Consultant Found Liable for Recommending a Non-compliant Tender
The latest significant event in tendering law is a case in which a consultant was found liable to an owner for recommending the owner accept a bid which did not comply with the Information for Tenderers. The court found that if a consultant had an obligation to oversee the call for tenders and review them, then it also had the responsibility to at least identify, if not outright reject, the non-compliant bid, or recommend the owners seek legal advice in that regard. This case underscores the importance of consultants recommending that the owner obtain legal advice with respect to the content of the invitation to bid prior to disseminating the tender documents to prospective bidders and with respect to the acceptability of any bids which may be non-compliant with the Instructions to Bidders. Given the fact that many, if not most, bids are imperfect in one way or another, this case represents another argument in favour of having an experienced construction lawyer on the development team.
The case in question is Tectonic Infrastructure Inc. v. Middlesex Centre (Township), a decision of the Ontario Superior Court of Justice rendered in 2004. The tender in question was a call for tenders by the Township for the construction of water mains and roads. The contract was awarded to a company which was interpreted as the lowest bidder at the time the contract was awarded. However, the successful bidder had inserted handwritten additions to the Form of Tender and various other matters the bidder felt the owner had failed to take into account. In the end, the court found that the additions by the successful bidder were not called for, that they were not clear and unambiguous as to price, that they did not constitute substantial compliance, and were not formalities which could be waived by the owners and, therefore, found that the bid was non-compliant. The court also found that the Plaintiff's bid was the only other bid under consideration and would have been accepted, but for the non-compliant bid. As a result, the court found that the Plaintiff was entitled to damages in the amount of profits it would have realized had it been awarded the construction contract.
The court also found that the consultant was required to draft and prepare the tender documents to suit the project, to analyze and evaluate the tenders, and to make a recommendation with respect to which tenders should be accepted. The owner claimed an indemnity from its consulting engineer. The court found that although the Information for Tenderers and the Form of Tender were standard forms supplied to the consulting engineers, it was the responsibility of the consulting engineers to edit the forms necessary for the particular work going out for tender. The court found that the consulting engineers had an obligation to oversee the call for tenders and review them and the responsibility to at least identify, if not outright reject, the non-compliant bid or recommend the owner seek legal advice in that regard. The consulting engineers failed to identify this effective bid as non-compliant and by recommending it to the owner, the consulting engineers held it out as being compliant. The basis for the finding was negligent misrepresentation arising out of the duty of care owed by the consulting engineers to the Township. The consulting engineers were found liable to the Township for the full amount of the damages claimed by the Plaintiff.
The case highlights one of the weaknesses in the construction industry, which is the reluctance on the part of the developing owners and their professional consultants to obtain legal advice at the appropriate times during the construction process. It is not surprising that developers want to minimize costs in an effort to enhance the profit margin on a project. However, it is surprising that the developer's consultants would not encourage and insist upon legal advice with respect to the content of the Instructions to Bidders and the acceptability of the tendered bids. By highlighting this weakness in the industry, perhaps this case will serve a useful tool for encouraging all parties to seek legal advice when it is obviously needed to avoid a dispute, rather than waiting for much more expensive legal advice after the dispute has arisen.
In our next edition of the Construction Law Bulletin (scheduled for August 2005) we will include another article on this topic, focussing on the liability of consultants, to owners, arising from post-tender "bid shopping."
Consultants' Insurance
Consultants are continually exposed to the possibility of claims being made against them for negligent acts, errors, or omissions in connection with the services they provide.
Consultants are continually exposed to the possibility of claims being made against them for negligent acts, errors, or omissions in connection with the services they provide.
In order to avoid the financial peril that is commonly associated with these claims, consultants must consider obtaining liability insurance. Liability insurance allows the consultant to rely on the insurance provider to pay any court awarded damages or negotiated settlements up to the limit of the policy, less any deductible. In addition, the insurer has a duty to defend an insured's claim until the policy's limit is exhausted, and to pay for any legal defence costs associated with a legal claim.
On April 22, 2005, Clark Wilson LLP presented a seminar on issues related to consultants contracts which included a discussion of the following:
Professional Liability Insurance Policies
Professional liability insurance is designed to protect consultants and consulting organisations from financial loss and civil liability for negligent acts, errors or omissions arising out of the performance of professional services. There are numerous sources of professional liability claims that the consultant must consider, including:
- owners, where damages from deficiencies in the design or the work incur damages;
- contractors, where, as a result of delays or additional costs, incur damages;
- third parties, where damages are incurred as a result of problems during construction or from defects after completion; and
- other consultants, where additional costs are incurred as a result of delays or changes.
It is important for professionals to understand what is typically covered, and what is not. In general, professional liability policies provide coverage for the cost of losses associated with situations involving professional liability. These policies also cover the cost to defend an action, which can be substantial even if liability is not found.
Project Specific Professional Liability Insurance
Another type of professional liability insurance is project insurance, or project specific liability insurance. This type of insurance is applicable only to the particular project for which it was purchased.
These policies typically provide professional liability coverage to the group of design professionals for claims arising from a specific construction project. Project policies are most appropriate for larger, more complex projects where the design team is composed of a head consultant firm and other sub consultants.
Practice Insurance – Typical Exclusions
Architects and engineers can purchase a "practice" policy that applies to all of the work in a consultant's practice, except for the work which is expressly excluded by the particular policy's wording. Practice policies cover errors, omissions or negligent acts in the performance of professional services. Typical exclusions include: fraud; cost estimates; projects in which the consultant has a financial interest; consultant services which are not part of the insured's profession; fines, penalties and punitive damages; construction activities performed by the consultant; pollution; and express warranties, guarantees and indemnities.
General Liability Insurance Policies
General liability insurance protects against claims arising from non-professional activities and business operations. It will protect an organization in the event the organization or any of its employees cause bodily injury or property damage to others and becomes legally obligated to pay damages. Most general liability policies issued to consultants contain exclusions for professional liability claims and other contract performance claims.
Wrap-up insurance is a form of project insurance and is a type of general liability policy. It allows owners and contractors the convenience of dealing with one insurer for claims arising from general liability claims associated with one individual project. Wrap-up insurance usually provides all project participants with high limit insurance.
Design Build Endorsement
Consultants who are involved in design/build projects may seek a design/build endorsement on their practice insurance policy.
Design/ build policies commonly cover only the design professional team. The design/ build endorsement usually modifies a number of exclusion clauses found in a standard practice policy and replaces them with clauses more applicable to construction activities.
Conclusion
It is important to remember that an insurance policy is a contract between the insurer and the insured. Technically, the contracting parties can agree to insure anything and everything. The realities of risk, however, have caused insurers to typically not insure certain activities or events. A recent example is the water ingress exclusion applicable to E&O policies. Architects and engineers should also keep in mind that the broader the coverage, the more the insurance will cost at the outset.
The key is to find the right balance: obtaining insurance for foreseeable risk at a reasonable price. Effective risk management means not only getting insurance, but getting the right type of insurance and coverage in the circumstance, with the right insurer, for the right price.
Builders Lien Act – Frequently Asked Questions
Can a material supplier claim a builders lien, even if it does not provide labour?
Yes. Under the older version of the Builders Lien Act, "materialmen" were defined separately from contractors. However, in the current Builders Lien Act, the material supplier is included in the definitions of contractor and subcontractor.
A material supplier may file a claim of lien for the unpaid price provided that the following criteria are met:
- The material is movable property.
- The material was delivered to the land on which the improvement is located.
- The material must be intended to become part of the improvement.
Note as well that a material supplier includes companies which rent equipment without an operator. So, for example, a company that rents equipment (such as jackhammers, propane heaters, etc.) to another company for use at the subject property, will likely have lien rights for the price of equipment rental.
What is a Notice of Interest?
A Notice of Interest is a document which is filed in the Land Title Office by the owner of the land. The Builders Lien Act provides that if the Notice of Interest is filed before a potential lien claimant provides work or services to the land, then the owner is not liable for liens on its land, except for work or services provided at the owner's express request.
You will often find a Notice of Interest filed on commercial property. This will protect the owner from responsibility for lien payments if one of its tenants hires a contractor for tenant improvements, but does not pay the full amount owing. As an owner, it is a simple, cost efficient way to provide protection from claims of lien in such circumstances. If you are a contractor hired by a tenant, you should consider adding a title search to your credit inquiries before signing the contract. If there is a Notice of Interest filed by the owner, you may wish to have alternate credit arrangements made with the tenant. Conversely, if you are an owner and one of your tenants is undertaking repairs or renovations to the property for which you do not want to be held responsible, you should consider filing a Notice of Interest.
The project has been ongoing for quite a while and there is a lot of money in the holdback account. Who is entitled to the interest that has accrued to the holdback?
Unless the parties otherwise agree, interest accrued on the holdback during the holdback period belongs to the owner: interest accrued after the holdback period accrues to the contractor to whom the holdback belongs.
Where a contract is relatively small, the amount of interest will be nominal. However, where the contract is for a substantial amount of money and the construction spans a year or more, the interest can be substantial and much of it will belong to the owner. As such, parties to a construction contract may want to give some thought as to who should receive the interest where it is expected to be a significant amount of money. The parties must, however, reach their agreement on the division of interest accruing on the holdback prior to the signing of the construction contract.
Correction
In the February 2005 Construction Law Bulletin, in my article entitled "Construction Contracts – Standard Forms" I referred to the Canadian Construction Documents Committee (CCDC) as being "of the Canadian Construction Association". That is not correct and I want to thank Mr. Michael Ernest of the Architectural Institute of BC for pointing out my error. The CCDC is a national joint committee responsible of the development, production and review of standard Canadian construction contracts, forms and guides. Formed in 1974, the CCDC is today made up of appointed members of the Association of Consulting Engineers of Canada, Canadian Construction Association, Construction Specifications Canada, and Royal Architectural Institute of Canada. The committee also includes one owner representative from each of the public and private sectors and an ex-officio member lawyer from the Canadian Bar Association, Construction Law Section.
I also noted in my article, somewhat editorially, that "interestingly enough, no subcontractor association is a member of the CCDC". Mr. Ernest informed me that one of the "contractor" positions on the CCDC is filled by a person who represents the trade contractors.
In additional to the above, we have also learned:
- the CCDC is actively developing a pair of Construction Management contracts, one for the Construction Manager as agent/advisor and the other for the Construction Manager at Risk; and
- the CCDC has published a brand new CCDC 23 guide document, which outlines the process of soliciting and evaluating construction bids and awarding the construction contract.
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