Legal Blog

Price Shopping

In a tender call, subcontractors invariably submit their prices just before the deadline by which the generals have to submit their tenders to the owner. Subs do this because they are concerned that the generals will shop their prices. The law of tender, as applied to the sub/general relationship, attempts to eliminate bid shopping. The law has evolved such that the moment a general carries a sub in its price, tender Contract A is formed (which states, in essence, that the general will award the subcontract to the sub if the general carries the sub’s price in its tender to the owner). The key, however, to the elimination of bid shopping is the owner’s requirement for the general to list the subs that the general proposes to use. Once the general does so, its choice of subs is in the open and cannot be hidden or changed. A general then bid shops at its peril. Such was the case in Combined Air Mechanical Services v. Computer Room Services Corp., 2015 ONSC 610, an Ontario Superior Court of Justice decision.

Deal

The project was to install mechanical systems in a computer room. The mechanical portion of the contract far exceeded the other portions of the contract. Both the general and the mechanical sub had intended to bid the contract to the owner. Ultimately, the parties agreed that they would work together; the sub would give its price to the general who would add that price to its own work in order to submit its bid. The sub agreed that it would not bid the project in competition with the general and the general agreed that it would not shop the sub’s price.

 

When the sub submitted its price, the general thought it was far too high. The general was worried that it could not insert a proper price for its own work and a mark-up of the sub’s price and still be awarded the job. The general and sub discussed the sub’s price and, after that conversation, the sub believed that it had satisfied the general’s concerns. Bad assumption.

 

The general did not have the time to obtain a new price from another sub. Accordingly, it reduced the profit that it expected to receive; used the sub’s price in its bid; notified the owner that the sub was going to be the mechanical subcontractor on the project; notified the owner that another mechanical subcontractor, sub #2, might also work on the project; and used the qualifications of the sub’s people to demonstrate its ability to provide the proper mechanical work. The general inserted the name of sub #2 before it had even contacted sub #2 about the job.

 

The general was awarded the contract and, as it had always intended, immediately obtained a quote from sub #2. That quote was significantly lower than the sub’s price. The general informed the sub that it would not be awarded the subcontract and then awarded the mechanical subcontract to sub #2. The general claimed that there was never a formal contract with the sub, there was no formal tendering process, and the sub submitted an unreasonably high price.

 

Liability

This was not a good fact situation for the general. The judge made the findings set out below.

• The lack of a formal tender call was irrelevant to the formation of Contract A. The general’s purpose in soliciting a quote for the mechanical work was to assist the general in the pricing of its own bid and this was sufficient to invoke tender principles of law.
• The general “basically iced (the sub) from submitting its own competitive bid.”
• Out of an abundance of caution, the general inserted in its tender to the owner, in addition to the sub’s name, the name of sub #2 – without first even speaking to sub #2.
• The general had always hoped to make up for its reduced profit in its bid to the owner with a lower cost in providing the mechanical work. This decision had never been communicated to the sub.
• The general wanted to keep the sub on a string. If it could negotiate a lower price with sub #2, it would make far more money; if it could not, it still had the sub’s price as a fall-back.

 

Not only did the judge find that the general breached both tender Contract A and its agreement not to shop prices, the judge found that the general breached its common law duty of honesty and good faith in contractual dealings. In particular, it breached its duty of honesty by including the sub’s profile to the owner and using the sub’s quote, knowing that it had no intention of using the sub to perform the work if it could find someone cheaper.

 

Damages

Just as in the Elan case (see our newsletter of March 2016), the quantification of damages was very important. However, unlike the Elan case, if the sub had been awarded the contract, it would have earned a sizeable amount of money towards profit and overhead.

 

As in Elan, the parties had the benefit of knowing sub #2’s financial performance for the project. Sub #2 had made a healthy profit on the project – even at a price that was significantly lower than the sub’s price. The judge calculated the sub’s lost profit at $505,000 – on a bid price of $968,000.

 

The judge noted that the sub was not required to mitigate its loss because its business was elastic (i.e. it was able to perform whatever work came in because it could readily subcontract out much of that work). The judge found that the sub could have performed its mechanical work on the project in addition to any other work that it was otherwise able to find.

 

Moral

 

It seems that the general did not have any scruples – assuming that the trial judge found the facts correctly. When a general carries a sub in its bid to the owner and then lists that sub as part of its subcontract team, the general plays with fire if it decides to subcontract with another subcontractor who pops up later with a lower bid.

 

Image courtesy of hotblack, Morguefile.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.