Evaluation Breached Tender Conditions: Alberta Queen’s Bench Court

You would think that the owner would get one thing right before issuing an invitation for tenders: its standard for evaluating the tenders.

Yet, in Elan Construction Limited v South Fish Creek Recreational Association, the Alberta Court of Queen’s Bench recently found that the owner’s tender evaluation criteria were unfair and did not reflect the terms of the tender, and awarded nominal damages to the unsuccessful bidder. The decision is a good checklist for owners in establishing tender evaluation standards.

Background

In July 2010, the South Fish Creek Recreational Association (“SFCRA”), issued an invitation for tenders for the construction, as additions to its existing recreational facilities, of two ice surfaces and multi-purpose rooms and other spaces. Elan was a pre-qualified bidder and filed a bid.

The published evaluation matrix provided for a maximum of 100 points and contained the following elements: Price, 35 points; Date of completion, 35 points; Previous community and arena experience, 20 points; References, 10 points.

Elan was not awarded the contract and sued for damages. The trial judge found the following with respect to the bid criteria:

Price: Elan’s bid was the lowest by $400,000.

Completion Date:  The Invitation to Bid stated that SFCRA wanted the Project to be substantially completed by August 1, 2011, with that date highlighted in bold. The Instructions to Bidders contained a liquidated damages clause providing for liquidated damages in the event of late completion in the amount of $15,000 per day, later reduced to $3,000 per day.

Elan’s bid provided for substantial completion by August 1, 2011 and completion of deficiencies by August 15, 2011. The successful bidder’s completion date was August 31, 2011.

The adjudicator did not use August 1, 2011 as the relevant date. Instead, he took the average of the completion dates of certain, but not all, of the bidding contractors considered most relevant, arriving at a completion date of September 5, 2011; and then awarded bidders points out of 30 based on their proximity to that notional date. As a result, Elan received 25 points for its on–time date of August 1, 2011 for substantial completion, while the successful bidder received 34 points for its later substantial completion date of August 31, 2011.

The evaluator used the same approach to deal with the estimated time to complete deficiencies, arriving at an average figure of 45 days after his notional completion date of September 5, 2011. As a result, Elan received zero points for its 14 day estimate while the successful bidder received four points for its longer 30 day projection.

LEED: Leadership in Energy and Environmental Design (“LEED”) experience was used as a factor in the evaluation criteria factor, but there was no indication in the Bid Documents to this effect.

Court’s Decision

The Court of Queen’s Bench found that on various accounts the evaluation factors used by the owner had not been disclosed in the bid documentation, and therefore the owner breached the implied duty of fairness inherent in the tender process. Here are the reasons of the court on some of the factors:

Substantial Completion Date

“Mr. Quinn’s methodology, as described above, created an arbitrary standard that could not have been within the contemplation of the bidders. His testimony as to his method and rationale served only to underscore the arbitrary nature of his evaluation. Moreover, his approach created, in my view, the kind of undisclosed evaluation criterion that the Supreme Court of Canada has said constitutes a breach of Contract A.”

Experience

“….SFCRA’s approach to evaluating the relative experience of the bidders cumulatively amounted to breach of the Bid Contract….While I agree that it would not be unreasonable for SFCRA to put greater emphasis on arena experience given the nature of the Project, in my view, that emphasis should have been disclosed in the Bid Documents…..an explicit preference for such experience could and should have been indicated in the Bid Documents….”

Other undisclosed criteria

“I find that other undisclosed criteria influenced SFCRA’s assessment of the bidders’ experience. ….any consideration of LEED in the assessment of experience…..should have been brought to the attention of bidders….Similarly, while interviewing candidates may be useful and may fall within SFCRA’s right to seek further information, bidders should have been made aware that interviews were a possibility. Further, Elan should not have been forced into the position of attending an important interview without key employees who were designated to work on the Project. In my view, both the use of interviews and the process by which they are conducted must be fair to all bidders.

In its analysis the court referred to the recent decision of the Supreme Court of Canada in Bhasin v Hrynew. In that decision, the Supreme Court held that there is a duty to perform contracts honestly. Applying that principle, the Court of Queen’s Bench said:

“I hasten to add that there is no suggestion that SFCRA acted dishonestly or with malice. Nevertheless, as the Supreme Court of Canada held in Bhasin, a duty of good faith may require more than honesty. Where a bid evaluation has been conducted in an arbitrary manner or on the basis of undisclosed criteria, that is sufficient to constitute breach.

The court concluded that, absent the owner’s breaches of contract, Elan would have been the successful bidder.

In assessing damages, the court held that either the cost of preparing the bid, or the lost profit on the construction contract that would have been awarded to Elan, is the proper measure of damages, but not both. In assessing damages under the second approach the court reduced Elan’s claim:

  1. because Elan had, in the court’s view and based on the next lowest tender, underestimated the subcontracts. On this account Elan’s claim should be reduced by $185,000, from $704,908 to $519,908
  2. because the contractor who was actually awarded the contract was anticipating a $300,000 profit and made a loss of $600,000, and Elan would likely have encountered a similar experience. Accordingly, Elan’s claim should be reduced from $519,908 to nominal damages of $1,000.

Having awarded damages based upon loss of profit, the court said that no damages could be awarded for the cost of preparing the bid, and in any event no proof of that cost had been provided.

Discussion

This decision is a good illustration of two perils relating to claims for breach of an invitation to tender, and the “smell tests” which the court will likely apply in the course of litigation over a tender.

First, a court will be very unsympathetic to an owner that has not prepared and applied tender evaluation criteria that fairly reflects the bid conditions. There is really no excuse for an owner applying criteria that do not accurately reflect the bid conditions which it has itself prepared and published. Interestingly, the court used the concept of “honest performance” of a contract, enunciated in the Bhasin case, to judge the owner’s performance of its obligations under the invitation to tender.

Second, the court will carefully scrutinize the bidder’s claim for damages. The court may well think: “Well, this contractor was fortunate not to have won that contract!”

Elan Construction Limited v South Fish Creek Recreational Association, 2015 ABQB 330

Construction law – tenders- Contract A/Contract B – honest performance – damages

Thomas G. Heintzman O.C., Q.C.,  FCIArb                                                      December 20, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Subcontractor’s Lien Rights May Be Terminated By The Contractor’s Abandonment

The construction and builder’s line statutes in Canada generally provide that a lien may be lost if an action is not commenced or a lien registered within a certain period of time within the “completion or abandonment” of the work. Usually, the word “abandonment” is applied to the party claiming the lien. But in Tervita Corp. v. ConCreate USL (GP) Inc., the Alberta Court of Appeal has held that the conduct of the other party to the construction contract may result in the contract being “abandoned”. In addition, the Alberta Court of Appeal held that more than one lien claim may be filed or registered for one lien. Both of these findings are significant for those engaged in construction disputes.

Background

Tervita was a subcontractor to ConCreate which had contracted with the owner. Tervita performed its last work in February 2012. In March and April 2012 a receiver was appointed for ConCreate and the receiver barred access to the site. In April 2012 Tervita filed its first lien. In July 2012, Tervita emailed the City’s consultant to say that its “contract was terminated with ConCreate prior to us being able to complete the work.” In July 2012, Tervita issued a Statement of Claim but it did not register a lis pendens against the land.

On October 2, 20121, the 180 day period for Tervita to register a lis pendens expired. On October 12, 2012, Tervita registered a second, identical lien. In November 1, 2012, a lis pendens was registered with respect to the second lien and the original Statement of Claim was amended to now refer to the second lien.

Decision of the Alberta Court of Appeal

The Alberta Court of Appeal held that the subcontract between Tervita and ConCreate was abandoned due to the conduct of ConCreate and its receiver, and that this fact was recognized by Tervita in its email of July 23, 2012 to the City’s consultant. The Court of Appeal held that the word “abandonment” includes abandonment by the party claiming the lien -in this case, Tervita – or by the general circumstances relating to the subcontract.

The Court of Appeal described the issues of subjective and objective abandonment as follows:

“In some cases a contract may be “abandoned” on an objective basis. The statute just requires abandonment, not necessarily abandonment by the lien claimant. Certainly a subjective abandonment by the lien claimant will be sufficient. However, when it becomes clear that the contract has been rendered un-performable by the conduct of either or both parties, by the actions of third parties, or as a result of external factors, the contract is essentially “abandoned”. Once it becomes impractical or impossible to perform the contract, no reasonable party would persist in saying they are “ready, willing and able” to continue performing……There comes a point in time when it is clear that the contract is at an end. That will also start the 45 days running. At some time between the date when ConCreate’s receiver posted guards and blocked access to the site, and the email of July 23, this contract was essentially abandoned.” (underlining added)

The trial judge had held that the subcontract had never been completed, that Tervita was always ready, willing and able to complete the work and that only in October 2012 did the City conclusively tell Tervita that it would not be allowed to complete the subcontract. Accordingly the trial judge held that the time to register the second lis pendens had not expired.

The Court of Appeal disagreed, finding that, by its email of July 232, 2012 Tervita had effectively admitted that the subcontract had come to an end and therefor the work was “abandoned”. It said:

“The test is when the lien claimant knew or should have known that the other party would not complete the contract. Once it would have been obvious to a reasonable contractor that the cessation of work caused by the receivership was not merely temporary, but represented a termination of the contract, the contract was effectively “abandoned”. An abandonment can occur without a formal communication from the other parties that the contract is terminated. Here the insolvency of ConCreate, the actions of its receiver in blocking access to the site, the discussion with the City about the possibility of doing the remaining work directly for the City, combined with the other surrounding factors, would cause a reasonable person to conclude that the contract was terminated. Tervita acknowledged that in its email of July 23. The fact that the City of Calgary might enter into a new contract for the same work was irrelevant to the ability to file a lien for the work done under the first contract.

….. To resolve this appeal, it is not necessary to determine exactly when the 45 days started to run. The contract had been abandoned, at the very latest, by the time of Tervita’s acknowledgment on July 23 that its contract had been terminated. In an objective sense, Tervita realized by that day that the cessation of work was not just temporary. The last day on which a lien could have been filed was approximately September 6, 2012, making the second lien ineffective.”

Notwithstanding tis finding that the time to file the second lien had expired, the Court of Appeal went on to find that the filing of a second lien is permissible. It said:

“Thus, the Act does not appear to preclude the filing of multiple liens. Since the lien right arises when the work commences, a subcontractor might theoretically file a separate lien at the end of each month, for all the work done that month and in all the previous months. If a statement of claim was subsequently issued later than 180 days after some of the early liens were filed, those liens would undoubtedly “cease to exist”. But it does not necessarily follow that all of the lien rights for early work that are also captured by later liens, or at the least those for work that is done later, would also “cease to exist”.

As noted, a liberal approach is to be taken in determining whether the claimant has lien rights. After that threshold is reached, a strict interpretation is required of the registration requirements. If it were not for the fact the second lien was filed after the passage of 45 days from the abandonment of the contract, that second lien would have been valid. The first “registered lien” had ceased to exist, but on a proper interpretation of the statute the underlying lien rights should not be taken to have been extinguished as well. If the lien claimant meets all of those requirements, a second lien that overlaps with the claims in a first lien is not per se invalid. On a proper interpretation, the expiry of the first lien does not undermine the fundamental validity of the second one.” (underlining added)

Discussion

The email from Tervita on July 232, 2012 seems to have doomed its later assertion that the subcontract had not been abandoned. But what if it had not written that email? Would its lien rights have continued for ever, since it was the contractor which precluded the subcontract from being completed? Probably not. At some point the objective facts would have established that the subcontract was abandoned even though the subcontractor wished to complete it.   The Court of Appeal appears to have been willing to find that the subcontract was not abandoned by reason of the appointment of the receiver for ConCreate, as long as there was a possibility that ConCreate’s receiver would continue with the contract and the subcontractor intended to do so.

There are a number of lessons to be learned from this decision. Contractors and subcontractors should be careful to determine whether the conduct of others on the site might be construed as an abandonment of the contract or subcontract. They should be careful when they, or others on the project, make definitive statements about whether the contract is abandoned. In either event, a lien claimant is well advised to immediately take all steps to preserve and protect the lien if the conduct on the project or statements of the parties on the project might lead to the conclusion that the contract or subcontract has been abandoned. Thus, if a party sends or receives a letter stating that the contract is terminated, then there is a distinct possibility that the contract is abandoned and immediate steps should be taken to register a lien.

Tervita Corp. v. ConCreate USL (GP) Inc. 2015 CarswellAlta 289, 2015 ABCA 80

Construction law – construction and builders’ liens – abandonment – time for registration of lien

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                              May 16, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Eight Rules of Tender Law Pronounced By The Ontario Court Of Appeal

In Rankin Construction Inc. v. Ontario, the Ontario Court of Appeal recently made a number of significant rulings in a tender case. While the rulings were based upon the specific wording of the tender in that case, they were made in the context of a major Ontario highway tender and appear to have wider application.

Factual Background

The Ministry of Transportation of Ontario (MTO) issued an invitation to tender for the widening of Highway 406. The invitation to tender required a bidder to declare the value of imported steel in its bid. The invitation stated that a 10 percent preferential allowance would be granted for domestic steel but that allowance did not apply H-Piles. Rankin did not declare the value of H-Piles as imported steel, believing that its steel qualified as domestic steel even though manufactured outside Canada. A competitor complained that Rankin’s bid was non-compliant and Rankin’s bid was disqualified and the contract was awarded to the second lowest binder.

The trial dismissed Rankin’s claim against Ontario and that dismissal was upheld by the Ontario Court of Appeal but for different reasons.

Rulings of the Ontario Court of Appeal

The Court of Appeal made the following rulings:

  1. Under the formula set forth in Ron Engineering, Contract A governing the tender process arose when bidders submitted their tenders.

This point may seem obvious but other decisions have raised doubts as to when Contract A is formed: Is it the moment before a bid is submitted; or when the bid is submitted, or when the bids are opened or when the bids are published? In this decision the Court of Appeal has said that “Contract A arose when the appellant submitted its tender.”

  1. Contract A was formed with any bidder who submits a bid, not just with a compliant bidder

This is an important point since some decisions, including that of the trial judge in this case, have held that Contract A is only formed between the person issuing the invitation and a compliant bidder. That approach does not make sense since if it is only Contract A that requires the issuer to deal fairly with the bidder in determining compliance. So there must be a Contract A in order for the treatment of compliance to be a binding factor between the issuer of the tender and the bidder. The Court of Appeal was clear that Contract A is formed with any bidder who submits a bid:

“The significance of the appellant’s non-compliance with the tender documents is that, pursuant to the express or implied terms of that Contract A, it may not be awarded Contract B, even if it is the lowest bidder — not that no Contract A is formed. I come to this conclusion based on the language of the Instructions to Bidders, which form part of the tender documents. In this case, the tender offer contemplated that tenders submitted might not be compliant….Paragraph 7.3 of the Instructions to Bidders specifically requires that a bidder include a tender deposit with its tender. This requirement is clearly material. However, para. 11.2 of the Instructions to Bidders also provides that “Tenders not accompanied by a Tender Deposit in the required amount may be rejected.” The fact that the MTO specifically addresses the consequences of the submission of a materially non-compliant tender — when viewed in conjunction with the other provisions in the Instructions to Bidders discussed below — is evidence that it intended that a Contract A come into effect, even if the tender submitted is non-compliant.

Respectfully, the trial judge erred in concluding that the necessary consequence of Ron Engineering referred to in Tercon, is that no Contract A can come into existence where a bid is not materially compliant with the tender documents, without considering the effect of the tender documents. In other words, the terms of the offer to consider bids made by the request for tenders, as reflected in the tender documents, must be scrutinized to determine whether the parties intended contractual relations to arise on the submission of a tender: see M.J.B. Enterprises. In my view, subject to the governing documentation, contractual relations would usually come into existence on the submission of a bid. This is a desirable result: it provides greater certainty as to the rights and obligations of the bidders and the owner, and may reduce the frequency of litigation arising out of the award of tenders.”

  1. The person issuing the invitation to tender has a right, but not an obligation, to investigate the bids

The trial judge had held that in the decision in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, the Supreme Court had found that the owner issuing an invitation to tender does not have an implied duty to investigate allegations of non-compliance by a rival bidder, but that the owner has a right to do so. The Court of Appeal agreed:

“…the tender documents do not preclude the MTO from conducting an investigation. They do not expressly provide that the MTO will not investigate any complaints, and I see no basis for implying such a term….Like the trial judge, I reject the appellant’s argument that an owner cannot investigate allegations of non-compliance unless the bid documents specifically give the owner the right to do so or the owner has a written policy that it will do so.

  1. The effect of non-compliance clause and the privilege and discretion clause was that the owner might, but was not obliged to, waive the non-compliance and accept the bid

The privilege clause said that “the Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted.”

As the Court of Appeal noted, this paragraph “constitutes both what are often referred to in cases involving the law of tender as a “privilege clause” (the right not to accept the lowest or any tender) and a “discretion clause” (the right to waive formalities as the interests of the MTO may require).”

The Court held that this paragraph allowed, but did not require, the MTO to waive a “formalities”:

“In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder.”

In arriving at this conclusion, the Court of Appeal apparently considered that “formalities” are what might be called “informalities”, that is, something that is a mere formality and not significant.

Accordingly, the Court of Appeal held that the MTO had the right not to waive the non-compliance in Rankin’s bid.

  1. A formality which could be waived was one which arose honestly and which does not substantially affect cost or the resulting comparative bids and maintains the integrity of the bidding process.

The Court of Appeal gave two reasons for its decision that the non-compliance was in respect of a formality which could have been waived by the MTO.

First, it applied what it called the ‘generous view of “informality”’ of the Supreme Court of Canada in Double N Earthmovers and then held that the non-compliance could have been waived:

“because of the appellant’s honest intention to use Canadian steel and the fact that the outcome, and the cost to the MTO, would have been the same had it declared that the H-Piles are imported steel. The price preference for Canadian steel was a mechanism for evaluating the competing bids. It did not affect the actual price to be paid by MTO to the successful bidder. And the MTO expected that American H-Piles would be used in the project. The appellant’s non-compliance “did not materially affect the price or performance of Contract B” [quoting from Double N Earthmovers], and therefore amounts to an informality….”

The Court of Appeal then gave a second reason: waiving the non-compliance maintained        the integrity of the bidding process. It said:

“I would add the following. Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process. And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible. Here, the tender process was essentially fair and the appellant’s bid was materially less costly to the public purse. Given this, in my view, a balancing of the public interest in promoting the integrity of the public bidding process so that the government can generally obtain the best prices, against the public interest in the MTO obtaining the best price possible in this particular case for widening Highway 406, also weighs in favour of the conclusion that the appellant’s non-compliance was a formality”.

  1. The owner could not waive a material non-compliance

On its interpretation of the invitation to tender, the Court of Appeal held that the MTO could not waive a non-compliance that was not a mere formality:

“In my view, a requirement that the MTO would not accept bids that were non-compliant, if the non-compliance amounted to more than a “formality”, can in this case be implied in Contract A on the basis of the presumed intention of the parties.”

The Court of Appeal held that, by not waiving the non-compliance in Rankin’s bid, the MTO had adopted the more cautious route in a sensible effort to avoid litigation.

  1. The owner was not obliged to notify bidders of non-compliant bids within 10 days

The tender documents contained two stipulations, as follows:

6.3         Bidders whose Tender has been rejected by the Ministry will be notified of the reasons within 10 days of Tender Opening.

12.1       The Ministry will notify the successful bidder that the Tender has been accepted within 30 days of the Tender Opening.

Paragraph 6.3 appeared in Part 6 of the tender documents headed Unbalanced Bids and Discrepancies. Paragraph 12.1 appeared in Part 12 of the tender documents headed Contract Award Procedures. MTO did not advise Rankin that its bid was non-compliant within the 10 days. Accordingly, Rankin argued that the rejection of its bid was invalid and MTO was obliged to award the contract to it as the lowest bidder.

The Court of Appeal rejected Rankin’s arguments for a number of reasons.

First, it held that paragraph 6.3 only applied to unbalanced bids, not non-compliance:

“….given that para. 12.1 gives the MTO 30 days to determine the successful bidder, I agree with the trial judge that interpreting para. 6.3 to require the MTO to determine whether it will waive “formalities” and, if not, notify non-compliant bidders, within 10 days of tender opening, makes no sense. To require the MTO to notify all unsuccessful bidders of the reasons why it will not accept their bids within 10 days of Tender Opening, would effectively require the MTO to determine the successful bidder within 10 days, rather than 30 days as expressly provided for under para. 12.1.”

Second, paragraph 6.3 did not convert an invalid and non-compliant bid into a valid and compliant bid. As the court said, the clause “does not provide that a “rejection” is invalid if the bidder is not notified of the reasons for the rejection within 10 days of Tender Opening.”

  1. The Exculpatory clause excluded all liability

Paragraph 11.3 of the tender documents said:

“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 acceptance of a Tender, except as provided in the tender documents”.

The Court of Appeal applied the tests in the Supreme Court of Canada’s decision in Tercon to determine the proper interpretation and enforceability of this exclusion clause. It found that the paragraph was a complete defence to any claim in the present circumstance. Rankin did not argue that the clause was unconscionable or unenforceable due to public policy. Rather it argued that the paragraph did not apply if MTO breached the conditions of tender. The court rejected that argument:

“The language is in my view clear — both in the paragraph itself and in the context of the Instructions to Bidders as a whole. A bidder presumably would not sue unless it alleged that the MTO had breached a term — express or implied — of the tender documents by accepting another’s bid, or not accepting its bid. To interpret para. 11.3 as not applying where a breach by the MTO of the tender documents is alleged would effectively render it meaningless. Paragraph 11.3 is a commercial response to the increased litigation faced by owners arising out of the acceptance, and corresponding non-acceptance, of bids.”

The court did say that in some circumstances the “the conduct of the owner in the bid process is so aberrant that it would justify a court’s refusal to enforce an exculpatory provision in the tender documents on public policy grounds. This is not such a case.”

Comments

The first three principles adopted by the Court of Appeal are helpful clarifications of the tender law relating to Contract A.

Principles 4 to 6 are more contentious since they involve three possible layers of discretion. The first layer involves the determination of the boundary between the two categories. Clearly, the court is hesitant to interfere with the owner’s determination that the non-compliance is a mere formality or is a substantial non-compliance. The second layer of discretion is introduced by the court’s finding that the tender documents allow the owner to waive something which is a mere formality. But the third level of possible discretion goes the other way. The court interpreted these tender documents as not giving the owner the discretion to waive material non-compliances. Differently worded tender documents might change either of these latter two discretions, requiring the owner to waive a mere formality or allowing the owner to waive a material non-compliance, but it seems that tender documents would have to be clearly written to achieve the latter result.

Principle 7 involves principles of contract interpretation that were used to rescue MTO from what were less than well-drafted tender documents. Besides arising from an analysis of the different parts of those documents, the principle appears to be based on a distinction between the substantive and procedural provisions of tender documents. The owner’s failure to follow the procedures – giving the bidders notice of non-compliance – cannot convert what is a non-compliant bid into a compliant bid.

Principle 8 is probably the most important and contentious. The Court of Appeal appears to have held that the exclusion clause drafted by MTO is the elusive “magic bullet” that removes all the owner’s liability arising from breach of any term of a tender. The court was at pains to say that egregious conduct by the owner might, in another case, not be protected by this exclusion clause. But absent such conduct, the court appears to have held that this clause gives the owner complete protection in respect of the tender.

If that is so, then many questions arise. Is there a Contract A at all? What is the consideration for the contractor’s bid if the contractor has no effective remedies? If the owner inserts such a sweeping exclusion clause into the tender documents, should the contractor be able to say that there is no Contract A and withdraw its bid? Or is such an exclusion clause so sweeping that it is contrary to public policy or unconscionable from the standpoint of the law of contract formation – something not argued by Rankin. Further cases may have to explore the answers to those questions.

Rankin Construction Inc. v. Ontario, 2014 CarswellOnt 12595, 244 A.C.W.S. (3d) 79

Construction Law – Tenders – Waiver – Non-Compliance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 26, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

When Is A Consultant Liable To A Contractor For Subsurface Information In Tender Documents?

One of the difficult issues in construction law is the duty owed, if any, by the owner’s consultant to the contractor. In particular, does the consultant owe any such duty in respect of subsurface conditions? In North Pacific Roadbuilders Ltd. v. Aecom Canada Ltd., the Saskatchewan Court of Queen’s Bench recently held that it did. While this case was decided in 2013, it is now about to go before the Saskatchewan Court of Appeal so it is timely to note the trial decision as we await the appellate decision.

Background  

North Pacific was awarded the contract to build a 57-kilometre ore haul road for Cameco Corporation between its mine and mill at one location and a new mine at another location. UMA was Cameco’s consultant and prepared the specifications and technical information for the tender documents. UMA was acquired by Aecom. North Pacific asserted that UMA was negligent in the preparation of the tender documents and misrepresented soil and terrain conditions that would be encountered on the project.

Cameco gave to UMA three reports prepared by a civil engineering firm named J.D. Mollard and Associates Limited (“Mollard”). The route for the road selected by UMA and Cameco was the one recommended originally by Mollard. The tender documents did not make any reference to the Mollard reports and did not state that those reports were available for inspection.

Decision

The trial judge held that UMA had a duty of care to the bidders on the project, relying on such decisions as Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206. The court held that it was foreseeable that bidders would rely on the information contained in the tender documents. While UMA’s failure to disclose the results of special-purpose test holes was not misleading to bidders, its failure to disclose the Mollard terrain mapping information amounted to a negligent misrepresentation.

The owner, Cameco, had the same terrain mapping information but had effectively excluded tort liability in the invitation to tender. That documents said that “Cameco shall not be liable for any damages or costs incurred by the Contractor in the performance of the contract in the event that the actual quantity or quality of the material differs from the quantity or quality of the material assumed by the Contractor for the purpose of submitting a bid.”

The court held that this language did not exempt the engineers from liability:

“The fact that the contractor may agree to exempt the party inviting tenders from liability for the design process does not suggest that it thereby should be taken to have exempted the engineering firm. In the scheme of things, it makes good practical and economic sense to place the responsibility for the adequacy of the design on the shoulders of the designing engineering firm, assuming reasonable reliance and barring disclaimers. The risk of liability to compensate third parties for design error will be reflected in the cost of the engineers’ services to the owner inviting tenders. But that is a much better result than requiring the owner to pay not only the engineering firm which it retains, but indirectly, the additional engineers which all tendering parties would otherwise be required to retain.”

The court concluded that “the combination of failing to disclose the Mollard terrain information combined with the uniform estimate for surplus rock to be encountered along the way, resulted in an expressly misleading representation to bidders.” The failure to disclose the Mollard terrain information was misleading by omission in implying there was no terrain information available to UMA that could assist bidders to prepare their bids.

On the other hand, the court concluded that UMA’s failure to disclose the results of test holes that it had dug did not amount to a misrepresentation:

“The question remains whether UMA should have disclosed the test hole results recorded by UMA survey crews in any event. I conclude such results not being disclosed did not make the material that was disclosed misleading or inaccurate…..The tests were never intended to disclose terrain conditions which might be encountered along the route….. Because they were specific-purpose tests, the results are arguably unrepresentative of all conditions that would be encountered along the route….. Failure to disclose the results of the special-purpose test holes was not misleading by omission to bidders.

The court concluded that the failure to disclose subsurface conditions amounted to a breach of the standard of care owed by the engineers:

“A key factor in Canadian court decisions awarding compensation to a contractor for variations in subsurface ground conditions has been finding that the project owner and/or engineer failed to disclose important information to the contractor. Where our courts have been satisfied that the owner or engineer has failed to fulfil his or her duty to warn a contractor of known adverse conditions which would have an obvious impact upon the contractor’s analysis and pricing of the project, the courts have decided in the contractor’s favour….not disclosing the Mollard terrain mapping information to bidders fell below the standard of what would be expected of a reasonable engineer in the factual situation faced by UMA. At the time of tender, 37 kilometres of the route was inaccessible to them, and was not going to be accessible to bidders. UMA had relied on the Mollard reports for preliminary design of the route, and used the Mollard terrain information to inform the regulatory authorities ….UMA knew that terrain information would be important to bidders in preparing their bid. While the Mollard reports advised against making the terrain information part of the tender specifications, it informed how the information might be made available to contractors, which indicates Mr. Mollard thought it was worthwhile making the information available to bidders. I conclude that UMA’s failure to disclose the Mollard terrain mapping information to bidders, which was the only information on the terrain to be encountered along the route that was available, and was information that UMA had relied on extensively itself, fell below the standard of a reasonable and prudent engineer and resulted in a breach of its duty of care to bidders on the project, including the plaintiff.”

The court dismissed UMA’s claim against Cameco and North Pacific that they were each contributory negligence. As to UMA, it had contracted out of any duty of care or responsibility to North Pacific in the invitation to tender and resulting construction contract.

As to North Pacific, its reliance on the tender information was reasonable. The bidders had assumed they had been supplied with the terrain information that was available. In these circumstances, North Pacific was not contributorily negligent in failing to make inquiries about additional terrain information.

Discussion

This decision takes the decision in Edgeworth into the subsurface world. Apparently, the non-disclosure of some information – such as test holes – will more likely lead to liability by the consultant to the contractor than the non-disclosure of other information – such as prior reports. What is the distinction and where is the boundary line? Apparently the more general the information, the more substantial the use of the information by the consultant or a regulator, and the less accessible this information to the contractor, the greater the duty of the consultant to disclose its existence to the contractor. Is this a satisfactory distinction?

The court’s reasons for holding the consultant liable are premised on the consultant being in the best position to ensure that no misrepresentation is made. But another consideration is whether the consultant is best able to absorb the cost of liability. Consultants are usually not able or willing to absorb what could be very large damage claims arising from tender misinformation. It seems likely that the consultant may request that exclusionary language in its favour be inserted into the invitation to tender, construction contract or contract with the owner. At the least, consultants may insist that their subsurface liability be limited to the amount of the liability insurance taken out by the consultant.

North Pacific Roadbuilders Ltd. v. Aecom Canada Ltd. (2013), 419 Sask. R. 117, 2013 CarswellSask 289.

Construction law – consultants – liability of consultant to contractor – negligence- subsurface information

Thomas G. Heintzman O.C., Q.C., FCIArb                                                             October 5, 2014

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 BakeryThat 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 69In 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

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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

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www.constructionlawcanada.com

Who Is A Successor To A Contract?

Most commercial agreements contain a clause stating that the contract is binding upon and for the benefit of “successors.”  For example, Article 10.1 of the CCDC Cost Plus Contract states that the contract “shall enure to the benefit of and be binding on…successors”.

What does the word “successors” mean?  Who are “successors”?  Do those who enter into the contract know who the successors are?

Recently, the Ontario Court of Appeal considered this issue in Brown v. Belleville (City).  I dealt with that case in an article last week. In that article I was concerned with whether inaction could amount to acceptance of a repudiation of a contract.

Factual Background

 Let’s remind ourselves of the facts in Brown v. Belleville. In 1953, a municipality signed an agreement with a farmer under which the municipality agreed to maintain and repair a storm sewer drainage system that it had constructed on and near the farmer’s lands. Six years later, the municipality stopped maintaining and repairing the drainage system.  Over the next 50 years, the original municipality and successor municipality clearly and repeatedly repudiated the agreement.

The lands were sold from owner to owner and each owner unsuccessfully sought to have the municipality repair and maintain the drainage system.  Finally, in 2011 the then owners of the lands, the Browns, sued the municipality for breach of contract. The municipality, the Town of Belleville, defended the action on a number of grounds.  It said that the limitation period had expired because the Browns or their predecessors had long ago accepted the municipalities’ repudiation of contract. The trial judge and the Court of Appeal rejected that position. I dealt with that issue last week.

Belleville also said that the Browns had no standing to sue because they were third parties to the 1953 agreement, and that contract law does not entitle third parties to enforce agreements. Belleville also said that the Browns were not “successors” of the original farmer who entered into the agreement.  That agreement said:

“THIS INDENTURE Shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns.”

The agreement was never registered against the title to the land.  The City said that the agreement was never assigned or otherwise transferred to the plaintiffs or the other owners of the land after the original farmer who entered into the agreement.  The City asserted that the Browns were third parties to the original agreement and did not fall within any of the accepted  category of persons who could enforce the agreement.

Court of Appeal Decision  

 The Court of Appeal held that, on its face, the contract created a category of persons who could enforce the contract as parties to the contract, namely, successors of the owner who entered into the agreement. In that sense, the Browns did not have to demonstrate the application of the “third party beneficiary rule”. They were effectively parties as much as the original party.

The court stated it this way:

“…the broad and unqualified language of the enurement clause constitutes an express stipulation by the contracting parties that they intended the benefit of the Agreement to be shared by future owners of Mr. Sills’s lands, as his successors or assigns or by way of inheritance.  The  language  of  the  enurement  clause  unequivocally  confirms  that  the contracting parties intended and agreed that the benefit of the Agreement would extend to an aggregation or class of persons that includes successor  landowner of Mr. Sills.   On the admitted findings of the motion judge, the Browns are Mr. Sills’s successors.   In this sense, the Browns are not strangers or ‘third parties’ to the Agreement.   Rather, they step into Mr. Sills’s shoes and have standing to enfore the Agreement as against the City as if they were the original covantee(s) to the Agreement…given the intention of the contracting parties stipulated in the Agreement under the enurement clause, I conclude that ‘relaxing’ the doctrine of privity in this  case  does  not frustrate  the  reasonable expectations of  the  parties  at the  time the Agreement was formed.  To the contrary, it gives effect to them.”

Belleville relied upon a 1980 decision of the Supreme Court of Canada in Greenwood Shopping Plaza. It said that that decision precluded the Browns from relying on the 1953 agreement to which they were not a party. The Court of Appeal held that, in light of more recent decisions of the Supreme Court, the Greenwood case had been largely over-ruled. In any event, having regard to the enurement clause, the prohibition against third party enforcement of the agreement had little or no application.  If necessary, the court said that it would apply the exceptions to the rule prohibiting third party enforcement of a contract and allow the Browns to enforce the drainage agreement when they so clearly fell within the category of persons who were intended to have its benefit.

The Court of Appeal considered one further objection of Belleville, namely, that the Browns were using the 1953 agreement as a sword – to bring an action and positively enforce rights – rather than as a shield – or as a defence. In the modern cases in the Supreme Court recognizing the rights of third parties to rely on contract they had not signed, those third parties were asserting the contract as a defence.

The Court of Appeal held that this distinction made no difference in the presence of the enurement clause:

 “I recognize  that London Drugs and Fraser River were cases where the third-party beneficiaries sought to rely, by way of defence, on the benefit of the contractual provisions at issue  to resist  claims  brought  against them – they  were not  seeking to  enforce  the affirmative benefit of the relevant contractual provisions….. Nonetheless, it is my view that the Browns’ status as the successors of the original covenantee under  the Agreement affords  them the  right  to seek to  enforce  the original covenantor’s contractual obligations, as against the original covenantor.   In effect, for the purpose of enforcement of the Agreement, the Browns are Mr. Sills and the City is Thurlow.  Further, insofar  as  the performance  of  the  City’s  obligations under  the Agreement are concerned, there is a clear identity of interest between Mr. Sills and the Browns.   As Mr. Sills’s successors, the Browns stood ready to comply with the activity required of them under the Agreement- the provision of access  to their lands.    In all these circumstances, the application of the principled exception to the privity rule advances the interests of justice.” (emphasis added

Analysis

 The Brown v. Belleville decision answers one of the issues arising from “successor” clauses. Based on that decision, a person falling within the clause does not have to worry about the old rule that contract law does not recognize the rights of third parties.  If the contact has an enurement clause in favour of or binding on successors, then successors are parties to the contract as much as the original parties.

The next issue is:  who are successors? Clearly, based on Brown v. Belleville, a later owner of the same land that is affected by the agreement is a successor. But what about a tenant, or subtenant, of that later owner? If that tenant has exclusive possession of the affected property, and is the person who is really affected by a breach of the agreement, is that person a successor? What about the owner of other interests in the land such as owners of easements or mortgagees?

The issue becomes even more complicated when one considers building contracts.  If the main contract between the owner and the contractor states that it is binding on the “successors” of the contractor, does that word include a subcontractor?  What if the owner has given a covenant in the main contract that affects the electrical work and the contractor subcontracts the entire electrical work to an electrical subcontractor?  Is the electrical subcontractor the “successor” of the contractor?  Why not?

If the contractor assigned the electrical part of the main contract to the electrical subcontractor (if it were permitted to do so), then the enurement clause would likely apply because that clause would likely be expressed to include assignees. If the clause includes both successors and assigns, then the word “successors” must be given a wider meaning than “assisgns”, but who does it include?

A further issue is this:  if the enurement clause is also expressed to be binding on successors, then third parties may find themselves bound by obligations under the contract even though they never signed the contract. In fact, a good test as to whether the contract enures to the benefit of a third party may be whether it should be binding on that party.  Clearly, the Browns were willing to be bound by the 1953 agreement and allow Belleville access to their land to repair and maintain the drainage system, so it was not difficult to find that the Browns were successors. Similarly, a subtenant or mortgagee of the Brown’s property would be willing to grant such access, so they may well be successors.

But what parties would be willing to be bound by the contractor’s building contract with an owner?  Would a subcontractor or supplier?  Likely not, especially if that includes the payment obligations. Often the subcontract will state that the main contract is incorporated into the subcontract, but at least one line of authority holds that some of the terms of the main contract (such as arbitration, insurance and guarantee clauses) are not incorporated into the subcontract unless that intention is specifically set forth in the subcontract.

Now that the Ontario Court of Appeal has held that successors may enforce a contract if there is an enurement clause in the contract to that effect, the clause may be more powerful and dangerous than it was previously.  This may be a good reason for the meaning of “successors” to be defined in the contract. The parties may mean that it includes only the successors by virtue of corporate or bankruptcy law. If so, they can say that. But they may mean it to have a broader meaning, such as a successor in title. Again, they can say that.  If they do not, then they will leave it up to the court to decide who is bound by or may rely upon the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 1, part 2

Brown v. Belleville (City), 2013 ONCA 148  

Construction law  –  Enforcement  –  Third Parties  –  Breach of Contract

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

 www..heintzmanadr.com

www.constructionlawcanada.com