October 15, 2008
By Robert Kennaley
McLauchlin & Associates

Robert KennaleyOne aspect of the law of tendering, which is particularly misunderstood, is how the law applies to the relationship between a contractor and a subcontractor.

Contractors who bid on a contract with an owner as part of a tender process will often receive bids for portions of the work from subcontractors. In other circumstances, contractors who already have a job will ask subcontractors or suppliers for quotes. In these circumstances, can the contractor owe an obligation to award a subcontract contract to any particular subcontractor or supplier? If so, when, and on what terms?

The short answer is yes, the contractor can owe such an obligation, depending on the circumstances of the case. There is a great deal of confusion, however, over when, and if such an obligation will arise.

The point to remember is that any such obligation will arise, firstly, as part of a tender process and, secondly, as a contractual obligation. In other words, the obligation will only arise where the quotes are given as part of a tender process and where it can be shown that the parties have agreed, either expressly or by implication, that the obligation is binding in the circumstances.

That any such obligation is contractual, depending on the circumstance, has been well established by the Supreme Court of Canada. First, in a landmark case, Ron Engineering & Construction (Eastern) Ltd., [1981], 1 S.C.R. 111, the Court established that the tender created a contract (‘Contract A’) between the owner and contractor. A term of the contract was that the bidder would hold his price for a certain period of time and then enter into the construction contract (‘Contract B’) if the owner accepted his price.
The obligations of the owner as part of a tender process were then dealt with by the Supreme Court in M.J.B. Enterprises Ltd. the Defence Construction 1951 Ltd., [1999] 1 S.C.R. 619. In M.J.B., the court confirmed that a contract is not always formed on the submission of a tender. Rather, the court held that the facts of each case would have to be looked at to determine if the parties intended to enter into a contract in that regard. The court then further held that, if a contract does arise upon the submission of a tender, the terms of the contract would also have to be determined with reference to the particular case, as they are with any other contract, and not with reference to some abstract legal rule.

The court has held that, again, the terms of the contract may arise by implication. As revealed in previous columns, the court held that when a contractual tender relationship has arisen, the contract will generally impose the following implied obligations on the owner: to treat bidders fairly and equally, to only accept compliant bids and to only consider disclosed criteria in assessing bids. There is, accordingly, no rule that an owner must necessarily accept the lowest contractor’s bid as part of a tender process. However, a bidder may have a complaint against an owner, depending on the circumstances of the case, if the owner has breached any of the above referenced obligations.

In Naylor Group v. Ellis-Don Construction [2001], 2 S.C.R. 943, the Supreme Court stated that while Ron Engineering and M.J.B. dealt with owners and contractors, “The Contract A/Contract B approach rests on ordinary principles of contract formation, and there is no reason in principle why the same approach should not apply at this lower level.” Accordingly, the court has made it clear that, depending on the facts of the particular case, the same type of obligations can be imposed on a contractor who receives quotes from subcontractors. Whether such obligations arise, however, will depend on whether or not it can be said that the contractor and the bidding subcontractors intended for the obligations to arise.

The circumstances upon which a contractor might receive bids from a subcontractor or supplier, of course, can vary widely. Sometimes the bids are requested, and sometimes the bids are unsolicited. Sometimes the contractor is asked to name his subcontractors and/or suppliers as part of his bid to the owner. In other circumstances, the contractor may simply be asked to provide a price in relation to portions of the work. Sometimes, the owner will make it clear that the contractor must award a subcontract to the subcontractors named in its bid. In other circumstances, the owner will have little, if any, say in determining which trades the contractor may retain.

Because the circumstances can vary widely, contractors who are concerned about possible claims from subcontractors should be careful when the tender forms they submit to an owner requires them to name their subcontractor or their subcontractor’s price. This might be enough for a court to decide that the contractor intended to award to that subcontractor.

Contractors might also wish to make it expressly clear to bidding subcontractors that, while they will consider their bids, there is no contractor/subcontractor tender process and the contractor accordingly owes no obligations to bidders in that regard. On the other hand, of course, subcontractors should be aware that, depending on the circumstances, they may be able to establish that the contractor has breached its contractual obligations as part of a tender process, such that they are able to recover damages for breach of a tender contract.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America.  He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.