Naylor Group Inc. v Ellis-Don Construction Ltd., [1996] OJ No 3247, 31 CLR (2d) 195 (ON Gen Div), revd [1999] 119 OAC 182 (ONCA), vard 2001 SCC 58, [2001] 2 SCR 943, online: LexUM http://scc.lexum.umontreal.ca/en/2001/2001scc58/2001scc58.html

This is not a tender dispute between an owner and a bidder, but between a general contractor and a subcontractor whose prices were used to secure a low bid.

Facts

In 1991 an Ontario hospital corporation issued a call for tenders for renovations to its hospital. It used a bid depository in place in Ontario.

Note: A bid depository is an institution independent from both owners and bidders which is sometimes used as a vehicle for a tender process for complex projects where a number of subcontractors and suppliers will be submitting bids alongside those of the general contractors. The purpose of a depository is to help provide structure and fairness to the process. Bid depositories operate pursuant to a set of rules which have to be observed by all parties using a particular depository.

Ellis-Don Construction (“ED”) intended to bid on the hospital project as a general contractor. In early November 1991 ED approached Naylor Group (“Naylor”), a contractor with expertise in electrical work, about submitting a bid as an electrical subtrade. Subcontractors’ bids were to be submitted by 12 December. Naylor raised the issue of union affiliation. Its employees were members of an “in-house” union, and were not affiliated with the International Brotherhood of Electrical Workers (“IBEW”). ED told Naylor that this would not be a problem in carrying them as a subcontractor.

But, ED was involved in a long-standing dispute with IBEW over exclusivity of bargaining rights, which dispute had culminated in an 18-day hearing before the Ontario Labour Relations Board (“OLRB”) the previous year; a decision from the OLRB was pending at the time of ED’s communications with Naylor.

Naylor spent six weeks preparing a detailed bid and on opening of the subtrade bids was the lowest at $5.5 million, a significant $400,000 lower than the next lowest bidder, Comstock Canada (“Comstock”). Comstock was an IBEW-affiliated subcontractor.

ED carried Naylor’s bid and was the lowest bidding general contractor for the hospital project at a total bid price of $38.1 million. The trial judge found as a fact that if ED had carried Comstock’s price for the electrical work then they would not have been the lowest overall bidder might very well have lost the prime contract on that account.

Because of delays in receiving funding from the Ontario provincial government, the owner hospital corporation asked ED for a delay in accepting the tender until May 1992; ED in turn asked Naylor and the other subcontractors for similar extensions. Naylor requested a letter from ED to confirm its intent to subcontract with it for the electrical work if and when ED’s tender for the prime contract was accepted. ED refused on the basis of a stated practice not to sign letters of intent prior to the award of a prime contract.

Meanwhile, on 28 February 1992 the OLRB released a decision in the matter of ED and IBEW confirming that ED had a standing collective bargaining commitment to using only electrical subcontractors affiliated with IBEW. By 10 March ED’s project manager for the hospital project knew about the adverse OLRB decision.

As well, while the foregoing events were unfolding the owner hospital corporation issued revisions to the project documents notwithstanding the fact that the tenders had closed; such revisions are a common occurrence in the context of large or complex construction projects. But, despite now having knowledge of the OLRB ruling on its obligations to IBEW, ED asked Naylor, together with other subcontractors, for price revisions to reflect the changes in the project. Naylor’s revised quote was carried by the ED in its revised tender.

In April, Naylor was made aware by some of their suppliers that ED had been shopping their bid to other electrical contractors for the purpose of finding a replacement for Naylor who could contract at a price comparable to Naylor’s. Naylor complained to the owner hospital corporation to no avail, who finally awarded the project to ED in May, the awarded contract still ostensibly contemplating Naylor as a participating subcontractor. ED at first attempted to convince Naylor to move from its own union and align with IBEW. When Naylor declined to do so ED wrote to Naylor to say that the OLRB decision prevented them from entering into a subcontract with them. ED subsequently provided a letter of intent to enter a subcontract with a different electrical subcontractor – which subcontractor had not originally submitted a bid for the project – at a price nearly identical to Naylor’s.

Naylor sued for breach of contract and unjust enrichment.

Procedural history

The trial judge dismissed Naylor’s contractual claim on that basis that no contract had ever come into existence between the parties and if it had it was frustrated by the OLRB decision. But, as damages for unjust enrichment the trial judge awarded Naylor the costs incurred through the process of preparing their bid.

Naylor appealed and the Court of Appeal did award some damages for breach of contract. Weiler JA applied the analysis deployed in Ron Engineering to find that all bidders using the bid depository necessarily agreed to its rules and those rules formed a part of the “preliminary contract or Contract A”. While a subcontractor was not automatically entitled to an award the rules of the bid depository stated that they must get the award unless either the prime contractor or the owner had a “reasonable objection”. She held that ED’s objection was not reasonable.

ED appealed to the Supreme Court of Canada on the issue of liability and Naylor cross-appealed on the issue of the amount of the award.

Issues to be determined

If, pursuant to rules of bid depository, a general contractor uses a sub-contractor’s prices in securing an award for a tendered contract, does it have any legal obligations in respect of that sub-contractor?

Holding

Yes, the nature of those obligations being informed by the particular rules of the depository.

Rule of law

Tender or process contracts as arise by way of the operation of the ordinary principles of contracts. There nothing barring the formation of tender contracts between general contracts and subcontractors if those parties have agreed to terms and conditions for such.

Reasoning

The unanimous judgment of the court of delivered by Justice Binnie (Chief Justice McLachlin and Justices Iacobucci, Major, Bastarache, Arbour and LeBel also sat for the appeal).

Binnie J, after briefly discussing the purpose and function of bid depositories, began by reiterating the Contract A/Contract B analysis as set out in Ron Engineering and M.J.B. Although those cases dealt with the formation of tender contracts between owners and prime contractors, Binnie J reasoned that the Ron Engineering approach was founded on “ordinary principles of contract formation” and so there was no reason why that approach should not apply to prime contractors and subcontractors (para 36).

Binnie J found that the particular bid depository rules under which the prime contractors’ and subtrades’ bids had been submitted were inconsistent with any automatic right of a subcontractor to enter Contract B with a prime contractor if the prime contractor’s bid was successful. But, Binnie J nonetheless held that a prime contractors still have Contract A obligations to subtrades whose bids they have carried, noting that the “Bid Depository does not operate simply for the prime contractor’s convenience” (para 41).

Binnie J noted that the rules and procedures of the bid depository itself referenced the need for respecting the “sanctity” of bids and assuring bidders that their bids would not be shopped. He agreed with Weiler JA that while there was no automatic right on the part of a subcontractor whose bid was carried to enter into a subcontract, the general assurance that they would in fact be given the subcontract subject only to a “reasonable” objection “was for subcontractors the most important term of Contract A” (para 45). He further stated that this term was not one that he was attempting to imply, but one that arose directly from the rules of the depository (para 49).

Before moving on to consider whether ED had breached its obligations, so defined, under Contract A, Binnie J first consider the issue of whether the tender contract was frustrated by the OLRB decision. He held that under neither the traditional “implied term” approach to frustration nor under the preferred modern “supervening event” approach could the doctrine of frustration apply for two separate reasons. First, an adverse OLRB decision was foreseeable for ED; and, further, the OLRB decision did not create an obligation for ED to give electrical work only to IBEW workers, it merely recognized an already existing obligation to do so (para 57). Second, the terms of the tender contract itself created a “reasonable objection” discretionary mechanism for refusal to carry a bid. This exit option could clearly be used to deal with any “supervening circumstances” and so there was no need to consider a court-imposed remedy (para 59). Instead, the question was more appropriately whether ED had breached its obligations under the tender contract by “unreasonably” objecting to entering a subcontract with Naylor.

Binnie J held that ED’s Contract A obligations to Naylor were assumed at a time when they knew that they were inconsistent with obligations that they might have in respect of IBEW. EDs subsequent non-performance under Contract A was not rendered non-compensable by the fact of ED having assumed competing obligations (para 63). They failed to show, after using Naylor’s bid to secure the prime contract and reassuring Naylor that their non-IBEW union affiliation would not be a problem, that their rejection of Naylor was reasonable for the purposes of discharging their obligations under Contract A. As such ED was in breach of Contract A.

Binnie J agreed that lost profits (expectation damages) were an appropriate measure of damages and did in fact increases the damage award based on a reduction in quantum undertaken by the Court of Appeal that he felt to be unsupported by the evidence. He further held that since Naylor had been found to be entitled to damages flowing from breach of contract there was no reason to consider the alternative ground of damages flowing from unjust enrichment.

Nota Bene

Binnie J observed that tort allegations along the lines of negligent misrepresentation “lurked in the background” of Naylor’s submissions, but since torts had not been argued at any level of court he was not going to consider the issue (para 38).

Why contractors and subcontractors should put agreements in writing

There are lots of reasons why it’s important to be clear about the details of an agreement, especially if it’s with a person or company that you don’t regularly deal with. And Infinity Steel Inc. v. B & C Steel Erectors Inc., 2009 BCSC 1053 is a great example of one of those reasons.

The Facts:

1. Infinity was a one-man structural steel company who obtained a contract for the construction of a steel building.
2. Infinity only wanted to supply the steel and negotiated with subcontractors for the actual erection of the building.
3. In June, it entered “an agreement” with B&C for erection of the structural steel.
4. B&C began putting up the steel in September. The job was to be completed in five weeks.
5. Almost six weeks into the project, B&C was not finished, but invoiced Infinity for materials and labour costs to that point.
6. Infinity refused payment, asserting that the work was being done on a lump sum basis
7. B&C continued working for several more weeks before walking away from the unfinished project.
8. Infinity sued B&C for breach claiming damages for “back charges for delay, increased costs to complete B&C’s work, and costs of administration and equipment charges.” It maintained that it had a lump sum contract with B&C.
9. B&C defended by denying breach, and claimed that the contract with Infinity was a cost plus arrangement.
10. At trial, neither party was able to produce convincing evidence of all the payment terms of the agreement.

The Ruling:

Since there was no reliable evidence as to the price and method of payment agreed on, the judge found as a fact that the agreement lack the “essential and critical term of price”, which is always a fundamental term of any contract, that there was “no meeting of the minds”, and, thus, that there was no contract. B&C was awarded its reasonable incurred costs for the work performed on a quantum meruit basis, plus 15%.

Lesson Learned:

• Be clear on the details of any agreement meant to have contractual force – especially terms of payment
• Even if formal contract documents are not drawn up, be able to produce reliable evidence of the agreement

Latin Maxim of the Day

Vox emissa volat; litera scripta manet – The spoken word flies; the written letter remains.

Nota Bene:

“Reasonable Costs” as determined by the court for a quantum meruit award may or may not reflect what a contractor might actually have billed or contracted for.