Legal Blog

Tender

In the beginning, construction contracts were created in the same manner as all other types of contracts.  Before there was a contract, there had to be an offer and an acceptance of that offer.  Then, along came R. v. Ron Engineering & Construction (Eastern) Ltd., a 1991 Supreme Court of Canada decision, and the construction industry was turned on its head.

Ron Engineering postulates two types of contracts.  Contract A is created when an owner accepts a tender made by a general contractor to build a project at a stated price.  Contract B is the actual construction contract that is to be entered into as a result of Contract A.  In essence, Contract A is a contract whereby the contractor and owner agree to enter into the construction contract, Contract B.

This case has spawned its own cottage industry of litigation.  We will deal with two fact situations that commonly arise and that are affected by this case.  First, how does this case affect the subcontractor-general contractor relationship?  Second, if the contractor has the lowest bid, must the owner accept the tender?

Subcontracts 

Generals usually compile their bid based on the bids given to them by their subcontractors and suppliers.  Often, generals list, in their tender form, the subs that they are carrying and intend to use on the project if the owner accepts the tender.  What happens when sub submits a bid to general, general carries sub’s price in its tender, and the owner awards the contract to general?  Has general just entered into Contract A with sub?

Initially, the cases emanating out of western Canada took the position that the parties had entered into Contract A. Accordingly, if general decided to award the subcontract (i.e. Contract B) to another sub, or use its own forces, there was a breach of Contract A and sub was entitled to claim damages from general.  However, in Scott Steel (Ottawa) Ltd. v. R.J. Nichol Construction (1975) Ltd., a 1993 decision of the Ontario Divisional Court, the court held that not only must general be awarded the contract from owner, general must subsequently communicate its own acceptance of sub’s bid before Contract A is created.

We now know that, in Ontario, an aggrieved sub cannot successfully sue a general for loss of profit on a construction contract that the sub felt ought to have been awarded to it, but was not.  Can the sub get anything else from the general? That question was answered in Naylor_Group Incorporated v. Ellis-Don Construction Ltd., a 1996 Ontario Court (General Division) decision. 

Sub put in the lowest bid and general wanted to accept that bid.  Unfortunately, general was not able to do so as a result of an adverse Ontario Labour Relations Board decision.  General then used sub’s bid to obtain another subcontractor to do the job at the same price.  The judge held that general should repay to sub the cost of $14,560.00 incurred by sub in preparing the bid.

The trial judge stated “The industry-wide hate of bid shopping is testament enough to the value of the information generated by this cost…Naylor expended this sum of money to generate the lowest electrical bid which Ellis-Don received.  Ellis-Don used this information to its benefit…I do not suggest that it should be required to disgorge a share of the profits made on the project but I do believe that Ellis-Don should repay to Naylor the cost of preparing the bids”.

The Weasel Clause 

A request for tender from an owner invariably contains a sentence, such as “The owner need not accept the lowest or any tender”.  Assume a contractor submits the lowest tender and is qualified to do the job. Can the contractor insist that the owner award the contract to it, if the owner decides to award a contract at all?

In the western provinces, the courts have imposed a duty of fairness.  If it is customary in the trade to award a contract to the lowest qualified bidder, the owner does not have the right to unfairly cast aside that bidder on grounds that were not set out in the instructions to bidders.

For example, in Chinook Aggregates Ltd. v. Abbotsford, a 1990 British Columbia Court of Appeal case, the court granted damages to a general contractor who had not been awarded a contract. The municipality had awarded the contract to a local bidder, without having first instructed all of the bidders that there was a local preference policy.

In Vachon Construction v. Cariboo, a 1996 British Columbia Court of Appeal decision, the court allowed loss of profit damages to a general contractor who had not been awarded a contract.  The court concluded that the owner unfairly allowed another general contractor to amend its bid to correct an error.  The low general contractor inserted a bid price that, as expressed in words, was different from the bid price expressed in numbers.  Both the bid price in words and the bid price in numbers were the lowest bids and were lower than the plaintiff’s bid.  The owner allowed the low contractor to amend its bid to the higher of the two amounts.  The court held that the low contractor’s bid was informal and could not be accepted by the owner.  The court also  held that the weasel clause was inapplicable because the owner was not dealing fairly with the plaintiff who had the next lowest bid.

In contrast, the Ontario Court of Appeal, in the 1992 decision of Acme Building and Construction Limited v. Town of Newcastle, stated that where there is a weasel clause, a duty of fairness becomes utterly irrelevant and the owner may rely on the clause completely.  Once again, there is a dichotomy in result, depending on whether the action is brought in Ontario or in the west.