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

1. 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?
2. 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

1. No.
2. 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).

M.J.B. Enterprises Ltd. v Defence Construction (1951) Ltd., [1994] 164 AR 399 (ABQB), affd [1997] 196 AR 124 (ABCA), revd [1999] 1 SCR 619, online: LexUM http://scc.lexum.umontreal.ca/en/1999/1999scr1-619/1999scr1-619.html

Facts

The respondent, Defence Construction (‘Defence’), invited tenders for construction of a water pumping and distribution system on a Canadian Forces Base in Alberta. It received four bids, including one from the appellant, M.J.B. Enterprises (‘M.J.B.’), who was the second lowest bidder, and one from Sorochan Enterprises (‘Sorochan’), who submitted the lowest bid.

The tender documents contained a privilege clause worded as follows: “The lowest or any tender shall not necessarily be accepted”.

The original tender package instructed bidders to provide split pricing. A typical lump sum price was required for one portion of the project (the pump house and a few other items). Apart from these facilities a major portion of the project involved digging a trench system for the piping to be laid in and backfilling the trenches with different types of material (stone, natural backfill, or concrete slurry) contingent on the site conditions of a particular trench section. So, for the piping portion of the job the tender required provision of separate lineal meter unit prices for the three different types of fill where the final quantities of each type were to be determined in the field by a supervising engineer. The total amount of pipe and trenching required was known at the time of tendering, but not the individual amounts of each type of fill which would finally be required. An amendment to the tender package changed this pricing scheme to require – instead of the separate unit prices – only a single unit price for all types of fill material regardless of the relative amounts of each type that might finally be required onsite.

On submission and opening of the bids Sorochan’s was the lowest. But they had included a note with their bid documents essentially stating that their pricing was based on a certain amount of backfill type fill but if more stone fill was in fact required then their unit price was to be adjusted.

M.J.B. and the other bidders complained that the note was a conditional qualification of Sorochan’s bid and rendered their bid invalid. Defence took the position that the note was merely a “clarification” and accepted Sorochan’s bid. M.J.B., the second-lowest bidder, sued for breach of contract arguing that Sorochan’s bid should have been disqualified and that they should have been awarded the job instead since they had submitted the lowest valid bid.

Procedural history

The trial judge agreed with M.J.B. that Sorochan’s note qualified their bid, but held that the privilege clause eliminated any obligation on Defence to award the contract to M.J.B. as the second lowest bidder. The Alberta Court of Appeal dismissed the appeal, holding that the privilege clause was “a complete answer” to the action (para. 12).

Issue to be determined

In a call for tenders, does the inclusion of a privilege clause in the tender documents allow the owner to disregard the lowest bid in favour of any other tender, including a non-compliant one?

Holding

No.

Rule of law

Tender contracts can arise as a result of call for tenders and the terms and conditions of a tender contract are determined by the provisions of the tender documents and by the intentions of the parties.

Although a privilege clause reserving the right not to accept to the lowest or any bids successfully gives the owner a qualified discretion not to award to the lowest bidder, it does not operate to override an implied promise to accept only compliant bids.

Reasoning

Justice Iacobucci delivered the unanimous judgment of the Court (Chief Justice Lamer and Justices Cory, McLachlin, Major, Bastarache and Binnie also sat for the appeal).

He began by discussing the holding in Ron Engineering that a contract can arise on the submission of a bid in response to a tender call and that the terms of that contract would be governed by the terms and conditions of the tender call. Iacobucci J. noted that the decision of Estey J. in Ron Engineering was primarily concerned with the duties and obligations of the bidder under such a contract. By contrast, the facts in M.J.B. raised the issue of the duties of the owner under a contract arising from a tender call.

Rehearsing some of Estey J’s reasons in Ron Engineering, Iacobucci J expressed some misgivings about characterizing Contract A as a unilateral contract, but agreed with the Court’s reasons in Ron Engineering that, depending on the terms and conditions and context of tender call, a call for tenders could indeed give rise to a separate contract intended by the parties to govern the tender process. That is, it is cannot be true that a contract arises in every situation or that such a contract will have particular terms, such as irrevocability. But such contracts certainly can be created, again, depending on the terms and conditions of the call (paras 17-19).

Iacobucci J found that a tender contract had been arisen between the parties, saying that:

At a minimum, the respondent offered, in inviting tenders through a formal tendering process involving complex documentation and terms, to consider bids for Contract B. In submitting its tender, the appellant accepted this offer. The submission of the tender is good consideration for the respondent’s promise, as the tender was a benefit to the respondent, prepared at a not insignificant cost to the appellant, and accompanied by Bid Security (para 23).

Turning to the issues of the terms of that contract, the argument raised by the appellant was that it was a term of the tender contract that Contract B be awarded to the lowest compliant tender. Iacobucci J rejected an argument that it was an explicit term of Contract A finding no clear support for such a term in the tender documents themselves.

Reviewing the law on implied terms, Iacobucci J found that it was an implied term of the tender contract that the owner was under an obligation to accept only a “compliant” tender, based in part on the reasoning that he found it “difficult to accept” that prospective bidders, including the appellant, “would have submitted a tender unless it was understood by all involved that only a compliant tender would be accepted” (para 30).

Finding that a tender contract had arisen and that it included an implied term to accept only compliant bids, Iacobucci J then turned to a consideration of the effect of the privilege clause and found that it did not operate to override the obligation to accept only compliant bids (para 45). Instead, he found that the clause could be used to allow owners to (i) take a more “nuanced” view of costs in assessing bids or (ii) to cancel a tender in the event of unforeseen circumstances, such as inadequacies discovered in the project design specifications after the fact. This said, Iacobucci J also indicated that “the rejection of the lowest bid would not imply that a tender could be accepted on the basis of some undisclosed criterion” (paras 46-47).

So, although Iacobucci J found an obligation to accept and award only to a compliant bidder, he found no obligation to award to the lowest compliant bidder (i.e. M.J.B.). This said, he held that although M.J.B. had no contractual right to be awarded the construction contract, its rights under the tender contract were still breached. Iacobucci J found that on the balance of probabilities the evidence suggested that, had the tender contract not been breached, M.J.B. would have been awarded the construction contract and, after concluding that they were not too remote, awarded expectation damages in respect of the lost contract (paras 55-60).

Nota Bene

Note 1: In obiter dicta Iacobucci J observed that the tender documents being considered in the case themselves illustrated the “rationale for the tendering process . . . to replace negotiation with competition” (para 41).

Note 2: The appellant argued that even if it had awarded Contract B to a non-compliant bidder, it had acted in a good faith belief that the bid was in fact compliant and so was not in breach of its duty to the other bidders. Iacobucci dismissed this out of hand, saying: “Acting in good faith or thinking that one has interpreted the contract correctly are not valid defences to an action for breach of contract” (para 54).

Construction law does not refer to any specific area of the law. Instead, it is a shorthand way of referring to many different areas of law as they apply to the special context of the construction industry. That is, construction law is not a discrete area of the law; it is an area of legal practice.

The core of construction law is the law of contracts. At present in Canada and in Newfoundland and Labrador the legal relationships between the main parties on any given construction project – the owner/developer, general contractor, subcontractors, suppliers, and engineers and architects – are governed very largely by the law of contracts. As such, the negotiation and conclusion of construction contracts is a key component of construction law practice.

Other areas of importance include:

• The law of bidding and tendering
• Bonding, insurance, guarantees and sureties
• Construction financing and procurement and delivery models
• Dispute resolution (mediation, arbitration and litigation) and dispute avoidance
• Builders’ or mechanics’ (construction) liens, and other security interests
• Real estate transactions
• Planning legislation and regulations
• Environmental law and regulations

As well as:

• Labour and employment law
• Occupational health and safety
• Business organizations and corporate law
• Administrative law (needed generally in dealing with regulatory and licensing bodies).

All said, a construction lawyer needs to be familiar with those areas of the law that are especially relevant to the construction industry. But a good construction lawyer is also characterized by their familiarity with the industry itself, the nature of construction business, and the needs of industry stakeholders – their clients.

Industrial activity in Newfoundland and Labrador has never been clearly focused in any one area. But the centre of gravity in recent years has definitely shifted away from the island and more in the direction of Labrador. Increased investments in mining exploration and development and the significant investments made in building the trans-Labrador highway are now to be joined by further development of the hydroelectric potential of the Churchill River.

This morning a $6.2 billion, 35-year deal was announced between Newfoundland and Labrador (Nalcor: http://www.nalcorenergy.com/) and the province of Nova Scotia (Emera: http://www.emera.com/) for the hydroelectric development of a portion of the Lower Churchill megaproject at Muskrat Falls in Labrador. Further details about the deal are forthcoming: http://www.cbc.ca/canada/newfoundland-labrador/story/2010/11/18/nl-muskrat-deal-1118.html.

According to the Nov 18 announcement the current projected delivery date is 2016.

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The legal rules of bidding and tendering in Canada consist primarily of judge-made law. In particular, the basic framework of bidding and tendering law in Canada was set out in a landmark Supreme Court decision in 1981 which fundamentally altered the common law of contracts as it had previously applied to analysis of tendered contracts.

That decision, R. v Ron Engineering, created the Contract A / Contract B framework which is at the core of Canadian bidding and tendering law. Following that decision owner/developers and bidders found themselves subject to a new set of rights and obligations when engaged with each other in formal bidding processes.

Because the decision represented a radical reformulation of the law, it predictably led to questions about its particular implications, the scope of the rights and obligations created under the scheme, and the extent to which it was actually binding on parties to a bidding process (that is, if you didn’t want to be bound by the new rules for some reason, was it possible to get around them?). To a significant extent this discussion is still ongoing, and the law of bidding and tendering in Canada continues to evolve as the courts are faced with novel situations, particular contractual provisions, and new arguments about why the rules should or should not apply in a particular way to a particular set of facts.

Since Ron Engineering, the Supreme Court of Canada has revisited the law of bidding and tendering five times in the past three decades, most recently in a decision issued this past February. In chronological order, these six decisions are:

R. (Ont.) v Ron Engineering & Construction (Eastern) Ltd., [1979] 24 OR (2d) 332 (ONCA), revd [1981] 1 SCR 111, online: LexUM http://scc.lexum.umontreal.ca/en/1981/1981scr1-111/1981scr1-111.html

M.J.B. Enterprises Ltd. v Defence Construction (1951) Ltd., [1994] 164 AR 399 (ABQB), affd [1997] 196 AR 124 (ABCA), revd [1999] 1 SCR 619, online: LexUM http://csc.lexum.umontreal.ca/en/1999/1999scr1-619/1999scr1-619.html

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

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

Double N Earthmovers Ltd. v Edmonton (City), 213 AR 81 (ABQB), affd [2005] AJ No 221 (ABCA), affd 2007 SCC 3, [2007] 1 SCR 116, online: LexUM http://scc.lexum.umontreal.ca/en/2007/2007scc3/2007scc3.html

Tercon Contractors Ltd. v British Columbia (Transportation and Highways), 2006 BCSC 499, revd 2007 BCCA 592, revd 2010 SCC 4, [2010] 1 SCR 69, online: LexUM http://scc.lexum.umontreal.ca/en/2010/2010scc4/2010scc4.html

The recent Tercon decision has sparked renewed debate in the legal community about the present state and the future of bidding and tendering law and bidding and tendering practices in Canada. The possible impact of the Tercon decision on procurement processes was a feature topic at the Canadian Bar Association’s National Construction Law Section annual conference. As well, provincial branches of the CBA have also been addressing the topic (the CBA New Brunswick Branch is including a session on developments in construction law in their upcoming Fall Conference).

Given that the rules of bidding and tendering are a current topic, I’ve decided that it might be useful (not least for myself) to prepare and publish briefs of the foregoing Supreme Court decisions. I’ll update this post with links to the briefs as I put them up.

Update:

• Ron Engineering
• M.J.B. Enterprises
• Martel
• Naylor
• Double N
• Tercon

President Obama has proposed the creation of a US $4B “national-infrastructure fund” in an effort to get away from “the federal government’s traditional approach of giving grants to specific states and localities for infrastructure spending”: WSJ.

At least one well-known American construction attorney, John Ahlers, thinks that the fund is a good idea, providing of course that it is properly managed.

It seems like a sensible idea to me too for financing similar types of large-scale infrastructure projects.

I immediately wondered how something like that would work in Canada. Although our constitutional structure would change the character of a project like that to some extent, would a similar institution in fact encourage interprovincial collaboration on, say, a high speed rail link or improved energy infrastructure? What’s the closest thing we have to a Canadian analogue at the moment? Are there any reasons why this wouldn’t work or else would not yield any significant benefits?

A little off the topic of construction law. A recent post by Simon Chester at slaw.ca discusses Professor Peter McCormick’s work – specifically his book, Supreme at Last: The Evolution of the Supreme Court of Canada – on the sources of authority cited by the Supreme Court of Canada in their decisions: http://www.slaw.ca/2010/01/27/65-years-of-change-in-what-the-supreme-court-cites/.

The post points out a few things, including the unequivocal shift away from English common law: “Canadian law has become itself, and is free-standing as a body of law; less and less is there a Commonwealth or even a global common law“; “English law has consistently declined and really stopped being a dominant source at the time of the Laskin Court”. Slaw provides a few very handy charts which help digest the annual SCC citation data by the numbers and show the clear trends.

The trend away from English law arguably has varying causes and significances (e.g. in the context of national identity and sovereignty), but a tangential issue I’m not sure anyone has addressed is the impact of diverging streams of common law on international trade.

Of course, in a market climate which at a glance is more globalized than at any point in history it may seem silly to be concerned about barriers to trade. And regardless of conflict of laws if there are market opportunities people will tend to find a way. But have diverging streams of common law contributed at all to inefficiencies? Increased chances of litigation of international arrangements? Prevented investment, enterprises or projects that otherwise would have occurred? Affected relationships with trading partners? Choice of trading partners?

Or, have Commonwealth divergences in the common law been more pronounced in areas of the law less likely to impact trade than others (e.g. criminal law as opposed to the law of contracts)?

While an increasingly made-in-Canada body of law has clearly positive significance for issues like sovereignty, it’s hard to see how increasingly idiosyncratic bodies of domestic jurisprudence diverging from a more uniform base can do anything but introduce inefficiencies – whether or not those inefficiencies have been compensated for by increased efficiencies elsewhere. Admittedly, it would be hard to introduce any meaningful valuations into this analysis (what is the economic value of national sovereignty?) and I am not an economist.

The question I am asking is utilitarian I suppose: What is the net social benefit of jurisprudential idiosyncrasy?

Thoughts?

American construction lawyer Christopher Hill’s latest thoughts have been on the effectiveness of mediation. He gives three good reasons why, in his opinion, mediation works:

1. It’s cheaper than litigation,
2. Mediated outcomes can be far more flexible than those possible at trial, and
3. The parties retain ultimate decision-making control, instead of giving it up to the court.

I agree with him completely, and I have a few things to add.

What is mediation?

First, though, a quick rundown on the nature of mediation. While experienced construction-industry professionals may have as good a handle on their basic legal options as their legal advisors do, owners and managers of small- or mid-sized firms may not always be as aware of those options (indeed, if they have never had a need to know, why should they?).

Parties to construction contracts sometimes find themselves engaged in legitimate disputes as a result of common problems such as changes in site conditions, changes in the nature or scope of work, or disagreements in the interpretation of contractual terms. If parties to construction contracts cannot resolve these disputes on their own there are three basic types of dispute resolution available: (1) Litigation, which is the traditional method of appealing to the courts, and (2) Arbitration and (3) Mediation which are both forms of extra-judicial “Alternative Dispute Resolution”.

Mediation is the least formal of the three options (Arbitration, also referred to as “Binding Arbitration”, lies between the other two in terms of the formality of the process and the amount of procedural control ceded by the parties). The essential difference between mediation and the parties simply hashing things out between themselves is the inclusion of a neutral third party – a mediator – to facilitate meaningful negotiations with the end goal of a voluntary settlement. Further:

• Mediation is confidential, and any representations made in mediation are typically made without prejudice and are not admissable in court.
• The mediator does not make a ‘ruling’ for the parties, although he or she may sometimes draft formal recommendations to the parties for settlement based on their knowledge of the dispute.
• Parties can still (and probably should) seek the advice of an independant lawyer.
• When and if the parties agree to a settlement they can agree to be bound by it, but if they do not reach an agreement, they can proceed to arbitration or litigation.

Courts themselves generally like parties to attempt mediation before appealing to a judge and some jurisdictions are actually moving to require it in some cases (see Rule 37A of the Rules of the Supreme Court, 1986, SNL 1986 c42: “Court Ordered Mediation“).

Contracting for mandatory mediation

It is actually possible to build mediation right into a contract at the negotiation stage (of course this is not an option with public tenders). That is, it is possible to include a provision mandating the parties to seek settlement via mediation (or arbitration) in the event of a dispute rather than marching straight to court. Doing so is a simple measure that seeks to reduce potential costs by heading off litigation in the event that an unforeseen dispute occurs.

There are legal and strategic arguments both for and against mandatory mediation provisions. Timothy Hughes has recently posted on the merits of mandatory mediation clauses in construction contracts, in part as a response to ENR writer Don Short’s series of posts emphatically recommending against mediation and skipping straight to arbitration.

I have little to add to what they’ve already said. But I did want to make mention of the option of drafting mediation into an agreement from the start because I still think that on balance a properly-worded mediation or arbitration clause has more potential upside than down, and including a provision like that is definitely worth discussing with a professional legal advisor. This is because I am generally in favour of mediation as a path to settlement.

Mediation is good business

Along with the three non-trivial benefits of mediation mentioned by Mr. Hill – cost-effectiveness, flexibility, and control – there are other significant advantages:

• There is more room to discuss issues that are relevant to the decisions of the parties but that are potentially ‘non-legal’.
• Mediation is faster. This is part of what makes it cheaper: It cuts down on legal expenses for costly preparation for litigation and it can get parties back to work with less fooling around.
• Public relations: While having your contract dispute covered in the local media might be free exposure, it’s probably not valuable exposure. Trials happen in the public eye; mediation is far more confidential.
• Mediation helps to conserve any social or good-will capital that a firm has acquired among its peers. I believe that collegiality is generally better for business than animosity, and mediation helps to foster that between parties in a semi-competitive/semi-cooperative industry like construction.

All said, more often than not seeking mediation of contract disputes is simply good business. Lawyers should make sure that their clients understand the availablity of mediation as an option. And a party to a contract dispute, if not otherwise advised on mediation, would be wise to ask their lawyer questions about it.

Nota Bene: Mediation and Economics

For those interested in economics, there is also a social cost-benefit argument to be made in favour of mediation, although more empirical work is apparently required. See Richard A. Posner, Economic Analysis of Law, 7th ed., (New York: Aspen, 2007), pp. 604-606: “Mediation as an Aid to Settlement.”

Keeping a handle on workplace practices is rarely on top of the priority list for owners and managers of small and medium-sized companies – there are too many other core tasks to stay on top of in the day-to-day running of the business. Managers at larger companies have the luxury of hiring a staffer to babysit the issue of workplace safety and practices for them.

Unfortunately, when an accident happens the company runs into it like a sunker everybody knew was there, but that nobody was keeping an eye on.

Slackness might cost you

In my pre-law life I spent a lot of time around heavy equipment. And every time I got out of a machine I took the pressure off the hydraulics – leaving a boom or a bucket needlessly hanging in the air always just seemed sloppy and unnecessarily hard on the gear.

Personal preferences notwithstanding, lowering hydraulic booms on parked machinery is also considered safe practice. A recent case from the BC Supreme Court – Slocan Forest Products Ltd. v. Trapper Enterprises Ltd., 2009 BCSC 1175 – is a great example of how much carelessness can cost. (Gary Oakes also commented on this case in the September 18, 2009 issue of The Lawyers Weekly).

In abbreviation, the relevant facts here are:

• Slocan was a forestry company and owned logging camps
• Trapper had a service contract with Slocan for general maintenance and operations of one of their camps
• Slocan hired a second company to do some renovations on the camp while the camp was vacant during the spring
• Trapper helped that company by, among other things, carrying away debris
• On the day in question a Trapper employee was using a front-end loader to collect debris by moving close to a building being worked on and positioning the bucket so the other company’s workers could toss debris into the bucket
• Near the end of the day the Trapper employee knocked off around 5:00 but left the loader parked with the bucket elevated for the other workers to continue working.
• Those workers never stayed long either and also quit earlier than they often did (possibly to catch a hockey game – I don’t make this up it’s in the decision)
• The loader bucket was left suspended over a “Christmas tree” (a splitter assembly for the camp’s propane system)
• The propane was supplied by a nearby tank farm with 9000 US gallon capacity
• At about 2:20 am the camp was flattened by a massive explosion
• After causation analysis it was found as fact that the critical event was the probable loss of hydraulic pressure in the loader’s rams, which caused the bucket to lower onto the Christmas tree, damaging it and creating a gas leak
• Slocan’s damages were assessed against Trapper at $1,750,000 plus another $483,850 that was agreed between the parties

So, to recap, because the employee left his machine parked with the bucket elevated the employer was on the hook for over two million dollars. There’s nothing really ground-breaking about the law applied in this case; the analysis is straightforward negligence and employer vicarious liability. Again, what the case illustrates very well is how a little sloppiness can result in a big bill.

A little might go a long way

So, while business owners and managers are often pressed with the business of core tasks, it makes a lot of sense to take meaningful steps to eliminate sloppy workplace practices (so, doing more than just filling out ‘toolbox meeting’ paperwork to satisfy the government safety inspectors). By doing so they can reduce the possibility of exposure to potentially onerous liabilities. Unless, of course, they’ve got a few million to burn.

Nota Bene

A final thought: one way to reduce possible liability as a result of workplace accidents is to encourage safe work habits in existing personnel. But, the adage about teaching old dogs new tricks is one to bear in mind. An employee who is characteristically careless might be a liability – period – no matter how many safety meetings he or she attends. An alternative to attempting to ‘teach’ safety is to keep it in mind at the hiring stage, and make it a consideration before making a hiring decision. That is, just hire people who, as a far as ascertainable by way of past behaviour and personal judgment, are on the ball and not prone to sloppy or careless habits.

Try looking at their boots – are they laced up? Because if they don’t have the energy for that they might not have the energy to park that machine properly either.

I was reading through my weekly list of construction law blogs when I noticed this post about “bid bombing.” The post draws attention to a recent article in Engineering News Record.

So-called bid bombs are bids that come in substantially lower than other competing bids. In these situations the other competing bids might be hovering more closely around a particular price range for the project. For example, out of four bidders on a public tender, three come in around $20M while the low tender steals the project for $14 or $15M. I’ve seen this happen, and for the second bidder this can be annoying and frustrating (although bidders are typically annoyed at losing a job anyway).

What the project price ‘should’ be

The ENR article makes two central assertions:

1. That that there is a “correct” price for a given tender call.
2. That unusually low bids are caused by “bad business managers” or “poor bidders.”

The article throws around the word “correct” a lot (engineers love the word): “correct materials specified”, “correct labor (sic) productivity”, determining contract requirements “correctly”, etc. Now, given that all players are working with the same set of variable costs, in a highly competitive market project costs and thus bids will gravitate to a fairly narrow range if everyone is working with similar resources, the same suppliers, and similar knowledge. Specifically, the article finds that on large projects the likelihood of a competitive advantage resulting in a price advantage of more than a few percent is practically non-existent, leaving the only real variable in the final price to be the profit margin. That is, whichever bidder decides to take the tightest margin above the proper cost should get the project.

The “poor bidders” who throw the bid bombs are those who i) make significant mistakes in their estimates, or ii) purposely take a project below cost. The article identifies the latter as bad management.

Altogether, the author calls bid bombing a problem because “qualified bidders” lose business and the low bids “ruin markets”.

What should the project price be?

While I agree that wild-card low bids very often are the result of uninformed or inexperienced estimators, or of intentional under-bidding, I take issue with both of the article’s main points.

First, while bids often will hover around a certain price range, I think that it is possible for a bidder to occasionally gain some competitive advantage, or series of advantages, which allows them to score the job. I’d actually argue that some of the more successful “qualified bidders” became successful not by consistently squeezing their margins but by working to gain advantages and thus making their work more profitable. Further, it is possible that profit margins in some local markets might have become temporarily inflated, so an unexpected low bid might actually be closer to the so-called “correct” price.

Second, while making a serious mistake in a bid is never good, I don’t think I’d be so quick to condemn intentional underbidding. Which is not to say I think it is typically an effective strategy – if anything, I’ve seen it fail as a strategy when used in an attempt to starve smaller competition out of a market. But that doesn’t mean that underbidding is not a legitimate strategy. The bidder takes the risks with the possible rewards, if any.

In the long run, the strongest contracting companies will survive, while others stagnate or fail. If a bid bomber takes a project and fails to complete, then there are remedies for that situation that the owners can pursue – often those remedies involve calling in other builders anyway. If a bid bomber takes a job and completes it within spec, then the owners (which are often the taxpayers) are happy.

All said, I’m not convinced that it’s so easy for the bombers to ruin the construction market.

As a final note, bid bombing situations in Canada could potentially attract the operation of privilege clauses. In fact, the proper good faith exercise of privilege clauses in situations where a low bidder has obviously made a mistake – so that the owner awards to the second bidder, presumably at a substantially higher price – might actually save headaches, time and money in certain circumstances.