British Columbia Courts change Tender Law in Construction Industry

Stephen Tatrallyay
June 30, 2009 — 1,758 views  

Two relatively recent decisions of the BC Court of Appeal have quite drastically changed the law of tender for that province, and have given lawyers elsewhere reasons to pause for thought in determining whether or not the "duty of fairness" still applies, and if so in what circumstances, and what if any language can be used to avoid it or lessen its impact.

To summarize Canadian law as it was before these cases, the Courts had created two fictional contracts in tender situations.  The Supreme Court of Canada ruled in The Queen v. Ron Engineering (1) that as soon as the owner put a tender on the market and  contractors responded to it with their tenders, a contract [called Contract A just to be confusing] arose between the owner and the tendering contractors.  The terms of this contract were mostly contained in the tender documents themselves, but they specifically included a duty of fairness (not to treat any tender any different from another) and to ensure that the contract for the work itself (‘Contract B') would only be let to a qualified bidder (ie., one whose bid corresponded precisely to what had been asked for in the specifications).  Owners have been struggling with these issues ever since, and trying to find contractual language which would permit them to do whatever they wanted.  These efforts have included letting contracts in accord with a "local preference" rule favouring local contractors  (2); letting a contract to a non-compliant bidder in reliance with tender language that "the lowest or any tender will not necessarily be accepted", commonly called a "privative clause"(3); re-writing the specifications during the tender process to favour one contractor over another (4); and general "bid shopping" - ie., negotiating with one contractor for a lower price based on disclosure of other tenderers' bids (5).  It is said that Canada has paid more judicial attention to this issue than any other jurisdiction in the Commonwealth and that is not hard to believe.

Both appellate courts and those of first instance seemed to be intent on making the duty of fairness more and more strict, until the Supreme Court of Canada released its most recent decision on point, Double N Earthmovers Ltd. v. City of Edmonton. (6)  In that case, the City had let a contract for the supply of operators and equipment to move refuse at a landfill site.  The specifications contained some requirements regarding the equipment, in particular that all equipment had been made in 1980 or later.  Other equipment was identified by name and model, but followed by the words "or equivalent".  The City let the contract to the lowest bidder notwithstanding that at least one of its essential pieces of equipment had been made before 1980, and notwithstanding that it had been advised of this situation by the second-lowest bidder, the Plaintiff.

The City met with the low bidder to discuss the problem, and he promised to get the required equipment.  A few days later, he sent a letter stating that the updated equipment was not available except at a ridiculous price increase, a letter which seems to have gone into a drawer somewhere and been disregarded.  The City awarded the contract to the low bidder in any case, and  Double N sued, claiming that it had been a beneficiary of the duty of fairness created by Contract A, and that the City had breached that duty by letting the contract to a non compliant bidder.

The Courts were having none of it, until it reached the SCC, where the majority agreed with the lower courts, but a large and important minority (McLachlin CJC, Bastarache Binnie and Charron JJ) would have allowed the action and awarded damages to Double N.  The majority decision was trumpeted by legal commentators as the beginning of an important change in the Courts' treatment of the duty of fairness in Contract A.  However, the decision of the large and powerful minority left this matter in some doubt.

Now, two more recent decisions of the BC Court of Appeal seem to indicate that, in BC at least, the duty of fairness has changed considerably, and become much weaker.

Tercon Contractors Ltd. v. HM the Queen (Ministry of Transport)

(7)was released  at the very end of 2007, 10 months after the release of Double N. Double N is not referred to in Tercon.  In Tercon, the BC Court of Appeal was faced with a situation in which six contractors prequalified to perform a road-work contract, on the basis of what it called was a "request for proposal".  Tercon submitted the second lowest bid, but the lowest bid was by a consortium consisting of one prequalified bidder and one who was not.  The Ministry "disguised" the bid of the joint venture as one by the prequalified contractor only, although it had full knowledge of the real situation.

The privative clause in the tender material was very sophisticated, reading as follows: Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for any compensation whatsoever as a result of participating in this RFP, and by submitting a proposal each proponent shall be deemed to have agreed that it has no claim.

The Court of Appeal made a finding that Tercon was a sophisticated actor in the industry and must have been aware of this clause when it bid, and that it removed any rights that it may have for redress for a potential breach of the duty of fairness.  They also seemed to suggest that a Request for Proposal had a lower threshold of fairness than a normal call for tenders.  Thus the clause was an effective bar to the lawsuit, which they then dismissed.  A motion for leave to appeal to the Supreme Court of Canada was granted on July 10 2008, and the case  was actually heard on March 23 of this year, at which time judgment was reserved.  Reasons for decision will hopefully be released in the very near future.

The BC Court of Appeal in Hub Excavating Ltd  v. Orca Estates Ltd et al.(8), a decision released on April 17 2009, a residential project was cancelled by the owners after the tenders were received and before the contracts were awarded.  Prior to the cancellation, the project engineer said to Hub's principal words to the effect that their price was very close to his estimate, that they were the low bidder and that he "knew of no reason" that the project would not proceed, but that they should satisfy themselves regarding this by talking to the owners. Hub's representative spoke to one of the owners and was told that a decision had not been made but that the owners were meeting in the next week.  Apparently in reliance on those statements Hub decided not to bid on another contract available to it, which it would have won had it decided to bid.  The Owners decided that the project was economically not feasible, and that they would not proceed with it.  It took them a further 3 weeks to get this information out to the bidders.  Hub sued, claiming that the Owners and possibly the engineers had breached a duty of fairness which they owed Hub.

The defenses were, firstly, that Hub had no standing to sue because its own tender was deficient, and secondly, that the duty of fairness did not arise in thin air, but only when Contract A was formed, and that it is in any event confined to the duty to create all bidders fairly and consistently in the process of assessing the bids, and does not extend to other aspects of the tendering process.  As a result of the Owner's decision to proceed with the tender call notwithstanding that it had already determined that it was futile to do so, Hub argued that a duty of fairness had been breached, as a result of which it had suffered damages, and claimed compensation.  The claim aganst Mr. Morris, the Project engineer, lay either in aiding and abetting this breach of the duty of fairness, or in negligently misrepresenting the situation to Hub which, relying on his statements, had forborne bidding on another contract, which it was able to demonstrate that it would have obtained and from which it would have made a substantial profit.

Although the trial judge found in favour of Hub on most of these arguments, the Court of Appeal overruled, holding that the duty could not exist in the absence of Contract A, and that Contract A did not exist until apparently some time after the bids were delivered.  It is respectfully submitted that this statement alone demonstrates that the Court misunderstood the entire "Contract A/ Contract B" analysis, because it is the entire premise of Ron Engineering that Contract A does come into existence as soon as the first bid is received in response to a request for tender.  However, the Court went on to point out that a decision as to whether to put a project out for tender was not governed by the duty of fairness, so that it was not a breach thereof to do the tender call even if they had no intention of performing the work.  In other words, the Owner is entitled to put bidders to the work and expense of preparing their tenders, even though it may have no intention at all of proceeding.  Unfortunately, given this result, the Court felt that it was not required to make rulings on some of the other arguments which might or might not have had merit, such as that there was no breach of the duty of fairness as all bidders were treated exactly the same, although the consequences to Hub were more severe than they were to some of the other bidders.

At the time of the preparation of this paper, the time for appealing to the Supreme Court of Canada in the Hub decision had not yet expired, so it is still possible that the case will be appealed.

1. The Queen v. Ron Engineering, [1981] 1 SCR 111

2.  George Wimpey Canada Ltd. v. Regional Municipality of Hamilton -  Wentworth (1997) 34 CLR 123 (Ont. C.A.) and see also Chinook Aggregates v. Abbotsford District (1989) Canlii 241 (BCCA)

3.  MJB Enterprises Ltd. v. Defence Construction (1951) Ltd. (1999) 44 CLR (2d) 163 (SCC)

4. Martel Bldg. Ltd. v. Canada [2000]2 SCR 860

5. Naylor Group v. Ellis Don Construction Ltd. [2001] 2 SCR 943

6. Double N Earthmovers Ltd. v. City of Edmonton [2007] 1 SCR 116

7  Tercon Contractors Ltd. v. The Queen (Ministry of Transport) (2007) BCCA 592, leave granted to appeal to the Supreme Court of Canada July 10, 2008 and appeal heard March 23 2009; under reserve.

8. Hub Excavating Ltd v. Orca Estates Ltd. et al (2009) BCCA 167; time to appeal to the SCC not yet expired.

Stephen Tatrallyay

Stephen Tatrallyay is an Ontario-based lawyer whose practice has concentrated in Construction Law for more than twenty-five years. Stephen has represented both plaintiffs and defendants. His clients have included Owners, General Contractors, subtrades, suppliers, workers and their unions, mortgagees, architects and engineers; and bonding companies "“ in short, virtually everyone involved in a construction project. In addition to construction liens, Stephen has been involved in delay claims, tendering claims, disputes and claims arising from failure of a building component or components, Occupational Health and Safety Act defences and non-lien contractual disputes. Stephen has been involved in cases from all over the province of Ontario, and on a consultative basis, in Alberta, Manitoba, Nova Scotia and the Northwest Territories.