Subcontractors Beware - The Owner Owes No Duty to You in Tendering

In the last issue we considered the recent decision of the BC Court of Appeal in Tercon Contractors Ltd. v. British Columbia (“Tercon”), which held that an owner could accept a non-compliant bid because the exclusion/privilege clause was drafted to allow for this possibility.

This was not good news for general contractors as it gives owners greater discretion in deciding which tender to accept.

The Tercon decision is being appealed to the Supreme Court of Canada, so expect more developments on this issue.

But what about the subcontractors – do they have a claim against the owner in this type of situation?

A recent decision from the Supreme Court of Canada answered this question.

FACTS
In Design Services Limited v. Canada, the Public Works department of the federal government of Canada (the “Owner”) awarded the contract for the construction of a building to a non-compliant bidder.

The lowest compliant bidder that should have been awarded the contract, and its subcontractors, sued the Owner.

While the general contractor settled with the Owner, the subcontractors continued with the lawsuit.

ISSUE
Does an owner owe a duty, either in contract law or tort law, to subcontractors in the tender process?

DECISION
At the Federal Court of Canada, which was the first court to hear the case, the Owner conceded that it had breached its duty of fairness in awarding the construction contract to a non-compliant bidder. This is different from the situation in Tercon, where the court found that the owner in that case had not breached the duty of fairness because the exclusion/privilege clause let the owner could accept a non-compliant bid without any consequences. This is most likely the reason why the Owner in this case decided to settle with the general contractor.

However, because the Owner did not receive tender documents directly from the subcontractors, the Federal Court found that there was no privity of contract between the Owner and the subcontractors. This meant that the Owner did not owe the subcontractors a duty in contract. However, the Federal Court did find that the Owner owed a duty of care in tort law to the subcontractors stating:
It is undisputed that, had the contract been awarded to [the compliant bidder], the [subcontractors] would have been paid for their work on the project, including the costs of preparing the bid documents. The professional consultants would have received fees for their services. The subcontractors would have shared in the profits proportionate to the value of their contribution to the enterprise.

This was a new development in the law of tendering and the Owner appealed. The Federal Court of Appeal reversed the decision, finding that the Owner did not owe a duty of care to the subcontractors in the tender process.

The Supreme Court of Canada agreed with the Court of Appeal’s decision. They stated that the subcontractors’ claims were for what is called “pure economic loss”, which means that they did not suffer any property damage. Any damage they suffered was purely financial in nature, i.e. their lost profits. The Supreme Court of Canada has consistently held that claims for pure economic loss will only be recognized in a limited number of situations. While there were factors that indicated a close relationship between the Owner and the subcontractors that would support a duty of care, because the subcontractors could foresee and protect themselves through contract from the possibility of economic loss, their claim was not recognized.

LESSON FOR SUBCONTRACTORS

  • Consider the possibility of a joint venture with the general contractor in tender processes that allow for this.
  • Ensure that you are named in the general contractor’s tender to preserve what minimal rights you may still have against the general contractor.

This article was written by Ian C. Moes, a lawyer who practice in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.