Martel Building Ltd. v Canada, [1997] 129 FTR 249 (FCTD), revd [1998] 163 DLR (4th) 504 (FCA), leave to appeal refused, 2000 SCC 60, [2000] 2 SCR 860, online: LexUM http://scc.lexum.umontreal.ca/en/2000/2000scc60/2000scc60.html
Facts
Note: This case deals with the possibility of a tort action in negligence for breach of a duty of care during negotiation of a contract (specifically during the solicitation and evaluation of tendered bids). As well, the issue of a breach of a duty of good faith, while not ruled on, was also raised. For these reasons the facts need to be given in some detail.
Martel Building (‘Martel’) owned a commercial property in Ottawa which was largely occupied by a Division of the federal Department of Public Works (the ‘Department’) under a 10-year lease. The lease was set to expire on 31 August 1993 and contained an option for renewal. Martel’s President and CEO (the ‘CEO’) arranged to meet with the Department’s Chief of Leasing (the ‘Chief’) to discuss a renewal and in March 1991 met with one of the Chief’s subordinates (the ‘Subordinate’). The CEO communicated Martel’s desire to renew the lease, and, in conjunction with the renewal, to retrofit the property. In May the CEO sent the Chief a letter reiterating Martel’s intentions.
In June the Chief met with the Acting Director of Accommodation (the ‘Director’) and informed him of Martel’s position. The Director told the Chief that the Department wanted issue a call for tenders for accommodations but also instructed the Chief to get a price from Martel. The Chief told the Subordinate to contact the CEO. Neither the Subordinate nor the Chief contacted Martel.
In February 1992 the Chief was asked to get a proposal for a defined lease term from Martel; as well, between October 1991 and April 1992 the Chief led the Department to believe that a proposal from Martel was in the works. The CEO was not aware of these expectations. The only action taken by the Chief during this period was to arrange an independent appraisal of the Martel building.
The CEO attempted to arrange a meeting with the Department in December 1991, but failed to get a meeting. The CEO never got a meeting with the Department until 15 April 1992, after trying again in the spring. The Department – represented by the Chief and another official (the ‘Other Official’) – and the CEO maintained different accounts of the content of the meeting, but the trial judge accepted that Martel understood tendering to be a possibility, but that the meeting signified commencement of negotiations for a renewal. The CEO gave the officials a price proposal. The Chief told the CEO that an independent appraisal had been commission and that they would let Martel know when the results were in.
The Department set a drop-dead date for negotiations for 30 June 1992, after which they would start the tender process; they later moved the drop-dead date to October 2. The CEO and the Other Official met several times between June and September 1992 to discuss revised prices, none of which fell within the range suggested by the commissioned appraisal.
In October, the CEO heard that tendering was underway and called the Chief on October 14. He learned that the internal mechanisms required for a tender process had in fact begun after the original June 30 drop-dead date. Ostensibly this was because the bureaucratic process required to procure accommodations was complex and time-consuming. An initial internal report recommending renegotiating the Martel lease was considered in September and again on October 9. At this point, because of declining rental rates the Department decided to proceed to tender. The CEO called the Chief and the Other Official once again on October 14 and 15. In response he got a letter saying that the tendering process was going ahead and no proposal would be accepted from him after October 22. The October 22 deadline was then extended to October 27.
On October 27 a Department advertisement for expressions of interest appeared in the paper. On the same day the Department met with the CEO, who, according to him, left with the understanding that if he met a certain price point then the Department would recommend renewal to the Treasury Board. Two days later the CEO called the Chief to say that he could meet the price requirement and the following day sent a written proposal. On receiving the proposal that day the Department decided that all the remaining terms of the lease would have to be finalized that day, including a requirement for full details of the planned retrofit. Martel was unable to provide those details by the end of the afternoon.
A rejection letter was sent to the CEO on November 26, and on the same day tender documents were issued with a December 3 submission deadline.
Martel submitted a bid and was the lowest bidder. They were not awarded the contract; the tender documents contained a privilege clause reserving the right not to accept the lowest or any tender (similar to the clause used in M.J.B. Enterprises). The decision to award to the second lowest bidder was based on a “net present value” method of financial analysis where prices submitted were adjusted by adding costs that the Department expected to incur as a result of choosing a particular bidder (primarily fit-up costs).
Martel sued in contract for breach of an implied term to renew arising out of the lease itself or out of the October 1992 agreement. Martel also sued in tort alleging breach of a duty to negotiate in good faith and negligent conduct of the negotiation and tender processes.
Procedural history
The Federal Court trial judge dismissed the contract claim and declined to consider liability based on breach of a duty to negotiate in good faith because she doubted whether such a duty existed at law in Canada. She also did not address the issue of negligence in tendering but observed that the assessment of fit up costs which were added to the plaintiff’s bid appeared “somewhat arbitrary” (para. 23). The trial judge did conclude that the relationship between the parties was proximate enough to give rise to a duty of care in negotiation, that it was reasonably foreseeable that the Department’s carelessness might cause damage, and that Department had in fact conducted itself in a negligent manner. But, she went on to conclude that Martel had not sufficiently established the required tort element of causation and dismissed the action.
The Federal Court of Appeal also declined to consider the issue of any duty to negotiate in good faith, but agreed with the trial judge that the conduct of the negotiations gave rise to a duty of care which had been breached. The Court of Appeal also took up the issue of negligence in tendering and found that the call for tenders created a contractual obligation to treat all bidders fairly. This obligation, although contractual, placed the parties in sufficient proximity to create a duty of care which the Department had breached by evaluating bids according to undisclosed conditions. On negotiations, the Court of Appeal held that the Department’s negligence effectively deprived Martel of the opportunity to negotiate a renewal; on tendering, the Department’s negligence deprived Martel of the opportunity for full participation and of a reasonable expectation of award. Where the trial judge concluded that Martel failed to prove causation, the Court of Appeal concluded that the Department’s conduct was the principal cause of both Martel’s loss of opportunity to negotiate and of Martel’s loss of a reasonable expectation of an award under the tender process.
Issues to be determined
- Does a duty of care exist in the context of negotiations and does the tort of negligence extend to pure economic losses arising from the conduct of pre-contractual negotiations?
- Did the Court of Appeal err in finding that a duty of care was owed in the tendering process and that the duty was breached?
Holding
- No.
- Yes.
Rule of law
On the issue of extending tort liability to economic loss in the context of contractual negotiations, the Court agreed that there was sufficient proximity between the parties to create a prima facie duty of care, but there were nonetheless compelling policy reasons to decline to extend such a duty in law.
On the issue of tort liability in the context of the preparation of tenders – arising as a result of a plaintiff’s past relationship with the party preparing the tender – the court held that as a matter of policy it would be fundamentally inconsistent to with the basic rationale of tendering of fostering competition between bidders to extend such a duty in respect of particular bidders who might as a result obtain an unfair advantage in bidding.
On the issue of tort liability in respect of the evaluation of tenders the court held that to the extent that such a duty of care existed it existed concurrently with the owner’s duties under the tender contract, which it had not sufficiently breached to cause damage to the plaintiff.
Reasoning
On the extension of tort liability to pure economic losses in the context of commercial negotiations:
The unanimous judgment of the court of delivered by Justices Iacobucci and Major (Chief Justice McLachlin
and Justices Gonthier, Bastarache, Binne and Arbour also sat for the appeal).
The Court first turned to a consideration of the question of tort liability in respect of pre-contractual negotiations. They noted that at the time of their decision Canadian common law had recognized five distinct categories of potentially compensable economic loss:
- Independent liability of statutory public authorities
- Negligent misrepresentation
- Negligent performance of a service
- Negligent supply of shoddy goods or structures, or
- Relational economic loss
But the Court held that alleged negligence in the conduct of commercial negotiations did not fall into any of these five categories.
To address the question of whether a novel tort should be established for pure economic loss in the context of commercial negotiations the Court turned to the Anns/Kamloops two-stage analysis for extension of a duty of care in a given case. The two stages of the Anns/Kamloops test address (i) Proximity, and (ii) Policy.
The Court found that there was sufficient proximity to raise a prima facie duty of care between the parties: “Although the Department is a government actor, in its negotiations with Martel, it was exercising an operational rather than a policy function. As such, this finding of a prima facie duty of care is not precluded by the appellant claiming to have exercised a bona fide discretionary policy decision” (para 53).
Having found sufficient proximity to raise a duty of care, however, the Court held that there were “compelling policy reasons to conclude that one commercial party should not have to be mindful of another commercial party’s legitimate interests in an arm’s length negotiation” (para 55). In particular it enumerated five discrete policy reasons for declining to extend the duty of care.
Foremost among these concerns was the issue of indeterminate liability. Discussing this issue the Court observed that the very nature of negotiation required rational economic actors to attempt to achieve gains potentially at the expense of the other party, noting too that the traditional view of economic loss by the courts was that from a social perspective it was less worthy of protection than physical or property harm.
Second, citing secondary literature, the Court expressed concern about the potential social and economic costs of extending a duty of care to commercial negotiations. The Court described the conduct of the Crown through its agents as contemptuous and discourteous, but observed that the Crown was able to conduct itself in this fashion in part as a consequence of its position of dominance in the Ottawa leasing market. It stated that advantages held by one party over another do not by themselves “point to liability” (para 65).
Third, the Court expressed the opinion that creating a tort like this would allow parties to use it as “after-the-fact” insurance against their own failures to conduct due diligence or properly hedge risks in the conduct of negotiations (para 68).
Fouth, the Court was unwilling to put the justice system in the position of being a regulator of pre-contractual conduct given the causes of action already available to contracting parties through doctrines such as undue influence, economic duress, and unconscionability, and to bargaining parties through the torts of negligent misrepresentation, fraud and deceit (para 70).
Fifth and finally, the Court stated that “needless litigation” should be discouraged, and in consideration of the “number of negotiations that do not culminate in agreement, the potential for increased litigation in place of allowing market forces to operate seems obvious” (para 71).
On the issue of whether a duty of care exists in the tendering process:
Iacobucci and Major JJ began by examining the Court of Appeal decision and determining that the Court of Appeal had conflated the contexts of (1) tender preparation and (2) tender evaluation in its assessment and finding of negligence on the part of the Department. This is an important distinction because the preparation of tender documents occurs prior to the formation of any tender contract (the so-called “Contract A”), while evaluation of tenders occurs after. As such, there can be no tort liability flowing from a contractual relationship for actions which occurred prior to the formation of that contract, and the Court stated that the two issues needed to be addressed separately.
Prior to exploring these issues, the Court reviewed the law of bidding and tendering as set out in its previous decisions in R. v Ron Engineering, [1981] 1 SCR 111 and M.J.B. Enterprises Ltd. v Defence Construction (1951) Ltd., [1999] 1 SCR 619. Pursuant to these decisions the Court found that the parties had in fact intended to initiate a contractual relationship via a tender process contract and that that contract included a term similar to that in M.J.B. that bidders were to submit compliant bids (para 87).
The Court also felt it justified based on the parties’ presumed intentions to imply a term in the tender contract that the owner would be “fair and consistent in the assessment of tender bids.” The Court stated:
Implying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process, and benefits all parties involved. Without this implied term, tenderers, whose fate could be predetermined by some undisclosed standards, would either incur significant expenses in preparing futile bids or ultimately avoid participating in the tender process (para 88).
The Court further stated that, while the extent of obligation of fair and equal treatment would be determined by the terms of the particular contract, “[a] privilege clause reserving the right not to accept the lowest or any bids does not exclude the obligation to treat all bidders fairly” (para 89).
In examining the tender documents, the Court found that the Department had in fact reserved wide discretion for itself in the evaluation of tenders, and had not breached its duty of fairness to Martel in respect of the assessment of the fit-up costs. This said, the Court did find that the Department had breached its duty to act fairly and consistently in respect of the addition of costs for installation of a security card system Martel’s bid, which it did not add to the prices of other bidders. These costs by themselves if not added to Martel’s bid still left a significant margin between Martel and the lowest bidder; and so the Court found that damages for breach of Contract A were precluded for want of causation.
Turning back to the issue at the Court of Appeal of general negligence claims in respect of the tendering process, the Court considered first the question of negligence in the evaluation of tenders. Acknowledging that concurrent or alternative liability in tort can exist with liability in contract, the Court stated that “the duty of care alleged in tort in the case at bar is the same as the duty which is implied as a term of Contract A” (para 107). Since they had already canvassed the issue of contractual liability and found none, the Court similarly declined to find liability in tort.
On the issue of negligence in drafting and preparation of tender documents, the Court again turned an Anns two-stage analysis. It did not, however, concern itself with the question of proximity and proceeded directly to the policy branch of the test to conclude that there was no duty of care in respect of the preparation of tender documents.
The Court reasoned that Martel’s arguments generally related to its prior relationship with the Department, and that to recognize a duty on the part of an owner to take into account its past relationship with a particular prospective bidder would be “inconsistent with the basic rationale of tendering”, which is to “replace negotiation with competition” (para 116). The obligation of fairness to all bidders precludes giving an advantage to one bidder based on past dealings, and further a party calling for tenders must necessarily have the discretion to change its mind as to the final terms to be included in a call for tenders.
Finally, the Court felt that introducing a duty of care into the context of tender preparation could have the potential effect of allowing a bidder to use such a duty to get around a contractual provision that they had not complied with (in Martel’s case, a tender requirement for continuous space), or allow unsuccessful, non-compliant bidders “to sue in negligence and argue that the terms of Contract A ‘did not reflect the reality of the situation’” (para 119).
So, in sum, all of Martel’s arguments for liability in tort ultimately failed.
The Court restored the judgment rendered at trial.
Nota Bene
On the issue of tort liability, the Court noted that Martel’s claim resembled an assertion of a legal duty to bargain in good faith, but that a breach of a duty of good faith was not actually alleged. As such, they declined to consider the question (para 73).
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