trial judge rejected the Crown’s submission that he must find fraud, mistake, bad faith or unconscionability before he could review the tender assessments made by the Crown, finding that such a standard was “overly deferential” to the sponsor and not supported by the case law.

These distinctions between the various standards of review are useful.  Often the standard of review may be the decisive factor in whether the court will interfere with the sponsor’s assessment of the bids.  The trial judge’s reasons for using the correctness standard when the conduct of the sponsor’s decision-makers does not deserve respect, but otherwise the standard of reasonableness, provide a nuanced approach to the standard of review.

The Court’s Jurisdiction

The Crown asserted that the court had no jurisdiction to deal with the plaintiff’s claim because the  Canadian International Trade Tribunal Act and the Canadian International Trade Tribunal Procurement Inquiry Regulations  had established a statutory code for procurement disputes falling within the jurisdiction of the Canadian International Trade Tribunal, and that the present dispute fell within the Tribunal’s jurisdiction. The Crown submitted that the statutory code operated to oust the jurisdiction of the Superior Court, such that the action must be dismissed.

The trial judge rejected this submission.  He noted that this submission had been made to the court by way of a motion to dismiss earlier in the action, and that motion had been dismissed.  Accordingly, the trial judge held that the issue was res judicata.  But the trial judge went on to agree with the motion judge’s decision.  He held that there would have to be very clear language in the statute before the court’s jurisdiction was ousted, and there was nothing in the legislation that expressly did so.

The trial judge also expressed some horror that the court’s jurisdiction could be usurped in this kind of case. He said

“The fundamental difference between a court like the Superior Court of justice and the CITT involves the capacity to determine facts. It would frankly be unthinkable for any judicial body, but a trial court to hear a matter such as this one.

 If I may resort to a Proustian sentence to make the point: this matter involves facts extending over several years [and the trial judge continued in one sentence for seventeen lines concluding] …and everything else that goes with a trial in which factual findings are fundamentalto the ultimate decision that teams of lawyers have spent thousands of hours working on.

I cannot imagine more inappropriate circumstances in which to advance an argument that the jurisdiction of the Superior Court should be ousted because Parliament intended that cases of this nature should be resolved before the CITT.

This is not intended to be disrespectful towards the CITT, but it is clearly not a fact-finding quasi-judicial institution. Matters of contract, tort and remedies resulting therefrom are generally fact driven. One cannot replace a trial court with an administrative tribunal, unless the tribunal takes on the general characteristics of the trial court, such as has happened in many respects in labour law. But there is nothing in the constitution and procedures before the CITT that suggests it has either the capacity or the experience to make factual determinations, unless of a fairly rudimentary nature…..

 In matters of procurement, there is an obvious need in some cases for recourse to a judicial institution whose primary responsibility is the finding of facts in the pursuit of justice. I consider this to be a strong policy argument supporting the conclusion that Parliament could not have intended to exclude the Superior Court’s jurisdiction in this area without the clearest words to that effect.”

The private sector may well share the judge’s concern that the review of government procurements exclusively by government appointed tribunals is no way to ensure independent justice. The private sector may well wish to be vigilant to ensure that Parliament and the provincial legislatures do not try to shut off recourse to the courts arising from government procurements.

Res Judicata 

 Res judicata was considered by the trial judge twice in his reasons.

First, he held that the earlier decision of the motions judge, that the role of the Canadian International Trade Tribunal (CITT) did not oust the jurisdiction of the court, was res judicata on that issue. Nevertheless, he agreed with that decision and arrived at the same conclusion.

Second, the trial judge concluded that the unsuccessful proceedings by Envoy before the CITT were not determinative of Envoy’s rights.  Again, that issue had been raised by the Crown before the motion judge on its earlier motion, and had been dismissed.  That made the earlier judge’s decision res judicata on the issue.

In addition, the trial judge considered this issue on its merits and concluded that the earlier proceedings before the CITT were not definitive for two reasons.

First, the “intervening circumstances” showed that the proceedings before the CITT “bear no relationship to those argued before and ultimately determined by the Court.” Moreover, the trial judge said that he would exercise his discretion to not apply the doctrine of res judicata having regard to the refusal by the CITT to allow any inquiry into the allegations raised by Envoy and the subsequent discovery by the Auditor General of the facts relating to PMS.

The reasoning of the trial judge can be a useful starting point for any litigant facing the issue of res judicata arising from a tender.  The decision could be that of a government tribunal, but it could also be that of the engineer or architect on the project.  If the issue is whether that decision is binding on the parties by reason of res judicata, or whether the court should exercise its discretion to relieve against the application of that doctrine, then reference to the Envoy Relocation Services decision may be useful.

Quantifying Damages: The Open Window Bakery Decision

Time and space do not permit this article to review the trial judge’s consideration of the Open Window Bakery decision of the Supreme Court of Canada to the calculation of the plaintiff’s damages.  The issue may be crucial in tender and procurement law. It will be addressed in the next article.  In all, it will take three articles to fully digest the issues raised in this Mother of All Tender Cases.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –   Res Judicata  –  Standard of Review  –  Jurisdiction of the Court

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                       May 16, 2013

The Mother Of All Tender Cases!

The recent decision in Envoy Relocation Services Inc. v. Canada (Attorney General) certainly deserves the title of Mother of All Tender Cases.  It is a judgment of over 1800 paragraphs in which Mr. Justice Annis of the Superior Court of Ontario analyzed and found in great depth how an invitation to tender by the federal government went wrong due to unfairness.  Not only is the factual analysis extremely detailed. The legal issues are of the greatest importance to the building industry and the procurement process, particularly relating to allegations of favoring an incumbent or preferred bidder.

The basic issue in this case was whether unfairness by a sponsor of a procurement which occurs prior to the time when the tenders are submitted by the bidder, or after the award of the substantive contract to the successful bidder, can be a breach of the bidding contract (known as Contract A under the Ron Engineering analysis).  The Crown said that the prior conduct could not be a breach of contract, since before the submission of tenders there was no Contract A.  As well, the Crown said that the subsequent conduct could not be a breach of conduct since, upon the award of the final contract (known as Contract B under the Ron Engineering analysis), the tender process was terminated.  The Crown said that it was only conduct by the sponsor between the time that the tenders were received and the time of the award of the contract to the successful bidder that could be considered for unfairness under the Ron Engineering line of tender cases.

Mr. Justice Annis held that the unfairness principle applied to conduct by the sponsor before the tenders were submitted because that conduct was embedded in the tender documents and in the sponsor’s consideration of the bid.  Mr. Justice Annis also held that this unfairness principle  applied to the sponsor’s conduct after the award of the contract if the sponsor colluded in the improper award of the contract.

Background

Mr. Justice Annis took 1194 paragraphs to set forth the facts, so the following is a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider again knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified level of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services, as the incumbent had done.

These facts about the 2002 and 2004 procurements were subsequently discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

Reasons of the Trial Judge

The trial judge concluded that the Crown had breached the express terms of the 2004 RFP, for instance by accepting the incumbent’s zero cost for PMS services. The trial judge also concluded that the Crown had breached the implied term that the invitation to tender would be fairly conducted. His reasons included the following:

  1.  By inserting a zero price for the PMS, the incumbent had failed to bid the ceiling price in accordance with the requirements of the 2004 RFP, and its bid was non-compliant and ought to have been disqualified.
  2. By inserting a zero price for the PMS, the incumbent was in an “obvious actual conflict of interest.”  By quoting a zero price for PMS, the incumbent would wish to discourage any transferee form using the PMS services, because it would have to pay for those services if the transferee requested them.
  3. the weighting in the selection formula used by the Crown was “intentionally amended to favour” the incumbent bidder, and the government’s “conduct on the issue of amending the selection formula [constituted] bad faith.”
  4. The Crown “fail[ed] to follow its own published evaluation process, which was also set out in the RFP.”
  5. The Crown was in a “conflict of interest as the result of being implicated in litigation with the incumbent bidder arising out of the 2002 RFP.”  The Crown “knowingly drafted…the provisions of the [2004] RFP intended to favour the incumbent.”
  6. The “Crown intentionally turn[ed] a blind eye to [the incumbent bidder’s] intention to breach the contract, if awarded it” since the incumbent intended to charge for PMS services even though it had bid a ceiling of zero for this service.

Some of the other comments of the trial judge about the conduct of the Crown are best left to be read in the actual judgment.

Based upon these findings, the trial judge found that Envoy Relocation Services would have been the winning bidder if the RFP had been properly conducted and he awarded about $29 million in damages for breach of contract.

The Legal Issues

The Crown maintained that any alleged misconduct by it fell outside its contractual duty of good faith under the decisions of the Supreme Court of Canada in MJB, Martel and Double M Earthmovers, which followed and applied the decision in Ron Engineering. The Crown’s position was that:

  1.  Any misconduct before the tenders by Envoy and the other bidders were filed could not fall within any contractual duty of good faith. Until those tenders were filed, there was no Contract A applicable to the bidding process, under the Ron Engineering analysis. The trial judge put the Crown’s position this way:
  2.  “The defendant argues that the duty of fair and equal treatment is limited to the assessment of bids and does not apply to all aspects of the bidding process. Therefore, the plaintiffs cannot make any claim in respect of property management services because it relates to the drafting of the tender documents, not the evaluation of tenders…. [The] duty of fairness does not extend beyond a duty to treat all bidders fairly and consistently in the process of assessing bids. The duty of fairness therefore, does not apply to other aspects of the bidding process. In particular, it does not apply to the preparation of tender documents.”
  3.  Any misconduct occurring after the 2004 contract was awarded to the incumbent could not be attacked because, under the Double M Earthmovers decision, once that award was made the contract applicable to the bidding  process (that is, Contract A) came to an end.

There were many other important legal issues discussed in this judgment but for procurement and construction law purposes, those are two of the most interesting.

The Trial Judge’s Decision

The trial judge found several elements of unfairness in the way the RFP was run, particularly in relation to the incumbent bidder.  The incumbent “had access to information that it could bid the PMS item based on actual volumes, which Envoy was not aware of because the answers to questions had directed Envoy to use estimated volumes found in the BOP formula.”  The trial judge concluded that “had accurate PMS volumes been provided to non-incumbent bidders, it would have become immediately apparent that the PMS tendering provisions were a scam by their use of egregiously inflated PMS volumes that in no way could be described as “estimates”.  In addition, “the repetition of the 2002 PMS provisions in the 2004 RFP constituted a hidden preference to [the incumbent] that was concealed from Envoy and the other bidders”.

The trial judge rejected the Crown’s defence that the Crown’s conduct could only be legally unfair if it fell within the time period between the submission of the tenders and the award of the final contract. As to the Crown’s conduct before the tenders were delivered, the trial judge essentially found that that conduct was embedded in the tender documents and the sponsor’s selection decision.  The tender documents themselves were unfair by reason of the Crown’s conduct in preparing and administering them in the tender process. As the trial judge said:

“Firstly, the simplest answer is that the definition of what constitutes an unfair evaluation would include an evaluation carried out on an RFP that includes concealed advantages or disadvantages to any bidder. Any aspect of the tendering process upon which an evaluation is based is part of the evaluation process. Accordingly, if the tender terms are inherently unfair because of undisclosed preferences, the evaluation based on those tender terms is equally unfair. The jurisprudence upholds this result.  (emphasis added)

Second, the trial judge relied upon several decisions that establish that undisclosed standards or criteria are classic examples of unfair tenders. The present situation was, in his view, no different:

“I find no distinction between a “concealed preference” and an “undisclosed standard” referred to in the decisions above with respect to preferring local contractors or providing insufficient details. In either case, tender documents concealing preferences or undisclosed standards undermine the integrity of the bidding process and with that, the implied obligation to treat all bidders fairly and equally.”

So far as evidence about the Crown’s conduct after the award of the 2004 RFP to the incumbent, the trial judge distinguished the Double N Earthmovers decision of the Supreme Court of Canada:

“[T]he Crown Collusion is also relevant to the blameworthiness of the owner. One of the factors in the Double N decision was that the City of Edmonton was an innocent party because it had no forewarning or knowledge of the contractor’s deceitful behaviour. In contradistinction to those facts, blameworthiness and culpability on the part of the Crown is evident throughout this tendering process.”

In addition, the trial judge held that the court could look to any relevant evidence, including conduct before or after the moment when the tenders were filed, in determining whether the conduct of the Crown in accepting the incumbent’s bid and rejecting another competing bid, was fair.

Comment

There are two useful aspects of the Envoy Relocation Services decision.

First, the factual circumstances contain a wide variety of circumstances in which an invitation to tender may be found to be unfair, particularly if there is an incumbent bidder:

  • permitting the incumbent access to information not available to other bidders;
  • requiring other bidders to use criteria not used by the incumbent in its bid;
  • failing to address the conflict which may arise if the incumbent has a claim against the sponsor rising from the prior contract, etc.

In fact, the Envoy Relocation Services decision provides a virtual check-off list of problems to be considered anytime an invitation to tender involves an incumbent bidder or potential favouritism to any bidder.

Second, the decision provides a good explanation of why a sponsor’s conduct may be contractually unfair even if it occurs before the bidders’ tenders are submitted. It may be unfair if it affects the fairness of the tender documents or the selection made by the sponsor. In either case, while the conduct may occur before the bidders submit their tenders, that conduct affects the sponsor’s conduct after the tenders are submitted.  That prior conduct affects the fairness of the crucial decision made as part of the bidding contract, namely, the selection of the winning bidder.

That conduct prior to the submission of the tenders may not give rise to liability in tort (as found in Martel). And it may seem illogical that conduct prior to the making of the Contract A bidding contract could be the basis of a claim for breach of that contract. However, the trial judge found that it is entirely logical because that conduct is part of the tender documents and part of the sponsor’s selection decision.

So far as the conduct of the sponsor after the selection of the winning bidder is concerned, the Envoy Relocation Services decision confirms that such conduct may be the basis of unfairness if the owner knows (or is reckless) as to the winning bidder’s subsequent conduct.  If the sponsor knows before awarding the bid that the winning bid is really non-compliant based upon that bidder’s tender or clear intentions (as found in Envoy Relocation Services and MJB,) then the sponsor can be held to have acted unfairly in awarding the contract to that bidder.  If the sponsor does not know these facts (as found by the majority in Double N Earthmovers), the subsequent conduct of the sponsor or winning bidder will not be the basis of allegations of unfairness against the sponsor.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –  Non-Compliant Bids  –   Incumbent bidder  –  Fairness

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                         May 8, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Is There An Intermediate Position Between An Invitation To Tender And A Request For Proposal?

Not all requests for bids issued by an owner are the same. A request for bids that will be binding on the chosen bidder is usually referred to as an Invitation to Tender.  On the other hand, a request for bids which is not binding on the chosen bidder is usually referred to as a Request for Proposals (or RFP). The RFP results in proposals which can be considered by the owner but are not binding on the bidder.

But how do you really tell an Invitation to Tender from a Request for Proposals? What sort of clause in the owner’s request results in a RFP rather than an Invitation to Tender?

And is there in intermediate position in which the owner and bidders do not have an obligation to enter into a contract but only an obligation to negotiate exclusively with each other for a period of time?

This was the issue faced by the Ontario Superior Court in Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre.

Facts

In 2006, the Campus issued an RFP for food services and the lease of a kitchen at a community centre which the Campus was building in north Toronto.  When fully developed the community centre was to include a private high school owned and run by a separate organization (the Academy). When the 2006 RFP was issued, the construction of the community centre had not begun, and the 2006 RFP stated that it was subject to design change.

The 2006 RFP stated that the Campus might reject any proposal or might negotiate with more than one party responding to it. The RFP contained a provision which stated as follows:

…The submission and acceptance of any proposal does not obligate [the Campus] to enter into a binding legal contract with the successful proponent, nor does acceptance of the proposal imply that a contract has been entered into with [the Campus]. The implementation of the project by the successful proponent is dependent upon entering into a separate legal contract with [the Campus], to be negotiated and signed prior to implementation of the project.

The Plaintiff made a proposal which was favoured by the Campus. The parties entered into an exclusive 90 negotiation period.  A final agreement was never reached, but the parties continued to negotiate until October 2007.

The Plaintiff began providing food services to the Academy which commenced operations in the campus premises in the fall of 2007. The high school submitted a Memorandum of Understanding to the Plaintiff but that MOU was never signed.

By 2011, the Campus’ plans had changed and it issued a new RFP for the provision of food services to the community centre. The Plaintiff protested that it already had a contract for those services. However, it did participate in the 2011 RFP, but was not successful.  After the issuance of the 2011 RFP, the Plaintiff continued to provide food services to the Academy but those arrangements were terminated in 2012. The Plaintiff then sued the Campus to assert that it held a contract to provide for food services to the community centre.

Decision of the Trial Judge

The trial judge held that the 2006 RFP did not lead to a contract between the parties for the provision of food services. The trial judge said that the 2006 RFP:

“made it clear that it was not an offer that would lead to a firm acceptance. Rather, as the courts have said elsewhere, the 2006 RFP was “a request for proposals and nothing more. The prize at the end of the exercise was…the opportunity to negotiate for a contract”…. While the 2006 RFP created an obligation to negotiate terms over a 90 day period, it presented to the Plaintiff nothing more than an opportunity to attempt to conclude an agreement. It was not itself a binding document.

The trial judge also concluded that the negotiations after the 2006 RFP did not lead to a written agreement for the provision of food services which was a specific requirement of that RFP before any contract could arise. The final draft agreement which was exchanged in October 2007 was not signed because there were still terms and issues to be concluded.

Discussion

The challenge of this case is to fit it into the Contract A – Contract B analysis under the Ron Engineering decision of the Supreme Court of Canada. Did the trial judge find that a contract arose for the tender process (Contract A in Canadian tender law under the Ron Engineering), but that no Contract B arose from the bidding process?  Or did the trial judge find that there was no Contract A because the Contract B that was being offered by the owner was too indefinite for Contract A to arise?

The first sentence of the provision in the request issued by the owner referred to above into bid documents appears to be very similar to a standard privilege clause. A privilege clause is usually inserted by owners to state that the owner has no obligation to accept the lowest or any tender. Such a privilege clause would not normally preclude a Contract A arising in a true tender situation, namely a contract for the purpose of the tender. That contract would normally carry with it the implied terms discussed in many decided cases, including an obligation on the owner to act fairly and not accept non-compliant bids.  A privilege clause may allow an owner to accept a bid other than the lowest bid and not to accept any bid if the privilege clause specifically allows that to happen.

Interpreted as a privilege clause, the provision referred to above should have been sufficient for the court to decide the case. Based upon the owner’s original request, the owner had no obligation to accept any bid, including the Plaintiff’s bid

But the plaintiff had a second agreement. It said that the conduct after the initial request by the owner resulted in, or evidenced, a contract.  By selecting the Plaintiff’s bid as the preferred bid and by negotiating with the Plaintiff, the owner had moved beyond the privilege clause. It was no longer a question of the owner’s right to not enter into any contract. The owner had effectively waived the privilege clause and entered into a contract with the Plaintiff by its conduct.

To address this point, the court seems to have adopted a hybrid conclusion.  The trial judge seems to have concluded that, yes, there was an obligation between the parties.  But that obligation was to negotiate with each other exclusively for a period of 90 days, not a final contract for food services. That “exclusive negotiation” obligation explained the subsequent conduct of the parties.  And when no final contract resulted for those negotiations, then there were no continuing contractual relations between the parties.

There is no question that a contract to negotiate exclusively with one party is a binding contract. The contract is not too indefinite to be enforced because it requires negative conduct, that is, no negotiation with another party, and it sets a specific period for that negative conduct to occur. But what an “exclusive negotiation” contract cannot compel is a specific result, a specific substantive contract at the end of the negotiation period.

In this sense, the trial judge may have been incorrect, and contradictory, to say that “while the 2006 RFP created an obligation to negotiate terms over a 90 day period, it presented to the Plaintiff nothing more than an opportunity to attempt to conclude an agreement. It was not itself a binding document.”  The obligation to exclusively negotiate with a party can be a binding contract. But it is only a contract not to negotiate with other parties. It is not a binding contract to conclude an agreement on the substance of the negotiations. In the present case, it was not a binding contract for the food services contract.

The present case creates, therefore, a potential intermediate or hybrid position between the normal Invitation to Tender and RFP, or between Contract A and Contract B. Under this hybrid position, a Contract A does arise for the bidding process.  That Contract may well contain the usual implied terms that apply to Contract A.  But the Contract B that the owner is offering is not a substantive building or supply contract on specific terms.  Rather the owner is offering an “exclusive negotiation” contract for a specific period of time.  That sort of Contract B is specific enough to allow Contract A to come into existence. But it does not compel the owner to agree to any specific terms for the final supply or building contract, except to the extent that those terms are stated in the original request.

The advantage to a bidder of this sort of arrangement is that it means that the Contract A-Contract B analysis applies to the original request by the owner. That analysis requires the owner to comply with the implied terms of Contract A, including the obligation to treat the bidders fairly. The disadvantage to a bidder is that, if the bidder is successful, the bidder will only obtain an exclusive right to negotiate with the owner for a specific period of time. But this disadvantage may not be a severe one since that sort of negotiation may be the reality in a tender process involving a privilege clause.

The advantage to the owner of this arrangement is that the result of the process is only an obligation to negotiate with one or a number of preferred bidders for a specific period of time, but not to agree to any specific terms other than those mandated in the original request.  This arrangement gives the owner the flexibility to deal with one or a few bidders and arrive at the best arrangement. The disadvantage may be that, during the initial request, the owner will have to abide by the Contract A obligations, including the obligation of fairness and the obligation not to deal with a non-compliant or higher priced bidder unless a privilege clause expressly permits it to do so.

This case demonstrates that the Contract A – Contract B analysis of Ron Engineering is not just a strait jacket as is often assumed. The analysis permits various types of Contract A and Contract B to emerge. And it permits variants between a strict Invitation to Tender and a strict RFP.

The genius behind Ron Engineering is that it separates the bidding contract – Contract A – from the contract emerging from the bidding contract.   It enables the court to imply into the bidding contract the necessary elements to allow the bidding process to proceed fairly. But it allows the contract emerging from the bidding process to be whatever contract the bidding process may contemplate.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 1, part 1(f).

Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre, 2013 ONSC 2057

Building Contract  –  Tenders

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                          April 29, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Is A “May Arbitrate” Clause Mandatory Or Permissive?

What is the meaning of an arbitration clause which states that a dispute “may be determined by arbitration”?   Does the clause mean that the arbitration process is permitted but not mandatory?  Or does the word “may” mean that the parties do not have to have a dispute, but if they do, the arbitration clause applies?

In Durham (Regional Municipality) v. Oshawa (City), the court held that the word “may” in an arbitration clause makes the arbitration permissive and not enforceable.  This conclusion is significant for building contracts which often use very similar wording.

Background

In December 2004, the Regional Municipality of Durham (the Region) passed a resolution relating to the jurisdiction over public transportation in the Region. The resolution transferred the jurisdiction over those facilities to the Region from City of Oshawa and certain lower-tiered municipalities which had previously had jurisdiction over them. The bylaw provided that the amount and future payment of exiting and unfunded liabilities was to be determined by negotiations between the region and the lower-tiered municipalities. It stated that “any matter not agreed to within three (3) months of the Effective Date [of the bylaw] may, at the request of the Region or a lower-level municipality, be determined by arbitration under the provisions of the Ontario Arbitration Act.”

There were some complicated issues to be resolved between the Region and the lower-tiered municipalities:  the identity of the facilities to be transferred, the nature of the legal arrangements (sale or lease), and amount and nature of the unfunded liabilities relating to former transit employees. Up until late 2009, it was not known exactly which assets would be transferred.

In early April 2009, the Region settled the issue of the transferred costs and liabilities with all the other lower-tiered municipalities except Oshawa.  On April 1, 2009 the Region requested arbitration. Oshawa asserted that, from the very beginning, it refused to accept responsibility for the unfunded liabilities. On April 21, 2009, Oshawa passed a resolution denying responsibility for the unfunded liabilities and refusing to proceed to arbitration.  On March 22, 2011, the Region commenced an action against Oshawa for payment of those liabilities.

The Regions took the position that the two year limitation period commenced on April 21, 2009 when Ottawa passed its resolution denying responsibility for the unfunded liabilities. The Region said that it was on that date that it “discovered” that there was a dispute with Oshawa, and that its action on March 22, 2011 was commenced within the two year limitation period from that date.

Oshawa asserted that the limitation period commenced in March 2005 when the three month negotiation period expired after the Region’s bylaw and that the Region’s action was barred by the limitation period. In the alternative, Oshawa said that its refusal to accept responsibility for the unfunded liabilities was well known to the Region long before Oshawa’s resolution of April 21, 2009 and that the Region knew or should have known, long before Oshawa’s resolution, that Oshawa denied responsibility for those liabilities and that the limitation period was running.

The Decision

The court held that the Region’s bylaw did not create a mandatory obligation to arbitrate. The words “may…be determined by arbitration” only established a permissive arbitral regime in which either party could opt not to arbitrate.  The court said:

“There is no decision that a permissive clause, in which parties “may” proceed to arbitration, triggers a limitation period. Had the limitation clause instead required  the parties to attend arbitration after three months by using the word “shall”, it would have changed the complexion of Oshawa’s arguments.”

The court also held that the limitation period commenced when Oshawa passed a resolution denying liability for the unfunded obligations, not when the three month period expired after the Region’s bylaw was enacted. The parties had negotiated in good faith right up to April 2009, all apparently in good faith. The relevant financial statements, upon which a resolution of the issues between the municipalities could be resolved, were not available until April 2006. So the limitation period could not sensibly run from the expiry of the three month period after the Region’s bylaw was enacted . Since a municipality can only officially act by resolution, it was not until Oshawa’s resolution of April 21, 2009 that the Region could reasonably know, and therefore discover, that there was a dispute.

Comments

Whether an arbitration clause requires, or merely permits, arbitration is of crucial importance in any contract and, to no less an extent, in a building contract. How does this decision help us understand and apply arbitration clauses?

The Region’s bylaw used the word “shall” at least 15 times.  It would seem that the arrangements instituted by the bylaw were mandatory, that the assets and liabilities were being transferred, with no going back. In those circumstances, what meaning should be given to “may”, at the request of the Region or a lower-tier municipality, be determined by arbitration”? Could the word “may” simply mean that the parties are not required to have a dispute?  Did all the “shall”s in the bylaw mean that the regime itself was mandatory, but that disputes were not mandatory? Did it make sense that the municipalities would have two dispute resolution regimes (arbitration and an action) to resolve their disputes?  Or does it make sense for an arbitration clause to be interpreted as permissive when that would mean that the Region had inserted an unenforceable clause into its bylaw?

This issue is of interest to construction law because wording of the same kind is found in building contracts . For example, GC 8.2 of the CCDC 2 Stipulated Price Contract is the dispute resolution clause in that contract.  GC 8.2 has the word “shall” in it at least six times.  But when it refers to arbitration, it says in GC 8.2.6 “either party may refer the dispute to be finally resolved by arbitration.” Other parts of GC 8.2 may make it clear that arbitration is mandatory if one party wants arbitration. But the use of the word “may” in the pivotal clause, 8.2.6 may confuse the issue if the decision in Durham v. Oshawa is strictly applied.

The decision in Durham v Oshawa may be more readily understood by considering whether the Region’s bylaw was an enforceable document as between the Region and Oshawa. If it was not, then the word “may” makes sense because a mandatory obligation could not be imposed on Oshawa.  If this is the case, then this decision has no application to a contractual arbitration clause.

It is interesting that the Region did not press the point that the arbitration provision was mandatory. It had passed a resolution on April 1, 2009 that the dispute should proceed to arbitration. But when Oshawa passed a resolution on April 21, 2009 refusing to arbitrate, the Region did not try to force Oshawa to proceed with arbitration. Perhaps it did not do so because it was concerned that, on April 1, 2009, the two year limitation period had already passed since its 2004 bylaw and the three month period for negotiation.  But having passed that resolution on April 1, 2009, it seems odd that it could later assert that the limitation period hadn’t even started to run.

There are some other interesting issues arising from this decision. But enough has been said to emphasize the point that limitation periods and arbitration clauses are a troublesome mixture.

Durham (Regional Municipality) v. Oshawa (City) (2012), 113 O.R. (3d) 54 (Ont. S.C.J.)

Construction Law  –  Arbitration  –   Limitation Periods

Thomas G. Heintzman O.C., Q.C.,  FCIArb                                                                                                                      April 20, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Can An Owner Look Behind A Bid And Find It Non-Compliant?

Is an owner entitled to look behind a bid submitted in response to an invitation to tender and determine whether it is compliant with the terms of the invitation to tender, even though on its face the bid is compliant? And if the owner does so, and determines that the bid is non-compliant, can the owner then disqualify the bid?  According to the recent decision of the Ontario Superior Court in Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139, the answer to both questions is yes.

This decision raises important issues about the discretion of an owner once it decides to look behind a bid. In Double N Earthmovers v. Edmonton (City), 2007 SCC 3, the Supreme Court of Canada held that the owner is not obliged to go behind a bid which is compliant on its face, to determine whether the bid really complies with the tender documents. The Rankin decision deals with the implications for the owner and the bidders if the owner decides to do so.

The Background

In 2005, Rankin was a pre-qualified bidder in an invitation to tender issued by the Ministry of Transportation of Ontario (MTO) for the widening of Highway 406 near Niagara Falls, Ontario.  The tender package provided an advantage for using Canadian domestic steel.  It did so by allowing a 10 per cent discount to the tender price to arrive at the Adjusted Total Tender. That adjustment did not apply, however, to imported steel and each bidder was required to declare the amount of imported steel in its bid.

The MTO specifications called for the supply of H-Piles made of rolled steel.  The H-Piles were to be driven into the ground to provide support for bridge structures. Rankin did not declare the H-Piles to be made with imported steel. In fact, they were manufactured in the United States. The value of the H-Piles in Rankin’s bid was about $500,000 out of a total adjusted bid of about $18.6 million or about 2.7 per cent.  All the other bidders declared the H-Piles to be made of imported steel.

The tenders were opened and Rankin’s bid was the lowest, both as to the total tender and the adjusted tender.  The MTO then received complaints that Rankin’s bid was non-compliant due to its failure to declare that its H-Piles were made of foreign steel.

MTO’s practice was not to ask for supporting documents or other proof of bidder’s declarations. Apart from one previous occasion, the MTO had never reviewed a bidder’s declaration of imported steel. Nevertheless, a local MTO investigator undertook an investigation and reported that the contract should be awarded to Rankin. That report was not accepted by the local MTO manager who recommended that Rankin’s bid be rejected and the contract be awarded to the next highest bidder. That recommendation was accepted and after consultation with the MTO’s legal department, the contract was awarded to the next highest bidder. No reasons for rejecting its bid were given to Rankin.

The MTO witnesses testified that Rankin’s bid was rejected to maintain the integrity of the bidding process. While the MTO had, under its Instructions to Bidders, the right to reject any or all tenders and to waive irregularities “in the Ministry’s interest”, the MTO witnesses said that a waiver of the non-compliance would compromise the bidding process.

The MTO argued that Rankin’s bid was non-compliant and accordingly, no Contract A came into being under Ron Engineering formulation. Therefore, MTO asserted that it owed Rankin no contractual duties.  Rankin argued that its bid was compliant on its face and that MTO was not entitled to investigate Rankin’s tender and then, based on that investigation, rule that tender to be non-compliant.

Reasons of the Trial Judge

The trial judge noted that the situation in the present case was the opposite of that presented in Double N.  There, the Supreme Court held that the owner was not obliged to go behind an apparently compliant bid. Here, the MTO had gone behind Rankin’s bid and investigated its compliancy and the issues were “whether an owner is disentitled to carry out such an investigation, and whether, if it does so at the instance of a rival bidder, [the owner] thereby breaches an obligation to the low bidder whose bid is found to be non-compliant as a result of the investigation.”

The trial judge held that the contract formed in the tender process, Contract A in the Ron Engineering analysis, should not be found to contain a term prohibiting the owner from “investigating whether a bidder is capable of fulfilling the material terms of its bid, in the face of information that it may not be.” In his view, such a term would not

“promote the integrity of the bidding process. Public sector owners, such as the MTO in this case, have a long-term interest in protecting of the integrity of the bidding process. Their concern is not necessarily restricted to the individual project under consideration, but with the maintenance of a vigorous and competitive tendering process on future projects.  Anything which would dissuade potential bidders from participating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest.”

The trial judge found that there was nothing in the MTO’s procurement policies which precluded the MTO from investigating Rankin’s bid, even if it was not MTO’s practice to do so. In addition, the trial judge said that, even if those policies had that effect, Rankin could not rely on them because the terms of the tender were governed by the tender documents, not MTO’s policies. Unless the MTO’s procurement policies were incorporated into the tender package, a deviation from those policies did not give rise to any breach of duty to a bidder.  Those policies were not expressly incorporated into the tender package, and an implied incorporation would “give rise to unnecessary uncertainty and potential confusion and would therefore be unjustified.” Accordingly such incorporation would satisfy neither the business efficacy nor officious bystander tests for implying a term into the tender contract.

The trial judge found that Rankin’s declaration of imported steel was “crucial” to the determination of the lowest bidder. The process for declaring imported steel was “integral and fundamental” to the tender scheme. Even though the resulting price difference was only $50,000 (10 per cent of the $500,000 value of imported steel H-Piles) and even though Rankin would still have had the lowest adjusted bid and total bid if H-Piles had been properly declared, that was not sufficient, for the following reasons:

“[The] materiality [of the non-compliance} is to be determined objectively having regard to the impact of the defect on the tendering process and the principles and policy goals underlying the process. The focus is not on the impact of the defect on the outcome of the particular tender process, but on the impact on the process itself, including the reasonable expectations of the parties involved in the process, including rival bidders….three elements [are] to be considered on an assessment of materiality of the non-compliance, namely, whether it undermines fairness of the competition or the process of tendering, impacts the cost of the bid or performance of Contract B, or creates a risk of action by other (compliant) bidders. This list is stated disjunctively, and accordingly, not all of them need to be present in order for there to be a finding of material non-compliance..…To require the MTO, at the stage of determining compliance with the tender documents, to undertake a consideration of whether an inaccuracy in the Declared Value of Imported Steel will in fact alter the ultimate outcome of the tender process, as a pre-condition to a finding of material non-compliance, would, in my view, be inappropriate and could introduce an element of uncertainty to the process and the imposition of an unjustified risk on the MTO.”

The trial judge then found that the owner, MTO, was “incapable of accepting a bid containing a material non-compliance” and that, therefore, “once the material non-compliance in the Rankin bid was discovered, the MTO was bound to rule it to be non-compliant and therefore not capable of acceptance.”

The trial judge also dealt with a paragraph of the tender documents which required the MTO to notify bidders whose tenders had been rejected within 10 days of the opening of bids.  He found that this paragraph did not apply because, by its heading it only applied to unbalanced tenders and discrepancies and not to non-compliant bids, and because the Rankin tender was not “rejected” but simply non-complaint.

The trial judge found that, in any event, the MTO was protected by an exclusion clause which read as follows:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in the acceptance of a Tender, except as provided in the tender documents.”

The trial judge applied the reasoning of the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69 and held that, unlike in that case, the exclusion clause covered MTO’s alleged misconduct and was a complete defence. Applying the unconscionability and public policy test in Tercon, the trial judge found that the exclusion clause was not invalid. In his view, even if the MTO erred in investigating whether Rankin’s bid was compliant, it did so, “not to subvert the integrity of the tender process in order to gain some unfair advantage, but rather to promote the integrity of the process.” Accordingly, its conduct was protected by the exclusion clause.

Comments

The background and the reason of the trial judge have been dealt with at some length because they address many of the “hot button” issues relating to tenders. Here are a few issues which arise by comparing the Rankin decision to the decision of the Ontario Court of Appeal in Bot Construction Limited v. Ontario (Transportation), 2009 ONCA 879:

  1. The trial judge found that the owner was prohibited from accepting Rankin’s tender once it found it to be non-compliant.  In Bot, the Court of Appeal was, again, dealing with a MTO tender and foreign steel components.  The successful contractor, Cavanaugh, specified welded steel components in its bid when the tender package called for rolled steel.  The Divisional Court held that this change made Cavanagh’s bid non-compliant, in the same fashion as the trial judge did in the Rankin case. The Court of Appeal in Bot reversed the Divisional Court and held that a standard of reasonableness should be applied to the MTO’s decision and that the decision that Cavanagh was compliant with the tender process fell within “a range of possible, acceptable outcomes that are defensible in respect of the facts and law.”
  2. The decision in Rankin may be at odds with the decision in Bot on another point, namely the degree to which the non-compliancy mattered.

Here is what the Court of Appeal said in Bot:

“The amount of steel required for the bridge beams was small (1.14 per cent of the total steel required for bridges by the Contract) and minor (0.26 per cent of the value of the Contract). …  Even if the use of Canadian steel required a change in the project specifications, this change would be a minor one and would be readily approved.  Finally, even if Cavanagh had declared imported steel for use on the bridge beams, it would not have affected the order of bidders because of the large gap ($2,259,000 in the total bids, $2,230,000 in the adjusted bids) between Cavanagh, the lowest bidder, and Bot, the second lowest bidder”.

These are the sort of factors that Rankin pointed to, unsuccessfully, so far as its bid was concerned.

3.  But where Bot and Rankin may come together is the different effect of a stated or unstated non-compliance.  In Bot, the successful bidder expressly and openly bid Canadian welded steel and asked for it to be accepted within the bid or that any non-compliancy be waived by the owner. In Rankin, Rankin’s tender contained a non-compliancy which was not apparent on the face of its bid. That non-compliance might have slipped through a DoubleN type of bidding process, namely one in which the owner does not examine into the bids which on their face meet the requirements of the bid.

So a bidder faces a choice if its tender contains a potential non-compliancy:

 If the bidder openly states the compliancy issue, then the bidder faces the possibility of being disqualified. But if the issue is accepted by the owner as not involving a non-compliancy, or if the non-compliance is waived by the owner, then the owner’s decision to accept the tender may be upheld as reasonable, according to Bot.

 If the bidder does not openly state the non-compliance issue, then the bid may be accepted as being apparently compliant, under Double N.  But if the owner does investigate and decides that the bid is non-complaint, then its decision may be upheld, according to Rankin.

See Heintzman and Goldsmith on Canadian Building Contract, 4th ed. chapter 1, part 1(f). 

Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139

Building Contracts   –   Tenders   –   Non-Compliant Tender   –   Waiver

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                           April 6, 2013

www.heintzmanadr.com

www.constructionlawcanada.com