Since the landmark decision of the Supreme Court of Canada over 30 years ago in The Queen (Ont.) v. Ron Engineering (1981), project owners have come to understand that issuing a formal call for tenders likely gives rise to enforceable contractual obligations with all bidding contractors submitting compliant bids. While subsequent decisions have refined and clarified Ron Engineering, the Contract A/Contract B theory of contract formation has remained the starting point for the determination of all tender disputes. However, Canadian jurisprudence is less clear when it comes to defining the rights of subcontractors whose bids are carried by prime contractors in tender bids to owners.
Owner Liability To Subcontractors In The Bidding Process
The Ron Engineering case stands for the proposition that when an owner issues a formal request for tenders it is making an offer to enter into a contract with compliant bidders. The submission by a contractor of a compliant bid gives rise to Contract A, the terms of which include a duty on the part of the owner to treat all bidders fairly. Most actions commenced against owners for breaching this duty of fairness allege that the owner awarded the contract to a non‑compliant bidder, to a bidder based on undisclosed criteria, or for some other form of breach of contract. In these situations, it is also common for the aggrieved contractor to seek lost profits as damages for the owner’s alleged breach. However, in many cases the subcontractors associated with the disgruntled contractor have suffered a similar loss of profit, as well as the cost of preparing and submitting their own bids. The Supreme Court of Canada was faced with this type of situation and in its decision in Design Services Ltd. v. Canada (2008) ruled that in most cases, an owner will not have liability to the subcontractors of a contractor whose bid the owner should have, but chose not to, accept.
The facts in Design Services are as follows. The owner issued a request for tenders for a designbuild project which required bidding contractors to submit bids which included not only a final price, but also the details of the contractor’s project team. When the owner awarded the contract to a non-compliant bidder, both the contractor of the highest scoring compliant bid and its subcontractor sued the owner. The owner and the contractor settled their action but the subcontractor continued to pursue its claim against the owner.
The Supreme Court stated that since there was no contractual relationship between the owner and the subcontractor, the subcontractor’s action could only succeed in tort as a new category of negligence that would give rise to damages for pure economic loss.
The subcontractor argued that the harm it suffered was reasonably foreseeable because the subcontractor was a known part of the designbuild team; had to attend meetings with the owner; and nearly 50% of the points in the evaluation process were related to the team members’ (i.e. subcontractors) ability to perform the contract work. The owner also conceded that it was foreseeable that its decision to award the contract to a different bidder would harm the subcontractor. However, the court noted that when assessing proximity for pure economic loss it is relevant whether the plaintiff had an opportunity to protect itself. The court referred to the owner’s tender documents which expressly provided for firms to form joint ventures for the purposes of bidding. Based on this finding, the court concluded that the subcontractor had an opportunity to protect itself through contract and chose not to do so stating, “[t]ort law should not be used as an after‑the‑fact insurer.”
The Supreme Court also commented that even if a duty of care had been found to exist, which it had not, the indeterminate liability an owner could face from subcontractors, sub-subcontractors, and on down the construction pyramid constituted a policy consideration which would have negated the duty of care.
The Design Services decision was cited by the Newfoundland Court of Appeals in the recent case of Defence Construction (1951) Limited v. Air‑Tite Sheet Metal Limited (2011) as authority for the conclusion that a subcontractor could not claim damages against an owner when the contractor improperly terminated the subcontractor’s contract, despite the fact that the owner’s permission was required to terminate the subcontractor’s contract.
The current authority suggests that owners will rarely be found to owe a duty of care to subcontractors. However, owners should exercise caution when engaging directly with subcontractors or participating in the administration of subcontracts, even if no contract is executed, as the more involved an owner is with subcontractors, the greater the possibility that a court might find that a duty of care exists.
Subcontracting And Bid Shopping
In most cases, the only beneficiary of bid shopping at the subcontractor level is the prime contractor. The cost reductions prime contractors obtain are not passed up to owners, and to make matters worse, these cost reductions often come as a result of subcontractor efforts to find less expensive, lower quality ways to achieve the contract specifications. In the end, the owner gets a lower quality project without any of the commensurate savings in price.
In order to prevent bid shopping, it is common practice for subcontractors to submit their bids within hours or sometimes minutes of the deadline for the submission of prime contractor bids. This timing makes it difficult for prime contractors to shop subcontractor bids before submitting their prime bid, but it does not eliminate the prime contractor’s ability to shop subcontractor bids after the prime contract has been awarded. Project owners that wish to prevent bid shopping sometimes include clauses in their contracts which prevent the substitution of subcontractors without their consent, however, these clauses are of little benefit to the owner if it does not investigate the reasons for which a contractor requests a substitution.
Disputes between contractors and subcontractors at the subcontract tender level can also delay or distract from the owner’s project. When disputes arise between prime contractors and subcontractor bidders over whether the submission of a bid gave rise to Contract A, the party seeking to enforce Contract A will argue that its bid response constituted an acceptance of the offer, being the request for bids by the prime contractor, whereas the party seeking to avoid Contract A will argue that it merely requested quotations. The courts would look at the terms of the tender/request to determine whether there is sufficient indicia within the tender documents to conclude that the parties intended to form a contract at the bidding stage.
The 2006 Ontario Divisional Court decision in David J. Harvey Holdings Inc. v. Hercules Food Equipment Ltd. is a useful, and somewhat unique, example of a court grappling with this issue. In this case, the prime contractor carried a subcontractor’s quote in its bid and was successful in winning the prime contract. When it came time for the subcontractor to perform its work, the subcontractor informed the prime contractor that it would not be doing the work. The prime contractor hired a replacement and sued the subcontractor for the amount it had to pay the replacement subcontractor above the subcontractor’s quote on the basis that the parties had entered into a Contract A which the subcontractor breached by refusing to enter into Contract B and perform the work. In this case, the court held that because the prime contractor’s request for a quotation contained no terms, and in particular, no irrevocability clause, the subcontractor’s submission of a quote did not give rise to Contract A obligations.
The reason that this case is novel is because in the majority of situations, the prime contractor is the party seeking the flexibility to contract with a different party or negotiate a lower than bid price from the subcontractor. This case is also notable because more often than not, the courts have held subcontractors liable to their bids, even in situations where the prime contractor’s tender to subcontractors did not include bid security or irrevocability (for example, see the 1984 decision in Gloge Heating & Plumbing Ltd. v. Northern Construction Co.).
There are two other recent cases on the issue of irrevocability that are important to understanding subcontractor bids, being the Supreme Court of British Columbia in Civil Construction Co. Ltd. v. Advanced Steel Structures Inc. (2011) and the Alberta Court of Queen’s Bench in Black Diamond Paving Ltd. v. Thierman Construction Ltd. (2010). The courts in these cases held that where a subcontractor bid contains an irrevocability clause, the deadline in the clause only needs to extend to the date that the prime contractor submits its bid to the owner in order to be enforceable. Both courts reasoned that Contract A crystallized when the prime contractor carried the subcontractor’s bid within the irrevocability period.
Owners that want to protect the quality and integrity of their projects and limit their exposure to potential claims from disgruntled subcontractors should be careful not to become directly involved in the selection of subcontractors, while maintaining the discretion to raise reasonable objections to the choice of subcontractors which cause concerns.
As set out above, owners are generally insulated from claims by subcontractors even when the owner is aware that a decision may negatively affect a specific subcontractor. However, owners have a legitimate interest in ensuring that suitable subcontractors are selected to perform the work. For this reason, prudent owners often require contractors to list the subcontractors they have carried in their bid and reserve the right to reasonably object to one or more should there be a concern. Further, for the major subcontracts, such as the mechanical and electrical subcontracts, owners can help ensure quality by pre‑qualifying subcontractor candidates and refusing unjustified substitution requests.