Construction Contract Law
Origins of Canadian Law and Application
Historical - In a Nutshell
a.
Role of the Sovereign
In our day-to-day life, we tend to think of various things as being “ours” - our car, our
shoes, our house, our land. Ownership of things is so ingrained in our being that the idea
that we may not have control over those things that we own is quite foreign. However,
ownership is different from controlling an object or person.
Humans are a species that exist in communities; we do not survive long in a solitary
environment. Certainly, the procreation of our species demanded communities of, at
least, two members. The family structure that resulted led to increasingly larger groups
that lived together until the pressures holding the groups together were overcome by the
need to move apart.
Historically, an individual did not really own certain things. For example, the land which
the group (tribe, village) used was not thought of as being owned by the individual.
Rather, the land was used by the individual or group but was really “owned” by nobody.
For early societies that were made up of migratory hunters, this concept worked since
they never put down roots to the point where they would have protracted disputes about
detailed boundaries. For those societies that were based on cultivation of a crop or herd,
the detail of a boundary would be critical. Each band would declare their area of
influence and it would be off-limits to others. In case of dispute with other bands, the
resolution might take the form of warfare. Within the band, some resolution process
would be used to deal with disputes between members.
This is the essence of sovereignty. 1 The authority that deals with serious matters of
concern to the group is the sovereign, the physical embodiment of the Almighty.
Modern authors23 consider supreme authority within a territory as being indicative of
sovereignty. This supreme authority, in early times, was believed to be derived from God,
in whatever form God took for the population. Thus, the Sovereign was believed to be
anointed by God to take his/her position as head of the entity within the geographic area.
1This overly simplistic view is offered with due apologies to any anthropologist, philosopher, political
scientist or historian reading it.
2 http://www.basiclaw.net/Principles/Popular%20sovereignty.htm
3 Philpott, Dan, "Sovereignty", The Stanford Encyclopedia of Philosophy (Summer 2003 Edition), Edward
N. Zalta (ed.), URL = <http://plato.stanford.edu/archives/sum2003/entries/sovereignty/>.
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Construction Contracts
The idea of Sovereignty is quite different from ownership. The Sovereign may have
owned land, but more important, the Sovereign controlled all aspects of life within that
territory. While the Sovereign might cede possession and certain aspects of control of the
land to an underling, the Sovereign still retained control and, potentially, could seize
control of that land at any time in the future.
b.
Limitations on the Sovereign
What might work in a cultural environment that was based on hunting or farming did not
work as well when society became more sophisticated and manufacturing and trade
developed. When commerce started to flourish, certainty in transactions was important.
As the Sovereign became dependent on a hierarchy of nobility to manage his lands, the
nobility needed certainty in their dealings with each other and the Sovereign. In the
context of our culture, this meant that the English King was required by his nobles to
submit to a standard of behaviour that they could accept. The first written manifestation
of this recognition by the Sovereign of a limitation of his power is the Magna Carta,
negotiated between the nobles and King John in 1215AD.4
Thus, in a written document, a Sovereign could limit his sovereign rights. These written
documents between Sovereigns became known as Treaties. Written documents dealing
with matters within a Sovereign entity, by the Sovereign, are sometimes called
Constitutions. In these cases, typically, these documents deal with a surrender of some
sovereign power.
c.
Surrender or Loss of Sovereign Authority
One way to lose sovereignty is by voluntarily surrendering it by treaty. There are many
examples of such treaties; NATO, the North Atlantic Treaty Organization, was formed by
the North Atlantic Treaty in 19495. Here, a number of nations agree to surrender their
sovereignty with respect to initiating armed conflict in the specific case where another of
the members is attacked.
Another treaty was formed between the United States and Russia regarding the sale of
Alaska6 where the USA purchased the territory of Alaska for $US7.2M.
Another, perhaps more obvious, way to lose sovereignty is by conquest. If a sovereign
power is overwhelmed by armed force, it ceases to retain control over its territory and, by
definition, ceases to be sovereign. The conquering sovereign then becomes supreme.
4http://www.bl.uk/collections/treasures/magna.html
5http://www.nato.int/docu/basictxt/treaty.htm
6http://www.bartleby.com/43/43.html
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d.
Sovereignty and the Law
The concept of sovereignty is crucial to understanding the evolution of the legal system.
Our system of justice is an outgrowth of dissatisfaction with the early British system of
monarchical rule. When the nobles forced John to concede elements of his sovereign
authority and, further, legitimized a mechanism to document this concession, a change
was started that has resulted in today's legal system. However, even today in Canada,
some remnants remain; our judges are still appointed by our sovereign, albeit on the
recommendation of the Prime Minister.
e.
Sovereignty and Canada
The Sovereign of Canada is the Queen, represented in Canada by the Governor General.
All governmental power flows from the Sovereign although our Sovereign has distributed
certain powers to agents through specific measures – the Constitution – and by practice
over the years.
Before our constitution was enacted in 1982, the final authority in Canadian life was
Parliament, which could use the power given to it by the Sovereign to make decisions.
The delineation of that power was contained in the British North America Act, passed by
the British Parliament in 1867. The Constitution changed that by providing a set of
supreme principles and rights that parliament must observe, subject to the purview of the
courts.
Thus, our sovereign has provided a constitution – a deliberate relinquishment of
sovereign powers to the federal parliament, the provincial legislatures and the courts.
f.
Canadian Constitution
The content of much of the Canadian Constitution can be found in the British North
America Act passed by the English parliament in 1867. Over the years, there were
changes to it until 1982 when it was transformed into the Canada Act, passed by the
British parliament on March 29, 1982. 7
In the Canada Act, the English parliament passed a bill, proclaimed by the Queen, which
established in law that the English parliament would no longer be able to pass measures
that could dictate Canadian activity.
2. No Act of the Parliament of the United Kingdom passed after the Constitution Act, 1982 comes
into force shall extend to Canada as part of its law.
With this act, the Queen, as sovereign of England, renounced any authority of the English
Parliament over Canadian affairs; she retained her authority as sovereign of Canada.
Now, the Canadian institutions were the final decision makers with respect to Canadian
7http://www.solon.org/Constitutions/Canada/English/Canada_Act_1982.html
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affairs.
Schedule B to the Canada Act 1982 is the Constitution Act 1982. Part I of the
Constitution Act 1982 is the Canadian Charter of Rights and Freedoms. The Charter is
the first statement of the rights of Canadians that could be enforced in spite of the wishes
of Parliament8
In the Schedule to the Constitution Act 1982 is a list of statutes that are renamed and
incorporated; the first is the Constitution Act 1867, formerly the BNA Act. This act
defines the respective authorities of the federal and provincial legislatures.
The Constitution Act 1867 gives the provinces virtually exclusive authority in matters
respecting civil disputes. Note the following excerpt from the Constitution Act 1867:
Exclusive Powers of Provincial Legislatures.
92. In each Province the Legislature may exclusively make Laws in relation to
Matters coming within the Classes of Subject next hereinafter enumerated; that is
to say,-11. The Incorporation of Companies with Provincial Objects.
13. Property and Civil Rights in the Province.
14. The Administration of Justice in the Province, including the Constitution,
Maintenance, and Organization of Provincial Courts, both of Civil and of Criminal
Jurisdiction, and including Procedure in Civil Matters in those Courts.
15. The Imposition of Punishment by Fine, Penalty, or Imprisonment for enforcing
any Law of the Province made in relation to any Matter coming within any of the
Classes of Subjects enumerated in this Section.
In section 92.13, the reference to Civil Rights means civil matters as opposed to criminal
matters; the term “civil rights” has, in some quarters, come to mean “individual rights”
which are dealt with in the Charter.
The Court System
History of the Court System
The court system in use in Canada is derived from the courts of England. Historically,
there were many separate courts but, for our purposes, two are very important in the
context of our studies, the courts of Law and the courts of Equity.
The courts of law make their judgments primarily on the basis of decisions made by
previous courts and statutes of Parliament while courts of equity make their judgments
based on the judge’s opinion of fairness.
The King’s Bench (or Queen’s Bench – depending on the gender of the monarch) began
as the King, sitting in counsel with his advisors, making decisions on matters brought
8Subject to the exceptions noted in the Act – the “notwithstanding clause” - Section 33
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before him. Initially, the King would be dealing with matters that concerned him, as
monarch. As time passed, the decisions were made by judges in the absence of the King
and in 1178, Henry II ordered that five judges should be available to conduct hearings in
his absence – in effect, a standing court at Westminster. The subject matter of these
hearings began to expand beyond matters dealing strictly with the King and included
disputes between individuals, called Common Pleas. In 1215, the Magna Carta provided
that there should be a Common Bench to which all matters not involving the King should
be referred and that such hearings should be in a fixed place.
In 1280, Edward I formed the Court of King’s Bench to hear petitions for justice instead
of the King hearing them personally.
Thus, the court system was split into the Court of King’s Bench and the Court of
Common Pleas.
The courts of law became known as the King’s Bench or Queen’s Bench, depending on
the gender of the Monarch. The courts of equity were called the Chancery Court. These
courts were merged in 1873 and now all courts can deal with both issues involving law
and equity.
Responsibility for the Court System
The provinces have the sole responsibility for organization of the court system. However,
judges to the Superior, District and County courts are appointed by the Governor
General. Further, the Federal Government is charged with the responsibility to “provide
for the Constitution, Maintenance, and Organization of a General Court of Appeal for
Canada, and for the Establishment of any additional Courts for the better Administration
of the Laws of Canada9.” The “General Court of Appeal” is the Supreme Court of
Canada and the Federal Courts are the “additional Courts” referenced.
Parliament established the Supreme Court to provide for such a final appeal mechanism
but until 1982 the decisions of the Court could be appealed to the Privy Council in Great
Britain.10 This is no longer the case; the Supreme Court is the final authority for all
judicial matters in Canada.
Parliament has established Federal courts to deal with certain non-criminal matters
arising out of Federal legislation, such as taxation.
Structure of the Courts in Alberta
In Alberta, we have three different levels of courts; Provincial Court, Court of Queen's
Bench and the Court of Appeal. Further, Provincial Court is divided into Criminal, Civil,
Family, Traffic and Youth courts. Each court can hear cases and make decisions with
respect to the area of law assigned to it. For example, a judge in Provincial Court – Civil
can deal with certain types of civil disputes but cannot deal with a matter related to
9The Constitution Act 1867, s.101
10http://www.solon.org/Constitutions/Canada/English/Statutes/S-26-RSC-1985.html
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guardianship of a child. The area of law with which a court can deal is called its
“Jurisdiction”. The Provincial Legislature established each court and defined its operation
through statute. 111213
The following table illustrates the respective jurisdiction of each court.
General Purpose14
Name
Provincial Court Civil
Civil Court hears all civil claims, subject to Provincial
Statutory restrictions. The court is limited to claims of less
than $25,000 subject to some restrictions.
Criminal
The Criminal trial court handles first appearances, entry of
pleas, bail hearings, preliminary inquiries and the trials
and sentencing of summary convictions and certain
indictable offences
Family
The Family Court hears maintenance applications
regarding spousal and child maintenance proceedings and
custody access claims, when divorce is not an issue. In
addition, this court hears all Child Welfare and Private
Guardianship applications
Traffic
Traffic Court deals with offences (commonly referred to
as provincial offences) under many provincial statutes,
municipal by-laws and a few federal statutes. Traffic
Court does not deal with charges under most federal
statutes, including the Criminal Code.
Youth
The Youth Court hears all proceedings under the
Provincial and Federal Youth Criminal Justice Act
applying to youth between the age of 12-17 years
inclusive.
11http://www.canlii.org/ab/laws/sta/p-31/20040802/whole.html Provincial Court Act
12Court of Queen's Bench Act http://www.canlii.org/ab/laws/sta/c-31/20040802/whole.html
13Court of Appeal Act http://www.canlii.org/ab/laws/sta/c-30/20040802/whole.html
14This information was gathered from the Alberta Courts website http://www.albertacourts.ab.ca/
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General Purpose14
Name
Court of
Queen's Bench
The Court of Queen's Bench is the superior trial court for
the province, hearing trials in civil and criminal matters.
Court of Appeal
The Court of Appeal hears appeals from the Court of
Queen's Bench, the Provincial Court and administrative
tribunals.
Items for Discussion
Decision-making By Courts
Roots in English Law - Common Law
Development of the Courts
Jurisdiction & Stare Decisis
BNA Act and The Court System
Current Issues
The Constitution
Court System In Alberta - Jurisdiction of the Courts
Stare Decisis
Civil Disputes - The Court Process
Provincial Court
Court of Queen's Bench
The Appeal Process
Lawyers
Governance & Rules
Types of Law
Litigators and Solicitors - Differences
Using your lawyer effectively
References
Supplemental Materials – Sovereignty
http://globalization.icaap.org/content/v4.1/odonnell.html
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Diagram of Court System
Provincial Court Act
Stare Decisis (II) – South Side Woodwork v R. C. Contracting Ltd.
Civil Claim Example (including dispute note)
Statement of Claim Example (including Defence and Counterclaim)
Excerpt from Rules of Court
Excerpt from Law Society Code of Conduct
Contracts
The material contained here is based largely on Fridman’s The Law of Contract.
A contract is an agreement between parties for the provision of one thing for another. The
thing that is provided may be intangible but it must be able to be appreciated by the other
party.
Fundamental elements of a contract are an offer, an acceptance and consideration. A
contract is characterized by a mutual desire to create an agreement and the ability of each
party to conclude such an agreement. A contract may be invalidated by one of the parties
being subjected to duress, misrepresentation by one party or by the contract involving an
illegal act.
Preliminary Matters to the Contract
Parties & Persons
The people that enter into a contract with each other are referred to as the “parties” to the
contract. The parties can be any person that is recognized in law; a human being is an
example of one such person. Others include business corporations, condominium
corporations, municipal corporations or other entities established by legislation. Some
other organizations have been accepted as persons for the purpose of contract even
though their existence is somewhat nebulous. Examples of these are trade unions,
aboriginal bands the Crown, and unincorporated associations.
Capacity
The parties must be able, in law, to enter into a contract. The law provides that certain
non-human entities are legal persons and can enter into contracts. The law also has found
that some persons cannot enter into contracts; these include:

Minors (with some exceptions – necessaries, service, beneficial contracts),

Insane Persons/Persons having a disordered mind,

Drunkards,
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Intention to be Bound
When a contract is formed, it is essential that both parties have an intention to be bound.
This is generally achieved by an offer by one party to the other and the acceptance by the
other party. Further, this agreement is manifest by some form of open agreement –
perhaps written – that clearly shows the agreement. When we speak of a “handshake”
deal, we are talking about the shaking of hands that would accompany the completion of
the recitation of the terms of the agreement at the end of negotiation.
Formation of the Contract
Offer and Acceptance
Offer
An “offer” means the signification by one person to another of his willingness to enter
into a contract with him on certain terms.15 The offer must be made with the intention of
forming an enforceable relationship with the other person.
It may seem that the meaning of an offer is pretty straightforward, however, consider the
following examples:
a.
A company places an advertisement in the newspaper that says, “We guarantee
that anyone using our product for the stipulated time and in the stipulated manner
will not get the flu. If a person gets the flu under these circumstances, we will pay
them £100.” Was there an enforceable contract here?
b.
A drug store displays goods on its shelves. Some of the goods, by law, can only
be sold under the supervision of a registered pharmacist. The pharmacist’s
workstation was near the cashier and he could supervise and approve any
purchase of a regulated product. A shopper picks up one of these restricted
products, puts it in a shopping bag and takes it to the cashier. There was a
question as to whether the sale took place under the supervision of the pharmacist.
The result hinged on whether the contract was formed when the customer put the
product in the shopping bag or when the customer passed through the cashier’s
wicket. When was the contract formed?
c.
A shopper sees some displayed articles and changes the price tag on one of them.
She takes the articles to the checkout, where the cashier rings the goods through.
The shopper is caught by the store security and subsequently charged with theft.
Was there a theft here or did the store accept the sale at the altered price by
ringing out the products?
The above examples are all based on actual cases.
15
Fridman, The Law of Contract, p.28. s. 2(a).
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In the first case, the court ruled that the company had made an offer to the world at large
and it was open to acceptance by anyone who could qualify.16
In the second case, the court examined whether displaying the goods on the shelf
constituted an “offer” in the contractual sense. If that were the case, then when the
customer picked the items from the shelf could be considered “acceptance” of the offer.
The court found that the display of the items was an “invitation to treat” and not an offer.
The offer arose when the customer took the goods to the cashier and “offered to purchase
them for the stated price. The acceptance took place when the cashier rang up the
purchase17.
In the third case, the court determined that the charge of theft could only be upheld if
there was no legal sale of goods. Citing Boots, above, the court determined that the
customer presented the goods to the cashier, albeit with the changed price tag, thus
making an offer to purchase. The cashier, on behalf of the company, accepted the offer
when the sale was recorded.
Exercise:
1.
An advertisement appears in the newspaper saying: “Lost Dog. I will pay
$100 to the first person who finds my poodle Fifi and returns her to me. Bob
Schuett”.
2.
An advertisement appears in the newspaper saying: “1990 VW Jetta.
200,000KM. $2,000.
Are these offers, in the contractual sense, or invitations to treat? Explain.
These cases and others have shown that an offer, to be considered the first part of the
contractual bargaining process, must be made in contemplation of forming part of a
contract. Generally, a newspaper ad is not such an offer. The exception is when the
wording of the ad is considered the first part of a unilateral contract.
Invitations to Treat
An invitation to treat is a statement that a person has, for example, goods for sale and is
willing to accept offers. Advertisements, invitations to tender, auctions and a general
display of goods are typical examples of invitations to treat and are considered to be
designed to elicit offers from other persons.
Knowledge of Offer
Is it necessary for a person to have knowledge of an offer to take advantage of it?
Apparently so, according to courts in the U.K. and Australia18. It is not, however,
16
Carlill v. Carbolic Smoke Ball Co. [1893] 1 Q.B. 256 (C.A.)
17
Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. [1953] 1 ALL E.R.
482 (C.A.)
18
Williams v. Carwardine (1833), 5 C&P 566.
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necessary for the offeree to hear of the offer directly from the offeror; he can hear of it
indirectly through parties who may be considered his agents.
Duration of Offers
An offer lapses if the time limit specified in the offer is reached before acceptance
although the time period for acceptance can be extended by the offeror. Further, an offer
will lapse after a reasonable period of time.
Revocation of Offers
An offer can be revoked by the offeror at any time prior to acceptance and it cannot be
accepted thereafter.
Tenders
The law regarding tenders has changed somewhat since 1981 and will be dealt with after
the discussion of acceptance, below.
Acceptance
Acceptance refers to the indication of the offeree that he agrees to enter into a contract on
the terms included in the offer. Acceptance is fundamental to the formation of a contract.
Circumstances under which an acceptance may be invalid include acceptance after the
deadline stipulated in the offer or acceptance after the offer has been revoked.
Must Accept Terms Offered
In order for a contract to be formed, the acceptance must clearly accept the terms that
were offered. If the acceptance attempts to vary the offered terms, the acceptance is
invalid and no contract is formed. If the offer contained instructions regarding how the
acceptance was to be communicated – for example, “acceptance must be in writing” –
then, if the acceptance is purported to be delivered by phone, it would probably be
invalid.
Battle of the Forms
This need for the acceptance to match the offer can lead to a situation where a “battle of
the forms” arises19.
Exercise:
1.
19
A lumber supplier issues a quotation to a contractor and the quotation is
subject to terms on the back of the quotation regarding payment, interest on
overdue accounts and responsibility for delivery. The client issues a Purchase
Order with its own set of conditions including payment and holdback. Is a
contract formed?
Fridman, p.63
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2.
A contractor and supplier talk on the phone about doing work on a project. In
general terms they discuss the scope of work and the price ($25,000) but there
is no agreement formed. After they get off the phone, they each send the other
faxes as follows:
a. The contractor states that he wants the supplier to supply the goods for
$25,000.
b. The supplier states that he wants to supply the goods for $25,000.
The faxes cross each other. Is there a contract formed?
In the first case, the existence of a contract will be determined by what happens next. At
the moment of the receipt of the Purchase Order, there is no contract but if the supplier
ships product, he will be found to have accepted the contract on the terms in the Purchase
Order.
In the second case, there is no contract since neither party accepted the other’s offer.
Subject To
If an offer is sent and acceptance given but the acceptance is “subject to” some other
event, there is no contract. For example, if the acceptance states that it is subject to the
review of the “boss”, there is no contract. Even if there is a direction to proceed with the
work, as is done in some “letters of intent”, there is no contract.
Letters of Intent
The so-called letter of intent is a dangerous document.
Exercise:
An owner has received a quotation based on the use of a standard CCDC form 2
Stipulated Price Contract from a contractor for the construction of a building.
Unfortunately, construction must start within 10 days for the owner to retain his
development permit and the bank that is funding the project will not have approval in
place for 30 days. In an attempt to secure his position, the owner writes the contractor a
letter stating:
It is my intention to issue the construction contract to you within 30 days but in
any case, immediately after the funding approval from my bank… I would
appreciate it if you can start mobilization and site work by the end of this week.
Is there a contract in place? If so what are its terms?
Is this situation altered if the owner added the following language to the letter?
I hereby agree to pay for any and all work undertaken by you prior to the issuance
of the contract on a cost-plus basis and even if the contract is never issued.
What are the terms of the contract that exists?
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Communication of Acceptance
When an offer is made which includes wording that states that the “offeree must signify
his acceptance of the offer by mailing his acceptance within 30 days” then a contract is
formed at the time the mailing of the acceptance occurs. But what happens if the offeror
never gets the letter. The courts have held that the contract still exists because the
mechanism for acceptance was stipulated by the offeror and it was followed. In the case
where the offer was sent by mail, the courts have held that it was implied that the
acceptance could be sent by mail and the contract was formed when the acceptance was
mailed. This is sometimes called the post office rule.
In other words, although common sense may say that acceptance must be communicated,
there are circumstances where a contract may be formed even if such acceptance is not
communicated.
If no such communication is required then the contract is formed in the offeree’s
jurisdiction. If the terms of the offer require communication of acceptance and if the
offeror is in Ontario and the offeree is in Quebec and the offeree calls the offeror on the
phone to accept the offer, the courts have held that the contract was made in Ontario
Silence cannot be construed as acceptance of an offer.
Once an offer has been accepted, a binding contract has been formed and no revocation
of the offer is possible.
Unilateral Contracts
A unilateral contract is formed when, by performance of some act, a party accepts an
offer. The example of finding someone’s dog, above, is an illustration of an agreement
that could be found to be a unilateral contract. The classic case is Carbolic Soap, above.
Counteroffer
If, in response to an offer, the offeree responds with a counteroffer, in most
circumstances the original offer is considered dead and cannot be subsequently accepted.
Tenders
For an excellent discussion of tender law, refer to the book Bidding and Tendering What
Is The Law?20
Historically
The law prior to 1981 was that a tender was an offer. This is still the law in the U.S., the
U.K. and other common law jurisdictions. When a tender was submitted, it was
considered capable of acceptance unless withdrawn, until it expired or another tender was
accepted. If a contractor found an error in his tender before acceptance, he could
withdraw the tender without concern about breach of his obligations. The law was that an
20
Sandori, Paul and Pigott, William M., Bidding and Tendering What Is The Law? Butterworth
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owner could not accept a tender that he knew contained an error and was not the tender
that the contractor intended to make.
There were a number of cases that dealt with tender law. The 1971 case, McMaster
University v. Wilchar Construction,21 dealt with an owner attempting to take advantage
of a contractor’s error and obtain a windfall. The basis of finding for the contractor was
that there was no true consensus formed between the parties since the terms of agreement
differed. In 1972, the Ontario Court of Appeal in Belle River22 found that an owner could
not accept a tender that it knew was mistaken as to a fundamental term, which, of course
included price. This was the law until 1981.
Ron Engineering
In 1981, the Supreme Court of Canada in Ron Engineering23 decided to consider the
question of tender law somewhat differently. The court determined that when a tender is
submitted, there are two potential contracts, Contract A and Contract B.
Contract A if formed when, in response to an invitation, the contractor submits a tender.
The offer is the client’s request for the tender and the potential consideration is the
commitment to review the submitted tender. The acceptance of this offer is indicated by
the contractor’s submission of the tender. Thus, the process of tendering forms a contract
which has as its terms a commitment to review the tender and an agreement to refrain
from withdrawing the bid.
Contract B is formed when the client accepts one of the tenders submitted by the
contractors.
The Contract A/B analysis has led to considerable change in Canadian tendering
practices. In case of a breach of Contract A, the courts now award damages that can be
considerable. If the contractor is found in breach, typically, the award will be the
difference between the tender submitted and the next higher. If the owner is found in
breach, the damages are, typically, the profit the contractor would have earned had he
completed the project.
Subsequently, in Martell24, the Supreme Court found that a tendering authority had an
obligation to deal fairly with tenderers; no damages were awarded in Martell, since it was
shown that the error committed by the owner did not cost the plaintiff any damages.
Until this point, the Supreme Court had refrained from reviewing its treatment of the
Contract A – Contract B theory. In 1999, the Court, in MJB25, reviewed some of this
theory while awarding a contractor agreed damages since the owner had been in breach
of contract A when it awarded a contract to a non-compliant tenderer. In the judgment,
21
McMaster University v. Wilchar Construction et al, [1971] 3 O.R. 801-820 Ont. HCJ
22
Belle River Community Arena Inc. v. W.J.C. Kaufmann Co. Ltd. et al. 20 O.R. (2d) 447
23
Ontario v. Ron Engineering & Construction (Eastern) Ltd. [1981] 1 S.C.R. 111
24
Martel Building Ltd. v. Canada [2000] 2 S.C.R. 860
25
M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. [1999] 1 S.C.R. 619
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the court noted that “The submission of a tender in response to an invitation to tender
may give rise to contractual obligations (Contract A)…” (emphasis added). This
seemed to indicate that the court would consider argument that Contract A would not
arise in all circumstances. This has led to a number of cases, including Derby Holdings26,
which was upheld by the Saskatchewan Court of Appeal, where the court found that a
contractor could use a flaw in his tender to escape from the consequences of an
substantial error in his bid calculations. This seems to say that an error in the tender
renders the tender invalid and the invalid tender is non-responsive and cannot be used as
the basis for formation of Contract A. If this is the case, we may be returning to the legal
situation prior to 1981.
Consideration
Consider the two situations:
1.
I promise to give you the Jetta.
2.
I promise to give you the Jetta if you lend me your pen
The first statement is a “gratuitous” promise; it does not involve any “consideration” or
benefit to the promisor. The second statement yields a benefit to the promisor and, thus,
can be the foundation of a contract. A contract involves an exchange between parties and
the concept of consideration is fundamental. The definition from Currie27 is:
Some right, interest, profit or benefit accruing to the one party or some
forebearance, detriment, loss, or responsibility, given, suffered, or undertaken by
the other.
Note that there is no requirement that the benefits be commensurate with each other. As
long as both parties, pursuant to an offer and acceptance, receive some benefit, a contract
will exist. Note that an agreement to refrain from pursuing a lawsuit is adequate
consideration to make an agreement enforceable.
Existing Obligation and Past Performance as Consideration
The Ontario Court of Appeal considered the situation when a contractor asked for more
money to fulfill his existing contract. In Gilbert Steel28 the supplier, having some
difficulty with escalating prices, asked the contractor for additional monies. The
contractor, fearing a loss of supply of steel, agreed. The contractor subsequently refused
to pay and the court found against the supplier since the contractor had not received any
consideration for the increased price that he paid.
Past performance cannot be consideration for an agreement.
26
Derby Holdings Ltd. v. Wright Construction Western Inc. [2002] S.J. No. 367
27
Currie v. Misa (1875), L.R. 10 Exch. 153; affirmed (1876), 1 App. Cas. 554 (H.L.)
28
Gilbert Steel Ltd. v. University Construction Ltd. (1976), 12 O.R. (2d) 19
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Payment of Existing Debt
Considering the situation in Gilbert, what would happen in the situation where a debtor
offers his creditor a lesser sum as full satisfaction for the debt. The case law would seem
to prevent that; in fact that is exactly the case. In Alberta the Judicature Act corrects this
problem and permits a settlement for a debt to exist.
Illegality of Consideration
In order for the contract to be enforceable, the consideration must be legal. For example,
getting 6 oz of grass as payment for a service would probably not be enforceable in court.
Exceptions to Requirement for Consideration
Effect of Seal
People often wonder about the effect of a corporate seal. A seal on an agreement negates
the requirement for consideration.
Statutory Intervention
In some circumstances, governments have intervened to deal with a situation that appears
unjust. The settlement of existing debts mentioned above is an example.
Promissory Estoppel
Estoppel refers to a situation where one is “estopped” or prevented from doing or taking
something. Promissory Estoppel refers to a situation where a person is prevented from
taking an action because of a prior promise or commitment. This is (1) a gross
oversimplification and (2) new legal doctrine that is still developing.
The essential features of promissory estoppel are:
1.
There must have been an existing legal relationship between the parties at the
time the statement on which the estoppel is founded was made.
2.
There must be a clear promise or representation made by the party against
whom the estoppel is raised, establishing his intent to be bound by what he
has said.
3.
There must have been reliance, by the party raising the estoppel, upon the
statement or conduct of the party against whom the estoppel is raised.
4.
The party to whom the representation was made must have acted on it to his
detriment.
5.
The promisee must have acted equitably.
In High Trees29, Denning J., in a decision described by Fridman as the turning point in
the law of equitable estoppel, decided that a landlord could not collect back rent at a
29
Central London Property Trust v High Trees House Ltd [1947] KB 130
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higher rate than had been charged since the tenant had relied on forebearance for a
number of years.
Capacity
Since contracts involve the consent of the parties to the contract, it is obvious that such
consent can only be given by those who have the power to give consent.
Excluded are persons who have mental disabilities, are too young to understand the
nature of their agreement, are prevented by public policy or are certain types of artificial
persons.
Common law prohibits a person from contracting with himself; the need for such
transactions – particularly in land transactions – has resulted in statutory provisions to
provide this capacity.
Incapacities of Natural Persons
Minors
With a few exceptions, minors are prohibited from entering into contracts. The
exceptions include a contract for necessaries where a minor contracts for food, clothing
and housing. Contracts of this nature have been shown to be enforceable.
Insane Persons
If a person is lacking in mental capacity as determined by a court, then any contract
entered into by that person is void. If, however, such a person enters into a contract
without a judicial determination having been found, then the contract is voidable at the
option of the person or his executors.
Drunkards
A person who was drunk at the time of entering into a contract to the point where his
level of intoxication prevented him from knowing was he was doing may void the
contract when he becomes sober. To effect this, he must avoid the transaction promptly.
Aged and Handicapped
There may be circumstances where a contract with an aged or handicapped person can be
voided but it appears that such a circumstance would result from an inequity of
bargaining power rather than some special consideration of older people.
Artificial Persons
The Crown
The Crown, both federal and provincial, has the right to enter into contracts. However, in
common law, there is no right of an individual to sue the crown. This has been remedied
by statutes which provide for the right of individuals to sue the crown for breach of
contract.
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Business Corporations
Corporations have the power to contract in the same manner as natural persons to the
limits under which they are formed. If a corporation goes beyond the powers given to
them by statute, their actions are void for want of capacity. While at one time a
corporation could only contract under seal, now, in Alberta, corporations can contract
under seal, without a seal in writing or orally.
Municipal Corporations
In a fashion similar to a business corporation, a municipal corporation may only contract
within the limitations imposed by its enabling legislation.
Unincorporated Associations
Many groups of persons exist and carry on activities without being incorporated. Some of
these organizations fall within legislation such at the Societies Act. However, if such a
group does not fall within such a statute, they have no legal identity and any contract that
they enter into will be personally binding on their offices.
Trade Unions
In common law, trade unions have no legal identity and, while they may act like another
corporate entity, they cannot make contracts in their own name. However, statutes
created to enable collective bargaining have endowed trade unions with some sort of
quasi-corporate status to allow them to enter into collective agreements. However, there
remains a question whether a trade union can enter into contracts and be sued on matters
unrelated to the collective bargaining process.
Privity
The concept of privity deal with the idea of being privy to a contract. If a contract is
between party A and party B, party C is not able to seek benefit from that contract even
though he may have a relationship with party B. An example would be if I wanted to buy
my daughter a car. I could buy the car and give it to her but if the car was defective, in
common law she would not be able to sue the vendor for the defect unless the warranty
made some provision to transfer that benefit to her.
Third parties are strangers to the contract and cannot seek the benefit of it.
Agency
An exception to the concept of privity is the theory of agency. This occurs when a third
party contracts as the “agent” of a person. When a person acts as an agent for another
person in the negotiation and execution of a contract, this latter person will get the benefit
and assume the liability of such a contract. This will only happen when the agent is acting
within the scope of his authority
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Contracts In Writing
The idea that all contracts must be in writing is false. However, certain contracts must be
in writing or they are unenforceable. Such contracts include contracts of guarantee, for
the sale of land or any interest in land and contracts that will not be performed within one
year
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Contract Terms
In simple terms, the terms of a contract are generally those items between the first
heading and the signature lines. The terms are the “various statements, promises,
stipulations, etc., grouped together30” in the contract. Terms of a contract can be express
or implied. Terms can be of a nature to limit or exclude liability.
Puffs, Representation and Terms
In the process of negotiating a contract, words may be spoken that do not end up in the
contract. For example, a car dealer may say that “I am the most reputable dealer in
Alberta” and subsequently conclude a contract. Is that statement a term of the contract
and is it a breach when it is subsequently learned that the deal was the biggest crook
south of Red Deer? What about the situation where a car dealer says that each used car
was inspected by a licensed mechanic and found mechanically sound and subsequently
the purchaser found that no such inspection took place? What about if the inspection took
place but a problem was missed?
The first situation has been described as “puff” in Carbolic Smoke Ball31, or what we
more commonly would describe as sales talk. Statements of a general nature, as
described, cannot be construed as terms of a contract. Neither can the second situation
unless the statements that were made ended up being incorporated in the written, or oral,
terms of the contract. Rather, these statements are “representations” that led to the
formation of the contract. Inaccurate representations can result in a finding of a void or
voidable contract.
Express Terms
Generally, in the case of a written contract, the express terms are fairly simple to
determine – they are in the document. Fridman defines an express term is one which has
been specifically mentioned, and agreed upon by the parties, and its form, character and
content expressed in the oral or written exchanges between them at the time the contract
was made.32 In the courts, the words “within the four corners” of the contract are used to
refer to the four corners of the sheets of paper on which the contract is written. The court
will consider anything written therein and nothing else. In the case of an oral contract, it
is not so simple to determine the express terms if the parties don’t have identical
recollections of the events or there is not some third-party observer to corroborate the
agreement.
Implied Terms
Sometimes, there are terms to a contract that are not expressed by the parties but are
implied by the circumstances or the pattern of dealing that had been established. For
30
Robert Duxbury, Contract Law 6th Ed., Sweet & Maxwell, p. 35.
31
Carlill v. Carbollic Smoke Ball Company
32
Fridman, The Law of Contracts, p. 473.
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example, if two companies had been dealing with each other for a number of years and
had established a pattern of billing and payment that showed that each company paid the
other 30 days after presentation of an invoice, a court would probably construe that the
payment period on a new contract was 30 days. Terms may be implied into a contract as
long as the implied terms are consistent with the express terms and the general tenor of
the contract.
Representations
A representation is a statement, spoken or written, at the time the contract was being
finalized. A representation may end up being a term but not necessarily. The difference
between a statement that ends up as a term and a representation has to do with the intent
of the person making the statement. If the intent is that the statement will be enforceable
by the contract, then the statement is a term. Otherwise, the statement is considered to be
made to induce the formation of the contract. An example might be, “On all our past
projects, all deficiencies were completed within 90 days of final completion.” Here, the
speaker was making a statement about his past work performance; this could be either a
“puff” or a representation depending on the context in which it was offered. If he added:
“We will do the same on your project” then this would certainly be a representation
unless the statement ended up in the contract. Then it would be a term.
Certainty of Terms
The terms of an agreement must be clear and unequivocal. The courts will give the literal
meaning to the words in the agreement and will not look beyond them. In the case of a
oral agreement, more latitude is given to the type of evidence that is considered. For
example, if a person offers to sell an object to 2 different people at a certain price and one
person accepts the offer and there is, later, a question as to whether the condition of the
object when it was sold was a term of the sale, the evidence of the other potential
purchaser might be allowed by the court.
Parol Evidence Rule
As a rule, if a contract is in writing, no oral (Parol) evidence is permitted to clarify the
intentions of the parties at the time of contracting. The written agreement is deemed to be
the entire agreement unless it says otherwise. Some contracts include specific wording to
this effect, so as to eliminate any possible misunderstanding. If there is a question of the
meaning of a contract – for example an ambiguity – the court will determine the meaning
by taking a literal interpretation of the words in the agreement unless such an
interpretation would lead to uncertainty, an absurdity or an injustice and the text was
unambiguous and grammatically correct33. If there still remains an ambiguity, it will be
resolved against the author of the agreement. This is a generalization and should not be
relied upon strictly but describes the way courts will probably deal with this type of
situation.
33
Fridman, p. 491
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Contract Avoidance and Rescission
When is a contract not a contract? When can a contract be reversed? These are two
common questions posed to lawyers by clients – generally when the client finds
himself/herself in a bad deal.
Misrepresentation
One of the most common situations where one wants out of a contract is the situation
when a party feels that they have been misled. The remedy that is offered to the
contracting party depends on the nature of the misrepresentation.
For example, a vendor, Joe, wants to sell his used car to a purchaser, Harry. He shows the
car, which has 110,000Km on the odometer, to Harry. Joe tells Harry that he wasn’t the
original owner but the mileage when he (Joe) bought it was 40,000km and the previous
owner had been an old lady who used it to go to church every week. Harry buys the car.
After a month he takes it to the original car dealer for an oil change. While there the
mechanic asks about Alice. “Who is Alice?” says Harry. “Alice is the cab driver who
used to own this car before some guy named Joe bought it.” said the mechanic.
Subsequently, Harry found out, through checking the dealer’s records, that Alice put
200,000km on the car before selling it. Apparently, Alice used to do a lot of her own
repairs and had replaced the speedometer at one time. Alice had always kept her cars
spotless. What can Harry do?
Since the mileage on the car was not a term of the contract, there was no term of the
contract that was violated. The mileage on the car was important to Harry when he
bought the car and the statement regarding mileage was made with the intention to induce
the sale of the vehicle. Thus, there was a representation; however, the representation was
false.
There are three kinds of misrepresentation: innocent misrepresentation, negligent
misrepresentation and fraudulent misrepresentation.
Innocent Misrepresentation
In the above example, if Joe had received his information from the old lady, Alice, who
looked the part, and accepted the information at face value, there was no intent to
misrepresent the facts. Further, Joe had no particular obligation to search out the facts
about the mileage. This is an innocent misrepresentation and occurs when the person
making the representation has reasonable grounds for believing the truth of the
information that he is imparting.
Negligent Misrepresentation
Before the sale was finalized, Harry asked Joe to verify the mileage on the car by
checking again on the prior owner because Harry thought the stated mileage was way too
low. Harry said that if the mileage checked out he would proceed with the sale. Joe
thought Harry was being foolish and didn’t bother to do any checking even though he
knew that the car had always been repaired at the dealer. Joe simply looked at the wear
and tear on the interior, which seemed consistent with a low mileage car. Joe reported to
Harry that he had checked and the mileage was correct.
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Here, we have negligent misrepresentation. Joe undertook to find out some information
for Harry and, by virtue of that, entered into a “special relationship” with Harry. By
failing to use reasonable efforts to find out the information, Joe was negligent and, by
making the statement confirming the mileage without checking, Joe made a negligent
misrepresentation.
Fraudulent Misrepresentation
After the sale was complete, Harry did some more checking and found out that Joe and
Alice were running an ongoing scam where Alice bought old taxis, cleaned them up,
replaced their odometers and sold them through Joe.
This is a case of fraudulent misrepresentation since Joe, knowingly, passed on false
information that was relied on by Harry when he purchased the car.
“A fraudulent misrepresentation consists of a representation of fact made without any
belief in its truth, with the intent that the person to whom it is made shall act upon it and
actually causing that person to act upon it.”34 Note that there are specific requirements to
show fraudulent misrepresentation.

There must be a positive misstatement of fact. Thus, a statement of opinion
cannot lead to fraudulent misrepresentation. Similarly, the courts deem that
everyone knows the law so no fraudulent misrepresentation can be found where a
representation as to the law occurs.

There can be no belief in the information being represented. “The misstatement
must be made dishonestly or recklessly, with lack of belief in its truth.”35 Thus, an
honest but mistaken statement cannot be considered fraudulent.

There must be intent that the person hearing the representation should act and the
information being imparted was important to the decision to act.

The person hearing the representation must act.
Remedies For Misrepresentation
The contractual remedies pertaining to each type of misrepresentation are:

Innocent misrepresentation: Here the victim may rescind the contract – it will be
found never to have existed and the parties will be restored to their original
situation. The victim may be able to get some indemnity and will restore any
benefits received by the contract. Note that damages cannot be claimed for a
wholly innocent misrepresentation.

Negligent misrepresentation: Here a victim may rescind the contract or seek
damages resulting from the misrepresentation.
34
Fridman, p. 309. This is quoted from Roussel v. Saunders (1990), 85 Nfld. & P.E.I.R. 228 at 238. This
section relies heavily on the material in Fridman pp. 309-327.
35
Fridman, p. 313.
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
Fraudulent Misrepresentation: A contract induced by fraud is voidable at the
election of the victim. Damages may be awarded to the innocent party and can
include all losses flowing directly from the avoided transaction. Rescission may
be granted but this remedy is discretionary.
Bars to Rescission
As was noted above, rescission attempts to restore the parties to the situation existing
prior to the formation of the contract. Ideally, it would appear as if the contract never
existed. However, there are certain events which prevent rescission.
Affirmation of Contract:
A contract is affirmed when an innocent party, with the full knowledge of the
misrepresentation, specifically affirms the contract or continues with the performance of
the contact for a period which would amount to affirmation of the contract.
Impossibility
If it is impossible to restore the parties to their original status, there is no rescission. For
example, if a mine was sold and worked for a considerable period, rescission would not
be possible since the contents of the mine would have been substantially altered.
Third Party Involvement
In a case where a 3rd party has acquired rights, for value, it will be impossible to rescind
the original contract.
Mistake
Consider the situation where Pete buys a house located in Edmonton from Fred as an
investment. Both parties proceed on the transaction and conclude the contract at 10:00am
Friday morning. However, unknown to both parties, the house burned down Thursday
night. Here both parties to the contact were mistaken. Is it just that such a contract would
remain in effect.
Fundamental to a contract is the parties agreeing with respect to the terms and conditions.
There must be consensus ad idem.
In common law, only an error, which is fundamental – going to the root of the contract, is
sufficient to determine that a contract is void. A mistake that affected the intention to
contract rather than the motivation for contracting would generate relief. The approach
taken in equity is somewhat different and would permit relief for the latter type of
mistake by permitting the contract to be voidable.
The law regarding mistake is somewhat complex and is beyond the scope of this course.
Discharge of Contracts
A contract can be discharged by its performance. However, a contract can be discharged
by frustration, breach or by agreement.
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Performance
Strictness
The parties to a contract are obliged to perform the obligations in the contract in the
express and implied terms therein. The duty to perform must be carried out precisely and
exactly. Anything less may be a breach of contract and prevent the performing party from
receiving the benefit (eg: payment) from the other party.
An example: a seaman contracted to work for a voyage for a fixed price. He died part
way through and his wife was unable to recover any portion for the portion of the voyage
that he worked.
This is, obviously, very onerous. There is some relief available based on certain
exceptions.
Severability
If a contract can be broken into “pieces” with each piece being able to be separately
performed, compensation may be awarded for the work done.
Substantial Performance
The doctrine of substantial performance has arisen where a contract has been completed
except for a portion of work, the omission of which would not be a serious breach.
Acceptance of Partial Performance
A party to a contract may elect to accept partial performance. For example, if the
construction of a home was completed except for some of the landscaping, the owner
might accept the contract, as performed with some credit for the unfinished work. The
other party must have a real choice with regard to acceptance of part performance; if the
contractor were to adopt a take it or leave it attitude, the courts would probably rule that
this constituted abandonment of the contract and award damages.
Breach
Performance of a contract may be prevented by the breach of the other party. For
example, if Joe was required to move equipment across a river over a bridge provided by
Fred and Fred did not provide the bridge, Fred’s breach would prevent performance of
the contract by Joe.
Frustration
Performance of a contract can be prevented by events occurring beyond the control of all
parties. For example, if Joe was required to move equipment across a river by barge but
the river dried up due to unseasonable weather, the contract would be frustrated.
Tender of Performance
If one party to a contract offers to perform its obligations but is rejected by the other
party, this may suffice to constitute performance under the contract. The rejection must
be unjustifiable. For example, if the contract called for the delivery of fuel oil to a house
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within the last 2 weeks of the month and the fuel was delivered on the last day of the
month but was refused, the supplier would probably be successful in claiming damages.
If, however, the supplier tried to deliver at 11:59pm on the last day, the court might deny
damages since the delivery was not attempted at a reasonable time.
Breach of Contract
Non-performance of any term of a contract constitutes breach however, the consequences
of the breach depends on its nature. A breach of a condition or a fundamental term is
somewhat different from a breach of a warranty. A breach of a warranty cannot discharge
or terminate the contract nor can it relieve the innocent party of its obligations to perform
under the contract. Rather, such a breach entitles a party to sue for damages. A breach of
a condition or a fundamental term entitles a party to treat the contract as ended to the
extent of terminating his obligations without terminating the liability of the party in
breach.
If a breach of condition occurs, the discharge of the contract may not take place unless
the innocent party elects to make it so. If the innocent party decides to waive the breach,
he cannot later complain of the breach and attempt to take action unless the action of the
offending party overrides the breach. Where a breach occurs and the innocent party acts
on it, the contract is terminated or discharged for breach. While the contract may be gone,
it is still alive with respect to the liability of the offending party.
Fundamental Breach
A breach of condition occurs where the contracting parties have agreed that any failure
by one party to perform a particular obligation shall entitle the other party to put an end
to all obligations of both parties.
A fundamental breach occurs where the event resulting from the failure of one party to
perform a primary obligation has the effect of depriving the other party of substantially
the whole benefit which was the intention of the parties that he should obtain from the
contract.
Exclusion Clauses
Exclusion clauses are used to limit the liability of one party to the other. For example, it
is possible to limit the liability for failure to perform to a specific amount or to certain
types of liability. No clause can exempt a party from liability for fraud.
Typically, an exclusion clause removes certain types of liability from one party. A
limitation clause limits the damages that may be claimed in case of a certain type of
liability arising.
Notice
An exclusion or limitation clause can be challenged on the ground that the party seeking
its protection did not bring its existence to the attention of the other party with the result
that the other party cannot be said to have assented to the clause. In Tilden Rent-a-Car v.
Clendenning the exclusion of insurance was found ineffective since the person at the
rental desk did not bring it to the attention of the renter.
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Anticipatory Breach
Anticipatory breach occurs when a party, by express language or conduct, or as a matter
of implication from what he has said or done, repudiates his contractual obligations
before they fall due. For this type of breach to be found, the following must be
established: (1) conduct which amounts to total rejection of the obligations of the
contract; (2) lack of justification for such conduct.36 If the injured party accepted the
repudiation, the contract is at an end and the innocent party is freed from his obligations.
Note that the offending party may still be liable for damages.
Remedies
Damages
The principle of damages is that the injured party should be made whole. This is subject
to the foreseeability of the damages. The damages claimed and awarded must have been
within the contemplation of both parties at the time of contract formation. The damages
must be not so remote as to not be foreseeable.
Specific Performance
A court can order a party to complete their contract.
36
Fridman, p. 638.
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Contract Breaches and Remedies
Note that this portion will be handed out in class. The following is an outline of the
material that will be distributed.
1. Origins of Disputes
a. Breach of Contract
b. Tort Issues – Breach of “Duty”
c. Statutory – Competition Act
2. Nature of a breach
a. Major – going to basic value of contract to one party
b. Minor – insufficient to cause void of contract
3. Results of Breach
a. Contract is a nullity from inception
b. Contract voidable by offended party
c. Damages
4. Intent of damages
5. Other remedies
a. Specific Performance
6. Where to go to get satisfaction
a. Courts
b. Alternative Mechanism
7. Court Action – litigation
a. Provincial Court
i. Civil Claim
ii. Dispute Note
iii. Pre-trial Hearing / Compulsory Arbitration
iv. Trial
v. Judgment
vi. Enforcement through Court of Queen’s Bench
b. Court of Queen’s Bench
i. Statement of Claim
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ii. Statement of Defence
iii. Affidavit of Records
iv. Examinations for Discovery
v. Trial
vi. Judgment
vii. Enforcement
8. Alternative Mechanisms
a. Negotiation
i. Principled vs. Positional Negotiation
ii. Getting to Yes
1. Don’t Bargain over positions
2. Separate the people from the problem
3. Focus on interests not positions
4. Invent options for mutual gain
5. Insist on using objective criteria
b. Mediation
i. Impartial Mediator – skill of mediator often overlooked
ii. No decision unless by parties
iii. Counsel there only as an advisor – parties do most of the work
c. Arbitration
i. Arbitration Agreement
1. Sets the rules
2. Establishes the questions to be asked
3. Defines all the details: transcripts, costs, appeals
ii. Private Court
iii. Parties pick the judge – the arbitrator
iv. Arbitration Act – gives judgment the weight of a decision of the
Court of Queen’s Bench
v. Quicker and cheaper than trial
vi. Less formal than trial
9. Best Way
a. Depends on nature of dispute
i. If question is primarily one of law – court
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ii. If fact-based and special knowledge needed – arbitration
iii. If parties are still talking – negotiation or mediation
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Tenders & Contract Formation
The principle reference for this section is:
Bidding and Tendering What is the Law? by Paul Sandori and William M. Piggott, 3rd
Edition, published by Butterworth.
Review of Requirements For A Contract
In our discussion of the elements of a contract we described the fundamental
requirements for a contract:
a)
Offer
b)
Acceptance
c)
Consideration
In addition, the parties must reach a consensus with respect to the terms of the contract
and both parties must have the capacity to enter into the contract. In the construction
industry one of the mechanisms used to establish contracts is the process of tendering.
Typically, the process involves the following steps:
1.
Prepare Tender Documents
2.
Identify potential population of bidders
3.
Possible pre-qualification of potential bidders
4.
Issue Invitation to Tender
5.
Obtain Tender Documents
6.
Submit Tender
7.
Receive Tender
8.
Review Tender
9.
Accept Tender/Award Contract
If one uses the normal meaning of the words, it is generally the case that the Tender or
Bid is considered the Offer while the Acceptance of the Tender is the trigger for the
contract formation.
The Form of the Tender
When a tendering authority is preparing the documentation associated with a formal
tender, it will provide a form of tender that it is willing to consider.
Normally, it will include terms like:
I, {bidder’s name}, offer to perform the work defined in the tender documents for
the sum of $xxxxxx
and
This tender is irrevocable for 30 days, or
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This tender is open for acceptance for 30 days.
Sometimes, in the Instructions to Bidders, the tendering authority will state that it will not
consider any tender unless it is accompanied by some form of security that will be forfeit
if the bidder fails to enter into a contract when one is offer.
In addition, there may a term:
Any or all tenders may be rejected. Or,
The tendering authority reserves the right to accept any tender or no tenders
This is the so-called “privilege” clause.
Historical Treatment of Tenders
The wording in a tender regarding irrevocability and the time for keeping the tender open
implies some obligation on a bidder. Prior to 1981, however, the nature of this obligation
was not seen as binding under contract law. The tender was analyzed as shown in the
following case:
Dickinson v. Dodds (1876), 2 Ch. D. 463 (Eng. Ch. Div.)
In this case, Dodds wrote Dickenson a letter stating: “I hereby agree to sell to Mr.
George Dickinson {the house} for £800… I will keep this offer open until
Friday…12th June 1874.” Later, Dickinson hear that Dodds had offered to sell the
house to another person. Dickinson sent Dodds a letter accepting the offer;
Dickinson sent the letter to Dodds by giving it Dodds’ mother-in-law.
Unfortunately, she forgot to give the letter to Dodds. When Dodds received it, he
advised Dickinson that he had already sold the house. Dickinson sued for breach
of contract.
The court determined that the original letter was simply an offer. A contract is
formed when both parties agree to the same terms as the same time. Since this
situation did not exist at any time, there was no contract. With respect to the
statement about keeping the tender open, the court stated that since no
consideration was obtained by Dickenson from Dodds for keeping the offer open,
there was no contract formed by this statement.
The courts until 1981 dealt with tenders primarily in the context of error in tender. In
1981, with Ron Engineering, the law regarding tenders in Canada took a new turn.
R. v. Ron Engineering & Construction (Eastern) Ltd.
Ron Engineering submitted a tender for $2,748,000 to the Ontario government. It
was the lowest bid but Ron soon discovered that it had made an error. Ron
requested that it be permitted to withdraw its tender.
The owner awarded the construction contract to Ron but Ron refused to sign,
taking the position that the bid could not be accepted since the owner was aware
that Ron had made an error.
The owner decided to retain the bid deposit, accepted the second lowest bid and
sued Ron for damages. The case ended up at the Supreme Court.
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Justice Estey, on behalf of the Court, stated that the bidding process involved 2
contracts, a bidding contract, Contract A, and the construction contract, Contract
B.
The Bidding Contract, Contract A, was a unilateral contract and arose when the
bid was submitted. If several contractors submitted bids, several contract A’s will
arise. Estey J. said that the Invitation to Tender was a unilateral offer, which,
when accepted, led to a contract. A term of this contract is that the bid is
irrevocable. An additional term is that the bid is accepted, the parties must enter
into Contract B.
The court noted that neither party was aware of the mistake until the bid was
submitted and opened. Contract A was then in existence and the contractor
submitted the bid that it intended to, including the price contained therein and
including the error.
The consideration with respect to Contract A was that the contractor was able to
bid the project and the owner received a bid according to the rules that it laid out.
Initially, Ron Engineering was considered a bit of an anomaly; its importance was not
fully understood until another case, involving tender error, was considered by the Court.
Calgary (City) v. Northern Construction Company Ltd.
The contractor, Northern, submitted a bid to the City for $9,342,000 which was
opened publicly. There was a spread of $395,000 between the bid of Northern and
the next bidder. Northern immediately knew there was a problem and, shortly
thereafter, advised the City that an error of $181,000 had been made in its tender
due to a clerical error. Northern, in a subsequent meeting, requested that, either it
should be allowed to withdraw its tender, or add $181,274 to its tender price.
Calgary refused and accepted Northern’s bid. Northern refused to sign the
proffered contract. Calgary awarded the contract to the second bidder and sued
Northern.
There was no disagreement with respect to the facts of the case. The trial judge
found for Northern, citing dissimilarities from Ron Engineering and by applying
the law of mistake. The Alberta Court of Appeal applied the Ron Engineering
analysis and said that Contract A was formed.
The Supreme Court, reviewing the case, found that there were no significant
differences from Ron Engineering.
This reinforcement of the Ron decision changed Canadian tender law. Since then, there
has been little treatment of tender error, as such. The cases that follow Ron tend to define
the responsibilities of the parties under the new Contract A.
Owners’ Responsibilities
Before Ron Engineering, the “privilege” clause was seen to give owners complete
flexibility with respect to handling tenders. Once the concept of Contract A became
known, various parties, both inside and outside the construction industry tested the
responsibilities that fell on the owner.
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Best Cleaners and Contractors Ltd. v. R.
In 1981, the Department of Transport (“DOT”) invited bids for the operation and
maintenance of the airport at Frobisher Bay NWT. The bid documents offered a
two-year contract but bidders were asked to quote on a further two years, for a
total of a four-year contract. Best and Tower Arctic Limited bid on the work and
Best was the low bid on the base contract. However, Tower was low when the
four-year option was considered.
After the bids were opened, Tower was asked if it would enter into a four-year
contract for the amount quoted. Tower agreed and DOT recommended that the
contract be awarded to Tower. Best heard of this and complained. DOT then
awarded the contract to Tower but for a two-year period. Best sued.
When the court dealt with the privilege clause, it said that the clause did not
change the owner’s obligations; it could award no contract or a contract to Tower
but its obligation under Contract A to Best was not to award a contract to Tower
something other than Contract B.
The court ruled that the two-year contract to Tower was a sham and MOT was in
breach of Contract A. The court said that there was an implied term to Contract A
that the owner must treat all bidders fairly and not give any bidder an unfair
advantage over others.
Elgin Construction v. Russell Township
Russell invited bids for water mains and sewers. The invitation to tender included
a privilege clause: “The Township reserves the right to reject any and all tenders
and the lowest or any tender will not necessarily be accepted.”
Elgin submitted the low bid but with a completion of 52 weeks. Atomik submitted
a higher bid but with a completion of 28 weeks. The cost to Russell would be less
with the Atomik bid since the supervision costs would be much less. Russell
suggested to Elgin that it should qualify its bid by reducing the completion time to
28 weeks. Elgin complied but Russell awarded to Atomik. Elgin sued.
Elgin argued that Russell failed to follow a “custom of the trade” when it rejected
Elgin’s bid and did not award to the lowest bidder. The court rejected that
argument, stating that no “custom of the trade” can override the explicit words in
the privilege clause.
Note that the owner was allowed to award the contract based on its evaluation of the
benefit to it.
Chinook Aggregates Ltd. v. Abbotsford (Municipal District)
Abbotsford awarded a gravel-crushing contract to a local company even though
Chinook was the lowest bidder. The invitation to tender contained a privilege
clause. Chinook sued. The trial court stated that Contract A came into existence
and an implied term of that contract that the lowest compliant bid would be
accepted. Abbotsford appealed on the basis of the privilege clause. The Appeal
Court stated that the privilege clause did not give the owner the right to exercise a
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local preference without revealing it in the bid documents. It would be inequitable
to allow the owner to hide behind a disclaimer clause.
Acme Building and Construction Limited v. Newcastle (Town)
Acme submitted the lowest bid but the Town accepted the 2nd tender. The Town
considered that the 2nd bid would do the project in less time and save the Town
rent. In addition, more of the subcontractors would be local. Acme sued, relying
on the “custom of the trade” argument. At trial, court rejected Acme’s arguments
and concluded that the procedures were fair. On appeal, the court accepted the
trial court’s reasoning.
Note, once again the privilege clause was upheld.
Kencor Holdings Ltd. v. Saskatchewan
Kencor was low bidder on a project. Graham Construction was second bidder.
The contract was awarded to Graham in spite of a report that said that Kencor was
more qualified. The reason given was that it was “expedient and in the public
interest.” The bid documents contained a privilege clause. Kencor sued. The court
ruled that the application of criteria unknown to the bidders would lead to great
unjustice. The judge stated that “this is a blatant case of unfair and unequal
treatment…” and awarded Kencor $180,000 for lost profit.
Here the court determined that unfairness trumped the privilege clause.
Power Agencies Co. Ltd. v Newfoundland Hospital and Nursing Home Association
The Association, a government funded body, operates a group purchasing
program for its members. The Association called for tenders for hospital supplies.
After the closing, the bid of Power was deemed the preferred bid. Shortly
thereafter, the Association was contacted by another bidder which complained
that Power’s bid was qualified. The Association, after examining the bids and
finding that all the bids were qualified, retendered. Power submitted a tender
“without prejudice” and was awarded the work. Power sued for damages since it
had not been awarded the contract the first time. Power’s claim was dismissed
since the bidders were all aware of the method of evaluation of the tenders.
Further, there is no obligation, in the face of a privilege clause, to award a
contract to a bidder simply because it complied with the requirements of the
tender package.
The Privilege Clause – The Supreme Court view.
M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.
The issue here was the question of fairness. Note that this case was one of the first
considered by the Supreme Court dealing with fairness and Ron Engineering – ie:
the obligations of the owner.
DCL invited bids for a pump house. The tender documents asked for prices for 3
types of backfill. The low bid was from Sorochan Enterprises Ltd. and contained
wording in which stated that it based its tender on 1 type of backfill and if others
were required, a unit price was provided. The other bidders complained but DCL
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replied that the note was only a clarification – not a qualification. The contract
was awarded to Sorochan and MJB sued. The lower courts asserted that the
privilege clause was a complete answer to MJB. The Supreme Court awarded
MJB its lost profit and stated that the privilege clause cannot override the owner’s
obligation to accept only compliant bids.
Here the Supreme Court reviewed the previous decisions and defined the role of the
privilege clause. The Court decided that the privilege clause is compatible with the
obligation to accept only a compliant tender but it is incompatible with an obligation to
accept only the lowest compliant tender. The Court said, “The discretion to accept not
necessarily the lowest bid, retained by the owner through the privilege clause, is a
discretion to take a more nuanced view of ‘cost’ than the prices quoted…”
The Court decided that there was no obligation to award a contract to the lowest
compliant bidder but there is, definitely, an obligation not to award to a non-compliant
bidder. This is quite serious for an owner. An acceptance of a non-compliant bid can
result in the owner paying the bidder’s lost profit if a judge feels that the unsuccessful
compliant bidder was disadvantaged.
Tercon Contractors Ltd. v. British Columbia
This recent (2010) case from the Supreme Court analyzed the acceptance of a noncompliant tender in the face of a strong exclusion clause and found that the precise
wording of the exclusion clause did not excuse the failure of the Province to comply with
the terms of Contract A.
Duty of Fairness
Tarmac Canada Inc. v. Hamilton Wentworth
George Wimpey (later Tarmac Canada) submitted the low bid for roadwork. The
tender documents included a privilege clause. The second bidder, by very little,
was Dufferin, a local contractor. Dufferin pointed out to the municipality that it
was a major supporter of the community and employed many local residents. The
Region awarded the contract to Dufferin without giving any reasons. Tarmac
sued. In Acme the court had decided that the privilege clause allowed the owner to
reject the low bid and accept another qualifying bid without giving any reasons. In
this case the judge found that the owner, relying on the privilege clause, could
accept or reject any bid without reasons, however, the judge found that the law
implies an obligation of fairness when the owner exercises its rights under the
fairness clause. Ron Engineering stated that there was a need to protect the
integrity of the bidding system. This meant that the owner must ensure that all
bidders bid on the same basis without hidden preferences.37
Apparently the privilege clause was not clear enough to override the implied duties of
fairness and good faith. This did not strip the clause of all meaning – it allowed the owner
to reject the bid in cases of force majeure or if it decides not to proceed with the project
or unforeseen circumstances undermine the viability of the project. The appeal court
37
Bidding and Tendering, p. 48
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upheld the decision. In commenting on the failure to give reasons, the court noted that the
Region did not have to give reasons, but in doing so took a risk.
Sound Contracting v City of Nanaimo
Sound submitted a bid and was a low bidder. On a prior job, Sound had pursued a
claim against Nanaimo and won the dispute involving changes to overhead and
profit for credits on work. Nanaimo, when reviewing the current bid, assumed that
Sound would be similarly aggressive and added additional engineering costs to
the Sound bid. These costs were not entered into the second bid with the result
that the effective price from Sound was higher than the original second bid.
Nanaimo decided that the second bid was, overall, the most favourable to the city
and awarded it. The trial court, finding a decision based on undisclosed criteria,
decided for Sound but the Appeal Court reversed the decision. The Appeal Court
found that previous dealings did not amount to an undisclosed criteria.
This seems strange since it appears that the court would allow the application of a
yardstick to one bidder but not another – a breach of fairness or setting an uneven playing
field.
Midwest Management v B.C. Gas
This is somewhat of a different twist on the privilege clause.
BC called for tenders and included a very extensive privilege clause that imposed
a regime for contractors wishing to make comments on their bid. Midwest
provided a covering letter with its bid stating that it did not provide for any
dewatering costs and proposed that such work would be reimbursed on a cost-plus
basis. Midwest did not comply with the Instructions to Tenderers when it included
this letter. During the bid review, BC sent out requests for clarifications to some
bidders, including Midwest. In a meeting BC noted that the letter from Midwest
did not comply with the instructions. Later, BC sent a letter to Midwest advising
that BC would not be awarding the contract to Midwest. Midwest sued based on a
breach of contact A. BC defended on the basis that Midwest’s tender was noncompliant. Midwest responded, stating that the privilege clause gave BC the right
to award to a non-compliant tender, noting that none of the bids was completely
compliant. Midwest quoted the Ron Engineering statement “…where at that
moment the tender is capable of acceptance in law, the rights of the parties under
contract A have thereupon crystallized.” Midwest argued that the privilege clause
made Midwest’s bid capable of acceptance; in fact, it was so general that any bid
could be accepted.
The court denied Midwest’s claim for breach of contract A.
However, Midwest alleged a “free-standing” obligation of fairness – a duty,
which if breached could result in liability. The trial court found no such duty.
On appeal, the court found no breach of contract A. When dealing with the
fairness issue, the court found that no such duty existed and was inconsistent with
the adversarial process in bidding.
Martel Building v Canada
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Martel was a landlord, having a Crown agency as a tenant. The lease was expiring
and it attempted, without success, to negotiate a renewal. The circumstances
surrounding the negotiations were somewhat unusual with the government
making demands at the last minute.
Tenders were called – the bid documents included a privilege clause. When
analyzing the bids, the government added $1,000,000 to Martel’s price for interior
work and $60,000 for a security card system. It added the interior cost to the other
bidders as well but did not add the security system. Martel was no longer the low
bidder and lost the tenant. Martel sued for lost rent – a pure economic loss –
alleging breaches of duty during negotiations, breach of contract with respect to
fairness.
Martel lost at trial and won at appeal.
With respect to the pre-bid negotiations, the Supreme Court found that the
government had negotiated negligently and breached a duty of care that arose
because of the special relationship that existed between the party. However, the
Court decided, as policy, that it would not legally recognize this duty nor
compensate Martel for its economic loss since “…it would defeat the essence of
negotiation…”
With respect to the “unfairness” aspect of the bid process, while lower courts had
implied a duty to treat all bidders fairly, the Supreme Court had not taken a
position. The Court said, “While the …document…affords the Department wide
discretion, this discretion must nevertheless be qualified to the extent that all
bidders must be treated equally and fairly. Neither the privilege clause nor the
other terms of Contract A nullify this duty….”
The Court did not deal further with alleged duty of care issues (ie: tort) since they
were identical to the contract breach, thus avoiding any discussion of a freestanding duty of care.
Here the Supreme Court made the final decision – there is an implied duty of fairness that
cannot be lightly overridden. It would appear that it would take very strong language to
override this implied responsibility.
Cable Assembly Systems v. Dufferin-Peel Roman Catholic School Board
The Board issued an RFP requesting proposals for a computer-cabling project.
The documentation contained two (2) privilege clauses as well as a clause stating
that any proposal will be subject to further negotiation. The proposals were
received and Cable was low. After negotiations with the 3 lowest bidders, the
contract was awarded to Compucentre. Cable sued the Board for breach of the
duty of fairness and good faith. The trial court found for the Board and was
upheld on appeal.
The interesting part of this action was that the court accepted the idea that there was no
real difference between a tender and an RFP. Owners should be aware that calling
something an RFP will not prevent the formation of a Contract “A”.
J. Oviatt Contracting Ltd. v. Kitimat General Hospital Society
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Kitimat tendered the site preparation work for a local health centre. Oviatt
submitted the low bid but the work was awarded to the second bidder, Boden.
Oviatt sued for breach of contract and breach of the duty of fairness. At trial,
testimony was given that Kitmat hired a consultant who reviewed the bids and
recommended that the contract be awarded to Boden. Further, the
recommendation was reviewed by an architect employed by the Province who
also recommended the Boden bid. There were some errors in the Oviatt tender
including the omission of 4 pages and the exclusion of a temporary road. The trial
judge reviewed the case law to determine the criteria to be used to determine if
the Oviatt bid was compliant. He concluded that the test was one of substantial
compliance rather than strict compliance with the tender instructions. Based on
this test, he concluded that Oviatt failed the test and the bid was non-compliant.
On appeal the decision was upheld.
This establishes the rule that substantial compliance is the appropriate test with respect to
the instructions of bidding.
Wind Power Inc. v. Saskatchewan Power Corp.
Saskpower requested proposals (via an RFP) for a wind power project and Wind
Power responded. Saskpower determined that the proposal was within the budget
and its Board approved the project. Saskpower then sought the approval of the
Cabinet as required by the Power Corporation Act. The Cabinet decided not to
pursue the project, citing economic considerations. Wind Power sued.
At trial, the court found against Wind Power. On appeal, Wind Power argued
Saskpower was obliged, in fairness, to award the contract to Wind Power (or,
implicitly, compensate Wind Power for not awarding it). The Appeal Court found
for Saskpower stating that the evaluation and award criteria (namely review by
Cabinet) was known to Wind Power. Further, forcing Saskpower to award the
contract would, in effect, cause Saskpower to break the law – the requirement for
Cabinet approval.
I find this case interesting because it is clear the bid was not capable of acceptance until
there had been a review by cabinet. Does this mean that the contractor could withdraw its
bid until then due to a serious error?
Mellco Developments Ltd. v Portage La Prairie
The City issued an RFP for the sale and development of certain city land. The
document called for “concept plans” and said the City would negotiate with the
applicant that presented the most attractive proposal. The RFP contained the
following language:
This is an invitation for proposals and not a tender call
Two proposals were received; an unconditional offer from Mellco for $316,000
and another from the Lions for $425,000. The latter proposal varied from the RFP
requirements in a number of ways but, the City accepted it anyway. Mellco sued.
At trial the court found for the City and the matter was appealed.
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Mellco argued that the City was in breach of Contract A by considering a noncompliant proposal for Lions. Further, the City was under an obligation to accept
the best compliant proposal assessed within the terms of the criteria in the RFP.
The Appeal Court found that there was no Contract A. It quoted Powder
Mountain Resorts Ltd. v British Columbia
The invitation for proposals appears to have been an invitation to negotiate
or, in other words, an invitation to treat. It appears likely that the intention
of the parties was that a submission of a proposal would initiate
contractual relations between the parties.
Further, the Court considered whether there was a breach of duty of fairness in the
evaluation process and found that the City complied with its responsibilities
Here, an RFP was not a tender and the court refused to find a Contract A.
Kinetic Construction Ltd. v. Comox-Strathcona (Regional District)
The Region issued a RFP for construction of a project. Kinetic was the low bidder with a
tender price of $1,494,790 and Robinson was second bidder by $210. The privilege
clause reserved the right for the owner to reject bids “which are nonconforming because
they do not contain the content or form required by the Instructions to Bidders” and even
to use undisclosed evaluation criteria. The bids were analyzed by an independent
engineer who found defects in Robinson’s bid but, in spite of these, recommended
Robinson as being their preference. The District awarded to Robinson. Kinetic sued.
Kinetic argued at trial that the Robinson bid was non-compliant and not able to be
accepted. The trial court found that the Instructions permitted the owner to consider noncompliant bids. Thus, a contract A was formed when the non-compliant bid was
submitted and the owner had an obligation to treat the bidder fairly. The Robinson bid
highlighted the areas of non-compliance and the District could have rejected it but chose
not to. This is in marked contrast to the Graham case discussed later.
Summary of Duties of Owner

Contract A includes an implied duty of fairness unless excluded by the bid
documents

The privilege clause will not protect an owner from a breach of Contract A

The privilege clause is (usually) incompatible with an award of Contract B to a
non-compliant bidder.

The privilege clause does not oblige an owner to award Contract B to a low
compliant bidder.

An owner will be held to an objective standard when it exercises its right under a
discretion clause.
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38

Whether a procurement process gives rise to Contract A or not depends on the
intentions of the parties as reflected in the bid documents issued.

Outside Contract A, there is no free-standing duty of fairness38
Bidding and Tendering p. 80
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Subcontractors
Ron Engineering dramatically altered the landscape with regard to owners and
contractors. It was not immediately apparent how this would affect the relationship
between contractors and subcontractors or suppliers.
Peddlesden Ltd. v Liddell Construction Ltd. BCSC 1981
Peddlesden submitted a tender to Liddell through a bid depository for masonry
work on a school. Liddell used Peddlesden’s bid when submitting its own bid and
named Peddlesden as the trade contractor. Liddell was awarded the contract and
advised Peddlesden that it was awarded the subcontract for the masonry work in a
letter of intent. Peddlesden had filed a bid bond with its tender but had failed to
seal the bond. When Liddell discovered this, it wrote to Peddlesden and stated
that its bid was incomplete and Liddell could not use the tender. Liddell had
another contractor do the work. Peddlesden sued claiming breach of contract.
Liddell pleaded that:
a. The bid bond was invalid so the bid was invalid,
b. The bid expired 2 days before Liddell purported to accept the tender in its
letter of intent,
c. Even if the bid had been accepted on time, it would still be necessary to
sign a construction contract and, since there was no such contract, there
were no contractual ties between the parties.
The judge noted that in Ron Engineering the court determined that the bidding
contract was different from the construction contract. Based on that, he
determined that they were different in nature. Thus, even though the acceptance
had not been communicated to Peddlesden by Liddell, when the tender of
Peddlesden was sent to Liddell a contract A was formed. In order to make this
binding on Liddell, the owner must accept the contractor’s bid and the acceptance
must be made within the period during which the bid is irrevocable. Thus, it is the
owner’s acceptance of the general contractor’s bid that forms a binding contract A
between the subcontractor and general contractor.
With respect to the bond, the court decided that it was a minor error and was
easily remedied (as the subcontractor had offered to do). The court awarded
Peddlesden its lost profit.
This seems to clarity the rules for the contracting hierarchy. The submission of the
subcontractor tender does not create the formation of contract A. Rather, when the
general contractor uses that tender as the basis of his tender to the owner, contract A is
formed and it becomes binding on the general contractor when the owner accepts his
tender.
The next case considers the situation where the owner and the low bidder - general
contractor re-negotiate the price. The question to be determined is the status of the
subcontractors who bid on the original contract.
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Westgate Mechanical Contractors Ltd. v. PCL Construction Ltd.
Several general contractors submitted tenders for a building in Vancouver. PCL
was low but the owner rejected all the bids. PCL had used Westgate’s price and
named Westgate when it prepared its tender.
The architect, on behalf of the owner, negotiated with the low 3 bidders. PCL
reduced its price by $285,000 and made other concessions which resulted in PCL
being awarded the job.
PCL asked Westgate to reduce its price by $120,000; Westgate refused, saying
that since PCL had used its price in the bid, PCL was obliged to award a contract
to Westgate. PCL awarded the contract to another contractor and Westgate sued.
PCL alleged that the original bid was not in effect since the owner had rejected all
the tenders and the resulting contract was separately negotiated.
The court found that the owner had not accepted PCL’s bid. Westgate’s claim was
dismissed.
This decision appears to leave open the possibility of abuse by owners who could call
tenders, reject all bids and use the results as pricing information for a subsequent
negotiation.
Ron Brown Ltd. v Johanson
Ron Brown, a mechanical contractor, gave his price to several general contractors,
including Johanson, bidding on a water treatment plant. Johanson bid the job and
was low bidder. He did not name a mechanical subcontractor. After award,
Johanson did the mechanical work with his own forces. Brown sued Johanson,
alleging that Johanson had used Brown’s price and was, therefore, obliged to
award the subcontract to him.
If Johanson had named Brown, both parties would have been obligated to each
other. However, since Brown was not “named” by Johanson, no contract A was
formed and Brown was unsuccessful. Note that there was an addition tort issue
raised.
Bate Equipment Ltd. v. Ellis-Don Limited
An Edmonton school district called for bids through the bid depository with the
tenders for the general contactors closing two days later. The general contract was
awarded to Ellis Don while the elevator contract went to Dover Corp. When the
2nd lowest bidder, Bate, found that the low bidder had qualified its bid, Bate
lodged a formal complaint. The bid depository upheld the complaint and
disqualified Dover. Ellis Don then changed the name of its elevator subcontractor
to Armor (Bate’s elevator company) and used Armor in its bid. Dover appealed to
the architect to have its tender reinstated. The architect concurred and
recommended that the owner request that Ellis Don show Dover as the elevator
subcontractor. The subcontract was awarded to Dover. Bate sued alleging a
breach of Contract A.
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The issue at trial was what were the terms of the Contract A formed between
Armor/Bate and Ellis Don when Armor submitted its bid. In Peddlesden the court
found that Contract A became binding when the owner accepted the bid of the
general contractor and no notification to the subcontractor was required. In this
case the judge would not accept that and noted that normal rules of contract
required notice to the bidder. Further, the instructions to bidders contained
statements regarding the owner’s right to approve the subcontractors. The judge
reviewed the tender documents and noted that they required the general contractor
to list his “proposed subcontractors”. The judge concluded that although Ellis Don
and Armor entered into a Contract A, since Ellis Don did not accept Armor’s bid
either explicitly or implicitly, there was no obligation formed to enter into
Contract B. The judge noted that simply carrying a subcontractor’s name and bid
did not constitute acceptance of the bid.
The role of the bid depository was examined and the court found the priority of
documents in the tender documents found that if the bid depository rule conflicted
with other provisions of the tender documents, the tender documents would
prevail. Thus, Ellis Don did not breach contract A.
Scott Steel v R. J. Nicol Construction
Nicol, a general contractor, requested that Scott provide bids for the supply of
structural steel. Scott quoted his price by telephone. Nicol used Scott’s quotation
and listed Scott as his subcontractor. Nicol was awarded the contract but decided
to award the steel subcontract to another firm. There was no evidence of bidshopping. The trial judge found that there was not contract A formed between the
parties since the subcontractor’s bid was not complete, the general contractor
could not use a subcontractor without the owners approval, and the schedule
proposed by the subcontractor would not permit the entire project to be completed
on schedule.
In Ron Engineering, Estey J. noted that there might be occasions when a Contract
A might not be formed. Here, the judge noted that she did not see why the normal
rules relating to acceptance should not apply. Further, Ron Engineering describes
the bidding contact as a unilateral contract and, she said, it is the nature of a
unilateral contract that the recipient of a bid is not obliged to accept it. The
recipient of the bid is not obliged to enter into a Contract B unless he has accepted
the bid and let the bidder know that he has accepted it.
Here and in Bate the court seems to take a step back from Peddlesden and requires that
some form of formal acceptance take place and be communicated to the bidder before a
contract A is deemed to have been formed.
Vipond Automatic Sprinkler v E.S. Fox
Vipond submitted a bid to Fox for the sprinkler installation on a project. The
project was over budget and Fox, after changes and deletions, submitted a lower
bid, which included Vipond’s price. Fox asked Vipond and 2 other sprinkler
contractors for a revised price for cheaper pipe, as specified in an addendum.
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Vipond did not change its price, stating that it already used the cheaper pipe.
Another bidder submitted a price lower than Vipond and was awarded the
contract. Vipond sued alleging breach of a verbal agreement to award the contract
to Vipond and a breach of its duty of fairness.
The judge found that even though the owner accepts the contractor’s bid, it does
not follow that the subcontractors bids are also accepted, accepting the Scott Steel
decision. The court dismissed Vipond’s claim.
Stuart Olson Constructors v. NAP Building Products
NAP submitted the low window price to Stuart Olson and was sent a letter of
intent. Subsequently, Stuart Olson sent NAP a subcontract which was modified
slightly and returned after it had been signed by one of its officials. Subsequently,
NAP changed its mind and repudiated the subcontract. Stuart Olson retendered
the work and awarded it to another subcontractor.
NAP attempted to argue that no Contract A or B was formed. The judge rejected
NAP’s claim and awarded Stuart Olson the difference between the NAP bid and
the low bid on the retender.
Naylor Group Inc. v. Ellis Don Construction Ltd.
Ellis Don, bidding on a hospital extension, invited Naylor to bid on the Electrical
work. At the time Ellis Don was having a dispute with the IBEW and the dispute
had come before the Ontario Labour Relations Board. The ruling was reserved at
the time of bidding.
Naylor had an in-house union but Ellis Don assured Naylor that this would not be
a problem. Naylor submitted a bid and was low. Ellis Don carried Naylor in its
bid, which was low. Had Ellis Don not carried Naylor, it would not have been low
bidder.
The OLRB decision was released its decision confirming that Ellis Don could
only use IBEW-associated electrical subcontactors. Shortly thereafter, the owner
made some changes to the design and asked Ellis Don to modify its quotation.
Ellis Don resubmitted its bid, again using Naylor as the electrical subcontractor.
The owner awarded the contract to Ellis Don. Ellis Don offered the contract to
Naylor on the condition that it use IBEW workers; Naylor refused and Ellis Don
awarded the electrical subcontract to another contractor. Naylor sued, claiming
that Ellis Don had used Naylor’s price to get the main contract and shopped its
bid to get a favourable price, undermining the bid process and breaching Contract
A.
At trial the judge found that the award of the prime contract to Ellis Don did not
automatically trigger a subcontract between Ellis Don and Naylor. There was no
contract between the two until Ellis Don had communicated its acceptance to
Naylor, which it never did.
Further, he noted that if such a contract had come into existence, it would have
been frustrated by the OLRB decision which prevented Ellis Don from entering
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into a contract with a non-IBEW subcontractor. The trial judge awarded Naylor
the costs of preparing his bid due to the tort claim of unjust enrichment. He also
noted that if he was wrong in finding no contract, his award for lost profits would
have been $730,286.
On appeal, the court found that Naylor had acquired rights under contract A.
Thus, unless reasonable objections were brought forward, Naylor was entitled to
the contract. The court found that Ellis Don had not acted reasonably and awarded
Naylor a discounted amount for lost profit.
The matter went to the supreme court. Here, the Supreme Court, for the first time
dealt with subcontract matters and applied the Contract A, Contract B theory. The
court considered 5 questions.
Was Contract A formed between Naylor and Ellis Don?
Naylor pleaded that when Ellis Don was awarded the general contact, there was
an automatic obligation to enter into a subcontract. The court found that there was
no such obligation. Further, he agreed with the lower court that there could be no
Contract B unless Ellis Don communicated its acceptance to Naylor. However,
under these circumstances there was a clear obligation to the subcontractor to
enter into a contract with it when it used the subcontractor’s price in its tender
unless it had some reasonable objection.
Was Contract A frustrated by the OLRB Decision?
In short, no. The OLRB decision was known when Ellis Don made its request for
Naylor to confirm its bid. When Ellis Don sought out Naylor to bid the work, it
was promising work that had already been contracted to IBEW.
Did Ellis Don breach Contract A?
Ellis Don carried the Naylor bid and, thus, assured itself of being the low bidder.
Ellis Don affirmed the agreement to use Naylor after the OLRB decision. When
Ellis Don signed the general contract, the agreement contained Naylor as the
electrical subcontractor. Naylor believed that Ellis Don used its bid to become the
low bidder and, once it had achieved this status, as a lever to negotiate a lower
price from another contractor. The court found that Ellis Don was in breach of
Contract A.
What are the Damages?
The court found Ellis Don liable for lost profit - $365,143.
Summary of Subcontractor Bids
The following general conclusions can be derived:

Contract A between a contractor and subcontractor arises when the subcontractor
submits an offer and the contractor carries that offer in his bid.

When a contractor carries a subcontractor by list its name and incorporating its
price I the prime bid, Contract A will oblige the contractor to communicate the
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acceptance of Contract B to that subtrade if the prime bid is accepted by the
Owner and the Owner does not reject that particular subtrade.

If the contractor carries the subtrade’s price but does not name the subtrade, the
terms of Contract A may still oblige the contractor to communicate acceptance of
Contract B to the subtrade if the owner accepts the prime bid without objection to
the subtrade.

Contract A between the prime and subcontractor ends if the owner does not
accept the prime bid or does not accept it within the period of the bid’s
irrevocability.

The contractor is not obliged to nominate the lowest subcontract bidder.

Bid shopping is a breach of Contract A.

The offer of a subcontractor remains open and irrevocable for a reasonable time
after the expiry of the period of irrevocability of the prime bid.
Mistaken Bids – Post-Ron
Gloge Heating & Plumbing Ltd. V. Northern Construction
Northern prepared and submitted a tender for work at the Edmonton International
Airport. It used the mechanical price of Gloge, submitted by phone shortly before
tender submission. Northern was the low bidder. Gloge advised Northern that it
had made an error and Northern, in turn, advised the owner. The owner would not
permit Northern to adjust its bid so as to use the second lowest mechanical tender.
Northern was awarded the contract and Gloge refused to enter into the
subcontract. Northern did the work using the services on another subcontractor
and sued Gloge.
Gloge advanced the arguments that
Northern failed in its duty to warn Gloge that it was very low,
Northern could not award the contract to Gloge once it was aware of the error in
Gloge’s tender, and
Gloge was free to withdraw its tender until Northern had accepted it, which it did.
The court found that Gloge, by delaying the submission of its tender until the last
minute, deprived Northern of the opportunity of analyzing the mechanical prices
and warning Gloge of the potential for error. The court then dealt with the
analysis using Contract A-Contract B principles, finding that the Gloge bid was
irrevocable for the time that the General Contractors’ bids were irrevocable since
the subcontractors knew that the general contractors would rely on them.
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Town of Vaughn v Alta Surety Company
This is the same case as Acme, described earlier. When the surety company
defended on the basis of the town not taking effective action to mitigate its loss by
accepted an amended offer from Acme, the court quoted Calgary v Northern and
said any such action would turn the tendering process into an auction.
Forest Contract Management v C&M Elevator
Forest requested bids from several elevator contractors for an apartment building.
C&M was the low bid. Forest submitted its tender to the owner and was awarded
the contract. C&M confirmed its telephone quote by letter. Some of the conditions
in the letter were not acceptable to Forest and were changed. The price was also
reduced.
The general contract was signed and work commenced. C&M received the
subcontract document and initiated work on the preliminary aspects of the work.
Shortly thereafter, C&M was advised by one of its suppliers that it had missed
one elevator. C&M advised Forest that it could not perform its contract and
returned the subcontract, unsigned. Forest retendered the contract, awarded it to
another contractor and sued C&M for the difference. The court found that a
Contract A was in existence in spite of the representation from C&M that the
changes to the original tender amounted to a counteroffer – nullifying the original
bid. The court noted that the changes were insignificant, and, in any case, C&M
had started work. This brought Contract B into being. The judge noted that once a
subcontractor starts work on Contract B, it is bound by the terms of Contract B. If
the terms of Contract B do not conform with Contract A, then the subcontractor
should notify the general contractor immediately and not perform until all the
terms are settled.
City of Ottawa Non Profit Housing v Canvar Construction
Canvar submitted a lump sum price to ONPH for the construction of a residential
building. Along with the tender it submitted a 5% bid bond. Canvar intended to
bid $2,989,000 and its bid bond was for $149,450 (5% of this amount). However,
due to a clerical error, the price was written as $2,289,000 – an error of $700,000.
At the tender opening, Canvar knew it had made a mistake and asked to withdraw
its bid or adjust its price. ONPH rejected both options so Canvar refused to
execute the contract. ONPH claimed damages.
At trial, the judge found no evidence that Canvar did not intend to submit the
price that it did. He relied on Calgary v Northern when he refused to allow Canvar
to change its bid. Canvar argued that the owner’s claim was unconscionable. The
court found that the essential items for such a finding to be missing. The court
assessed damages against Canvar of $841,000 of which the surety had to pay
$149,450.
The court of appeal looked at this somewhat differently. It found that the wide
disparity of the bids plus the calculation of the bid bond amount meant that the
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error was evident on the face of the tender and the bid was not open to
acceptance.
Derby Holdings v Wright Construction
Here, the contractor used his error to escape from a larger error.
Derby invited bids for renovations to a shopping mall and four general contractors
responded. The low bidder, Wright, reviewed its tender and determined that it had
made a significant error in compiling the electrical portion of the bid. The error
amounted to $208,939 on a bid of $1,347,130. Wright informed the architect of
the error but offered to negotiate the final price so that it would still be the low
bidder. Derby refused to negotiate and attempted to accept Wright’s bid.
Derby awarded the work to the next bidder and sued Wright for the difference
between the low and second bid.
During the bidding process, an employee of the architect sent out a memo to the
bidders stating that the electrical work had been removed from the tender and
would be bid separately. This memo was followed by Addendum #1 wherein the
architect, himself, stated that the memo should be ignored and the electrical work
was part of the bid. The addendum required that bidders should acknowledge its
receipt. A clause of the instructions to bidders stated that no addenda would be
issued within 3 days of the tender closing; addendum # 1 was issued less than 3
days before the closing. The tender form had no provision for the bidders to
acknowledge inclusion of any addenda. Neither of the low 2 bidders
acknowledged receipt of addendum on its tender. The architect confirmed, by
phone, that Wright had received the addendum but did not confirm that Wright
had included the contents of the addendum in its tender.
The bidding process was very confused.
At the trial, Wright’s defence was that its bid could not be accepted because it was
non-compliant – it did not include the work specified in addendum # 1 and did not
acknowledge the Addendum on the bid form as required in the Instructions to
Bidders. Derby took the position that neither the memo nor the addendum had any
legal effect since they were issued after the 3 day deadline. Furthermore, the
phone call acknowledgment by Wright was a rectification of a non-compliant
aspect of Wright’s bid.
The judge was quite sympathetic with Derby’s position and felt that Wright’s
argument about non-compliance was a “smokescreen”. Nonetheless, he decided
that Wright’s bid was non-compliant and could not be accepted. He
acknowledged that finding a tender non-compliant at the behest of the contractor
was new law but he couldn’t see why the application of this legal principle would
depend on the source of the challenge.
Review of Tender Form
Review of Tendering Procedure
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Bibliography
G.H.L. Fridman, The Law of Contract, 4th Edition, Carswell
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