February 23, 2006

By Brian Babcock

Ontario’s highest court recently ordered a construction contractor to pay $434,000 in damages for refusing to perform a contract after it made a $557,000 error in its tender bid. The court would not allow the contractor to withdraw the bid.

To begin with, Construction Law 101: since a 1981 Supreme Court decision, the law of Canada has been that, in the case of most tender forms, two contracts are made. The first contract, known as Contract A, is the agreement that the owner will abide by the rules of the tender, and doctrines of fairness, and, except in exceptional circumstances, award the tender to the lowest qualified bidder. In return, the bidder is obligated, upon acceptance of their bid, to sign Contract B, the agreement to perform the work.

This system works well, and protects the integrity of the tendering system. Difficulties arise in the exceptional cases. Many of those involve errors on the tender form. In the last 30 years, the law has become very technical about:

• which mistakes allow a bidder to withdraw,
• which ought to be fixed, ( a rare case, where an obvious error is amended rather than voiding the bid)
• which require an owner to reject a bid, and
• which are ignored, allowing the owner to accept the mistaken amount of the bid.

The fourth category causes concern to bidders. The Ontario Court of Appeal recently revisited the rules in a case where the error was not obvious on the face of the bid. The issue then became whether or not Contract A was ever formed. The trial judge accepted the contractor’s position that Contract A never existed because the owner’s tender package required the low bidder to provide cost breakdowns and other documents between the opening of tenders and award of Contract B.

The first lesson to be drawn from this decision, Toronto Transit Commission v Gottardo Construction Limited, is that each tendering case will be decided on its own facts. Although the rules are common, and are broadly applied to protect fairness, tendering is still part of contract law, which is the part of the law where private parties have wide reign to make their own rules. The form of tender and the specific nature of the defect might alter the result in a particular case.

Secondly, the court had no sympathy for the argument that Gottardo’s failure to produce the backup documents should render them ‘non compliant’, and disqualify their bid. The court applied the generally understood law, which is that once Contract A is formed, the bidder must perform. Gottardo’s actions, or inaction in not producing backup documents was a breach of contract, but this breach did not free Gottardo from its commitment. Even though the contractor breached the contract, the owner was allowed to enforce Contract A. As the appeal court points out, this is essential for the integrity of the bidding system.

In Gottardo, the error in the bid would have been obvious to the TTC once it reviewed the supporting documents, but was not obvious on the tender form. Gottardo argued therefore that this ought to be like the first category of mistake, where an owner can not take advantage of an obvious error on the tender form itself. The third lesson from this case is that timing matters. If the error was known before Contract A was formed, the mistake would be mutual, and grounds to allow Gottardo to void the contract. Discovery later has now been confirmed to be a different case – the fourth group of situations, where the owner may insist on performance, or claim damages when required to pay a higher price.

The fourth lesson to be learned is that financial hardship alone will not be enough for a court to relieve the contractor of its responsibility under Contract A. Even where a bidder breaches Contract A, legal principles known as equity apply to allow a judge to excuse performance where the result would be unfair. Unfairness however is not left as one judge’s instinct, but is tested accordingly to well-developed concepts.

The Court of Appeal confirmed that any hardship must be grossly disproportionate and unconscionable to allow the bidder to escape its obligations. The appeal court does not define what would be grossly disproportionate. In Gottardo, the error was $557,000 on a $4,811,000 tender, resulting in damages to the owner of $434,000. Despite the large numbers in the case, we might generalize that a 10 to 15 % error is not grossly disproportionate. That might however, depend on the evidence available as to the sophistication of the bidder (Gottardo was a large and experienced contractor) and the impact which the loss of revenue might have on the bidder. Since bidders often include 10% for profit and additional amounts for overhead, it makes sense that the error in this case ought not to be considered ‘gross’.

To recap:

1. Contract A is the obligation of the low bidder to enter into a contract, contract B, which is the Contract to complete the work.
2. An error on the face of a bid will prevent the formation of Contract A.
3. The courts will apply the common rules to maintain the integrity of the system, but each case turns on its own facts. As a result, well-drafted documents are a key for the owner, and careful review is key for a bidder.
4. The integrity of the bidding system requires, where tender documents are properly drafted to create Contract A, that bidders not be allowed to escape this obligation through post tender non compliance.
5. Timing matters to arguments of mistake. A mutual mistake allows a bidder to escape performance, but not a unilateral mistake.
6. The courts will forgive a unilateral mistake and allow the bidder not to perform Contract A if the error is grossly disproportionate and would lead to an unconscionable result.

We at Weilers have decades of experience acting for all parties to construction claims, and are available to advise, draft, negotiate, mediate, arbitrate, or litigate, as needed.