In our March 2006 newsletter, we discussed the case of Design Services Ltd. v. Canada, a tendering decision of the Federal Court of Canada. This case made its way to the Supreme Court of Canada, culminating in a 2008 decision, and is therefore worthy of another look.
The owner had wrongfully awarded a contract to a non-compliant tenderer. The general sued and ultimately settled with the owner. However, some of the subs on the design-build team also sued the owner for their damages. The judge had to decide whether the subs were entitled to their damages directly against the owner, given that the tender came from the general.
Approximately 13 designers, suppliers, and subs, along with the general, were part of the design team. The owner required the general to supply full details about all of the team members. This included details about the role each of the team members would play, the relationship of each of the team members to the others, team members’ experience with other projects and history of working with each other, and the principals of the team members. All team members had to declare that they had been involved in the preparation of the drawings and specs and certify the deliverables, work plan, and quality control program. Further, the successful bidder had to ensure that all team members would attend a “partnering session” with the owner. All this evidence was tendered to persuade the judge that a contract with the general was equivalent to a contract with all of them.
The judge held that the owner had not entered into Contract A with any team member other than the general. The tender was clear that only the general made the proposal. It allowed the design team to enter into a written joint venture agreement and for the joint venture to submit the proposal, but the design team and general did not do this. Accordingly, just as the owner would have been unable to claim against the design-build team members, other than the general, for breach of Contract A, the team members were not able to claim against the owner for its breach.
The judge did hold that the owner owed and breached a duty of care to the team members to treat them fairly. He decided that this was not a case of indeterminate liability to an indeterminate class of people because the owner knew exactly who the team members were and therefore knew to whom it would owe its duty of care. Further, the harm to the team members was foreseeable. The judge stated, “This is a case that cries out for a remedy.”
The Federal Court of Appeal reversed the trial judge. It held that there was no reason to create another duty of care between parties who had not contracted with each other and that, since the subs could have protected themselves by forming a joint venture with the general but did not, it would not impose on the owner a duty of care to them.
Tort law deals with compensation for breaches of duties of care. For example, if I drive my car negligently and injure someone, I have breached a duty of care and must compensate the injured party.
Tort law will compensate an injured party for property damage and personal injuries, but it will compensate for pure economic loss (i.e. monetary loss) only in limited situations.
Pure economic loss will be compensated if the facts fall within five existing categories. They include negligent misrepresentation; negligent performance of a service (e.g. legal services); and negligent supply of shoddy structures that might result in damage to health and safety (e.g. negligent installation of cladding on a high-rise building). There are two others, but we will not discuss these.
Accordingly, to determine whether there is a cause of action in tort for pure economic loss, a court must determine whether the claim falls within any of the existing categories. If it does, there is a cause of action – subject to proof of the requisite facts. If it does not, then the court must decide whether to create another category. That, in itself, is a multiple step process.
Step 1(a) – the court must determine whether there is a sufficiently close relationship (i.e. proximity) between the parties to justify the imposition of a duty of care.
Step 1(b) – if there is that proximity, the court must determine, in the particular circumstances of the case and given the relationship between the parties themselves, whether policy considerations should negative the duty of care.
Step 2 – if the plaintiff passes Steps 1(a) and 1(b), the court must determine whether there are policy reasons, in general (i.e. regardless of the particular relationship between the parties), that would negative a duty of care.
The Supreme Court of Canada (SCC) quickly concluded that the subs’ claim, which was for pure economic loss, did not fall within any of the existing categories. It therefore went through the multi-step analysis to decide whether to create a new category.
Step 1(a) – The usual test for proximity is foreseeability. The trial judge decided that it was foreseeable to the owner that if it breached the tendering process, then the subs within the tendering teams would be adversely affected. The SCC agreed that the tendering process in this case was heavily dependent on the team process and that there was sufficient proximity.
Step 1(b) – The SCC noted that, in this case, the owner allowed each general and its subs to submit their bids as one joint venture proponent. In doing so, the subs would be liable to the owner in contract and the owner, in turn, would be liable to the subs. However, the subs did not see fit to do so, but still claimed the same benefits for a breach of Contract A as if they had done so. This was sufficient policy reason for the SCC to conclude that the duty of care arising from proximity should be overridden.
Step 2 – Since the subs did not overcome both hurdles in Step 1, the SCC did not have to discuss Step 2, but did anyway. It concluded that, in general, an owner should not be liable to subs in tort in tendering situations. It did not want owners to be liable to an indeterminate class of claimants. It stated:
“Given that this type of tendering process is not unique and that there are many types of arrangements that can arise between owners and contractors and in turn between contractors and subcontractors, a recognition of an owner’s duty of care towards subcontractors could lead to a multiplicity of lawsuits in tort, an undesirable result.
That the facts here suggest indeterminacy is, I think, symptomatic of a more general concern in the construction contract field. Even where subcontractors are named and known by an owner, those subcontractors will have employees and suppliers and perhaps their own subcontractors who also could suffer economic loss. And these suppliers and subcontractors will have their own employees and suppliers who might claim for economic loss due to the wrongful failure of the owner to award the contract to the general contractor upon which they were all dependant. The construction contract context is one in which the indeterminancy of the class of plaintiffs can readily be seen.
Even if a prima facie duty of care had been found at the first stage … it would have been negated at the second stage because of indeterminate liability concerns.”
Accordingly, the SCC dismissed the subs’ appeal. This decision accords with the general philosophy that, in construction matters, parties have duties only to those immediately above and below them on the construction ladder.