Canada: Design Services Ltd. v. Canada: Liability Of Owner To Subcontractors In Tendering Context

Last Updated: June 6 2008
Article by Matthew Ghikas and Marina Pratchett

On May 9, 2008, the Supreme Court of Canada delivered its decision in Design Services Ltd. v. Canada, 2008 SCC 22. This case addressed the issue of an Owner's liability to subcontractors when that Owner allegedly breaches its tendering obligations to Contractors.

The Court refused to extend the established principles of recovery by a general contractor for breach of tendering obligations to the subcontractor community. Although an owner may be liable to the disappointed general contractor, the Supreme Court held that persons who would have been subcontractors to a general contractor had the contract been properly awarded, may not claim damages for economic losses suffered because the contract was wrongfully awarded. The case was decided based on contract law principles; the Court determined that the right of action given to a contractor is founded on principles of contract, and potential subcontractors - who have no contractual relationship with the owner - have no similar right of action. The Court considered the application of tort law to the facts but refused to recognize a cause of action arising in tort.

In the first instance, the Court was influenced by the fact that, on the facts of this case, by virtue of the design-build nature of the procurement, the subcontractors had been offered the opportunity to enter into a joint venture with the general contractor, and therefore could have secured a direct contractual right against the owner, but had refused to do so. The Court expressed the view that commercial parties who have the option to define their rights through contractual means cannot later assert analogous rights based on tort duties. Additionally however, and of application beyond design-build tenders, the Court held that a cause of action in tort should not be available to subcontractors in tendering situations as the liability of an owner would be too uncertain (or in legal terms, indeterminate).

Relevant Background

Public Works and Government Services Canada ("Public Works") launched a "design-build" tendering process for the construction of a naval reserve building in Newfoundland. According to the tendering documents, proponents could bid on the contract alone or with other entities as a joint venture. Public Works awarded the contract to a non-compliant bidder and was sued by Olympic Construction Ltd. ("Olympic") – the contractor that should have been awarded the contract. The subcontractors associated with Olympic also sued Public Works, although they had never entered into a partnership or joint venture with Olympic. Though Olympic settled with Public Works, the subcontractors continued with their action for economic losses suffered as a result of Public Works' decision to award the construction contract to the non-compliant bidder.

In the lower court, the trial judge recognized that there was little support in the case law for the recognition of liability in tort by owners to subcontractors in the tendering process. The trial judge nonetheless decided to create a new category of duty of care, holding that Public Works owed a duty in tort to the subcontractors in this case. In the trial judge's view, it was foreseeable that the subcontractors would suffer financial losses if Public Works awarded the contract to a non-compliant bidder. Although the subcontractors had not entered into a joint venture with Olympic, the trial judge concluded the process was analogous to a joint venture and therefore created a relationship of proximity that supported liability in tort.

The Federal Court of Appeal set aside the decision, concluding that a new duty of care should not be recognized in these circumstances. The Supreme Court of Canada upheld the decision of the Federal Court of Appeal.

Tendering Law Principles

Canadian tendering law, founded on principles of contract originating in the Ron Engineering decision, holds that "Contract A" is formed once a proponent submits a compliant bid to the owner. As determined in M.J.B Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619 if an owner awards a contract to a non-compliant bidder, provided there is no term of the tender that would allow them to do so, the owner breaches its obligations under "Contract A" - it being an implied term of "Contract A" that that non-compliant bidders would not be accepted - and is liable to the compliant bidders.

If the subcontractors in this case had formed a joint venture with Olympic, they would have been parties to "Contract A" between Olympic and Public Works, and would have been able to sue Public Works directly for breach of "Contract A". Though the subcontractors were offered the opportunity to enter into such a joint venture, they declined. Their failure to take advantage of this protective measure was – in the eyes of the Court - fatal to their claim.

Tort Law Principles

There are five recognized categories in which recovery for economic loss is currently permitted in tort law: Independent Liability of Statutory Public Authorities; Negligent Misrepresentation; Negligent Performance of a Service; Negligent Supply of Shoddy Goods or Structures; and Relational Economic Loss (i.e. losses flowing from physical damage sustained by a third party's property, such as business losses suffered by a railway when a railway bridge is damaged by a ship). The Court determined that the subcontractors' claimed loss did not fit any of the five categories and declined to create a new category for this particular situation. That decision was based primarily on two overriding policy considerations.

First, while the subcontractors had the opportunity to protect themselves by contract from the risk of economic loss, they specifically declined to form a joint venture with Olympic, which would have put them in a further contractual relationship with Public Works. The Court expressed strong reluctance as a matter of policy (at paras. 56 and 57) to enable a 'back door' approach to recovery.

Second, although it was unnecessary to the decision, the Court also concluded that the subcontractors would have failed because the creation of a new duty of care would have offended another policy concern: the fear of indeterminate liability. Recognition of a duty of care on the part of an owner to subcontractors in a tendering process could lead to what has been described as "liability in an indeterminate amount for an indeterminate time to an indeterminate class". The Court explained that in cases of pure economic loss (i.e. those without physical injury or damage to property),"care must be taken to find that a duty is recognized only in cases where the class of plaintiffs, the time and the amounts are determinate". Here, the class of potential plaintiffs was not well-defined and the type of tendering process was not unique. Because many types of arrangements may arise between owners, contractors, and subcontractors, recognition of an owner's duty of care towards subcontractors could lead to a multiplicity of lawsuits in tort. Moreover, suppliers and subcontractors have their own employees and suppliers who might claim for economic loss due to the wrongful failure of the owner to award the contract to the general contractor upon which they were all dependant. The Court reasoned that "[t]he construction contract context is one in which the indeterminacy of the class of plaintiffs can readily be seen".

Implications Of Supreme Court's Decision

In Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, 2000 SCC 60, the Supreme Court had left open the question of whether an owner could owe a duty of care to subcontractors. The Court has now answered that question in the negative, particularly where subcontractors have the option of protecting themselves through contractual means, but likely in all instances, based on the policy considerations referred to by the Court. Further, the Supreme Court's comments about the fear of indeterminate liability (again - not necessary to this decision) are significant and will be given weight by lower courts.

To read the Supreme Court of Canada's decision, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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