Legal Blog

Good for the Goose

We all know that generals can successfully sue owners for breach of the tender contract. However, in Ontario it was nigh well impossible for subs to successfully sue generals for breach of the tender contract. A general would carry a sub’s bid in the general’s tender to the owner; the tender would be accepted; the general would for one reason or another enter into a construction contract with a different sub; the sub would sue the general; and the sub would lose. Not any more! A 1999 decision of the Ontario Court of Appeal in Naylor Group Inc. v. Ellis-Don Construction Ltd. (trial decision discussed in January 1997 newsletter) has changed the rules of the game.

What Happened 

The owner used the bid depository system for mechanical tenders. The subs’ bids were to be open for acceptance for 7 days after the owner could accept the bid of a general. The successful general carried the bid of sub #1. The tender document submitted by the general stated that sub #1’s price was carried and that the sub #1 would perform the mechanical work.

The owner asked the general to hold open its tender for a further period of 2 months and the general likewise requested sub #1 to hold open its tender for the same period. Sub #1 agreed and its tender was held open for acceptance until May 11.

On February 28, the Ontario Labour Relations Board ruled that an electrical union’s grievance was valid and that the general was still bound by contract to deal with that union. Sub #1 had no contract with that union. By March 10, the general became aware of the labour decision.

On March 4, the general requested Sub #1 to submit a price on post-tender additional work. On March 17, after not receiving an answer, the general pressed Sub #1 for its quote. Sub #1 gave it that day. The general, in turn, submitted its quote to the owner incorporating sub #1’s quote. In the meantime, the general had gone to other subs to determine whether they could do the work at the same price of sub #1.

On April 15, the general informed sub #1 that it could not allow sub #1 to do the work because to do so would breach the labour decision. On May 6, the owner awarded the contract to the general. The general never accepted the bid of sub #1. On June 2, the general informed the architect that it had chosen sub #2 to perform the mechanical work. Sub #2 had not been pre-qualified on the project and had not submitted a tender. The general had informed sub #2 of the price of sub #1. The price to do the work of sub #2 was identical to the price of sub #1.

At Trial 

The trial judge felt that he was bound by the Divisional Court decision of Scott Steel v. R J. Nicol Construction (discussed in our January 1997 newsletter), a case in which the court had held that a sub had no cause of action against a general in similar circumstances. The trial judge held that the general had never formally accepted the bid of sub #1 and the mere fact that it carried its price was not acceptance. Accordingly, no tender contract was ever formed and the sub was not awarded damages representing its loss of profit for the job. The trial judge did find that the general had shopped the bid of sub #1 and awarded sub #1 the cost of preparing the bid. Sub #1 appealed.

Court of Appeal 

Rule 

The Court first referred to the conditions in the Bid Depository’s standard tender form. Based on those conditions and common law principles, the Court held that “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.” When can the general reasonably refuse to contract with the sub? In many cases, a general in the heat of a tender submission carries a sub’s bid without having checked out the sub. The general may reasonably determine, after the rush is off, that the sub does not have the capability to perform the work. Alternatively, someone in the general’s organisation may realise that the general has, on other occasions, had bad experiences with the sub. The general would be reasonable in refusing to award the contract to the sub in these circumstances.

Reasonable? 

Was the general reasonable in refusing to accept the tender of sub #1? The Court held that it was not, on two grounds.

You will recall that the general knew about the labour decision on March 4 and did not immediately inform sub #1 that its tender would not be accepted as a result. Instead, the general pushed sub #1 on March 17 to deliver its price on the post-tender addendum. Once the general received the price of sub #1, sub #1 became expendable and its tender and post-tender price could be shopped. This alone disentitled the general from refusing to accept the tender of sub #1.

In addition, the Court was not convinced that the adverse labour decision was a sufficient reason to refuse to accept the tender. There were decisions of the Labour Relations Board that demonstrated it was sensitive to the prejudice a prime contractor could suffer due to a retroactive decision. The Court was of the opinion that the general should have gone back to the Board for clarification.

Fairness and Good Faith 

The Court noted that much had been written about the duty of fairness and that the cases in Ontario seemed to diverge from cases elsewhere in Canada.

The Court stated that “a construction contract could not be awarded on the basis of a hidden preference or on a basis other than that which had been stipulated in the documents governing the submission of a tender.” This statement would apply to both a sub dealing with a general and a general dealing with an owner.

Further, the Court noted that the fairness and good faith “with which the prime contractor has treated the subcontractor are important factors to consider in assessing the reasonableness of the prime contractor’s decision not to enter into construction contract B” with the sub. Good faith means giving effect to the reasonable expectations of the parties. Further, situations in which one party wrongly seeks to snap up an advantage in an unfair manner or seeks to avoid an obligation is a breach of the duty of good faith.

On the basis of this analysis, the general did not deal in good faith with sub #1.

The Court distinguished the Scott Steel case; in that case there was no hint of bad faith. However, in its analysis, the Court actually overruled the case.

Outcome 

The Court started out with the trial judge’s estimate of lost profit of $730,286. It then discounted that amount by 50% to account for the contingency that sub #1 may not have been awarded the contract even if the general had acted fairly and the contingency that, even if it had been awarded the contract, all may not have gone well on the job. That number was then reduced by a further 50% to allow for two further contingencies. Perhaps the Board would not have allowed the general to enter into a construction contract with sub #1. Perhaps, in order for sub #1 to be awarded the contract, sub #1 would have had to enter into a subcontract with a subsub that did have an affiliation with the electrical union. Sub #1 ultimately was awarded damages for loss of profit of $182,500.

Next Time 

Our next newsletter will deal with two cases in which a sub successfully sued an owner for breach of contract A at trial. Both of these cases were overturned on appeal.