Legal Blog

Rescission

In our July 2004 newsletter, we discussed the case of Toronto Transit Commission v. Gottardo Construction Ltd., a December 2003 decision of the Ontario Superior Court of Justice.

In that case, the general made an arithmetical error in its tender. The judge held that the owner had no right to accept the general’s tender because:

1.   The instructions to tenderers stipulated that, after the tender closing, the general was to supply a cost breakdown summary and other documents. The general provided the cost breakdown summary. That summary made it apparent that the general had made a mistake in the calculation of its tender price. The judge held that Contract A could come into existence only after the general had supplied everything that the tender documents contemplated. Accordingly, the cost breakdown summary was part of the tender and, with that summary, the tender evidenced an error on its face. The owner could not accept a tender with an error on its face.

2.   Although the general supplied the cost breakdown summary, it did not provide the other documents that the tender instructions required. Accordingly, the general’s tender was non-compliant and the owner could not accept it.

Since the owner could not accept the bid, there was no breach of tender Contract A as a result of the general’s refusal to execute construction Contract B. The judge dismissed the owner’s action.

Dilemma 

If either reason for the dismissal withstands appeal, the owner is put in a dilemma. If it asks for further clarification of the bid, the general can demonstrate that there is a mistake on the face of the tender and be released from the tender. If it asks for further documents, then it puts the general in a position in which, by refusing to do what it is supposed to do, the general can withdraw its tender. We do not usually have a whole lot of sympathy for owners, but these results do not seem to make much sense.

More 

After the judge held that the owner could not accept the general’s bid under Contract A, she could have stopped; however, she went on and analysed the situation as if there had been a Contract A with a compliant tender.

First, she determined that was no error on the face of the general’s initial tender documents. She reviewed the percentage difference between the general’s bid and the next high bid, compared it to the 22.9% difference in Ron Engineering, and decided that the bid was not so low as to constitute an error on the face of the tender. Indeed, she indicated that “an arithmetic error of significant dimensions does not warrant a finding of error on the face of the tender.”

Using the Ron Engineering analysis, under the assumed scenario the general ought to have executed construction Contract B. However, the judge then analysed the situation using the equitable remedy of rescission of contract.

The concept underlying the equitable remedy of rescission is that one party, who knows of a unilateral mistake that another party made, ought not to take advantage of that mistake. The theory is that equity will not allow unfair, unjust, or unconscionable conduct. Of course, if Contract A is rescinded, there is no necessity for Contract B.

Contra 

We suspect that counsel for the owner was apoplectic in being required even to argue this point. He argued that:

1.   The general was sophisticated; it had an office staff of ten people and an estimator with over 30 years experience.

2.   Both the owner and the general were commercial entities that had allocated their risk by virtue of the general posting a bid bond.

3.   The general clearly understood that its tender was irrevocable and that the terms of its tender would bind it.

4.   The general’s principal had signed the tender in blank with the general submitting the numbers at the 11^th hour by telephone. The general adopted this system for its commercial advantage and the general could not now complain that it did not like the result.

5.   Contract A was formed when the general submitted its bid, at which time neither of the parties knew of any mistake.

6.   No act of the owner induced or contributed to the general’s mistake.

7.   The public tender process would become a sham if a general could withdraw a bid during the irrevocable period.

No Way 

The judge disagreed. She felt that it would be unfair and unjust to enforce Contract A because:

1.   The case was not about the integrity of the public bidding process; it was about the interpretation of instructions to tenderers that the owner drafted.

2.   The general had a logical explanation for its honest and inadvertent mistake. It was not a capricious attempt to cancel its obligations.

3.   The owner never considered the general’s mistake; instead, it snapped at the error.

4.   The general would have suffered severe and irreparable financial hardship from the contract. The owner did not care.

5.   While the general may have an advantage of brinksmanship with the subs, ultimately the owner benefits from that brinksmanship by way of lower competitive tender prices.

6.   Although the owner did not induce the mistake, the threshold does not deal with the conduct of the owner, but rather with the effect on the general.

Our Take 

Other than point 5, we do not find any of the points of the judge especially compelling. Further, she did not deal with all of the arguments that the owner made to her. We find that her first point, dealing with the interpretation of the tender instructions, to be meaningless. She had assumed for the purposes of the analysis that Contract A had been formed and that the tender was compliant. Of what relevance are the tender instructions at that juncture?

Her decision turns Ron Engineering on its ear. The argument that the judge accepted in this case could have applied equally well in Ron Engineering. Indeed, in Ron Engineering, the mistake cost the general even more than it would have cost the general in this case.

Subs can also make this rescission argument. However, we suggest that they would be less likely to have success with it. In the case of a sub, the general has relied on the sub’s price in compiling the general’s tender. It would be inherently unfair to allow the sub to be released from its contract with the general, when the general is bound to honour its price to the owner.

The use of the rescission remedy opens the floodgates for arguments that can nullify the law of tender, law that has been accepted for the past 23 years. We have spoken with the solicitor for the owner and, fortunately, the owner is appealing this decision.