When the contractor chose to carry the plaintiff’s bid in its bid to the owner, it committed itself to subcontract the electrical work to the plaintiff in the absence of a reasonable objection. What is reasonable depended on the facts of the case.

Naylor Entitled To Recover Damages For Breach Of Contract

By Paul Sandori

Naylor Group Inc. v. Ellis-Don Construction Ltd.

Prime contractor awarded large construction contract as lowest bidder ? prime contractor?s bid carries subcontractor?s bid ? subcontractor?s workers not members of International Brotherhood of Electrical Workers (IBEW) ? prime contractor unable to enter into subcontract with named subcontractor contracts with IBEW subcontractor at same bid price ? contractor breached Contract A ? damages for wrongful refusal to contract

In 1991, the Oakville-Trafalgar Memorial Hospital called for bids for the construction of an addition and renovation of a hospital. Ellis-Don Construction Ltd., a general contractor, invited Naylor Group Inc. to bid for the electrical work on the project.

At the time, Ellis-Don had a continuing dispute over bargaining rights with the International Brotherhood of Electrical Workers (IBEW). After many years of wrangling, the dispute came before the Ontario Labour Relations Board (OLRB) in 1990. The ruling was still under reserve at the time of bidding.

Naylor had an in-house union, not affiliated with IBEW. Ellis-Don assured Naylor that this would not be a problem.

Naylor bid a price of $5,539,000. Naylor?s bid, submitted through the Toronto Bid Depository, was low and Ellis-Don carried Naylor?s price in its own bid for the prime contract. The next lowest bid for the electrical work was Comstock, an IBEW subcontractor, whose bid was $411,000 higher than Naylor?s.

Ellis-Don was the low prime bidder at $38,135,900. If it had carried Comstock?s electrical bid instead of Naylor?s, it would not have been low bidder overall and would probably have lost the prime contract.

The OLRB decision was released on February 28, 1992. It confirmed Ellis‑Don?s obligation to use only electrical subcontractors affiliated with the IBEW.

In the meantime, the Hospital had incorporated various changes to its project. Despite the OLRB ruling, Ellis-Don asked Naylor to submit a price for the contract changes, and carried Naylor?s price in its bid to the owner. In May 1992, with Naylor still carried in Ellis-Don?s list of subtrades, the Hospital awarded the prime contract to Ellis-Don. GC 10.2 of the prime contract (CCDC-2 1982) provided:

The Contractor agrees to employ those Subcontractors proposed by him in writing and accepted by the Owner at the signing of the Contract.

Ellis-Don indeed offered the subcontract to Naylor but on condition that it align itself with IBEW. Naylor refused. Ellis-Don then offered the work to Guild Electric, an IBEW subcontractor but ineligible under the bid depository rules, for the same amount as had been bid by Naylor. The final subcontract was eventually signed with Guild with a minor price difference.

Naylor sued for breach of contract and unjust enrichment. It claimed that Ellis-Don had used Naylor?s low bid to get the prime contract, then ?shopped? its bid to get the work done at a very favourable price. All of this, argued Naylor, undermined the integrity of the bid depository process and breached the terms of Contract A, as defined by the Supreme Court of Canada in R. v. Ron Engineering & Construction (Eastern) Ltd.

At trial, Justice Langdon found that the award of the prime contract to Ellis-Don did not automatically trigger a subcontract between Ellis‑Don and Naylor for the electrical work. According to traditional rules of contract formation, there was no contract between the parties until Ellis-Don had communicated its acceptance of Naylor?s bid to the subcontractor, and Ellis-Don had never done that.

In any event, said the judge, if any such contract for the electrical work had come into existence, it was frustrated by the OLRB decision which precluded Ellis-Don from contracting with a non-IBEW electrical subcontractor.

The trial judge nevertheless allowed Naylor?s claim for unjust enrichment, namely the cost of preparing the bid and related overhead, and awarded Naylor $14,560. He also assessed the damages he would have awarded Naylor if he had found breach of contract: the amount of its lost profit on the project, which he assessed at $730,286.

Naylor appealed. In the Ontario Court of Appeal, Justice Weiler proceeded in accordance with the analysis set out in Ron Engineering. In exchange for binding itself to an irrevocable bid, she said, Naylor also acquired rights under Contract A. It was not automatically entitled to the award of the subcon-tract for the electrical work (Contract B), but such an award had to be made unless Ellis-Don or the owner had a reasonable objection, as provided by GC 10.3 and GC 10.5 of the standard form contract.

Justice Weiler held that Ellis-Don?s objection to Naylor was not reasonable for two main reasons: (1) Ellis-Don ?shopped? Naylor?s bid; (2) Ellis-Don could have persuaded OLRB to allow the contract with Naylor. In the absence of a reasonable objection, Ellis‑Don had breached the terms of Contract A with Naylor.

Justice Weiler accepted the trial judge?s estimate of Naylor?s loss of profit ($730,286). She then discounted this figure by 50 per cent for job site contingencies, and the resulting figure by a further 50 per cent to account for the contingency that the OLRB would not have allowed the contract to be awarded to Naylor, or that Naylor may have had to enter into a sub-subcontract with another electrical subcontractor with IBEW affiliation. Thus, the Court of Appeal awarded Naylor damages for breach of contract in the amount of $182,500.

Both Naylor and Ellis-Don appealed to the Supreme Court of Canada. In September 2001, 10 years after the bidding process started, the high court finally settled the dispute.

The Court, for the first time, made it clear that the Contract A/Contract B approach, pioneered 20 years ago in Ron Engineering, applies to subcontractor bids just as it does to prime bids. It then addressed five issues: (1) Was a Contract A formed between Ellis-Don and Naylor?; (2) Was Contract A frustrated by the OLRB decision?; (3) If not, did Ellis-Don breach the terms of Contract A?; (4) If so, what are the damages?; (5) In the alternative, is Naylor entitled to recover on the basis of unjust enrichment?

Justice Binnie also noted: ?There lurked in the background to some of Naylor?s submissions in this Court occasional allegations which seemed grounded in tort, including negligent misrepresentation.? However, tort was neither pleaded nor argued in the courts below, so he did not consider it. The message to the industry is ?stay tuned!?

1.?? Was a Contract A formed between Ellis-Don and Naylor?

Naylor contended at trial that Ellis-Don, on winning the prime contract, became automatically obligated to it under the terms of Contract A to enter into the electrical subcontract, i.e., Contract B. Justice Binnie found nothing in the bid documents to give rise to such an obligation. On the contrary, the bid documents clearly contemplated the possible substitution of a subcontractor different from the firm one in the prime bid. GC10.3 and GC 10.5 of the standard contract were incorporated into Contract A, and were plainly inconsistent with Naylor?s theory.

Furthermore, he agreed with Justice Weiler that there could be no Contract B without Ellis-Don communicating to Naylor the acceptance of its subcontract bid.

Justice Binnie pointed out, however, that the prime contractor, under Contract A, had clear contractual obligations to the subtrades it carried in its own bid. The bid documents created Contract A. The terms of this contract were drawn from the bid documents which, in this case, included the provisions of the prime contract and the bid depository rules. Among the terms of Contract A was one which required the successful prime contractor to subcontract to the firms whose bids it had carried unless it had a reasonable objection to one of them.

Therefore, when Ellis-Don chose to carry Naylor?s bid in its bid to the owner, it committed itself to subcontract the electrical work to Naylor in the absence of a reasonable objection. What is reasonable depended on the facts of the case.

2.?? Was Contract A Frustrated by the OLRB Decision?

Ellis-Don argued that, even if it were bound by Contract A, it was nevertheless relieved of any obligation by the supervening event of the OLRB decision which ruled out Naylor.

Frustration occurs when an foreseen situation arises for which the parties made no provision in the contract and performance of the contract, in accordance with its original terms, is impossible.

Justice Binnie found that there was no frustration of the Contract A between Ellis-Don and Naylor. The OLRB ruling was a foreseeable outcome. It recognized and affirmed Ellis-Don?s obligation to the IBEW, it did not create it. Accordingly, when Ellis-Don approached Naylor to do the Hospital work with non‑IBEW workers, and subsequently carried the bid to the owner, it was promising work that it had already bargained away to IBEW.

Ellis-Don was in no better position than someone who sells his house to two successive buyers. A court decision upholding the validity of the first contract of sale would not frustrate the second contract. It would simply lay the basis for a
claim in damages by the second purchaser. Similarly, the OLRB decision merely affirmed that Ellis-Don had a pre-existing obligation to IBEW, and the loss of the contract entitled Naylor to damages.

Furthermore, the parties to Contract A specifically provided their own test to deal with supervening circumstances which might disqualify Naylor, by means of a flexible exit option based on reasonableness. Thus, the legal issue here was not the doctrine of frustration but whether, in light of its conduct under the terms of Contract A, it was reasonable for Ellis-Don to reject Naylor because of its union affiliation.

3.?? Did Ellis-Don Breach the Terms of Contract A?

Justice Binnie had sympathy for the dilemma Ellis-Don was in at the time of bidding. The OLRB decision was pending for about a year. In the meantime, Ellis-Don had either to bid carrying IBEW subcontractors (perhaps unnecessarily) and risk losing major projects, or bid carrying non-IBEW subcontractors (perhaps wrongly) and risk the subsequent wrath of the IBEW and, perhaps, the OLRB.

The problem, said Justice Binnie, was that Ellis-Don tried to solve its dilemma at Naylor?s expense. He did not agree with the Court of Appeal?s optimism that the OLRB ruling could be abated or bypassed: ?The IBEW, having established the correctness of its position at much effort and expense, could be expected to insist on the fruits of victory.?

Ellis-Don chose to carry Naylor instead of its IBEW affiliated rival, Comstock, and thereby assured itself as low bidder of winning the prime contract.

Ellis-Don?s only objection to Naylor was the fact it was not an IBEW subcontractor. In light of Ellis-Don?s conduct, however, this was not a reasonable objection: Ellis-Don assured Naylor that its in‑house union was no problem, and it carried Naylor?s bid in its own bid with full knowledge of the proceedings before the OLRB. It even affirmed its agreement to use Naylor after the OLRB ruling. Ellis-Don signed the prime contract, which named Naylor as the electrical subcontractor, two months after it was fully aware of the OLRB decision.

Naylor, not surprisingly, saw Ellis-Don?s conduct in a very poor light. It believed that its bid was used by Ellis-Don to obtain the prime contract and used again to secure a substitute electrical subcontract at the same price from Guild, contrary to the rules of the Toronto Bid Depository which formed part of Contract A. Justice Binnie, however, decided to dispose of the case on the narrow contractual ground that Ellis-Don could only extricate itself from Contract A by demonstrating that, in all the circumstances, its objection to Naylor was reasonable. This it has failed to do; therefore it was in breach of Contract A.

4.?? What Are the Damages for Breach of Contract A?

Following well accepted principles, Naylor had to be put in as good a position financially as it would have been in had Ellis-Don performed its obligations under Contract A. The normal measure of damages in the case of a wrongful refusal to contract in the building context is the contract price less the cost of executing or completing the work, that is, the loss of profit.

Naylor?s claim for lost profit was $1,769,412. This figure was based on an average mark-up of 12.4 per cent on the contract price, grossed up to an average mark-up of 31.2 per cent on the entire job because of Naylor?s demonstrated capacity to squeeze profit out of contract extras.

The trial judge had concluded that this was overly optimistic, and held Naylor to a more realistic mark-up of 11.2 per cent plus minor adjustments, producing a figure of $730,286. He noted that Guild Electric had suffered a significant financial loss on the job. He also made other adjustments.

The Court of Appeal reduced the trial judge?s estimate by 50 per cent because it felt the trial judge had failed to take into account a number of relevant features of the unexpectedly adverse conditions on the job site. Justice Weiler, having ruled that Ellis-Don erred in refusing to contract with Naylor because the OLRB, if asked, might have allowed a subcontract with Naylor, then reduced Naylor?s damages to $182,500 on the basis that the OLRB might not have done so. She concluded that in that event, Naylor might have had to do some sort of deal with an IBEW subcontractor, which would have further squeezed Naylor?s profit.

Justice Binnie agreed with Justice Weiler that the trial judge had failed to take into account the unexpectedly severe site problems, and accepted the reduction of the loss of profit to $365,143. However, the further reduction of Naylor?s loss of profit to $182,500 for labour relations contingencies was, in his opinion, too speculative and he increased the damage award to $365,143.

In light of the conclusion that Naylor is entitled to recover damages for breach of contract, there was no need to examine the alternative ground of unjust enrichment.

Supreme Court of Canada

McLachlin C.J. and Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel JJ.

September 27, 2001.