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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