When and How is a Subcontractor Bound by its Tender in a Bid Depository System?

The process by which subcontractors’ tenders are accepted in a bid depository is fundamental to the efficacy of that system.  If that process does not effectively bind the subcontractors, then the subcontractors will be able to unilaterally withdraw their bids later.  The British Columbia Supreme Court addressed this issue in its recent decision in Civil Construction Co Ltd v. Advance Steel Structure Inc.

This case required the court to unscramble the “Contract A – Contract B” legal structure created by the Supreme Court of Canada in Ontario v. Ron Engineering & Construction (Eastern) Ltd, [1981] 1 SCR 111 and apply it to the relationship between a contractor and subcontractor.  In Ron Engineering, a distinctly Canadian legal structure was created for contracts between the owner and the contractor in a bid depository system.  Under that structure, there are two contracts which are potentially formed in such a bidding system. The first contract, Contract A, is the contract formed by the submission of a bid. That contract is a judge-made creation arising from the wording of a bid depository system. It is based upon and regulates the bid system itself and requires the bidding contractor to leave its price in place for the duration of the bid and requires the owner to award the contract only to a compliant bidder. The second contract, Contract B, is the ultimate construction contract which may be entered into if the bidder is successful.

That process is workable at the owner-contractor level but becomes more difficult to apply at the contractor-subcontractor level.  Nevertheless, in Naylor Group Inc. v. Ellis-Don Construction Ltd, [2001] 2 SCR 943, the Supreme Court held that the same structure applies to the relationship between a contractor and subcontractor when the subcontractor files a bid in a bid depository system and the contractor carries that bid in its bid to the owner.

What Binds a Subcontractor to a Bid?

In Naylor v. Ellis-Don, it was the contractor, Ellis-Don, which refused to award the subcontract to the subcontractor, Naylor, whose bid it carried in its bid to the owner.  So the dispute dealt with whether the contractor was in breach of its obligations, not whether the subcontractor was.  The Supreme Court held that, by carrying the subcontractor’s bid in its own bid, a Contract A was created between the parties which “required the successful prime contractor to subcontract to the firms carried in the absence of a reasonable objection.”  (My emphasis added).

In the Ontario Court of Appeal, the result was stated somewhat differently.  There the Court of Appeal said: “Thus, unless the successful prime contractor has a reasonable objection to the subcontractor it has proposed, the prime contractor must communicate its acceptance of the subcontractor’s bid.” (Again, my emphasis added, for comparison purposes).

In Civil Construction v. Advanced Steel, it was the subcontractor that refused to adhere to its bid.  And it said that its bid had not been accepted by the contractor.  In these uncharted waters, what is the right result under the Ron Engineering structure, or is the structure being bent so out of shape that it cannot apply?  What event binds the subcontractor to its bid, a communicated acceptance or the filing of the contractor’s bid?

Civil Construction was a bidder as the general contractor in a tender by the City of Richmond, British Columbia for the construction of a drainage pump station upgrade.  Advanced submitted an unsolicited bid dated June 10, 2009 to Civil Construction for the structural steel subcontract work.  In its bid, Advanced stated that its bid was “valid for acceptance for the next 30 days and valid for delivery within 90 days after acceptance”.  Civil incorporated Advanced’s bid into its own bid dated June 10, 2009 to the City of Richmond.

On July 10, 2009, Civil was advised by the City that it was the successful bidder.  Civil’s project manager testified that, on that same day, he called each of the subcontractors, including Advanced, to advise them that they were named as sub trades in its tender submission.  On July 13, 2009, the City wrote to Civil to formally award the general contract on the project to Civil, and Civil wrote to Advanced on the same day to award it the structural steel subcontract.

Advanced refused to enter into the subcontract for two reasons:

First, it said that Civil’s acceptance on July 13, 2009 of Advanced’s bid of June 10, 2009 was outside the 30 days stipulated in that bid.

Second, it said that Civil’s acceptance of its bid contained conditions not set forth in its bid, and therefore amounted to a counter-offer, which Advanced refused to accept.

Civil proceeded to hire another structural steel subcontractor and sued Advanced for the extra cost of that subcontract.

The Court rejected both of Advanced’s arguments

First, it held that the relevant acceptance by Civil of Advanced’s bid occurred on June 10, 2009. That acceptance occurred by reason of Civil including Advanced’s bid in Civil’s own bid to the owner.  By doing so, Civil created the Contract A with Advanced under the bid depository system.

Under that system, the B.C. Court held that Advanced’s bid was accepted by Civil under Contract A once that bid was submitted by Civil as part of its bid to the owner.  Relying on previous decisions in the Supreme Court of Canada and Alberta, the Court held as follows:

“[C]ontract A is formed when a subcontractor tenders in response to a general contractor’s invitation and the general contractor incorporates that bid as part of its tender to the owner. Under contract A a subcontractor may not withdraw its tender for a set period and must enter contract B upon acceptance of its bid, which is when the general contractor’s bid with the subcontractor’s tender included is accepted by the owner.

The general contractor’s obligation to a subcontractor under contract A arises once the general contractor chooses to carry the subcontractor’s bid in its tender to the owner.

In return for the subcontractor being bound by its bid, the general contractor, upon acceptance of its bid, which includes the subcontractor’s bid, is obliged to enter into a construction subcontract B with the subcontractor.”

The Court accordingly held that, since Civil had included Advanced’s bid in its own bid on June 10, 2009, the relevant acceptance had occurred within the 30 days set forth in Advanced’s bid.  In effect, the Court interpreted the words “valid for acceptance” in Advances’ bid as meaning “valid for acceptance for Contract A, not Contract B”.  The Court did not refer to any communication of that acceptance by Civil to Advanced, or any necessity for such a communication.

Second the Court also held that Civil’s purported addition of further work in the subcontract was not permissible under the Contract A system.  Therefore, Civil and Advanced were bound to enter into a Contract B that conformed to the bid, and the additional work specified by Civil was ineffective and Advanced was bound by a subcontract which did not include that additional work.  Accordingly, Advanced was liable in damages to Civil based upon that subcontact.

Two Disquieting Features:

While this decision is the common sense result of a bid depository system, it does have two disquieting features.

First, when the contractor includes the subcontractor’s bid in its tender to the owner, should the contractor be obliged to tell the subcontractor, at that time, that the latter’s bid is included in the contractor’s tender?

Normally, an acceptance only occurs when the acceptance is communicated to the offeror.  There could be many subcontractors who tender for the work.  If there is no communication from the contractor to the subcontractor when the contractor submits its bid, should the subcontractor be presumed to know that its bid is the one which has been accepted for inclusion in the general contractor’s bid?

As noted above, in Naylor v. Ellis-Don, the Ontario Court of Appeal said that the contractor “must communicate its acceptance of the subcontractor’s bid” to the subcontractor.  But what if it doesn’t?  Does that let the subcontractor off the hook?  And while the Supreme Court said in that case that Contract A “required the successful contractor to subcontract to the firm carried”, is the subcontractor similarly bound to proceed with the subcontract in the absence of an express and timely acceptance by the contractor?

The courts can, of course, create exceptions to the normal rule that an acceptance occurs when it is communicated to the offeror.  Those exceptions are based upon business efficacy and the presumed intent of the parties.  One such exception is the old rule that a posted acceptance is deemed to occur at the time of posting, not the time of receipt.

The Court Constructed a New Exception for Subcontractors

It appears that in the present case, the court constructed a new exception for subcontractors’ bids in the bid depository system.  According to this decision, the acceptance of a subcontractor’s bid for purposes of Contract A occurs when the contractor includes the subcontractor’s bid in its own bid, even though that is not communicated to the subcontractor.  The real question is whether that is a good rule, and if it is, whether the rule should be specifically set forth in the bid documents. Otherwise, it could be argued that the contractor should be required to notify the specific subcontractor whose bid has been included in the contractor’s bid to the owner, so that the subcontractor knows that its bid has been accepted for the purpose of Contract A.

For the moment, and based on this decision, contractors and subcontractors may proceed on the basis that if a subcontractor states a time for acceptance in its bid, then that statement will be taken to mean the time in which the contractor has to insert that bid into its own bid to the owner, that there is no need for the contractor to advise the subcontractor that that has occurred, and that it is up to the subcontractor to inquire, if it wishes to know, whether its bid has been included in the contractor’s bid.

Warning to Contractors:

The other question which is raised by this decision is whether a subcontractor can avoid this result by a more specific tender. Can the subcontractor specifically state in its bid that its offer of a construction contract (ie:  Contract B) must be accepted within a specific period of time, and a time period shorter than the contractor’s bid period?  In other words, could the subcontractor specifically state that its bid could only result in a construction contract if that construction contract is entered into within a specific period of time which is less than the bidding process allows?

The short answer is that such a bid is non-compliant with the bid depository system and Contract A under the Ron Engineering structure.  This answer follows from the requirement in Contract A that the subcontractor keep its bid open during the bid period and enter into Contract B on the terms set forth in the bid, that is, up to the time the contract is awarded and a reasonable time thereafter.  But if this is the right answer then contractors will have to be alert to ensure that any subcontractors’ bids they receive do not have such a short fuse in them, and if they do, to disqualify them from the bidding process.

Advanced may have intended to raise this question in the present case.  But the court did not answer the question by holding that Advanced’s bid was non-compliant with the terms of the bid.  Rather, it interpreted the word “valid for acceptance” in Advance’s bid to mean “valid for acceptance under Contract A”, and it arrived at that conclusion by reference to the bid depository system and Ron Engineering.  It will require a more specifically drafted subcontractor’s tender to raise the “non-compliant acceptance period” issue.

Construction Law – Subcontractors – Bid Depository System

Civil Construction Co Ltd v. Advance Steel Structure Inc., 2011 BCSC 1341

Thomas G. Heintzman O.C., Q.C.
November 13, 2011


When Does The Negotiation End And The Limitation Period Begin For An Arbitration Claim?

Construction Law – Arbitration – Negotiations – Limitation Periods – Contract

An arbitration clause in a construction contract may be written in a way that encourages the parties to settle their differences by negotiation and agreement. But if the parties attempt to do so and fail, can one of the parties then say to the other: “Gotcha! The limitation period for your claim has now passed!” That is the issue which the Ontario Court of Appeal recently addressed in L-3 Communication Spar Aerospace Limited v. CAE Inc.

SPAR was awarded a contract to develop a hardware and software system. SPAR subcontracted some of the deliverables to CAE. SPAR was required to deliver data about those deliverables to CAE within a certain timetable. The subcontract said that if the data was not delivered within 90 days of that timetable “and the parties cannot agree to a price adjustment due to the delay….beyond the 90 days”, then CAE was relieved of its obligations under the subcontract “only to the extent that performance is not possible as a direct result of Spar to provide that information”. The subcontract then stated: “The price and other adjustments that are not agreed between the parties may be referred to arbitration” under the arbitration clause in the contract.

SPAR provided certain data to CAE, but CAE took the position that it was inadequate, and that SPAR should obtain further data from the vendors of the relevant software to SPAR. Spar refused to do so, and its refusal to do so was clear by November 2005. CAE proceeded to obtain the data from SPAR’s vendors. CAE’s evidence was that it had discussions with SPAR about settling the question of who would pay for the cost of obtaining that data.

When the cost and price issue was not settled by December 2008, CAE demanded payment for the cost of obtaining the data from SPAR’s suppliers. SPAR responded by stating that CAE’s demand was premature and that CAE was required to proceed by way of the arbitration. When CAE then delivered a Request to Arbitrate in January 2009, SPAR took the position that CAE’s arbitration claim was barred by the two year limitation period in Ontario. SPAR said that the limitation period commenced in November 2005 when SPAR unequivocally said that it would not obtain the data. SPAR commenced a court application for a declaration to that effect.

The Ontario Superior Court dismissed SPAR’s application and its decision was upheld by the Ontario Court of Appeal.

The Superior Court held that, under the wording of the subcontract, the right to arbitrate arose and the limitation period for CAE’s claim commenced, not from the date that SPAR said that it would not obtain the data, but from the date that the parties had failed to agree on a proper price adjustment. The Court held that that date was not until at least the fall of 2007, and accordingly the arbitration claim was commenced in time. The Court did not agree with CAE that the limitation period did not commence until CAE had full knowledge of the full costs of obtaining the data. But it did agree that the entitlement to arbitrate and the limitation period did not commence until “SPAR indicated its intentions to avoid any and all financial responsibility for the increased costs associated with procuring the data”.

The Court of Appeal agreed. It held that the commercially reasonable interpretation of the subcontract was that “a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration.” Only then did the right to arbitrate arise and the limitation period commence running.

The Superior Court also found that, by its conduct, SPAR was estopped from asserting that the limitation period was running from November 2005. In light of its decision on the primary matter, the Ontario Court of Appeal did not deal with this issue.

Two comments can be made about this decision:

First, it is a welcome recognition of the duty to negotiate where such a duty is contained in the contract. Had the courts held that the limitation period started running from the time SPAR refused to obtain the data, the obligation to negotiate the price and costs dispute would have been effectively removed from the contract. When parties include an obligation to seek an agreement over those sorts of matters, then full recognition and effect should be given to that obligation. The only way to do so is to hold that the limitation period does not commence until that process is complete. That causes no hardship on either party, since either party can at any time state that negotiations are over and refuse to negotiate further.

Second, this decision is a reminder that it is the exception. It is the exception because most construction contracts do not contain an express duty to negotiate and attempt to agree on costs or other matters in dispute under the contract. Accordingly, in most instances it is dangerous for a party to continue to negotiate when, based upon the date of the other party’s alleged wrongful conduct or its discovery, a limitation period is looming. In most cases, the limitation period will have started to run and the party with the claim must protect its litigation rights, and then negotiate.

So there are two lessons to be learned:

First, when you are negotiating the contract and want to provide for an obligation to negotiate, expressly state that obligation in the contract and expressly state that any limitation period will only commence once the negotiations are complete.

Second, if you are in the midst of a contractual dispute and a limitation period is looming based on the date of the wrongful conduct or its discovery, then initiate the arbitration claim and negotiate later, unless you are very certain that the contract provides that the limitation period is not running in the meantime.

Construction Law  – Arbitration – Negotiations – Limitation Periods:

L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133; 2011 ONCA 435 (CanLII)

Thomas G. Heintzman, O.C.,  Q.C.                                                                                           July 17, 2011

Pay-When-Paid: When Is The Contractor Not Obliged To Pay The Subcontractor?

Construction Law  –  Building Contract  –  “Pay When Paid”

The Ontario Superior court recently wrestled with the issue of how to interpret and apply a “Pay When Paid” clause in a subcontract.

In 1473662 Ontario Limited v. Avgroup Consulting Services Limited, the Court appears to apply the traditional approach to this clause, but opened a door for subcontractors to avoid its severity.

Avgroup was the general contractor for a hotel construction project. The numbered company (which carried on business as “Dyson Electric”) was the electrical subcontractor.  Avgroup alleged that the parties had contracted pursuant to the CCDC subcontract, and that the contract contained a “Pay When Pay” clause which read:

“The Contractor shall pay the Subcontractor no later than thirty (30) days after the Submission Date or three (3) working days after the Contractor receives payment from the Owner, whichever is the later.”

However, that contract was never signed.  Dyson alleged that the contract was found in the invoices which it had submitted to Avgroup and which Avgroup had accepted as the basis for payment.  Those invoices did not contain a Pay When Paid clause.

The Court appeared to accept that the Pay When Paid clause in the form of CCDC contract relied upon by Avgroup was substantially similar to the clause in the contract which had been considered by the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc (1988) 32 C.L.R. 32 (Ont. C.A.).  The clause in that case stated:  “Payments will be made not more than thirty (30) days after the submission date or ten (10) days after the certification or when we have been paid by the owner, whichever is the later.”

The Court of Appeal in Timbro held that such a clause was not just a payment-timing clause operating during the project, but entirely precluded the sub-contactor from recovering from the contractor in the event that the contractor was not paid by the owner.

The court in the present case evidently felt itself to be bound by the Timbro decision.  But the court held that there was a triable issue relating to whether the contract was in the form of the CCDC subcontract or in the form of the subcontractor’s invoices.  Accordingly, the court dismissed Dyson’s motion for summary judgment.

This decision highlights the need for the Supreme Court of Canada to review the Pay When Paid issue.  There is conflicting authority in Nova Scotia (Arnoldin Construction & Forms Ltd. v. Aslta Surety Co (1995), 19 C.L.R. (2d) 1 (N.S. C.A.)) and leave to appeal that decision was dismissed by the Supreme Court of Ontario.  Moreover, members of the construction industry, and the drafters of the CCDC subcontract, should clarify their intention about the meaning of a Pay When Paid clause.

The fundamental questions are these:  Who should bear the risk of the owner’s insolvency, the contractor or the subcontractor?

Why should the subcontractor, who has no dealings with the owner and no means of managing the risk of the owner’s insolvency, bear that risk rather than the contractor?  A subcontractor may reasonably be expected to bear the risk of the timing of the payments by the contractor during the project, but it is more difficult to understand why the subcontractor should bear the risk of the owner’s insolvency.

The same issue can, of course, arise in a sub-subcontract or a supply contract if that contract contains a Pay When Paid clause.  Here, the risk is the contractor’s insolvency.  Is it reasonable for the sub-subcontractor or supplier to the sub-contractor to bear the risk of the contractor’s insolvency when they have no dealings with the contractor?

These are questions which the courts and the construction industry need to carefully consider.

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

Construction Law – Building Contract – “Pay-when-Paid”: 

1473662 Ontario Limited v. Avgroup Consulting Services Limited, 2011 ONSC 2900 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                               June 26, 2011


Is A Subcontractor Bound By The Arbitration Clause in the Main Contract?

In a judgment delivered on May 6, 2011, Chief Justice Joseph P. Kennedy of the Nova Scotia Supreme Court dealt with a contentious issue relating to arbitration clauses in construction contracts.

Is an arbitration clause in the main contract between the owner and the contractor incorporated into a subcontract between the contractor and subcontractor?  If that incorporation occurs, then the subcontractor’s court claim must be stayed and the subcontractor must assert its claim by way of arbitration.

In Sunny Corner Enterprises Inc v. Dustex Corporation, the main contract contained an arbitration clause requiring that any dispute between the owner and contractor be arbitrated.  The subcontract was contained in a purchase order that stated that the scope of the work was to be as defined in the main contract.  The contractor argued that the purchase order sufficiently incorporated the terms of the main contract, and therefore the arbitration clause, into the subcontract.  The subcontractor acknowledged that the main contract was integral to the purchase order, but asserted that the purchase order did not specifically incorporate the arbitration clause from the main contract into the subcontract.

The Chief Justice held that the later is the proper statement of the law.  Referring to Goldsmith and Heintzman on Canadian Building Contracts (4thed), he held that an arbitration clause in the main contract will only be incorporated in the subcontract if it is specifically incorporated.  It was not sufficient to merely say in the subcontract that the main contract was an “integral” part of the subcontract.  As he pointed out, there may be many terms in the main contact which are irrelevant to the subcontractor.  He referred to an Alberta decision [Q.Q.R. Mechanical Contracting Ltd. v. Panther Controls Ltd., 2005 ABQB 58] in which a two year guarantee provision in the main contract was held not to have been incorporated into the subcontract.  Accordingly, Chief Justice Kennedy dismissed the motion to stay the action and permitted it to proceed.

There is logic and a lesson to be learned from this case. The parties to a subcontract may well intend to be bound by the conditions in the main contract relating to the actual nature and performance of the work.  After all, they need a common road map to get the project built that is consistent with the main contract.  But it is quite another thing for them to agree to be bound by consequential, remedial and procedural matters found in the main contract.  There is no inherent reason why the parties to the subcontract cannot agree to a different regime for those matters.  For a court to find that they made an agreement to be bound by the main contract about those matters, there should be specific provisions in the subcontract to that effect.

See Goldsmith and Heintzman:  Canadian Building Contracts (4thed) at Chapter 7, section 1 and Chapter 10, section 1.

Arbitration  – Construction Agreement –  Subcontract:

Sunny Corner Enterprises Inc v. Dustex Corporation, 2011 NSSC 172   https://bit.ly/kXG9Ck

Thomas G. Heintzman


May 15, 2011