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Fast Play

     We have often discussed tender situations in the construction context. However, tender problems can arise in a variety of procurement situations. One example is set out in Optics Limited v. Timbercon Inc., 2011 and 2012 decisions of the Ontario of Appeal. 

Manual

     Timbercon was a supplier of parts and systems to Lockheed, a manufacturer of fighter planes. Oz manufactured attenuators, which adjust the amount of light passing through fibre-optic components (we have no clue what this actually means). What Timbercon provided to Lockheed in this project was not stated, but it seems that Timbercon was, in essence, a middleman between the manufacturer and the user.

     Initially, Timbercon requested and paid Oz for 10 manual attenuators. It then suggested that it might need another 900 of them, but would pay only when Lockheed requested and paid for them. Oz told Timbercon that it had already manufactured the attenuators and requested Timbercon to take them off its hands as a favour.

     Oz delivered the attenuators and billed Timbercon $131,000 for them. Timbercon paid $53,000 for those that Lockheed wanted and indicated that it would be happy to return the rest. It seems that Oz “forgot” that the delivery was on consignment and wanted its money, not the return of the attenuators.

Automatic

     In the midst of this, the parties had bigger fish to fry. Lockheed was also contemplating the purchase of automated attenuators (which automate the manual function that we cannot understand). From the outset, and continually thereafter, Timbercon told Oz that Oz would be the sole supplier of the automated attenuators.

     Oz and Timbercon had a conference call to discuss a Lockheed visit to Timbercon’s premises and the technical questions that Lockheed was raising. Oz thought that the call went well; Timbercon, not so much. Timbercon felt that Oz was attempting to bully it, made insulting allegations, and demanded an upfront fee for its engineer to attend at Timbercon’s premises. Oz also pressed Timbercon for payment for the manual attenuators.

     One day later, Timbercon contacted Dicon, Oz’s competitor, hoping to involve Dicon as a potential supplier of the automated attenuators.

     When Oz’s engineer attended the meeting with Lockheed at Timbercon’s premises, Timbercon advised Oz that there was no other competing bidder. At about the same time, Timbercon sent an email to Dicon stating, “We are looking forward to working with your team.”

     A few weeks later, Timbercon met with Oz and did not tell Oz that Dicon was bidding. Worse yet, Timbercon rigged the bid as follows:

a)   When it received Dicon’s bid, it told Dicon that Oz’s bid was significantly lower. Dicon then reduced its quote.

b)   Once Dicon submitted its revised quote, Timbercon marked up the Dicon quote by 42% and the Oz quote by 72%.

     Oz’s bid was not as good as Dicon’s regarding the delivery dates, but Oz, had it known about Dicon, would have adjusted that timing. In any case, Lockheed testified that, although Dicon’s timing was preferable, Oz’s production timing was still acceptable. 

     Timbercon requested Lockheed to choose the supplier it preferred. Not surprisingly, Lockheed preferred the Dicon quote. Oz discovered for the first time, by way of Timbercon’s press release, that Dicon had tendered and was the successful bidder.

Trial

     The trial judge held that Oz had no right to claim the balance of its invoice for the manual attenuators. Oz gave them to Timbercon on consignment and, once Timbercon returned the attenuators, Oz had no further cause to complain.

     The trial judge also held that, although there was a special relationship between Oz and Timbercon, Timbercon made no actual misrepresentations and was therefore not liable for negligent misrepresentation. She also held that although Timbercon acted unfairly to Oz, there was no contract between them and therefore no legal duty to act in good faith.

Appeal  

     The Court disagreed with the trial judge regarding the representations. The trial judge ignored one very important representation; that is, Oz was the only bidder. That representation was false. Timbercon knew it was false and declined to tell Oz of the Dicon competition. Oz relied on that representation to its detriment. Had Oz known that it had competition, it would have sharpened its pencil and moved up its delivery dates.

     The Court also analysed Oz’s claim for breach of good faith. After much deliberation, the Court agreed that the available remedies for pre-contract negotiations, such as negligent misrepresentation, deceit, duress, unconscionability, and undue influence, were all that a claimant could use. The Court declined to recognize a free-standing claim for breach of good faith. 

     In a construction tender situation, a contractual relationship already exists, such that good faith is important. Contract A is formed immediately upon a tender being delivered. Accordingly, everything that happens after that time can be used in a claim for breach of a duty of good faith.

     Oz also appealed the decision regarding the manual attenuators, but the Court held that there was evidence on which the trial judge could have concluded that there was a consignment agreement only.

     Since the trial judge had not assessed damages, and since there was insufficient information on which the Court could assess them, the Court remitted the matter to the trial division for a damages assessment.

Costs

     The Court awarded Oz $40,000 towards its costs of the appeal.

     The trial judge, after ruling in Timbercon’s favour, had awarded $454,000 to Timbercon for its partial indemnity trial costs. Once the Court of Appeal overturned liability, not only did Timbercon not get that award, it was also subject to pay trial costs to Oz.

     Timbercon wanted the assessment of the costs deferred until a trial judge actually quantified Oz’s damages. It argued that costs are dependent on damages awarded because costs must be proportionate to the amount at stake. It also argued that there was an offer to settle, which would also affect the quantum of the costs awarded.

     The Court acknowledged that these were good arguments, but decided to fix the costs regardless. Why? Because Timbercon’s behaviour before trial sufficiently incensed the Court that, in essence, it did not matter how the damages were finally quantified. Timbercon had rigged bids and had been caught. Further, Timbercon had failed to produce a smoking-gun email during discoveries, an email that became known only after Oz obtained an order requiring Dicon to produce its documents.

     The Court also decided that Timbercon’s actions were sufficiently outrageous to award Oz substantial, not merely partial, indemnity costs; it fixed those costs at $617,000. It then reduced the costs to $370,000 to account for the fact that Oz was unsuccessful in its claim regarding the manual attenuators and another claim for breach of confidentiality and misappropriation of intellectual property.