Canada: Tendering: A Contractor’s Rights and Obligations with Respect to Subcontractor Bids

Last Updated: April 11 2003
Article by Kenneth Crofoot

The general contractor bid contains an amalgamation of its own estimating and pricing with that submitted by its subcontractors. The Courts have struggled with the issue of determining when the submission and acceptance of a contractor bid requires the contractor to enter into a subcontract with a particular subcontractor. No subcontractor wants to submit a bid which is carried by the general contractor to achieve acceptance, only to have some new party show up to undercut its price and obtain the subcontract. The Courts have basically considered the issue as one of determining when the tender terms and circumstances require the contractor to enter into a bid with a low bidding subcontractor or alternatively, the subcontractor carried in the general contractor’s bid.

No consideration of this issue is complete without a review of the recent Supreme Court of Canada decision in Nayler Group v. Ellis Don Construction (2001), 204 D.L.R. (4th) 513, in which Ellis Don carried the Nayler bid in its contract, despite the fact that Nayler had an in-house union and there was an outstanding Ontario Labour Relations Board ("OLRB") decision pending as to whether Ellis Don would have to deal with an IBEW subcontractor. When the OLRB decision was released confirming Ellis Don’s obligation to use only electrical subcontractors affiliated with the IBEW, Ellis Don attempted to offer the subcontract to Nayler based upon the condition that it align itself with IBEW. Nayler refused and Ellis Don then offered the work to another IBEW subcontractor for roughly the same price as had been bid by Nayler. The trial judge relied upon a line of cases, discussed further below, as the rules of contract formation, i.e., that there could be no contract until Ellis Don had communicated its acceptance of Nayler’s bid to Nayler, which had never been done. The trial judge found that the contract for electrical work had been frustrated by the OLRB decision, which precluded Ellis Don from contracting with a non-IBEW subcontractor. The Court of Appeal, however, allowed the appeal on the basis that in exchange for binding itself to an irrevocable bid, Nayler acquired the right to be awarded the contract. The tender terms only allowed Ellis Don not to award the contract if there was a reasonable objection to the subcontractor. The Court found that Ellis Don’s objection was not reasonable because it had "shopped" Nayler’s bid and had failed to attempt to negotiate with the OLRB to allow the contract to proceed with Nayler.

In the Supreme Court of Canada, the Court accepted Ellis Don’s argument that Ellis Don was not automatically obligated, upon acceptance of its bid, to award the contract to Nayler. In order for a construction contract to arise, Ellis Don had to notify Nayler of the acceptance of the subcontract bid. However, the Court also found that Ellis Don was obligated to notify Nayler of the acceptance of its subcontract bid unless it had a reasonable objection to the contract with Nayler. The Court found that there was no frustration of the contract between Ellis Don and Nayler because the OLRB decision was a foreseeable outcome to the parties at the time of the tender. The Court found Ellis Don’s decision to carry Nayler instead of an IBEW contractor was done to assure itself a low bid and that it could not, therefore, escape from its obligation to Nayler merely because the OLRB decision had gone the wrong way. The Court, therefore, found that Ellis Don had not demonstrated to the Court that its objection to Nayler was reasonable.

The important result of Nayler is that most invitations to tender which require the identification of chosen subcontractors will result in an obligation by the contractor to award the contract to the named subcontractor as the result of Nayler. The only issue is whether the general contractor can demonstrate a reasonable objection after it has named a particular subcontractor. Nayler seems to have suggested that the basis for such a rejection would have to be based on some unknown issue which had arisen subsequent to the naming of the subcontractor, such as some inability to perform or a previously unknown financial problem.

The Supreme Court of Canada did not disagree with the general proposition that the subcontract only arises when the general contractor notifies the subcontractor of acceptance. As a result, it may still be possible that the tender terms permit the general contractor more latitude than was available under the tender terms in Nayler to substitute another subcontractor. It is necessary to closely review the terms of the invitation to tender to determine the parameters. There are a number of older cases which hold that the mere effect of carrying a subcontractor’s price in a bid did not constitute an acceptance, conditional or otherwise, of the subcontractor’s bid and did not create an obligation on the part of the contractor to award the subcontract to the subcontractor whose bid was carried. (See Vipond Automatic Sprinklers v. E.S. Fox (1996), 27 C.L.R. (2d) 311, Bate Equipment v. Ellis Don (1992), (Ont.Gen.Div.) 2 C.L.R. (2d) 157 and Derrick Concrete v. Central Oilfield (1994), 17 C.L.R. (2d) 120 (Alta.Q.B.).) All these cases may still be applicable where the invitation to tender terms can be distinguished from Nayler to provide a latitude for the general contractor to choose a subcontractor other than that carried in its bid. One can expect that where a bid shopping process has occurred however, the Court will not be particularly sympathetic to the contractor’s position unless the invitation to tender terms are very clear that such a process was contemplated throughout.

Bid Depositories

In order to limit bid shopping with respect to subcontractor bids, many tenders utilize the facilities of a bid depository. A bid depository is a central facility, usually run by a local construction association, where the subcontract bids are filed and are available to all general contractors bidding. The invitation to tender typically requires that the bid depository be utilized and that its rules be applicable with respect to subcontracts. The rules of bid depositories are quite standard and usually require the general contractor to utilize the services of a subcontractor’s bid which its utilizes. The invitation to tender will usually require the general contractor to name the subcontractor whose bid it has utilized. The bid depository rules also provide that the general contractor is required to award the subcontract in accordance with the invitation to tender documents. If CCDC contracts are in use, for instance, the only basis not to award the subcontract to a subcontractor whose bid is carried is if either the contractor or the owner have a reasonable objection under paragraphs 3.8.5 and 3.8.3, respectively. As a result, in most cases, Nayler has meant that the contractor can no longer take the position that its obligations to the carried subcontractor only arise when the acceptance letter has been sent. The sending of the acceptance letter, though required, is not a significant contractual event because the general contractor may very well be obligated to send it.

Once a bid depository is specified as required, all parties in the process must follow the rules. In Ken Toby Ltd. v. B.C. Building Corp. (1997), 34 C.L.R. (2d) 81 (B.C.S.C.), the plaintiff Subcontractor was the only bidder for masonry work. The owner issued a post-tender addendum requiring a cash allowance to be substituted due to its concern that the single bid was too high. As a result, the plaintiff’s bid no longer had to be carried and the plaintiff was not awarded the subcontract. The owner’s addendum was found to have breached the rules of the bid depository. The owner was considered to have owed the subcontractor a duty of care and was found liable to the subcontractor. An owner therefore should not specify use of a bid depository if it is not prepared to abide by the depository’s rules.

There is no doubt that the use of a bid depository and the ability to incorporate the bid depository rules is one prudent method to police dealings with respect to subcontractor bids and to clarify the parties’ respective obligations.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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