Clark Wilson LLP

November 2004

Protecting the Integrity of the Tendering Process

The decision of the British Columbia Court of Appeal in Graham Industrial Services Ltd. v. Vancouver Water District1 is another milestone in the Law of Tendering in Canada. In this case the successful tenderer, Graham Industrial Services Ltd. ("Graham"), petitioned the Court for declarations that the tender it had submitted to the Greater Vancouver Water District (the "District") for construction of the Capilano Pump Station failed to comply with the Instructions to Tenderers and consequently no contract was formed between Graham and the District and that Graham's tender was incapable of acceptance by the District.

Graham launched its petition following the opening of tenders, when it was discovered that its tender was about $5 million lower than the other three tenders submitted. Immediately after the opening of the tenders Graham advised the District that its tender contained an arithmetical error and sought to withdraw it.

At the hearing of the petition Graham argued that its tender was incapable of acceptance by the District because it was non-compliant with the Instructions to Tenders in various respects, including misnaming and misdating of the bid bond as well as its failure to provide certain technical information required by the Instructions to Tenderers.

The District reviewed the tender and advised Graham that it considered Graham's tender to be without material defects and accordingly awarded the contract to Graham and forwarded the contract documents for execution. According to the Instructions to Tenderers, if Graham did not execute and return the contract documents within ten days of receipt, it risked the loss of its bid bond or an action for the difference between its tender price and the next lowest tender. At the hearing of the petition, the District relied on a Discretion Clause in the tender documents that permitted it to deem any defects to be non-material. Additionally, the Instructions to Tenderers contained a Privilege Clause which gave the District the right to accept or reject any tender and to accept all or any part of a tender or award all or a portion of the work to a any tenderer.

The Supreme Court agreed with Graham that its tender was non-conforming in material respects and concluded that the District could not accept Graham's tender and that no contract A, or tender contract, came into existence.2 The Court found that the alleged non-compliance with the Instructions to Tender resulting from the misnaming and misdating of the bid bond of no significance, as it was likely that the surety would issue final bonds in the name of the correct entity if the contract was awarded to Graham. However, the Court focused on the technical requirements in the Instructions to Tenderers and found that Graham's unresponsive responses were so patently deficient that they could not, on an objective reading, be said to "conform in all material respects to the Invitation to Tender".

At the Court of Appeal, the District contended that the Supreme Court erred in substituting its analysis as to the adequacy of Graham's tender for that of the District. The District argued that it was not open to the court to substitute its discretion, or objectively scrutinize the owner's exercise of its sole discretion under the Discretion or Privilege Clauses. It further argued that the Supreme Court's conclusion is contrary to the express terms and conditions in the Instructions to Tenderers, contrary to the relevant authorities, and cannot be sustained in the absence of any allegation, evidence, or finding of bad faith.

Graham, on the other hand, argued that the decision of the Supreme Court correctly used an objective test to scrutinize the District's exercise of discretion and that such objective scrutiny discloses material defects in its tender, which renders it incapable of acceptance.

The other tenderers, who were joined by Graham in the original petition, supported Graham in its submissions and argued that to construe the Discretion and Privilege Clauses as granting the District an unfettered discretion to determine which tenders are compliant, would undermine the integrity of the tendering process.

The Court of Appeal agreed with the Supreme Court and found that a Discretion Clause cannot be used to render a materially non-compliant tender capable of acceptance. No Contract A comes into existence unless the tender is substantially compliant with the call for tenders. The Court concluded that the test whether a defect in a tender is material is an objective test, so that the Court is entitled to substitute its view for that of the Owner.

Also important are remarks by the Court of Appeal with respect to certainty in the tendering process. The Court concluded as follows:

"The conclusion that the Discretion Clause cannot operate to bring a non-compliant bid into existence and thereby create Contract A does not introduce uncertainty into the tendering process. Rather, it enhances certainty. It ensures that the owner will only exercise its decision-making discretion in respect of bids that are materially complaint. It also ensures that all contractors can be confident that their bids will receive fair consideration and be neither accepted nor rejected for arbitrary reasons. In these respects, I consider that my conclusion protects the integrity of the tendering process."

However, the industry must now wrestle with the issue of what defects would render a tender non-conforming in material respects that it cannot be accepted.

Hannelie Stockenstrom

References

  1. 2004 BCCA 5, 40 B.L.R. (3d) 168, 25 B.C.L.R. (4th) 214
  2. The contract A/Contract B analysis of the tendering process is set out in R. v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111, 119 D.L.R. (3d) 267, 13 B.L.R. 72 (S.C.C.)

Continuing Responsibility of Owner in Builders Lien Action

The Supreme Court of British Columbia recently held that an owner remains a proper party to an action to enforce a claim of lien even when security has been posted pursuant to s. 24 of the Builders Lien Act (the "Act").

In Paramount Drilling and Blasting Ltd. v. North Pacific Roadbuilders Ltd. and others 2004 BCSC 622, the lien claimant had started an action to enforce its claim of lien. The general contractor applied for an Order to pay money into Court as security for the land, as permitted by s. 24 of the Act. That application was granted, the funds were paid into Court, and the claim of lien was removed from title. The owners then brought this application to substitute themselves with the general contractor as the defendant in the action, such that the action against the owners would be effectively dismissed.

In bringing their application, the owners relied on an earlier decision where the B.C. Supreme Court did order that the action be dismissed against the owner in similar circumstances: Blueline Stucco Ltd. v. Discovery Reach Developments Ltd., [1998] B.C.J. No. 1883 (QL) (S.C.). The Court in Paramount Drilling considered the Blueline decision, but also considered some cases decided under the earlier version of the Act. The Court in Paramount Drilling did not follow the Blueline case, but instead followed the earlier cases decided when the former version of the Act was in force. The Court in Paramount Drilling found that the Act did not allow the action to be discontinued against the owners because the claim of lien remained a claim against the land, even though the funds paid into Court were a substitute for the land. Since there remained a claim against the land, the owners remained proper parties to the action.

The Court suggested that the owners might be entitled to a stay of proceedings as against them, until the action between the general contractor and the lien claimant was determined. However, as this issue was not squarely before the Court, no final determination on this point was ever made.

This case is significant because owners often require clear title and pay money into Court, or into trust, as security for that purpose. This case found that even when this is done, and the claim of lien is removed from title, the owner remains a proper party to the action brought by the lien claimant. By remaining a party to an action, the owner may incur further legal fees, and may also ultimately be held liable to the lien claimant for costs over and above the amount paid into Court as security. This is of particular concern when the other defendant (i.e. the general contractor) becomes insolvent, and the lien claimant looks to the owner for payment of all legal costs.

How can the owner protect itself in such circumstances? As noted above, the Court may grant a stay of proceedings against the owner, which temporarily allows the owner to cease participation in the action. An owner may consider posting (or have the general contractor post) more than the usual 10% or 15% as security for costs, particularly if the amount of the claim of lien is modest. An owner may also consider an indemnity agreement with the party it has contracted with (i.e. the general contractor).

Note that leave to appeal of the Paramount Drilling decision has now been granted, which means that the Court of Appeal will decide whether or not the decision in that case should be overturned.

If you would like a copy of the Paramount Drilling decision, or have any questions regarding the decision or builders liens in general, contact Amy A. Mortimore at 604.643.3177 or aam@cwilson.com.

Kraft Construction Co. v. Martech Electrical Systems Ltd. Construction Delay: A Case Comment

The decision of the B.C. Supreme Court in the Kraft Construction1 decision underscores the complexities in both advancing, and defending, construction delay claims. The purpose of this article is to briefly review the Court's decision, and to provide some practical guidance for contractors and owners alike in the event that they are faced with a delay claim.

The Kraft case arose out of the construction of the Prince George Courthouse. Kraft Construction Co. ("Kraft") was the general contractor, and Martech Electrical Systems Ltd. ("Martech") the electrical subcontractor. Substantial completion of the Courthouse had been scheduled for September 19, 1996, but actual completion did not occur until March 12, 1997: a delay of nearly 6 months (2 months of which was the result of a sprinkler leak, which was the fault of neither party, and which was discounted in considering the delay claims advanced). Kraft and Martech each advanced claims against the other as a result of the construction delay: Martech alleged that the delay was as a result of Kraft's lack of site coordination, mismanagement and prolonged site inspections by the project consultant, and Kraft alleged that the delay was a result of Martech's lack of performance and late completion of its subcontract. This dispute resulted in 50 days of trial in 2002, with reasons for judgment being delivered in May, 2004. Ultimately, the Court held that each party had sustained delay, partially attributable to the other. The Court allowed damages to Kraft in the amount of $106,962, and damages to Martech in the amount of $415,675. Needless to say, the judgment amounts were significantly less than the amounts either party actually claimed.

Some of the key legal and evidentiary issues raised in the decision are as follows:

  1. It is an implied term in every construction contract (in the absence of explicit language to the contrary) that an owner or general contractor will not unreasonably delay or hinder a contractor in the execution of his work. That implied term will form the basis of a delay claim including any delay caused by other contractors hired by the owner or general contractor (unless a reasonable reason for the delay can be established).
  2. A contractual requirement mandating that notice of a claim for delay be made "within a reasonable time after the first observance of such damage" does not require each party to assemble a completely quantified claim at the first indication that delay had occurred. Rather, while each party should act quickly to put the other on notice of potential claims, it would be unreasonable to expect a fully quantified claim to be put forward until the project was actually completed.
  3. There are evidentiary hurdles which need to be overcome in advancing delay claims, both in establishing that a delay has occurred and, more importantly, that there has been a resultant loss. Careful, and contemporaneous documentation is the key to advancing a successful delay claim.

Legal Issues

  1. Liability of general contractor for delay caused by other subtrades

    In Kraft Construction, the subcontract contained a clause allowing either party to the agreement to make a claim if it suffered any damage "because of any neglect of the other party or of anyone employed by him… ". Kraft argued that the provision of its subcontract with Martech did not explicitly contemplate liability of the contractor for the acts or neglect of its other subcontractors. By comparison, Kraft argued that the wording of Clause GC 9.2.1 of the CCDC-2 Stipulated Price Contract did contemplate the extension of the contractor's liability to include the acts of other subcontractors by virtue of the following language:

    9.2.1 If either party to the Contract should suffer damage in any manner because of any wrongful act or neglect of the other party or of anyone for whom the other party is responsible in law, then that party should be reimbursed by the other party of such damage.

    The Court held that the contract between Kraft and Martech, even though it did not include the language of the standard CCDC-2, had to be interpreted to include subcontractors in the meaning of "anyone employed by Kraft." The Court went on to hold that it is an implied term in every fixed price contract that the owner or general contractor will not unreasonably delay or hinder a contractor in the execution of its work. "Unless the contract in question expressly deals with the issue, such a term shall be implied and the contractor may claim damages for unreasonable delay, including those caused by other contractors hired by the owner or general contractor."2 The only limit on that implied term is situations where the delay of the other contractor is found to have been reasonable (for example where inclement weather has prevented the contractor from continuing), in which case the owner or general contractor will not be liable for the delay. If a general contractor, or owner, wishes to displace a subcontractor's right to claim damages from delay as a result of another subcontractor's actions, this must be expressly stated in the contract. While this might appear inequitable, the Court notes that the general contractor or owner in such a situation will be in a position to seek recovery from the subcontractor(s) whose work gave rise to the damages. In this case, the Court held that the owner, and Kraft, were each 50… responsible for 4 weeks of delay caused by the millwork subcontractor.

    1. Notice of a delay claim must be made within a "reasonable" time

      The contract between Martech and Kraft simply required that delay claims be made, in writing, "within a reasonable time after the first observance of such damage." (This is in contrast to the provisions of Clause GC 6.5 of the CCDC-2, which allows for extension of the contract in the event of delay, and reimbursement for related costs, if notice, in writing, of a claim is given within 10 days after the commencement of the delay.)

      Martech and Kraft's contract raised two issues: what is "reasonable" and what constitutes the making of a claim. The Court ultimately held that both parties, merely through early letter writing and written memoranda complaining of delays in the scheduled completion, satisfied the notice requirements under the contract, although a detailed quantification of each party's claim was not forthcoming until after substantial completion. In coming to that conclusion the Court commented that the relevant provision dealt with "making claims, not providing notice of claims or intentions to claim, but providing express or implied notice of an intention to claim serves to alert a party so that it can alter its position. In this case, it would not be reasonable to expect either of the parties to actually put a quantified claim forward until the project was completed, as they did."

    Evidentiary issues

    As mentioned above, this case resulted in 50 days of trial time, evidence at which included over 8,500 numbered images of documents scanned into an electronic database. The Court noted, repeatedly, the importance of the documentary evidence in the determination of the issues between the parties, both in order to establish the cause of the construction delay and the resultant loss to each of the parties.

    Ultimately, after an extensive review of the evidence, the Court found that identifying the significant individual causes of delay was not the difficult part of the exercise: the real difficulty arose in determining the ultimate effects of each delay, particularly in light of the complex nature of the construction. As the Court pointed out, not all delays directly impacted on costs by causing equivalent delay in substantial completion. While the various methods by which delay claims can be quantified is beyond the scope of this article, it is clear that simplistic approaches to the quantification of delay claims (such as claiming the difference between actual cost and estimated cost) are not likely to succeed. As such, the careful collection of documentation in the field, from the moment the existence of a delay claim is suspected, is critical in order to establish one's case. Some of the key documents which any owner or contractor either advancing, or defending, a delay claim should be sure to collect are as follows:

    1. tender package;
    2. all signed contracts and subcontracts;
    3. all change orders, change directives and site instructions;
    4. all construction schedules (both original and revised);
    5. all field notes and correspondence;
    6. all purchase orders and other accounting and payroll records;
    7. all drawings issued in the course of construction (including issued for construction drawings, as-built drawings and shop drawings)
    8. all meeting minutes;
    9. photographs of the site conditions from the moment a delay claim is suspected; and
    10. contemporaneous notes delineating the effect of delay on the work.

    Stephanie Jackson

    References

    1. [2004] B.C.J No. 1063
    2. Kraft Construction, paragraph 280

Comments & Feedback