Legal Blog

Owner Competition

The normal tender case usually arises out of one of two situations: (i) an owner awards a contract to a general who is not the low bidder, or (ii) a general carries one sub’s price and awards the subcontract to another. What happens when an owner (general) decides to do part or all of the work itself in lieu of awarding the (sub)contract to a general (sub)? Is that smart business or is it bid shopping? We have two cases that answer this question.

Part Me, Part Others

In Port Hawkesbury v. Borcherdt Concrete Products Ltd., a 2008 decision of the Nova Scotia Court of Appeal, a general sued the owner because the owner had failed to award it the contract.

The general had submitted a tender for the supply and installation of precast concrete bleachers, part of the owner’s construction of a civic centre. The tender call contained the usual privilege clause. Only one general tendered the project. Its price was $269,000, about $100,000 and 59% more than budget. Within days, the owner negotiated with another supplier to supply the bleachers for $96,300 and then undertook to use its own employees to perform half of the labour to install the bleachers. The case does not state who did the other half.

Once the owner locked in the new supply price and decided to use its own employees for half of the installation, it formally rejected the general’s tender.

The trial judge agreed that the general’s bid was well over the budgeted amount, but held that the owner did not deal fairly with the general and, in effect, was bid shopping. He awarded the general its expected lost profit of $68,500. The owner appealed.

Not Fair

The court first noted that the privilege clause does not exonerate a party calling for tenders from treating the tenderers fairly.

The court stated, “There was no evidence before him that its tendering documents permitted the Town, post-closing, to change the process and to contact a third party and discuss a scope of work different from that in its original tender. Nor am I persuaded that he erred in determining that, in the circumstances of this case, the Town had an obligation to notify (the general) that its bid had been rejected, or at least that it was negotiating with a third party.”

It seems that a number of factors bothered the court. First, the owner changed the scope of the work after the tender closing. Second, the owner started to negotiate with another supplier. Third, the owner did this without giving the general a chance to be involved.

Bid Shopping

The trial judge felt that when the owner took over part of the work included in the tender, it became a non-compliant bidder. Further, it engaged in unfair practices while retaining the right to use the general’s bid price. Conducting itself in this way allowed the owner a backstop in case its machinations failed. Until the owner concluded its alternate plan, the general was still liable under contract A to keep its bid open and available for acceptance.

The court agreed and held that the owner had engaged in bid shopping.

Damages

The trial judge had awarded the general the full, lost profit it had claimed. He felt that the Town had the onus to convince him that, even without its bid shopping, it would not have awarded the general the contract.

The court disagreed. It noted that the general had the onus of proving, on a balance of probabilities, that, but for the owner’s breach of tender contract A, the owner would have awarded construction contract B to the general. That finding must take place before there is a link between the breach of the tender contract and the loss of profit.

In this case, the owner testified it might possibly have awarded the contract to the general, but probably would not have done so. The court noted that the speed with which the owner acted to get a better price was indicative that the owner would not have been inclined to award the general the over-budget contract.

Historically, judges have reduced damages for breach of a tender contract if:

(i)  It was possible that, even had the owner not breached, the owner still would not have awarded the contract to the general;

(ii) The contract would not have been as profitable as the general originally contemplated; or

(iii) The general took or could reasonably have taken steps to obtain other work to mitigate its damages.

In this case, the court relied only on the first reason and reduced the damages award by 35%.

Alternatives 

What should the owner have done when faced with the one over-budget tender? It seems that it should have contacted the general to negotiate alternatives with it. If it were unable to do so, it should have rejected the general’s bid. Only then, could it have researched the market to use alternative methods to achieve its purpose. In that way, the owner bears the risk that it might not be able to achieve its objective and, if it returns to the general, the general can refuse the work or insist on an even higher price.

All Mine 

In Clow Darling Ltd. v. Detra Builders Inc., a 2008 decision of the Ontario Superior Court of Justice, a general requested a mechanical sub to bid a hospital project that the general was tendering. The sub submitted its price, but the general did not accept the sub’s tender; the general decided to perform the mechanical work itself.

The general was refreshingly candid during its examination. It admitted that it had decided from the start to perform the mechanical work itself; it requested the sub to quote the work so that it could have a measure of an appropriate price for that aspect of the work.

The general argued that the jurisprudence did not apply to this situation because, in the prior cases, the general had accepted the sub’s bid (e.g. by carrying the sub’s price in the general’s tender to the owner). In this case, the general had never accepted the sub’s bid.

The trial judge noted, “this is clearly a procedure akin to bid shopping,” and made short shrift of this argument. He said, “If the integrity of the bidding process is to be preserved … the defendants’ position cannot be sustained. The reason is obvious, since (the general) was only using the bidding process to shore up its own bid and never intended to accept any bidders who responded to its call for tenders. Consequently there never could be an acceptance of the “Contract A”…In such a situation the clear violation of the principles of fairness should entitle the plaintiff to any damage suffered as a result …”

Damages

The only evidence of damages came from the sub’s estimator. He testified that the bid included $106,500 of estimated profit and was based in part on an earlier job that the sub had completed with the same owner, architect, and mechanical consultant as the present job. The judge accepted it as a reasonable calculation of lost profit. In this case, contrary to the Borcherdt case, the general would have awarded the contract to the sub if it were not allowed to use its own forces and there did not seem to be any dispute over the quantum of the lost profits or the contingencies that might have arisen on the job.

Moral

Using someone else’s quote to determine how much to budget for one’s own forces is bid shopping.