Canadian courts have historically been divided on whether to apply Contract A to the relationship between a bidder and the subcontractors named in the bidder’s tender on construction projects.
The courts have historically been divided on whether to apply Contract A to the relationship between a bidder and the subcontractors named in the bidder’s tender.
In some instances, they have recognized a subcontract A relationship existing between a bidder and its named subcontractors, have enforced subcontractor rights during a tendering process and have also found subcontractors liable for failing to honour their sub-tenders. In other in-stances, the courts have rejected the application of such duties.
The law remains far from settled after the Supreme Court of Canada’s consideration of subcontractor rights in Naylor Group Inc. v. EllisDon Construction Ltd. While the Supreme Court’s decision resolved the specific dispute between a bidder and its would-be subcontractor by focusing on the bidder’s obligations based on the specific written rules incorporated into the tender call from the Toronto Bid Depository System, it failed to clarify whether an implied rule protects subcontractors who are named in a successful bidder’s tender in procurements where no bid depository system is being used.
The particular case dealt with a tender call issued by an Ontario hos-pital for a construction project through the Toronto Bid Depository System. That system provided a set of standard bid depository rules that governed the use of subcontractor bids by general contractors. Naylor Group Inc. (“Naylor”), an electrical subcontractor, submitted a bid under those rules. EllisDon Construction Ltd. (“EllisDon”), a general contractor, named Naylor’s bid in the tender it submitted to the hospital. EllisDon was awarded the contract but chose not to use Naylor for the electrical work. Naylor sued EllisDon and lost at trial.
The Ontario Court of Appeal reversed the trial decision. It found that the bid depository rules required EllisDon to use Naylor unless there was a reasonable objection. Since the bid depository rules were clear, the Court of Appeal’s analysis focused primarily on interpreting those rules.
However, the Court of Appeal also made some statements that could be interpreted as applying a general duty of fairness to bidders in relation to their named subcontractors.
The Court of Appeal stated that “the fairness and good faith of the prime contractor in its dealings with the sub-contractor are also factors to consider in determining the reasonableness of the prime contractor’s objection”.
The Court of Appeal also appeared to be considering general principles of law in its overview when it stated that “the core issue in this case is the extent to which the principles of Ron Engineering apply between the prime contractor and a subcontractor”. However, in light of divergent decisions from across Canada, the Court of Appeal’s failure to expressly state that an implied rule exists between bidders and their named subcontractors left the matter open for future de-bate.
The Supreme Court’s decision also failed to go beyond the specific facts of the dispute and therefore failed to provide the much needed clarity with respect to a general implied rule. The decision considered the specific facts and held that the successful bidder’s “obligation to contract, subject to reasonable objection, arises directly out of the rules of the Bid Depository … and does not resort to an ‘implied’ term”. While it upheld the Ontario Court of Appeal’s conclusion, the Supreme Court failed to address the general issue of whether the duty of fairness would apply to create an implied named subcontractor rule in the absence of specific bid depository rules.
The obligations owed by bidders to their subcontractors or other bid-ding partners will continue to be an open question determined on a case-by-case basis.
Paul Emanuelli’s procurement law practice focuses on all aspects of the tendering cycle including bid dispute resolution. This article is extracted from Emanuelli’s Government Procurement textbook published by LexisNexis Butterworths. Reach Paul at paul.emanuelli@procurementoffice.ca.
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