The defendants’ submission that the subcontractor had sufficient work to keep its two field employees (its total complement of on‑site employees at the time) occupied and generating income was incorrect. The nature of the subcontracting business, said the judge, is such that a subcontractor can work on more than one project simultaneously. The number of employees engaged by the subcontractor is not static.

Contractor pays damages – objection to employing electrical subcontractor was not reasonable

Schaible Electric Ltd. v. Melloul-Blamey Construction Inc.

Contractor carried bid of electrical subcontractor in successful bid to construct school – contractor subsequently awarded bid to another subcontractor claiming original subcontractor was insolvent and unable to secure bonding – subcontractor sued school board and contractor for breach of contract – school board had no contractual duty to subcontractor – contractor's objection to employing subcontractor was not reasonable – no contractual right existed to demand large bonds in short period of time – subcontractor awarded damages in the amount of profit it would have realized on the project

The key issue in this case was whether Melloul-Blamey Construction Inc., a general contractor, reasonably objected to employing Schaible Electric Ltd. as subcontractor on a school project for the Hamilton-Wentworth District School Board in Ontario.

In August 1999, the Board tendered the construction of the school in accordance with the Ontario Bid Depository Standard Rules and Procedures. Schaible?s bid of $563,530 was the lowest for the electrical subcontract, and Melloul-Blamey carried Schaible?s bid in its bid to the Board. Melloul-Blamey submitted the lowest general bid, and was awarded the contract. The contract price was $6,193,000.

Melloul-Blamey awarded the electrical subcontract not to Schaible but to the second lowest bidder, for $579,000. Schaible sued both Melloul-Blamey and the Board for breach of their contractual obligations. The case was decided by Justice Cavarzan.

The CCDC2-1994 standard form of contract was one of the contract documents incorporated into any subcontract under the Bid Depository Rules. Article 1.1.2.1 of the CCDC2 General Conditions provides that: "Nothing contained in the Contract Documents shall create any contractual relationship between … the Owner and a Subcontractor, a Supplier, or their agent, employee or other person performing any of the work." Justice Cavarzan found that this provision was incorporated into the Contract A between the general contractor and a subcontractor. Therefore, no Contract A was formed between the Board and Schaible.

Contract A between Melloul-Blamey and Schaible incorporated the Bid Depository Rules. Article 12(d) of the Rules provided as follows:

A Prime Contractor must place a Subcontract with the Trade contractor whose price is received through the Bid Depository and carried in his/her bid …

However, General Condition 3.8.5 of the CCDC2 prime contract provided that:

The Contractor shall not be required to employ as a Subcontractor or Supplier, a person or firm to whom the Contractor may reasonably object.

Clearly, there was a conflict between the Bid Depository Rules and the prime contract. In R.G. Lamarche and Associates Ltd. v. Lundy Construction (Ontario) Ltd., the court held that the CCDC2 provisions prevail and that, if a general contractor has reasonable cause for objection to the use of a named subcontractor, it may employ another. A similar conclusion was reached in Bate Equipment Ltd. v. Ellis-Don Ltd.

In Naylor Group Inc. v. Ellis-Don Construction Ltd., the Supreme Court of Canada held that:

The prime contractor is protected by Article 10 of the General Conditions of the Stipulated Price Contract that would eliminate a subcontractor if the owner had "reasonable cause" to object (Article 10.3) or if the prime contractor itself "may reasonably object" (Article 10.5). The prime contractor?s protection lies in the contractual right to object. The subcontractor's protection lies in the concept of "reasonableness".

Thus, the real issue in this case was whether Melloul-Blamey?s objection to employing Schaible was reasonable. The onus was on Melloul-Blamey to establish that it was.

Melloul-Blamey?s main argument was that Schaible was both insolvent and unable to secure bonding. However, the Board and its pre-qualification committee felt comfortable with Schaible as a subcontractor on this project. At the time of the trial, Schaible was still in business and all debts of the corporation had been paid off. It was not open to Melloul-Blamey, said the judge, to invoke bankruptcy as a reasonable objection for failing to employ Schaible.

Melloul-Blamey required that Schaible obtain and pay for both a 100 per cent Performance Bond in the amount of $563,530 and a 100 per cent Labour and Material Bond in the same amount. Moreover, it allowed only five days, including a Saturday and a Sunday, for Schaible to accomplish this feat.

Justice Cavarzan found that Melloul-Blamey did not have the contractual right to demand the bonding that it did. Schaible?s failure to obtain bonding, in the circumstances, did not constitute a reasonable objection to employing Schaible.

In short, Melloul-Blamey failed to demonstrate that it had a reasonable objection to employing Schaible as the electrical subcontractor. Melloul-Blamey?s decision to contract with another electrical subcontractor, Wallingham, rather than Schaible was arbitrary and capricious, said Justice Cavarzan. There was no genuine effort to verify the information received, nor to confront Schaible with the facts and give it the opportunity to respond. The judge concluded:

The above history of events bespeaks an intention [on the part of Melloul-Blamey] to avoid contracting with Schaible from the moment the faintest off-the-record murmurings of the most general nature came to Melloul-Blamey's attention. Its purported due diligence amounted to perfunctory window-dressing in the course of which not one official of the general contractor thought it necessary to keep a note.

Melloul-Blamey and the Board submitted that they were not aware of any Canadian case in which the court had rejected a general contractor?s right to object to a subcontractor except in cases of bid shopping.

That may well be so, agreed Justice Cavarzan. He accepted that Melloul-Blamey did not bid shop in this case but added: ?In my view, this does not relieve it of the onus of demonstrating that its refusal to contract with Schaible was on the basis of a reasonable objection. To hold otherwise would be to rewrite that limitation which protects Schaible under Contract A.?

With regard to the Board, the judge found that it, unlike Melloul-Blamey, had no contractual duty to ensure that Melloul-Blamey?s objection to using Schaible was reasonable. The Board quite properly took the position that it could not investigate or adjudicate the legal and factual issues between Melloul-Blamey and Schaible. It committed itself to protecting the integrity of the bid depository process by insisting that Melloul-Blamey not engage in bid shopping.

With regard to damages, the defendants agreed that the calculation of damages would be Schaible?s bid price less the cost of completing the work, as stated in the Supreme Court of Canada reasons in Naylor.

The substitute electrical subcontractor, Wallingham, had realized a profit of $70,361 on the project. Wallingham?s bid price was $15,500 higher than Schaible?s. Accordingly, Schaible might have earned $15,500 less overhead and profit, i.e., $70,361 less $15,500 or $54,861.

Wallingham?s principal testified that his company had achieved a higher than anticipated profit on this project because it was working on other projects in the same area. Workers could be transferred from one project to another as needed, a factor which helped to keep overhead low. In addition, his company achieved a higher discount on materials supplied because it ordered material for all three jobs. These advantages would probably not have been available to Schaible, and represented a relevant contingency in calculating its damages.

There were no site contingencies experienced which would have had the effect of increasing the electrical subcontractor?s cost of performing the work.

Based on this information, the court found that Schaible?s lost profit as a result of the breach of contract by Melloul-Blamey was $45,000.

The defendants submitted, however, that Schaible had fully mitigated, or could have mitigated, any damages it may have suffered because it was ultimately as busy as it would have been had it worked on the project. The court disagreed. Shaible?s fiscal year which encompassed the construction period for the project showed gross sales roughly one-half of the levels reached in the prior and succeeding fiscal years.

The nature of the subcontracting business, said the judge, is such that a subcontractor can work on more than one project simultaneously. The number of employees engaged by the subcontractor is not static. The number of workers assigned to projects varies as the work on the project progresses and workers are hired and laid-off or assigned to other projects as circumstances require. Therefore, the defendants? submission that Schaible had sufficient work to keep its two field employees (its total complement of on‑site employees at the time) occupied and generating income was incorrect.

In the result, the court dismissed Schaible?s claim against the Board, and awarded damages against Melloul-Blamey in the sum of $45,000 together with prejudgment interest.

Ontario Superior Court of Justice
   Cavarzan J.
   May 28, 2004