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Posted on January 1, 2007 | Posted in Construction

In our May 2005 newsletter, we roundly criticised the trial judge’s decision in David J. Harvey Holdings Inc. v. Hercules Food Equipment Ltd., a 2004 Ontario Superior Court of Justice case. We used words like “wrong” and “aberration.” We savaged the reasoning and the outcome. The appeal has now been decided in the Divisional Court and, to our surprise, the trial judge has been upheld.

What’s It About 

A sub bid a project pursuant to a call for tenders on which the general was bidding. The sub was successful; the general sent the sub a PO asking the sub to sign its acceptance; the sub, however, sent back a note saying that it was too busy to do the work. The general, therefore, contracted with another sub to perform the work at an increase in price of $25,000 and sued the sub for that amount. 

The trial judge dismissed the action.

First Issue 

The trial judge refused to allow an expert witness to testify because his report dealt with the very question that the judge was asked to answer, “Was contract A created with the quotation?” We had agreed that the judge should not have allowed the expert to opine on the issue of contract A formation. However, we felt that the judge should have allowed the expert to give evidence about construction practices. The Divisional Court noted that the judge had discretion not to accept an opinion that was no more than a legal opinion and “dressed-up argument” and therefore agreed that the trial judge could exclude the expert.

Second Issue

The trial judge held that the very nature of the PO, requiring an acceptance, meant that the PO was an offer, not an acceptance. We had stated that the words “accepted by” were mere surplus; as soon as the general sent the purchase order, it accepted the quotation and formed the contract. The only purpose of the words was to ensure that the general had something from the sub acknowledging the contract.

The Divisional Court agreed with the trial judge, but set out facts that the trial judge did not mention. It seems that what we thought was a short, unconditional PO also referred to terms and conditions on the back of the PO. By adding these terms and conditions, the PO was no mere acceptance of the sub’s offer; the PO, rather, was an offer itself.

Third Issue 

The trial judge held that the facts did not fit within the classic Ron Engineering unilateral contract. He said that the request for tenders from the general to the sub did not stipulate that the sub’s tender had to be irrevocable for any time, much less for a “reasonable period” on which the expert would have opined and that the general argued should be 60 days. We said that a sub’s bid must be irrevocable for, at minimum, the length of time that the general’s bid must be irrevocable to the owner.

You can see from our comment that we had assumed that the general had led evidence on the terms of the project’s tender documents. Inexplicably, it seems that the general did not. The general’s lawyer had made a “tactical decision” not to submit the tender documents into evidence; when he realised that this tactical decision was a tactical blunder, the lawyer tried to get the documents into evidence on the appeal. He was unsuccessful because new evidence will be allowed on an appeal only if the existence of that evidence was not known at trial. Since the lawyer knew about the tender documents, but chose not to introduce them at trial, he could not introduce them on appeal.  

The Divisional Court agreed with the trial judge that, without the tender documents, there was no evidence to indicate that the sub had to keep its bid open for any length of time, reasonable or not.

Upshot

In a breach of tender case, a decision not to submit the tender documents as evidence is utter folly. Contract A, by definition, is a contract that states that a bid is irrevocable for a period of time and that, if the bid is accepted within that time, the parties will enter into contract B. There cannot be a contract A if there is no duty on the sub (set out either in the project tender documents or the documents from the general asking for a bid from the sub) to keep its bid open for acceptance. If there is no contract A, then the general can still accept the sub’s tender before it is withdrawn, but the purported acceptance must be unconditional; adding new terms simply makes the acceptance a counteroffer and does not create a contract.

From what we can determine, without having seen the actual terms of the tender documents to ascertain why the general’s lawyer did not submit them into evidence at trial, the general did not lose the action, its lawyer did.

Suppose 

Suppose the tender documents had been put into evidence and there was a proper contract A. The tender documents usually set out the form of contract between the owner and the general. They do not set out the form of contract between the general and its subs. When the general accepts the sub’s bid under contract A and submits its own form of contract B, can the sub say that it does not have to accept that contract? We are of the view that simply because a sub binds itself to contract A does not mean that the sub has to accept whatever contract B the general puts in front of it.

If the sub has seen the general’s standard form of contract, either in the general’s invitation to bid the project or due to past dealings with the general, the sub will probably be bound to it.

If the sub has never seen the form of contract, we believe that the court will impose a duty of good faith on the general and sub to act reasonably to negotiate contract B. In our newsletter of January 2005, we discussed a case in which we were counsel for the general and successfully made that argument. In that case, the sub was held liable for breach of contract A for its failure to negotiate the terms of contract B in good faith.

Conversely, if the sub and general, acting in good faith, cannot agree on the terms of contract B, the court will not impose a contract on them.

Accordingly, a sophisticated sub, who wants to get out of its bid, will pretend to negotiate contract B, but may have any number of reasonable pretexts upon which to refuse to execute the contract. An unsophisticated sub will simply say, “no deal”. The former sub may ultimately be released from its tender whereas the latter sub may well be held liable for the general’s damages.

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