Is The Owner Liable For Delaying The Commencement Of The Building Project?

Time is money on a building project. And the obligation of the owner and the contractor to proceed expeditiously with the project may be one of the most important aspects of their relationship.

But what if the owner delays in notifying the contractor of the award, or in signing the building contract?  Can the owner be liable, even if the contract has not yet been signed?  In Bre-Ex Limited v. Hamilton (City), the Ontario Superior Court has recently answered Yes to these questions.  In the process, that court also provided a smorgasbord of answers to many questions arising from a construction claim.

The Background

In the fall of 2001, the City of Hamilton issued a call for tenders for the construction of a new leachate collection system at a landfill site located within its boundaries.  The tender documents stated that a binding contract would exist upon the acceptance of the tender by City council, that the listed documents would constitute the contract between the parties and that the signing of a contract would be a formality. The tender documents also stated that the work would not proceed without the City’s acceptance of the bidder’s methodology and that the “specifications” included “all written and printed descriptions or instructions pertaining to the method and manner of performing the work…”  The tender documents also stated that the City “will require that work commence immediately following the award of the Contract and will require the work to be completed by approximately the end of July, 2002”

Bre-Ex submitted a tender which provided for a methodology that was quite different than the methodology proposed by other bidders.

The tenders were opened on November 6, 2001 and Bre-Ex’s tender was the lowest. Before any contract was awarded, Bre-Ex advised the City that it would be undertaking the work during the winter months, although that statement was not contained in its formal tender. Before awarding the contract, the City and its consultants reviewed Bre-Ex’s methodology and accepted it.

On December 11, 2001, City council accepted Bre-Ex’s bid and authorized the award of a contract to it.  On January 6, 2002, the time expired for Bre-Ex’s tender to remain open.  The City did not advise Bre-Ex of the award of the tender to it until January 24, 2002.  The parties disagreed about whether Bre-Ex’s methodology should form part of the formal contract, Bre-Ex insisting that it did and the City asserting that it did not.  These matters were not sorted out until March 2002 when the City agreed to insert Bre-Ex’s methodology into the formal contract.  Bre-Ex signed the contract on April 12, 2002 and the City signed it on June 12, 2002.

As a result of these delays, Bre-Ex largely lost the ability to perform work during the winter of 2002, and it was forced to do much of the work during the winter of 2003.  It filed a delay claim with the City.

In these circumstances, the Superior Court held that the City was in breach of the building contract arising from the City’s acceptance of Bre-Ex’s tender.  In arriving at this conclusion, the court found as follows:

  1. The City’s failure to advise Bre-ex of the award of the contract from January 6, 2002 to January 24, 2002 was a breach of contract.  As a result of the tender documents, it was reasonable for the contractor to understand that its work was to commence on January 6, 2002 (being the date that its tender expired) if it was awarded the contract.  Moreover, it was reasonable for the bidders to assume that, if the City accepted a tender within the tender period, the City would forthwith advise the successful bidder so that it could marshal the documents and its forces in order to start work on January 6, 2002.
  2. The City was in breach of contract by failing to sign the formal contract until June 2002.  In particular, the City was wrong to assert that the methodology set forth in Bre-Ex’s bid should not be part of the contract.  It was only when the City agreed to put that methodology into the contract that the contract was finally signed.

Contractor’s Tender Methodology Became A Contract Specification

The court’s conclusion on this latter point is instructive.  The court held that the necessary result of the tender documents was that the contractor’s methodology was a “specification” included in the building contract.  This conclusion followed from the working of the tender document, and in particular the statements that:

    • the definition of “specification” included all documents pertaining to the method of performing the work;
    • the work could not proceed without the City’s acceptance of the contractor’s methodology;
    • the City had clearly accepted Bre-ex’s methodology in awarding it the contract; and
    • the subsequent execution of the Contract Documents was a formality.

This conclusion that the methodology in Bre-Ex’s tender became a “specification” is an important one for construction law.  It demonstrates that definitions used in standard form construction contracts and tender documents can include more than just the documents that the parties attach to their “formal” contract.  The tender process itself may well make documents delivered by the contractor during that process part of the contract, as “specifications”.

Owner’s Contractual Obligation To Commence The Project With Dispatch

The court then concluded that the delays by the City breached an implied obligation to perform its contractual duties within a reasonable time.  The Court quoted from Heintzman and Goldsmith on Canadian Building Contracts to the effect that what is a reasonable time for the performance of contractual duties must be decided in light of the “specific work and conditions and the general circumstances in which the contract was entered into”.

In its tender documents, the City had stated that the work was to commence immediately after the award of the contract and was to be completed by approximately July of 2002.  In these circumstances, the Court held that the City breached its implied duty to proceed with the contract with reasonable dispatch by its delay in advising Bre-Ex of the award of the contract and by its delay in executing the contract, all of which caused Bre-Ex to lose the ability to perform the work in the winter of 2002.

The Building Contract Arises From The Tender Process Itself

This conclusion followed from the fact that there were two contracts between the City and Bre-Ex, one relating to the tender itself (known in Canadian law as Contract A), and the other being the building contract arising from the City’s acceptance of Bre-Ex’s bid on December 11, 2001 (known in Canadian law as Contract B).  The City’s duty to proceed with reasonable dispatch might arise from both contracts, but it certainly arose from the building contract, Contract B.  As both parties acknowledged, that contract arose on December 11, 2001 when the City accepted Bre-Ex’s bid.  Accordingly, the implied duty to act with reasonable dispatch arose from that contract.  It did not require the execution of the formal contract in June 2002 for that duty to come into existence.

This conclusion is also an important one for construction law.  The owner’s duty not to delay the project does not just arise during the project.  That duty applies to the commencement of the project.  And it applies even before the execution of the “formal” contract if, as is usually the case for a true tender, the building contract arises from the tender process itself.

Damages awarded to Bre-Ex

The final interesting aspect of this case is the wide scope of the damage relief that was awarded to Bre-Ex.  It was awarded damages for: loss of revenue due to a decline in profit for the first quarter of 2002, fuel and labour escalation costs, refinancing costs, and loss arising from sale of equipment and required rental of replacement equipment.

Important Conclusions

The Bre-Ex decision is a very useful case to consult when allegations of owner’s delay are raised.  The decision reminds us that, when an invitation to tender provides, as it usually does, that a contract arises from the acceptance of the tender, then a building contract is immediately formed.  That contract may well include the methodology or systems proposed by the bidding contractor, as part of the specifications of the contract.  And it will require both parties not to delay pending the execution of a formal contract, but to proceed with reasonable and immediate dispatch.

See Heintzman and Goldsmith on Canadian Building Contracts (3rd ed.) at Chapter 5, part 1(b)

Bre-Ex Limited v. Hamilton (City), 2012 ONSC 147

Construction Law   –   Tenders   –   Implied Duties   –   Performance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                               July 26, 2012


Tercon Contractors? The Latest Chapter

The 2010 decision of the Supreme Court of Canada in Tercon Contractors Ltd v. British Columbia (Transportation and Highways) is one of the most important recent Canadian decisions relating to contract law.  It has particular importance to building contracts.  Those interested in construction law are watching to see how Tercon will be applied in subsequent cases.  In the recent decision of the British Columbia Court of Appeal in Roy v. 1216393 Ontario Inc, we now have one of our first indications of where Tercon will go.

The facts behind Roy v. 1216393 Ontario Inc.

In Roy, the plaintiffs entered into an agreement to buy a building lot from the defendants for $184,700 and gave the defendants’ lawyer a deposit of $18,470.   The defendants had previously sold the lot to another party but neither the defendants nor their lawyer told that to the plaintiffs.  The other party sued for specific performance and this precluded the defendants from completing the sale to the plaintiffs.  So the plaintiffs sued the defendants and their lawyer for damages.

The agreement of purchase stated that if the agreement was not completed due to the vendor’s fault, then the sole remedy of the plaintiffs, the purchasers, was the payment to them of the deposit, as liquidated damages.  The Court of Appeal noted, “as the deposit monies came from the purchaser, it has the effect of being an exclusion of liability clause.”

The trial judge refused to apply this clause and awarded the plaintiffs $317,000 in damages against the defendants.  The trial judge held that the clause was unconscionable because “it permitted the vendor to walk away from the contract with no consequence, though the purchasers would face significant consequences on failure to comply with obligations imposed on them.  From the purchaser’s perspective, it would render the purported contract no contract at all.”

Harkening back to Tercon, the B.C. Court of Appeal noted that the dissenting judgment in the Supreme Court established three questions with respect to the enforcement of the exclusion clauses:

1.  Does the clause even apply to the circumstances in issue? If it does:

2.  Was the clause unconscionable at the time of the contract?   If not,

3.  Should enforcement of the exclusion clause be denied on grounds of public policy?

The exemption clause will not be applied if the answer to question (1) is No, or the answer to question (2) or( 3) is Yes.

The trial judge applied the second test and concluded that the clause in question was unconscionable.  But, the Court of Appeal said, the trial judge did not perform the proper analysis of unconscionability.  The Court of Appeal said that there are two elements to unconscionability;  inequality of bargaining power, and substantial unfairness.  The Court of Appeal said that the trial judge had only considered the “substantial unfairness” element, not the inequality of bargaining power element.

The Court of Appeal refused to make its own decision as to whether there was inequality of bargaining power between the parties.  It also refused to consider whether the fraud of the defendant or its lawyer invoked the third (“public policy”) element of the Tercon test or precluded the defendants from relying on the exclusion clause at all.  The Court sent those matters back for a re-hearing.

In the result, we can draw a number of conclusions about how appellate courts in Canada are likely to apply the three-part test developed by the dissenting judgment in Tercon.

First, this dissenting judgment was accepted by the B.C. Court of Appeal as establishing the law with respect to the enforcement of exclusion clauses.  This is so even though the majority judgment in Tercon decided the appeal based on the first issue, namely that the dispute did not fall within the exclusion clause at all.

Second, the B.C. Court of Appeal confirmed that the unconsionability element of this test has two elements:

inequality of bargaining power and substantial unfairness.

In the case of the tendering of building or construction contracts, it may be very difficult, if not impossible, to establish inequality of bargaining power.  As the minority judgment in Tercon said:

“While Tercon is not on the same level of power and authority as the Ministry, Tercon is a major contractor and is well able to look after itself in a commercial context.  It need not bid if it doesn’t like what is proposed.  There was no relevant imbalance in bargaining power.”

The B.C. Court of Appeal did not deal with the third element of the test, namely, whether the exclusion clause should be enforced having regard to public policy.  But the remarks of the minority in Tercon make it difficult to avoid an exclusion clause in the context of a tender of a construction project:

“No statute in British Columbia and no principle of the common law override their ability in this case to agree on a tendering process including a limitation or exclusion of remedies for breach of its rules.  A contractor who does not think it is in its business interest to bid on the terms offered is free to decline to participate.  As Donald J.A. pointed out, if enough contractors refuse to participate, the Ministry would be forced to change its approach.  So long as contractors are willing to bid on such terms, I do not think it is the court’s job to rescue them from the consequences of their decision to do so.”

In the result, the decision of the B.C. Court of Appeal in Roy confirms that a bidder under an invitation to tender a construction contract will have a real challenge in avoiding an exclusion clause in the tender, at least under the second and third elements of the dissenting judgment in Tercon.  The bidder will more likely avoid that clause by showing that it does not apply to the dispute in question at all.  Otherwise the bidder may have to take the whole matter back to the Supreme Court and argue that the three part test was not the rationale of the majority decision in Tercon and not part of Canadian law.

Another way of looking at the decisions in Tercon and Roy is to question whether the invitation to tender creates any enforceable rights at all.  If it contains an exclusion clause that gives no enforceable rights to the bidding contractor, then there may be no consideration for the contractor’s bid, and therefore no Contract A created by the tender.  If that is so, then the contractor’s bid is itself just an invitation to treat.  If the contractors bid is just an invitation to treat, then the owner’s “acceptance” is just an offer and the contractor is not obliged to leave its bid open or accept the owner’s “offer”.  That could be the result of an owner’s invitation to bid containing an exclusion clause which eliminates any risk or obligation of the owner.

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

Building Contracts   –   Tenders  –   Exclusion Clause

Roy v. 1216393 Ontario Inc, 2011 BCCA 500

Thomas G. Heintzman O.C., Q.C.                                                                                          February 29, 2012

Can A Contractor Use Its Own Mistakes To Withdraw Its Bid?

A contractors’ worst nightmare is making a mistake in a tender and being stuck with a low bid.  The next worse nightmare is submitting a winning bid but one which contains errors which arguably make the bid non-compliant.

What happens when both occur?  Can the contractor get out of its low bid by its own errors?  That is the issue that the Manitoba Court of Queen’s Bench recently dealt with in Manitoba Eastern Star Chalet Inc. v. Dominion Construction Co Inc.

The Supreme Court of Canada has revolutionized the law of tender by its Contract A/Contract B regime for tenders.  Under that regime, Contract A is the contract formed by the contractor submitting a tender in response to the owner’s invitation to tender, and Contract B is the subsequent construction contract awarded by the owner.  Contract A converts what appear to be unilateral acts in the tender process into an enforceable contract.

The courts will typically imply terms into Contract A.  Thus, the owner will generally have an implied duty not to accept a non-compliant bid absent a term in the invitation to tender to the contrary.  The contractor will have a duty not to withdraw its bid during the period stated in the invitation for the owner to accept a bid.

But what happens when the contractor’s bid is allegedly non-compliant due to the contractor’s own faulty bid, and the contractor wants to withdraw it because it is seriously underpriced?  Can the contractor do so?  The Manitoba Queen’s Bench has said No, unless the non-compliance is clear from the face of the bid.  In its decision, the Court has provided an extensive and useful analysis of the law on this subject.

The Background

Dominion was one of three bidders on an extension to a seniors housing complex being constructed by Manitoba Eastern Star Chalet.  Dominion’s bid was more than $600,000 under the next bid on a project worth about $2.5 to $3 million, or about 25% under the next bidder.

When it was notified that its bid was accepted, Dominion sought to withdraw the bid on two grounds.

First, that it had failed to provide a resolution of its board of directors authorizing the signatory to the bid to sign it.

Second, that its bid failed to refer to Structural Addendum #4 included in the tender documents.

Dominion said that these items were required by the invitation to tender, and therefore its bid was non-compliant and incapable of acceptance by the owner.  Admittedly, it was Dominion’s own fault that these items were omitted, but Dominion maintained that the Contract A regime applicable to tenders precluded the owner from accepting its bid.

The trial judge rejected Dominion’s position.  In the course of his reasons, he examined the Contract A/Contract B law, all the way from the 1981 decision of the Supreme Court of Canada in Ron Engineering up to its 2007 decision in Double N Earthmovers.   The trial judge agreed that, unless the invitation to tender states otherwise, Contract A requires the owner to only accept a compliant bid.  Therefore, if Dominion’s bid was truly non-compliant under Contract A, then the owner could not accept it and Dominion could withdraw it, even if that non-compliance was entirely due to Dominion’s fault.

The trial judge noted that an attempt by a contractor to withdraw its bid based on non-compliance due to its own fault gives rise to “mischief” which “effectively reward[s] a bidder who has made a mistake in its bid, but then can utilize its non-compliance for the purposes of not honouring a contract.”  Nevertheless, the court held that logic and previously decided cases led to the conclusion that a contractor can do exactly that, if the circumstances permit it to do so.

However, the court held that the circumstances did not permit Dominion to withdraw its bid.  As to Structural Addendum #4, the court held that it was effectively included in Dominion’s bid, when the whole bid was properly read.  In the alternative, the order of precedence in the contract documents overcame any error arising from the absence of this addendum.

In addition, the amount of the cost of this addendum was insignificant in relation to the total cost of the project.  In the result, Dominion’s bid was substantially compliant with the invitation to tender with respect to this issue.

As to the failure of Dominion to file with its tender a corporate resolution authorizing the signatory to sign the bid, the court found that Dominion had never done so in any bid, even when the invitation to tender required such a resolution.  The person signing the bid for Dominion had authority to sign the bid and that person intended to sign and submit the tender on behalf of Dominion.  Dominion’s corporate seal was affixed to the tender. The Instructions to Bidders stated that a non-compliant bid could be accepted at the discretion of the owner.  Even giving that discretion a narrow scope, the trial judge held that the non-compliance was not substantial and fell within the owner’s discretion to accept it.

The trial judge also found that the amount by which Dominion’s bid was less than the next bid was not a matter which ought to have alerted the owner to any non-compliance or other reason not to accept the bid.  Any mathematical error in Dominion’s bid was not apparent on the face of the bid.  The trial judge held that “the divergence in the bid numbers did not raise the need for an investigation into the reasons, nor was there a duty to do so”.

At the end of the reasons, the trial judge returned to the issue of whether Dominion was entitled to rely on its own fault to escape its bid.  As noted above, early in the reasons, the trial judge held that, based on logic and previously case law, a contractor should be able to do so.  But at the end of the reasons, the trial judge said:

“If there is any error in my analysis or my findings, I am satisfied that such an error would be sufficiently small that it is incumbent on the court to protect the integrity of the tendering process by not allowing Dominion to point to these alleged incidents of non-compliance to resile itself from a bid which it fully intended when it was submitted to be compliant, to be binding, and to be accepted.”

This statement is strong evidence of the inclination of courts to ensure that the tendering process is not undermined by the faulty and unfair conduct of either the owner or the bidders.  If a bidder asserts that it may escape the consequences of its own faulty bid due to non-compliance, then the court will scrutinize the alleged non-compliance very, very carefully.  The court will place a high burden on the bidder to demonstrate that the non-compliance is so material and substantial as to be a true non-compliance and one not falling within the discretion of the owner to accept non-compliant bids, however that discretion is expressed in the tender documents.

This decision is useful in three other respects:

First, it contains a very helpful collection of the cases that deal with whether a contractor has a right to withdraw from its own faulty bid due to non-compliance.

Second, it addresses two circumstances in which this court held that the non-compliance was not substantial: failure to include reference to drawings (and the impact of the contractual order-of-preference provision on that failure), and the failure to provide a corporate resolution authorizing the execution of the bid.  Anyone dealing with circumstances like these may look to this case for assistance.

Third, the decision effectively assumes, or holds albeit in obiter in the final result, that a bidding contractor may withdraw such a bid.  It is, accordingly, an important update on that principle.

This decision does not address the situation that might arise if the contractor purposefully or recklessly puts a material non-compliant term into its bid, to protect itself from a possible mistake in its bid and hoping to negotiate around that non-compliance if it is awarded the contract. Whether a contractor would ever be so reckless as to do so is another matter.  Whether a contractor could rely on that sort of non-compliance will await another day.

Tenders  –  Non-Compliance  –  Withdrawal of Bid

Manitoba Eastern Star Chalet Inc. v. Dominion Construction Co Inc., 2011 MBQB 320.

Thomas G. Heintzman O.C., Q.C.                                                                                  January 25, 2012

Does A Tender Give Rise To Liability For Negligent Misrepresentation Or Bad Faith?

Can an informal tender process which is not part of a bid depository system give rise to liability for negligent misrepresentation?

Can it give rise to liability for bad faith conduct?

In Oz Optics Limited v. Timbercom, Inc., the Ontario Court of Appeal recently answered Yes to the first question, and after agonizing over the second question, decided not to answer it.

The Background

Timbercom issued a purchase order to Oz for the purchase on consignment of manual optical products.  Those products were part of the equipment to be supplied by Timbercom to Lockheed Martin for installation into fighter aircraft.  Because Oz did not sign the purchase order the Court held that there was not a contract between the parties and dismissed Oz’s claim for payment for manual optical products not used by Timbercom.

Timbercom and Oz also had discussions about the supply by Oz of automated optical products to be similarly supplied by Timbercom to Lockheed Martin.  Timbercom repeatedly told Oz that Oz was the sole supplier and there was no competitive supplier.

Unknown to Oz, Timbercom obtained a competitive bid from another supplier.  Timbercom advised the competitor that its price was higher than another competitor’s price (being Oz), so the competitor reduced its price.  Timbercom gave no such competitive “heads-up” to Oz. Then, when Timbercom submitted the two bids to Lockheed Martin, it marked up Os’s bid by 72% but only marked up the competitor’s bid by 42%.  Lockheed Martin accepted the competitor’s bid, but its employee testified at trial that, had Oz’s bid been the only one, Oz’s bid would have been successful.

The Court of Appeal for Ontario held that Tibercom was liable to Oz for negligent misrepresentation.  The Court agreed with the trial judge that there was a special relationship between the parties concerning the statements made by Timbercom to Oz.  Timbercom’s statement that Oz was the sole supplier was a negligent misrepresentation, if not nearly fraudulent, the Court held.  The evidence established that Oz had relied upon that statement to its detriment, and that if Oz had been aware of a competitive bid, it would have acted differently by changing its delivery schedule which was the only element in its bid that was less advantageous than the competitor’s.

In view of its finding of liability for negligent misrepresentation, the Court of Appeal declined to decide whether Timbercom could be liable under a self-standing duty of good faith.  Such liability could arguably result from an inferred contract based on the whole process.  The Court noted that the process was not a bid depository system and therefore did not necessarily result in the Contract A – Contract B regime recognized by the Supreme Court of Canada in Ontario v. Ron Engineering, [1981] 1 SCR 111 and M.J.B. Enterprises Ltd v. Defense Construction (1951), [1999] 1 SCR 619.  Accordingly, a duty of good faith arising from a Contract A relating to the bidding process itself did not necessarily arise.

The Court of Appeal also noted that, in view of Martel Building Ltd v. Canada, [2000] 2 SCR 860 and similar cases, the pre-contractual negotiations leading to a tender does not create a general duty of care.  However, the Court said that, if a subcontractor is told that it is the sole supplier, then there is arguably a stronger basis to infer a duty of good faith when “the bidder is unknowingly considered a bidder among many.”

Having explored the legal and policy grounds for and against the existence of a duty of good faith in these circumstances, the Court of Appeal declined to decide the issue.  The finding of negligent misrepresentation was, in its view, a sufficient basis to dispose of the appeal.

Moreover, the Court was of the view that the torts of negligent misrepresentation and fraud are available to address misconduct during an informal bidding process.  Only if and when those torts were not sufficient to deal with liability should a court embark upon the difficult task of deciding if a self-standing duty of good faith arises in the circumstances of the particular tender.

This decision addresses one issue arising from informal tenders but leaves a big question mark around the other.  The Court of Appeal has held that, when an owner or contractor engages in a tender process and makes specific statements during the tender process, a special relationship exists between the parties and those statements can lead to liability for negligent misrepresentation or fraud.  So care must be taken about any statement contained in a call for tenders.  The person issuing the tender may try to avoid the special relationship by stating in the tender that there is no such relationship, but it is unlikely that exclusionary language will avoid liability particularly for fraudulent misrepresentations.

Unanswered Questions

The unanswered questions are whether there is any need for a duty of good faith in an informal tender situation, and if there is, what the basis of that duty would be.  The need for a duty of good faith could exist in at least two situations:

First, if the plaintiff’s claim does not result from something stated by the party letting the tender, then the torts of negligent misrepresentation and fraud will not be available.  But if there has been no statement by that party, what other circumstance could properly give rise to a claim by the plaintiff, especially if there is no duty of care during the pre-tender process?

Second, the plaintiff may recover damages on a more favourable basis under contract law than tort law.  If so, the plaintiff may wish to recover damages for breach of an implied contractual duty of good faith and not for negligent misrepresentation.

If there is a need for the duty of good faith, what is its legal foundation?  Does any tender, no matter how informal, result in an inferred contract?  If so what are its terms?  An obligation on the parties to deal with each other in good faith cannot be the only term.  Would the court have to invent all the other terms, such as an obligation of the bidder to leave its bid open for some specified period, and if so what period, or the obligation of the party calling for the bid to accept only a complaint tender, and if so, complaint with what?  The uncertainties surrounding the proposed contract seem daunting.

The specific circumstances of the particular case will determine all these factors.  In one situation, the circumstances may arguably give rise to a special relationship even absent a specific misrepresentation; in another, no such circumstances may exist.  In one situation, the dealings between the parties may be sufficiently clear that a Contract A relating to the bidding process may be inferred; in another case, the uncertainty of those dealings may preclude the existence of a Contract A.

In any event, we have heard the alarm bell, but not heard the last word, on the duty of good faith in informal tenders.

Construction Law  –  Tenders   –  Negligent Misrepresentation  –  Duty of Good Faith

Oz Optics Limited v. Timbercom, Inc., 2011 ONCA 714

Thomas G. Heintzman O.C., Q.C.                                                                                              December 28, 2011

An Owner Owes No Duty Of Care To A Subcontractor In A Bid Depository System

The Newfoundland and Labrador Court of Appeal has recently held that an owner does not owe a duty of care to a subcontractor arising from the normal operation of a bid depository system: Defence Construction (1951) Limited v. Air-Tite Sheet Metal Limited.

The Background:

The owner, Defence Construction, a wholly owned subsidiary of the government of Canada, entered into a contract with N. M. Dobbin Limited for the construction of an aircraft hanger in Labrador.  Dobbin in turn entered into a subcontract with Air-Tite for the installation of the heating system.  Those contracts were awarded through a bid depository system. The heating system was designed by Shawmont Newfoundland Design Associates.

The heating system did not work properly.  As a result, Dobbin terminated Air-Tite’s subcontract and retained another company to perform corrective work.  Later, it was determined that the fault was due to the negligent design of Shawmont, not the defective work of Air-Tite.

Defence Construction sued Shawmont and Dobbin for damages and Dobbin commenced third party proceedings against Air-Tite.  In a separate action, Air-Tite sued Dobbin and Defence Construction for damages as a result of the wrongful termination of Air-Tite’s contract with Dobbin and the failure of Dobbin to award the corrective work to Air-Tite.

The Trial:

The trial judge held that Shawmont had been negligent in the design of the air conditioning system and awarded damages in favour of Defence Construction against Shawmont.  The trial judge dismissed Defence Construction’s claim against Dobbin on the ground that Dobbin had followed the Shawmont design and had not itself been negligent.

The trial judge also held that Defence Construction was negligent in the supervision of the contract between Dobbin and Air-Tite and awarded Air-Tite damages against Dobbin and Defence Construction.  The negligence alleged against Defence Construction was that it granted permission to Dobbin to terminate the sub-contract to Air-Tite and award the corrective work to the third party without taking reasonable care to inquire as to whether the failings in the heating system were due to the fault of Air-Tite.

The Court of Appeal:

The Newfoundland and Labrador Court of Appeal allowed the appeal so far as Air-Tite’s claim in negligence against Defence Construction.  Applying the decision of the Supreme Court of Canada in Design Services Ltd. v. Canada, [2008] 1 S.C.R. 737, the Court held that the owner, Defence Construction, owed no duty of care to the subcontractor Air-Tite.

The Court held that subcontractors do not fall within a recognized category of persons to whom a duty of care in negligence is owed by owners.  Nor were there good policy reasons to create a new category of persons, namely subcontractors, to which owners owed a duty of care.

Main Contract Creates No Duty Of Care

Air-Tite relied upon a provision in the main contract between Defence Construction and Dobbin (Article 4.6) which prohibited Dobbin from changing the subcontractor without the permission of Defence Construction.

The terms of the main contract were incorporated into the contract between Air-Tite and Dobbin.  The trial judge had held that Article 4.6 created a duty of care between Defence Construction, as owner, and Air-Tite, as subcontractor, requring Defence Construction to use reasonable care in consenting to Dobbin terminating the subcontract with Air-Tite and replacing it with another subcontractor.

The Court of Appeal rejected this proposition.  The Court of Appeal held that the terms of the main contract could not, by themselves, create a duty of care by the owner to the subcontractor. Rather those terms were the “means for Defence Construction to oversee the manner in which Dobbin executed its part of the bargain.”  These considerations worked against, not for, a conclusion that the main contract created proximity of relationship between the owner and the subcontractor.  In the Court’s view, Air-Tite’s arguments were an attempt “to shift responsibility for Dobbin’s wrongful termination of its contract with Air-Tite to Defence Construction when the latter was not privy to the subcontract.”

Bid Depository System Creates No Duty Of Care

The Court of Appeal also rejected that Air-Tite’s submission that a duty of fairness arose from the tender process and created a duty of care from the owner to the subcontractor.

As the Court said:

“While such a duty of fairness may have been a general expectation of Air Tite, there is no basis on which to conclude that Defence Construction and Air-Tite had a relationship that, as between those parties, created expectations or reliance which would impose the duties suggested by Air-Tite on Defence Construction.”

Nor could the bid depository system, without more, establish subcontractors as a new class of persons to whom owners owe a duty of care, particularly in relation to the alleged wrongful termination by the contractor.

The Court continued:

“This is not a situation that fits within or is analogous to a relationship previously recognized as imposing a duty of care between the parties.  Neither is it a situation where a new duty of care should be established.”

Damages For Breach Of The Subcontract

The Court of Appeal also dismissed Dobbins appeal from the trial judgment holding it liable to Air-Tite for not retaining Air-Tite to perform the additional remedial work.  The Court held that Air-Tite had no right to be awarded that work as Dobbin’s contractual right to make changes in the work encompassed the right to assign the remedial work to another subcontractor and not Air-Tite.  Nevertheless, the Court held that Dobbin had wrongfully terminated the subcontract and that, had that not occurred, Air-Tite “would have been retained to do the work that was contracted” to the third party.

This latter conclusion is open to question.  The amount of damages to be awarded for breach of contract is not based upon the probabilities of what the defendant “would have done” but upon what the defendant was entitled to do.  Even if Dobbin wrongfully terminated the subcontract, its liability for damages cannot be greater than the amount it would have had to pay Air-Tite had it acted in accordance with the subcontract:  Hamilton v. Open Window Baker Ltd., [2004] 1 S.C.R. 303.  Accordingly, if Dobbin was entitled to award the additional work to another subcontractor – as the court found – then it should not have been liable to Air-Tite based upon whether or not it might have or would have awarded the additional work to Air-Tite.

The Important Issue:  No duty of care by an owner to a tendering subcontract

The first point in this decision is of considerable importance.  The Newfoundland and Labrador Court of Appeal has held that, as a matter of principle, a bid depository system does not create a duty of care by the owner in favour of the subcontractor.  This decision extends and solidifies the decision by the Supreme Court of Canada in Design Services.  In the latter case, the subcontractor was given the option to join a joint venture with the contractor.  The Supreme Court of Canada held that, in that circumstance and when the subcontractor did not take up that option, there could be no duty of care between the subcontractor and the owner.

The decision of the Newfoundland and Labrador Court of Appeal shows that the principle in Design Services is of general application.  In the absence of specific facts giving rise to a special relationship, an owner has no duty of care to a subcontractor arising from a bid depository system.

Construction Law –  Duty of Owner to Subcontractor – Tendering

 Defence Construction (1951) Limited v. Air-Tite Sheet Metal Limited, 2011 NLCA 67

Thomas G. Heintzman, O.C., Q.C.                                                                                                     October 14, 2011

Can A Condition In An Invitation To Tender Be Illegal?

Construction Law – Tenders – Illegality

Can a condition in an invitation to tender a construction contract be illegal?  This is a question upon which construction law is largely silent.  But the Court of Appeal of Quebec has held that a condition of tender may be unlawful. This is not a recent decision, but it is not well known outside Quebec.  The importance of the issue of illegality makes it a suitable subject for this blog.

In Société de developpement de la Baie James v. Compagnie de construction et de developpement Cris Ltée, the contractors contested standing terms which James Bay Development Society inserted into its invitations to tender.  Those terms (sub-sections 3.1 and 3.3) excluded any bid from a contractor who had commenced proceedings against, or was the defendant in proceedings commenced by, James Bay Development Society.  The Court of Appeal held that this condition was illegal as being contrary to public order.

The Court of Appeal held that Section 3.3 was contrary to the principle of the rule of law.  That principle is now incorporated into the Canadian Charter of Rights and Freedoms.  A principle element of the rule of law is access to the courts. While the law of contract is based upon the liberty to enter into any contract that the parties may agree to, there are limits to that liberty, and one limit, in Quebec, is public order. Any contractual provision which contravenes political public order is an absolute nullity.  While the parties can agree in their contract to waive certain rights, they cannot do so with respect to matters which are oppressive to the extent of being contrary to public order.

In addition, the Court of Appeal noted that sub-section 3.1 of the standing terms permitted the Bay James Development Society to accept, in its discretion, a non-compliant bid.  However, the provincial law governing the tenders stipulated that a non-conforming bid was required to be automatically rejected.  Accordingly, the Court of Appeal held that, on this additional ground, sub-section 3.1 of the standing terms was invalid.

This decision is a reminder of the need to review the terms of any invitation to tender from an overall standpoint, including its legality.  In the case of any governmental body, the Charter of Rights and Freedoms, and other statutes, regulations or bylaws applicable to that body, may be relevant.  Those considerations and the James Bay decision, may not be applicable if the owner issuing the invitation to tender is not a public body.  But there may be other conditions of legality which apply to the tender.

See Goldsmith and Heintzman on Canadian Building Contracts (4th ed.), Chapter 1, Section 2(d).

Construction Law – Tenders – Illegality: 

Société de developpement de la Baie James v. Compangnie de construction et de developpement Cris Ltée, (2001), 16 C.L.R. (3d) 26 (Que. C.A.)

Thomas G. Heintzman                                                                                                                                                 June 5, 2011 

Is A Site Visit A Material Condition To A Tender?

Construction Law – Tenders – Site Visit – Materiality

An invitation to tender may contain many conditions, some of which are more or less material to the ultimate submitted tender.  Is a requirement that the contractor attend a site visit a material condition of the tender?  In Admiral Roofing v. School District 57 (Board of Education), the British Columbia Supreme Court said Yes, and held that a missed site visit eliminated the contractor from the bidding process.

The District School Board issued an invitation to tender for re-roofing of two buildings. The invitation contained a term stating that a “mandatory” site visit was being held at 8 am on a certain date, that registration at the site visit was required and that “failure to attend and register will lead to the non-acceptance of the tender by the owner.”

The President of Admiral Roofing arrived 15 minutes late at the first site.  After the representatives of the School District had moved to the second site, he joined the group making the site visit.  He was asked by the School District representatives whether he wished them to go back with him to the first site, and he declined stating that he would visit that site himself later.  He was told later that day that Admiral Roofing’s bid would not be accepted.   Nevertheless, he went back to the first site and then submitted the tender. The School Board did not open that tender.

The contractor and the School Board brought an application to determine whether Admiral Roofing’s tender was non-compliant so that the School District was unable to accept it.  The British Columbia Supreme Court held that it was.

The contractor argued that it substantially complied with the site visit requirement by attending part of the site tour, signing its name and returning later to the first site.  The court held that the word “attend” required the attendance at the two locations and at the mandatory site tour starting at 8 am.  The Court held that the words “failure to attend and register will lead to the non-acceptance of the tender by the owner” made this mandatory requirement sufficiently clear.

The Court also held that this failure by the contractor could not be waived by the owner under the tender condition entitling the owner to waive “irregularities … of a minor or technical nature.”  While arriving late by five minutes might have been technical if the School District’s site team had still been there, there was no discretion to waive the actual first site visit itself.

The Court quoted from another case in which it was held that a defect is material if it “undermines fairness of the competition or the process of tendering …impacts the cost of the bid or the performance of contract B …or creates a risk of action by other (complaint) bidders.”

The Court applied a “restrictive interpretation” to the discretion clause, which approach has been held necessary “in order to respect the mandatory requirements of the instructions to tenderers and to protect the tendering process.”  Applying that approach, the Court held that there was no discretion to accept the bid.

This approach places a very narrow limit on the owner’s discretion to accept non-compliant bids, from two aspects.

First, it treats procedural irregularities in the same way as substantive irregularities.  It may be argued that the procedural necessity to attend a site meeting is of a different order or nature than the actual contents of the bid or timing of its delivery.  The former cannot impact the content of the bid itself or the constructed project.  Nor does a missed site visit appear to unfairly impact other bidders who are required to deliver their bids on time.  A site meeting seems to be very much for the benefit of the bidder, and to the extent that it has any value to the owner, that value would seem to be one that the owner should be entitled to waive.

Second, the Court’s interpretation appears to place an inordinate importance on the threat of a claim by another contractor.  The late attendance at the site meeting does not seem to materially interfere with the other ingredients referred to by the Court:  the fairness of the competition, the process of tendering, the cost of the bid, or the performance of Contract B.   Rather, reading between the lines, the threat of an action by another bidder that makes the “defect” material.  That approach may be inappropriate for two reasons.

First, in this case, the parties apparently made the application to the court immediately, and before the tender were completed.  So the court was in a position to deal with the legality of the bid before claims were made by other contractors.

Second, the threat of litigation should not, by itself, be relevant to the materiality of the defect of default.  Otherwise, the other contractor will always “hold the hammer” and the owner’s discretion to accept a bid with a non-material defect will virtually disappear.

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

Construction Law – Tenders-Site Visit – Materiality:

Admiral Roofing v. School District 57 (Board of Education), 2010 BCSC 1394

Thomas G. Heintzman                                                                                                  May 29, 2011

Tenders in Construction Projects – Which Limitation Period Applies?

What is the limitation period for the commencement of an action arising from a tender in a construction project?

If the owner is a municipality or other public body, does a limitation period in its incorporating legislation apply to the tender?  These were the questions recently faced by the Prince Edward Island Court of Appeal in Central Roadways v. City of Summerside.

In May 2008 the City of Summerside sought tenders for the resurfacing of city streets.  Two bidders, Central Roadways and another bidder, submitted tenders.  Central Roadways’ tender was the lowest, but on June 16, 2008 the City’s Council met and decided to award the contract to the other bidder, and advised Central Roadways the next day.

In November 2008, Central Roadways asked the City why its tender was not accepted and requested a copy of Council meeting minutes of June 16, 2008.  The City replied by letter and provided  a copy of the minutes but the minutes did not disclose any reasons why the other tender was accepted and not the tender of Central Roadways.

On February 20, 2009, Central Roadways commenced an action against the City.  The City brought a motion to dismiss the action on the ground that it was barred by the limitation period in s-s.46 (2) of the City of Summerside Act.

Section 45 and 46(1) of that Act provided that notice was to be given to the City in the case of damage sustained from unsafe conditions, or from nuisances or encumbrances, on City streets or sidewalks.  Section 46(1) then said that, except as provided in S. 46(1), all actions against the City were to be commenced within six months of the cause of action arising.

The City asserted that this limitation period applied to the claim arising from the tender, and the judge who heard the motion agreed.  But the P.E.I Court of Appeal reversed the decision.

The Court of Appeal examined the wording and history of the City of Summerside Act and concluded that the six month limitation period only applied to claims arising from City bylaws or claims relating to unsafe conditions or nuisances and encumbrances on City property.  Even though the word “all” in s. 46(2) was normally all-encompassing, it should not be so interpreted in light of these surrounding circumstances.

The Court of Appeal noted that the limitation period in P.E.I. for claims in contract is six years and that a limitation period of six months is a very different limitation period.  Since the shorter limitation period was found in a statute for the City’s benefit, it should be interpreted against the City in the event of any ambiguity.  The Court said:

“Interpreted to include all causes of action against the City, the very short six-month limitation period would seriously circumscribe the right of a person to commence any action against the City.  This being so, any ambiguity must be resolved in favour of a less restrictive limit on the time within which to commence an action.”

The Court of Appeal held that the claim by Central Roadways was in contract, since it arose from the alleged breach of its contract with the City inherent in its submission of a tender to the City’s invitation.   While there might be good policy reasons for the City to provide very short limitation periods for actions arising from slip and falls or other accidents on City streets,

“there is no valid policy reason why other actions against the City, like an action for breach of contract, should have the time for the commencement thereof limited to a very short six months…If the Legislature is of the mind that there are valid policy reasons for a shorter limitation period for the commencement of such actions against municipalities like the City, then it should express the policy more clearly in the Act  so as to specifically exclude these actions from the scope of the Statute of Limitations.”

This decision contains warnings about limitation periods relating to tenders.

The first warning is that a claim arising from a tender is a claim in contract and must be brought within the limitation period for a contract claim.  In addition, a tort claim relating to the tender must be brought within the limitation period relating to tort claims.

The second warning is this:  look for any limitation period contained in the tender documents. The tender documents may themselves contain a specific and shorter limitation period.  A shorter contractual limitation period may be permitted under the general limitation statute.  Thus, In Ontario, s.22(5) of the Limitations Act, 2002 permits the normal two year limitation period to be shortened in business agreements, but not consumer agreements.

And third, ensure that there are no other statutory limitation periods which may apply to the tender.  In Ontario, that is unlikely since s.19 of the Limitations Act, 2002 states that a statutory provision containing a conflicting limitation period is of no effect unless that provision is set out in the Schedule to the Limitations Act, 2002.  But if there is a limitation provision in another statute which is potentially enforceable, then depending on the origin and nature of that provision, the decision in the Central Roadways case may require that the limitation provision be read against the public body and only enforceable if it clearly applies to the tender.

Tenders – Limitation Period – Construction Contract – Actions – Breach of Contract – 

Central Roadways v. City of Summerside, 2011 PECA 4 (CanLII)

Building Contracts – Tenders – Bonds

Building Contracts – Tenders – Bonds

Today we will examine a recent decision of the Court of Appeal of Ontario which dealt with Tenders for construction contracts.

In Bois A. Lachance Lumber Limited v. Conseil Scolaire Catholique de District des Grandes Rivieres, the tender documents required the bidders to obtain performance bonds “upon acceptance” of a bid.  The Court of Appeal held that the successful bidder did not have to provide a performance bond with its bid, but only after acceptance of its bid.

The Court of Appeal went on to hold that, once the successful bid was accepted, then all owner’s tender duties owed to the other bidders were terminated, applying the rational of the Supreme Court of Canada in Double N Earthmovers Ltd. v. Edmonton (City), 2077 SCC .  Accordingly, the owner could then wave or vary any term of the bid and enter into whatever contract it liked with the successful bidder, and substitute a letter of credit for the performance bond.

This decision is a reminder of the difference between the contract formed by the tender process (Contract A) and the contract between the owner and a bidder arising from the tender process (Contract B).  While Contract A contains a duty of fairness and a duty not to accept a non-compliant bid, once Contract A is completed and those duties are fulfilled, and the owner selected a bidder that meets the criteria of the tender documents, then the owner can enter into a Contract B which is different than the tender terms of Contract A.

The law entitles the owner to enter into a Contract B which is different from the terms set out in the tender documents because the law expects the owner to act in its own economic self-interest and not give up economic value to the contractor, and because the law wishes to leave the owner an contractor with the flexibility to enter into the best deal.

However, what has not been explored in this case is the degree to which the owner can influence the tender process.  Can the owner put terms into the tender, and thus into Contract A, which it knows that it will not insist upon, and which it knows that certain bidders cannot meet?  Can the owner stipulate that the successful bidder must provide a performance bond, well knowing from the beginning that certain bidders cannot provide such a bond and that it will waive that requirement or accept security of an entirely different nature?  Can the owner stipulate a particular building material in the tender, intending from the outset to waive that requirement and accept another material?  At what point does that sort of conduct amount to bad faith and a breach of Contract A? And at what point does Contract B become an entirely untendered contract?  In the case of a public authority required to contract by tender, at some point does that conduct fall outside that requirement?  These are unanswered questions which are raised by decisions such as that in Bois.

Building Contracts – Tender – Bonds:  Bois A. Lachance Lumber Limited v. Conseil Scolaire Catholique de District des Grandes Rivieres, 2010 ONCA 694 (CanLII)