Legal Blog

Tender Negligence

The ingenuity of lawyers should never be underestimated. Just when you think that you know everything that can reasonably be known about a subject, some bright lawyer, thinking outside of the box, dreams up a different angle and we are off to the Supreme Court. Such was the case in Martel Building Ltd. v. Canada, a 2000 decision of the Supreme Court of Canada.

Non-Construction 

An owner had leased a building in Ottawa to the federal government. The lease was coming due and the parties entered into a form of negotiation for the renewal. They could not come to an agreement and the feds opened up the matter to tender. The owner submitted a tender, along with other prospective landlords, and was the low bidder. However, after the feds included fit-up costs to all of the tenders, the owner was considerably higher than the second low bidder, whose tender the feds accepted.

The owner alleged that the feds should be liable for its economic losses because:

1.   The feds owed the owner a duty not to harm it in the pre-contractual negotiations and were negligent in the manner in which they conducted the negotiations. Note that there were no allegations of negligent misrepresentation;

2.   The feds assessed the tenders unfairly and, although the standard tender clause was inserted, were therefore liable for both breach of contract A and for negligence; and

3.   The feds drafted the tender documents negligently and ought to have considered the prior negotiations and circumstances with the owner when they drafted the tender documents.

The owner was unsuccessful at trial but was successful in the Federal Court of Appeal.

Economic Loss 

Tort law has evolved to compensate parties for injury to person and property. However, the courts have been much less likely to apply tort law for pure economic loss.

For example, if I contract with you to sell a widget, I am liable if the widget does not work and, because the machine in which you place it breaks down, it costs you money to replace the widget and fix the machine. I am liable in contract for your pure economic loss. Conversely, if I manufacture a widget that an independent retailer sells to you and your machine breaks down, the retailer is liable to you in contract for your repair costs but I am not liable to you in tort for that economic loss. I do not have a duty of care to you for your economic loss. However, if the defective widget causes the machine to explode and you are hurt or your factory is blown up, I am liable to you in tort. Your losses are no longer purely economic; they are losses arising out of personal injury or property damage.

As with every rule, there are some exceptions to the rule against pure economic loss in tort – but not many. The exception used most often is negligent misrepresentation (i.e. you are liable in tort if you negligently misrepresent something to me and I rely on your misrepresentation to my detriment). In the construction field, the applicable exception relates to faulty construction causing a safety hazard (e.g. Winnipeg Condominium Corporation v. Bird Construction). A contractor is liable in contract to an owner for faulty construction but is not liable in tort to a subsequent owner for repair costs, unless the faulty construction constitutes a safety hazard.

Not This Time 

The Court had to decide whether the exceptions to the pure economic loss rule should be extended to pre-contractual negotiations in which a contract never arose.

The Court refused to do so for a number of policy reasons:

1.   The very object of negotiations is a zero sum game (i.e. what I gain, you lose). The primary object in a negotiation is to ensure that you obtain the most advantageous terms for yourself; it is not to ensure that you inflict no economic harm on your negotiating counterpart.

2.   To impose a duty of care as requested would deter socially useful conduct. “It would defeat the essence of negotiation and hobble the marketplace to extend a duty of care to the conduct of negotiations, and to label a party’s failure to disclose its bottom line, its motives or its final position as negligent.”

3.   It would be the equivalent of providing the disappointed party with after-the-fact insurance for failed negotiations.

4.   It would require the courts to scrutinise the minutiae of pre-contractual conduct and would turn the courts into regulators.

5.   It would encourage needless litigation.

Tender Evaluation 

The Court agreed that there was an implied duty in contract to evaluate the tenders fairly and consistently. However, it found that the feds did this in all material respects and in the one respect in which they failed to do it, the dollar amount would not have affected the decision to award the tender as it was awarded.

Since the Court concluded that there was no contractual breach of the evaluation of the tenders, there was no tort breach because the same factors in determining liability applied.

Tender Drafting 

The Court held that there was no duty of care in tort in this case to properly draft a call for tenders. Again, policy considerations prevailed:

1.   The integrity of the tender process would be compromised if the person calling for tenders had to draft the tender documents to take into account its past relationship with one of the tenderers. Once the feds decided to tender, they were not required to account for any past relationship with the owner; negotiation gave way to competition.

2.   A party calling for tenders has the discretion to set out its own specifications and requirements. As long as there is no negligent misrepresentation in the tender documents, there is no duty of care in drafting the documents.

Not Covered 

The Court took great pains to point out that this decision dealt only with the allegations of negligence. It did not deal with the concept of bargaining in good faith because that concept was not argued before it. The Court stated: “a duty to bargain in good faith has not been recognized to date in Canadian law. These reasons are restricted to whether or not the tort of negligence should be extended to include negotiation. Whether or not negotiations are to be governed by a duty of good faith is a question for another time.”

The Beat Goes On

The Supreme Court of Canada has granted leave to appeal in two cases of interest: D’Aoust Construction Ltd v. Markel Insurance Company (see newsletter of March 2000) and Ellis-Don Construction v. Naylor Group (see newsletters of January 1997 and September 1999).