Legal Blog

Breach of Tender Contract Damages

Much ink has been spilled analysing tender contracts (i.e. contract A) and determining their implied terms in light of that analysis. However, like any breach of contract case, a finding of liability for breach of the tender contract is just the first part of the analysis. The second, and equally important, part is the quantification of the damages that flow from the breach. This second part was front and centre in Elan Construction v. South Fish Recreational Association, a 2015 decision of the Alberta Queen’s Bench.

Liability

 

The owner was building an arena. It solicited tenders and pre-qualified a number of general contractors to provide them. It created a matrix to evaluate the tenders based on four criteria: price, completion date, experience, and references. Each criterion was given a maximum point allocation.

 

The owner received the tenders, evaluated them using the matrix, and awarded the contract to the second lowest bidder (the “winner”); the low bidder (the “loser”) was a sore loser and commenced an action against the owner. It alleged that the owner used undisclosed criteria in its evaluation and allowed the winner to compete unfairly. It claimed damages for loss of its contemplated profit of $705,000.

 

While matrix evaluations are acceptable, the evaluations must comply with the matrix criteria and the information provided in the tender documents. This allows a disgruntled bidder an opportunity to second-guess the evaluation.

 

The judge held that the owner’s analysis was problematic because it:

 

• evaluated the completion dates using an arbitrary standard that bidders could not have contemplated
• gave greater weight to arena construction experience rather than to ordinary commercial experience, without disclosing that criterion
• took LEED into account without mentioning it as a criterion
• made no mention that there would be an interview and pressured the loser to attend the interview without its key representatives being available
• allowed the winner to substitute another, and better, superintendent after the bid and before evaluation.

 

The judge accounted for all of these problems and decided that, had the evaluation been done properly, the loser would have been allocated more points than the winner and would have been awarded the contract.

 

The loser won on liability.

 

Damages Analysis

 

A breach of contract almost invariably results in an analysis of the expectation interest of the innocent party. What could that party have expected had there been no breach? Further, the damages being claimed must be caused by the breach and must not be too remote (i.e. they must arise naturally in the usual and ordinary course from the breach of the contract).

 

The expectation interest would be the lost profit that the loser could have expected to achieve had there been no breach. Loss of profit could reasonably have been expected to arise out of a breach of the tender contract. The cost to compile the tender should not be relevant because that cost would have been expended as part of the bidding process regardless of a breach.

 

The judge held that, had the matrix been evaluated correctly, the loser would have been awarded the contract and, accordingly, it lost its expected profit from the project.

 

The owner argued that the loser had actually mitigated its damages because the loser’s assigned project manager was immediately moved to another project. The judge correctly noted that the test was not whether personnel were moved to other projects, but whether, in the absence of the breach, the innocent party would have earned profit on its other jobs regardless. The judge noted that the loser was a large contractor, did not hire this project manager specifically for the project, and would move project managers from job to job as needed. Accordingly, any collateral profit made on other jobs through the efforts of that project manager would not be credited to the lost profit arising out of the tender breach.

 

Quantum

 

The loser provided financial information to show that its typical profit margin was 5% and that its historical profit margin on similar jobs ranged from -1.5% to 37.42%. The judge accepted this evidence and held that 5% was reasonable. Accordingly, he held the reasonable lost profit was $705,000 as claimed.

 

Lost profit can be demonstrated a number of ways (e.g. the profit margin used in the tender itself, the historical profit margin for all work, etc.). We are not keen on the methodology that the loser used in this action, but it worked.

 

Contingencies

 

You might think that the loser was home free, but not so. The judge considered the dreaded contingencies. In effect, the judge asked: knowing what we now know about the actual construction of the project, would the loser have actually earned its expected profit of $705,000? In this analysis, the testimony of a witness from the winner sunk the loser.

 

The winner testified that it started construction with an expected profit of $300,000, but even after the owner ponied up an additional $250,000 in claims, it ended up with a $400,000 loss. Could that $950,000 (or $700,000) swing be attributed to the loser or could the loser differentiate itself from the winner and the adverse conditions it encountered?

 

Cuts

 

The loser, unlike the winner, carried the price of a steel sub who underestimated the scope of the work and would not have honoured its bid. The judge found that the loser would have absorbed a $185,000 cost increase to use the price of the next high steel bidder. According, the judge reduced the lost profit claimed from $705,000 to $520,000.

 

The judge then set out additional complications that the winner encountered:

 

• the winner carried the low masonry sub, but decided that the sub was too high risk to be given the subcontract and therefore the winner had to contract with another mason for an additional $60,000
• the winner subcontracted with a paving sub who went under and the winner spent another $70,000 to have its contract completed by another sub
• the winter was unusually cold, shutting down the project on 23 days. This caused a project delay, including its attendant costs and premium time to accelerate the work in an attempt to meet schedule
• design problems caused significant delays (which is why, we assume, the owner paid an additional $250,000).

 

The judge concluded that, in essence, the loser would have been adversely affected by the same difficulties and delays as the winner and would have had no competitive advantage over the winner in dealing with those adversities. Since the winner’s profit swing due to the adversities was $950,000 (for some reason the judge seemed to have forgotten about the owner’s contribution of $250,000), the judge concluded that the substantial cost of the adversities would have exceeded the anticipated adjusted lost profit of $520,000. Accordingly, the judge awarded the loser only nominal damages of $1,000.

 

It seems that the loser won the liability battle, but lost the war on damages. The loser remained a loser.

 

Image courtesy of Snowbear

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