The Muddy Waters of Tendering Law

The Straight Line Newsletter — Issue #5

In This Issue

Hari Panday. Pro-Demnity Board Member

At a recent meeting of the Pro-Demnity Board, Hari Panday was elected as the first non-architect Chair. Hari is a seasoned executive and an independent director with over 35 years’ experience in the investment industry, private capital markets and non-profit sectors in Canada and the USA. He owns PanVest Capital Corporation which is engaged in corporate finance and advisory services to boards, respecting corporate governance, risk management, business strategy and new market development.

In addition, Hari is a director of Tarion Warranty Corporation. His not-for-profit contributions include service on the boards of the Canadian Forces Foundation; the Institute of Corporate Directors, Ontario Chapter; C.D. Howe Institute, National Council; the Corporation of Roy Thomson Hall and Massey Hall; and as Honorary Governor of the Royal Ontario Museum.

Hari is an Honorary Lieutenant-Colonel, 32 Service Battalion, Canadian Armed Forces, focusing on economic self- sufficiency of our men and women transitioning out of the Armed Forces.
Hari was awarded the Queen Elizabeth II Diamond Jubilee Medal. In 2008 India Abroad named him to its Power List of 35 most influential Indo-Canadians, and in June 2009, he received the Corporate Executive of the Year Award from the Indo-Canada Chamber of Commerce.

— The Editor

The muddy waters of tendering law

As the rules that apply to tender calls and award of the work continue to evolve, new obligations and rights are created for owners and contractors who participate in a bid process. But “muddy” situations may arise, requiring that architects, owners and their legal advisors, maintain an awareness of the evolving laws, and pay careful attention in the preparation of tender documents as well as the evaluation of the bids submitted.

Having issued a call for bids, an owner will review the tenders received and select the bid that is most attractive, generally the one that offers the lowest cost or the greatest value to the owner. The process and evaluation method that is most commonly used now is a direct result of the landmark decision of the Supreme Court of Canada (SCC) in The Queen (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111 (“Ron Engineering”). At first glance, the legal process seems straightforward enough, but the fallout from the decision has led to a convoluted legal regime that is with us to this day.

In Ron Engineering, the SCC stated that a contract was formed simply by the sub-mission of a bid in response to the tender call. The SCC referred to this contract as “Contract A,” to distinguish it from the construction contract that the successful bidder would ultimately enter into with the owner, referred to as “Contract B.” In other words, there are generally several Contract A’s formed when an invitation for tenders is released – each the result of separate bids by prospective contractors – but only one Contract B is formed with the successful bidder.

The provisions of Contract A are governed by the terms and conditions of the tender call. General principles of this contract include the irrevocability of the bid, the qualified obligations of the owner to accept the lowest tender, and the obligation of both parties to enter into Contract B upon the acceptance of the tender. This means that the fundamental terms of Contract B are also governed by the tender call.

Prior to Ron Engineering, a call for bids was simply that – an invitation to submit a tender – and a construction contract would be entered into with the chosen bidder. After the decision in Ron Engineering, and the introduction of Contract A, a new legal regime came into being – one that had never been seen before – raising new questions about the nature and terms of Contract A. For example, is the owner able to accept a bid that does not completely comply with the tender documentation? Or, in other words, is one of the terms of Contract A that only a fully compliant bid will be accepted by the owner?

This question was answered by the SCC in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. [1999] 1 S.C.R. 619 (“M.J.B.”). The SCC, in this case, was reviewing the implication of an “exclusion clause” or a “privilege clause” in the invitation for tender. This clause provided that “the lowest or any tender shall not necessarily be accepted” and the owner in question was engaging the privilege clause in order to disregard the lowest bid in favour of another tender, which was technically a non-compliant bid. The SCC ruled that the owner did in fact breach Contract A by accepting a non-compliant bid, thereby confirming that it is indeed a term of Contract A that only a fully compliant bid will be accepted.

This question was answered by the SCC in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. [1999] 1 S.C.R. 619 (“M.J.B.”). The SCC, in this case, was reviewing the implication of an “exclusion clause” or a “privilege clause” in the invitation for tender. This clause provided that “the lowest or any tender shall not necessarily be accepted” and the owner in question was engaging the privilege clause in order to disregard the lowest bid in favour of another tender, which was technically a non-compliant bid. The SCC ruled that the owner did in fact breach Contract A by accepting a non-compliant bid, thereby confirming that it is indeed a term of Contract A that only a fully compliant bid will be accepted.

Most recently, the SCC returned to a review of the law of tendering in Tercon Construction Ltd. v. British Columbia
(Transportation and Highways), 2010 SCC 4 (“Tercon”). Tercon adopted and reinforced the principles previously established by the SCC with respect to the tendering process in Ron Engineering and M.J.B.

In Tercon, the owner accepted a non- compliant bid on the apparent authority of the privilege clause. Of particular importance in this case was the fact that the privilege clause also appeared to preclude any bidder’s claim for damages resulting from the tendering process. The plaintiff, the second-lowest bidder (and lowest compliant bidder), sued for damages anyway. In a lower court decision, the plaintiff was successful, and was awarded damages. The owner appealed, and the Court of Appeal disagreed with the lower court decision, siding with the owner. It found that the privilege clause was clear and barred all compensation for defaults. The plaintiff then appealed to the SCC.

In reviewing the privilege clause, the SCC held that when a plaintiff seeks to escape the effect of a privilege clause, the first issue is a consideration of whether the privilege clause applies to the circumstances. If so, the second issue is whether the privilege clause is unconscionable at the time, and therefore, invalid. In Tercon, the SCC found, in a 5–4 result, that the privilege clause did not exclude damage claims resulting from an owner’s decision to permit a non-compliant bid in the tendering process. This was a pure breach of the express and implied terms of the tendering contract. The SCC restored the lower court’s decision and the damage award.

Tercon also dealt with the principle that a Contract A may be entered into at the time a bid is submitted, depending upon whether the parties intend to initiate contractual relations by the submission of a bid. If so, the SCC clarified that the terms and conditions of Contract A are governed by the terms and conditions of the tender call. The SCC found that the privilege clause is only one term of Contract A and must be read in connection with the rest of the tender documents. The SCC also found that “clear language is necessary to exclude liability for breach of such a basic requirement of the tendering process, particularly in the case of public procurement.” In other words, the court set out that expansively worded privilege clauses will apply to limit the liability, or increase the discretion, of the owner.

The impact of the Tercon decision is noteworthy, in that it speaks to the possible breadth of privilege clauses, and how owners can use them to their advantage. At the same time, the effects of privilege clauses are inherently limited by the tenets of tendering law – for example, the duty of an owner to accept only a compliant bid, and the duty of an owner to treat all bidders equally and fairly (Martel Building Ltd. v. Canada, 2000 SCC 60).

This area of law is technical and complex and continues to be reviewed by the lower courts. The Ontario Court of Appeal (OCA) released a decision in September, 2014, Rankin Construction Inc. v. Ontario, 2014 ONCA 636 (“Rankin”) which may assist with (or further confuse) the interpretation of the law. In Rankin, a bidder submitted a tender that was by far the lowest, although it contained a minor irregularity. The value of the irregularity was immaterial to the difference between its bid and the next lowest, and as a result, had no meaningful effect on the process. Even so, the owner, clearly fearing the impact of the irregularity, selected the second lowest bid. In response, the first bidder sued.

The OCA reasoned that an owner is able to investigate allegations of non-compliance, but there was no obligation for an owner to do so. In this circumstance, the privilege clause in the tender documents dictated that the owner “may, but is not required to, waive non-compliance by a bidder that amounts to a ‘formality,’” although “formality” was unfortunately not defined in the tender documents. Here, the OCA found that the owner exercised its discretion to not waive the formality in good faith, and as a result, dismissed the claim.

Interestingly, the decision-making was ultimately inefficient, as the owner in Rankin ended up accepting a significantly higher bid than the one that appeared
to be the lowest. This naturally leads to additional confusion with respect to the state of the law.

Although the law is convoluted, a number of conclusions can be drawn from this legal regime and the development of the case law. The following are all points that owners/bidders, and their representatives, should keep in mind:

  • Parties should strictly adhere to the tender documents: the scope of the project and evaluation criteria should be clearly set out in the tender documents and should be followed closely by every interested party. The tender documents may also set out what occurs if none of the bids are acceptable, and what options the owner has in that scenario;
  • Owners must treat all bidders equally and fairly: the same scope and evaluation criteria must be applied by the owners to all bidders; and
  • Privilege clauses may be relied upon, but do not empower owners to accept non-compliant bids: expansively worded privilege clauses can be helpful to owners, but courts are not afraid to limit their scope if they breach a tenet of tendering law, such as the inclusion of a privilege clause that will result in favouring a particular bidder.

— Matthew Urback

Practical considerations for architects to keep in mind when assisting clients in formulating tendering documents can include the following:

  • Fill out a draft response or Form of Tender from the perspective of a bidder: owners have found themselves in trouble when they have failed to identify a problem point or ambiguity in their draft. This method can provide a fresh perspective for the owner and may uncover an ambiguity that was previously unknown;
  • Ensure that the tender is in compliance with over-arching laws or regulations: municipalities have bylaws that they must comply with and a failure to do so can lead to future litigation;
  • Include evaluation criteria in a clear and straightforward manner: tenderers should be able to clearly understand the basis upon which their tender will be evaluated;
  • Stay within your expertise: in evaluating tenders, architects should not simply be the mouthpiece for the owner, but should provide independent, neutral advice remembering that their role is separate and apart from that of the owner; and,
  • Consult a lawyer: for economy, owners and their representatives are sometimes reluctant to do so until necessary, even if they do not have answers to particular questions. This is a complicated area of the law and a tender call may require the assistance of counsel. It is certainly true here that “an ounce of prevention is worth a pound of cure.”

Architects are easy targets for lawsuits – frivolous and otherwise

Any fool with $250 and a typewriter can sue anybody. In my own practice I have seen an architect sued over mechanical defects, a mechanical engineer sued over structural defects and a structural engineer sued over building envelope defects. A contractor often has no money and insurance will not cover workmanship defects, so the plaintiff will try to place liability on insured “deep pockets” defendants such as architects and engineers.

As a design professional, you cannot control whether you are sued, but you can control your exposure and outcome by managing risks from the outset. Wherever possible, a proposal for services, an engagement letter or a contract for your services should define a monetary limit to exposure and limit the types of claims. The monetary limit should be no higher than the policy limit for a single claim under your professional liability insurance.

As well, whenever possible, you should exclude liability for “consequential damages,” such as loss of profits expected from a delayed project. Damages of this kind can break your company if they exceed your insurance coverage. If you are acting as a sub-consultant, make sure that any limits of liability negotiated by the prime consultant apply to you as well.

An architect or engineer may not be able to negotiate the most favourable terms for limiting liability, but a design professional has complete control over the definition of the scope of its services. Lawsuits are often not about the design, but about as-built construction relative to the design and adequacy of the field review. These topics are often ignored in an engagement letter. The architect should exclude responsibility for changes made without its approval.2

The number, purpose and scope of field reviews should be defined, and should expressly state that a review is not an inspection. The owner or contractor must be assigned the responsibility to call for a field review at defined stages. Too often a required field review is called too late or is not called at all. Architects or engineers are then asked to provide a certification of field work that they should not issue, and often lack the resolve to require finished work to be opened up for review.3

If you are sued, or if there is even a threat of a lawsuit, notify your insurer. An often overlooked benefit of professional liability insurance is that it pays the cost of defence of any lawsuit (subject to a deductible that may apply to defence costs on some policies).4 Counsel appointed by your insurer can give you guidance in dealing with the claim and can minimize the impact of the legal process on you and your practice.5 Experienced defence counsel will know how to set the stage for a higher award of costs against the plaintiff if the court dismisses the claim, but those costs will go to the insurer who is paying for the defence.

Due to the prohibitive cost of going to trial, most claims are resolved through mediation. Settlement often requires a modest contribution by all defendants regardless of fault. Buying your way out of a lawsuit is often the most practical and cost effective solution. If there is no fault at all by the design professional, the payment will be made entirely by the insurer, as the insurer is paying to reduce its defence expense. If there is some exposure to the design professional, it will have to contribute some part of its deductible,6 depending upon the policy provisions.

I am often asked about recovering the internal costs incurred by an architect or engineer in dealing with such claims. Unfortunately, Canadian law does not recognize this kind of compensation.

In conclusion, become familiar with the provisions in the standard forms of Client–Architect agreement provided by the OAA or the RAIC. Get legal advice regarding your standard engagement letter if you do not use the standard forms of agreement provided by the OAA or RAIC. Get legal advice regarding any supplementary conditions or amendments to these standard forms of agreement prepared by yourself, a client or sub-consultant. Talk to your insurer about coverage concerns or insurance requirements specified by a client; and be prepared to say “No!” to risks that exceed your insurance coverage.
— Philip Carson

Comments from Pro-Demnity
  1. Many architects would like to imagine that they are the subject of a “frivolous” lawsuit. But regardless of merit, Pro-Demnity must provide a defence, if only to get the action dismissed. In reality, few actions are truly “frivolous”, notwithstanding that some (or even many) aspects of the claim may turn out to be without particular merit.
  2. Refer to Pro-Demnity Bulletin: Dealing with Substitutions to Your Design, December 31, 2016.
  3. Claims related to insufficient or negligent field review services have been identified as one of the highest claim categories, across most building types. This research has been the subject of Loss Prevention seminars over the past year, starting in the fall of 2016. Pro-Demnity and the OAA have prepared a new Claims Experience Workbook including checklists aimed at reducing claims related to field review.
  4. The Pro-Demnity policy provided to Ontario architects under our mandatory regime does not apply the deductible to defence costs, although excess policies available from other insurers may do so, particularly for higher claim limits.
  5. Pro-Demnity is owned by the architectural profession in Ontario. Our claims staff (and the counsel we retain) works to minimize impact on our insureds and their practices.
  6. Pro-Demnity policies include a “disappearing deductible” that has the architect paying a pro-rata share of its full deductible for damages paid up to $250,000. For example, if damages amount to $100,000 (40% of $250,000), the architect pays only 40% of the deductible. 100% of the deductible applies for damages at or above $250,000.

Our Contributors

Matthew Urback is lawyer at Shibley Righton LLP. He practices in various areas, including in the areas of Professional Liability, Wills and Estates, and Employment Law. He graduated from Queen’s University’s Faculty of Law in 2010 and was called to the Bar in 2011.

Matthew can be reached at:
Shibley Righton LLP
250 University Avenue, Toronto, ON M5H 3E5
Telephone: (416) 214-5200

Philip Carson, partner with Miller Thomson LLP, is based in Calgary. His practice includes litigation respecting construction, builder’s liens, professional negligence and real estate disputes. Philip has a strong practical understanding of construction and design which he draws on to defend negligence against architects and engineers and address disputes over construction contracts.

Philip can be reached at:
Miller Thomson LLP
700 – 9th Avenue S.W., Suite 3000, Calgary, AB T2P 3V4
Telephone: (403) 298-2403

The Straight Line is a newsletter for architects and others interested in the profession. It is published by Pro-Demnity Insurance Company to provide a forum for discussion of a broad range of issues affecting architects and their professional liability insurance.

Publisher: Pro-Demnity Insurance Company
Editor: Gordon S. Grice
Design: Finesilver Design + Communications
Address: The Straight Line c/o Pro-Demnity Insurance Company 200 Yorkland Boulevard, Suite 1200 Toronto, ON M2J 5C1

Pro-Demnity Insurance Company is a wholly owned subsidiary of the Ontario Association of Architects. Together with its predecessor the OAA Indemnity Plan, it has provided professional liability insurance to Ontario architects since 1987.

Questions related to the professional liability insurance program for Ontario architects may be directed to Pro-Demnity Insurance Company. Contact information for the various aspects of the program can be found on the Pro-Demnity website:

Pro-Demnity Insurance Company makes no representation or warranty of any kind regarding the contents. The material presented does not establish, report or create the standard of care for Ontario architects. The information is by necessity generalized and an abridged account of the matters described. It should in no way be construed as legal or insurance advice and should not be relied on as such. Readers are cautioned to refer specific questions to their own lawyer or professional advisors. Letters appearing in the publication may be edited.

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