Can A Change To A Construction Contract Be Set Aside For Duress Or Coercion?

Building projects often give rise to heated discussions. When a change order is made in that sort of situation, can one party later say that the change order was made under duress or coercion? The Newfoundland Court of Appeal said Yes in the recent decision in Hickey’s Building Supplies Ltd. v. Sheppard.

Background Facts

This decision was reviewed in the last article June 7, 2015. To refresh our memories the facts were as follows:

Mr. and Mrs. Sheppard hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements. The construction of the home was more than a year late. When constructed, the flooring was not level and there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard.

One of the issues in the case was whether the Sheppards had agreed to a change in the height of the ceiling from 9 feet to 8 feet. The contractor said that he had discussed the height of the ceiling with Mr. Sheppard who had agreed to the lower ceiling. The contractor submitted that the Sheppards had waived any requirement of 9-foot ceilings.

Mr. Sheppard said that when he met with the contractor, the meeting degenerated into shouting. Mr. Sheppard said that he agreed to the 8-foot ceilings because he could not countenance any further delays in the project. Mrs. Sheppard said that the contractor was adamant that “we’re not getting nine foot walls.”

Decision of the Court of Appeal

The Court of Appeal adopted the following definition of waiver:

“waiver…arises where one party to a contract, with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal.”

The court then adopted the following test as to whether waiver had occurred:

“…a finding of economic duress is dependent initially on two conditions precedent:

(i) the contractual variation must be extracted by pressure in the form of a demand or threat;

(ii) the exercise of pressure must be such that the coerced party has no practical alternative but to comply with the demand or threat.

If these two conditions are met, the focus shifts to whether the party consented to the contract variation. The factors to be considered are (i) whether the promise was supported by consideration (ii) whether the coerced party protested the variation or executed it on a “without prejudice” basis and (iii) [if not,] whether the coerced party took steps to disavow the variation on a timely basis.”

Based on this test, the court concluded that:

“the evidence regarding the heated discussion between Mr. Sheppard and the Contractor leads to the conclusion that there was a demand amounting to pressure on Mr. Sheppard to agree to the eight-foot rather than nine-foot walls. In the circumstances, the Sheppards had no practical alternative but to accept this change. The change was not supported by any consideration from the Contractor. Finally, the Sheppards vehemently protested the variation.”

The Court of Appeal accordingly upheld the trial judge’s conclusion that the contractual requirement for 9-foot ceilings had not been waived by the owners.

Discussion

Parties to a building contract should remember that the negotiation for changes to some building contracts may be a fragile exercise, at least in some circumstances. One of the parties to the contract may be under a financial, emotional, physical or other handicap or impairment. That party may be the owner, but it also may be a supplier or subcontractor which is in a position of financial vulnerability. If that party has no real option but to acquiesce in the demand for a change in the contract, and if there is no consideration for that change, then the conduct of the party demanding the change may be later seen as over-bearing and coercive. If it is, then that conduct may be set aside and the change order, or waiver of the original contract, may be nullified.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 8, section 7(b)(ii)

Hickey’s Building Supplies Ltd. v. Sheppard (2014), 36 C.L.R. (4th) 15, 2014 CarswellNfld 353

Building contracts – change orders – waiver – duress and coercion – rescission

Thomas G. Heintzman O.C., Q.C., FCIArb                                                       June 15, 2015

www.heintzmanadr.com

Waiver During A Bidding Process Held To Bar Claim Arising From The Tender

The Ontario Superior Court recently dealt with the troubling issue of whether an owner can rely upon a waiver of claims signed by a bidder during a tender to defeat a contractor’s claim arising from the tender. In Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), the court held that the owner was entitled to do so. The court also dealt with two other issues relating to tenders: whether there was a contract between the owner and the bidder; and whether the limitation period to assert a claim arising from the tender had expired.

For these three reasons this decision is an important one in relation to the law of tenders. .

Background

Todd Brothers was the lowest bidder in an invitation to tender which closed in April 2009. The invitation to tender had been issued by the Township for the construction of a new runway and the rehabilitation of an existing runway at the Township’s airport. An environmental assessment of the project was undertaken of the project by the federal environmental agency. Todd Brothers then agreed to extend the time for acceptance of its tender to July 15, 2009. The municipality decided to proceed with the project in phases because some phases did not require environmental approval. Todd Brothers agreed to the phasing of the project, and to a further extension of the time for acceptance of its tender.

In September 2009, Township council passed a resolution accepting Todd Brothers’ tender in accordance with the tender documents, subject to the Canadian Environmental Assessment Act.

Prior to the Township council resolution accepting its tender, Todd Brothers signed a “Compensation Waiver Acknowledgment” which provided that Todd Brothers would:

“not seek any compensation for … work identified but not completed … in the event that the Township cannot proceed to any of the phases as a result of matters beyond the control of the Township of Algonquin Highlands, or delays resulting from the review being completed by the CEAA … any other public issues/concerns or the withdrawal of funding from applicable sources.”

The Canadian Environmental Assessment Agency (CEAA) completed its review in December of 2010. However, the new municipal council decided not to proceed with the project. Ultimately, the Township proceeded with a joint project with the provincial government which resulted in the first three parts of the original project not proceeding.

Todd Brothers started an action against the Township on July 10, 2013, asserting that the Township’s failure to proceed with the full project was a breach of contract. The limitation issue was whether Todd Brothers had discovered or ought to have discovered its claim prior to July 10, 2011. If so, its claim was barred by the two year limitation period in the Limitations Act, 2002.

Decision of the Ontario Superior Court

The first question was whether any contract had come into existence between Todd Brothers and the Township. The Township submitted that although the Township council passed a resolution accepting Todd Brothers’ tender, the tender documents said that an award of the contract required the Township’s “written confirmation mailed to the successful bidder”, and no such confirmation was mailed; and that no acceptance of the tender was ever communicated to Todd Brothers.
The court rejected that submission, stating:

 “This provision does not, as argued by the Township, make an award of the contract conditional upon the Township’s “written confirmation mailed to the successful bidder”. Rather, it provides an obligation on the part of the contractor to sign the contract contained in the RFT, within seven days of being advised that its tender was accepted. If the Township failed to mail written notice of the award to Todd Brothers, it cannot rely upon that failure to argue that acceptance of the tender did not create a binding agreement.”

In arriving at this conclusion, the court relied upon the Contract A/Contract B analysis of the Supreme Court of Canada in the Ron Engineering decision. The court in the present case explained the application of Ron Engineering as follows:

“Contract A is formed when a contractor submits a compliant bid in response to an invitation to tender. The principal terms of Contract A are the irrevocability of the tender during the acceptance period provided for in the RFT, and the obligation of both parties, if the tender is accepted, to enter into a contract (Contract B), on the terms set out in the RFT. The obligation of the parties to enter into Contract B arises from Contract A, and is not dependent upon communication of the acceptance from the owner to the contractor.”

The second question was whether the waiver signed by Todd Brothers barred its claim. The court held that it did. The circumstances fell within the wording of the waiver. The court concluded that the Township was unable to proceed with the first three parts of the project due to the ongoing CEAA review. Once that process was finished, then the Township was:

“unable to proceed with those parts of the original project after December of 2010, because of the joint airport improvement proposal made by MNR. Had the Township failed to pursue the joint project with MNR, as required by the OMAFRA contribution agreement, it risked withdrawal of provincial funding.”

The third issue was the limitation question. The court held that Todd Brothers did not discover nor ought to have reasonably discovered its claim before July 2011. Its claim only arose when “Todd Brothers discovered that this work would no longer be made available to it.” In July 2012, the discussions with the environmental authorities were still ongoing and Todd Brothers had reason to believe that they would work out. It was not reasonable to insist that Todd Brothers commence an action at that point when discussion between the parties were still unfolding.

Discussion

Each of these three issues are of interest. The first point raises two questions:

What events give rise to a contract under an invitation to tender?

And if a contract arises, did it oblige the Township to enter into Contract B-the building contract?

The court answered the first question. It concluded that Contract A was formed when Todd Brothers submitted its bid and the tenders closed. At that point there was a Contract A between Todd Brothers and the Township governing the bidding process. That contract came into being automatically and without any need for a communication from the Township to Todd Brothers.

The court did not apparently answer the second question. Under the Ron Engineering regime, Contract A required the Township to enter into Contract B – the construction contract – unless there was a justifiable reason not to do so. But the court did not consider whether there was justification for the Township not to enter into Contract B. Why were the CEAA process and the dealings with the province of Ontario not a sufficient justification for the Township not to proceed with the contract with Todd Brothers? Indeed, in its discussion of waiver, the court appears to have concluded that the CEAA process and the dealings with the provincial government did justify the Township in not entering into the building contract with Todd Brothers.

The court’s conclusions about waiver also seem problematic. What was the consideration for the waiver? Todd Brothers was the low bidder and, under the Ron Engineering analysis, the Township was obliged to enter into the building contract with Todd Brothers, absent reasonable justification for not doing so. It does not seem open to the Township to say that it awarded the contract to Todd Brothers in consideration of receiving the waiver: as the court said, the Township was obliged to award the contract to Todd Brothers due to the Ron Engineering regime. So what was the consideration that made the waiver enforceable? Why was it not a gratuitous promise or unilateral offer that Todd Brothers was entitled to withdraw?

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 3, part

Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), 2015 CarswellOnt 3045
2015 ONSC 1501

Building Contracts – Tendering – Contract A-Contract B- consideration – waiver – limitation periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                     March 24, 2015

www.heintzmanadr.com

constructionlawcanada.com

 

Eight Rules of Tender Law Pronounced By The Ontario Court Of Appeal

In Rankin Construction Inc. v. Ontario, the Ontario Court of Appeal recently made a number of significant rulings in a tender case. While the rulings were based upon the specific wording of the tender in that case, they were made in the context of a major Ontario highway tender and appear to have wider application.

Factual Background

The Ministry of Transportation of Ontario (MTO) issued an invitation to tender for the widening of Highway 406. The invitation to tender required a bidder to declare the value of imported steel in its bid. The invitation stated that a 10 percent preferential allowance would be granted for domestic steel but that allowance did not apply H-Piles. Rankin did not declare the value of H-Piles as imported steel, believing that its steel qualified as domestic steel even though manufactured outside Canada. A competitor complained that Rankin’s bid was non-compliant and Rankin’s bid was disqualified and the contract was awarded to the second lowest binder.

The trial dismissed Rankin’s claim against Ontario and that dismissal was upheld by the Ontario Court of Appeal but for different reasons.

Rulings of the Ontario Court of Appeal

The Court of Appeal made the following rulings:

  1. Under the formula set forth in Ron Engineering, Contract A governing the tender process arose when bidders submitted their tenders.

This point may seem obvious but other decisions have raised doubts as to when Contract A is formed: Is it the moment before a bid is submitted; or when the bid is submitted, or when the bids are opened or when the bids are published? In this decision the Court of Appeal has said that “Contract A arose when the appellant submitted its tender.”

  1. Contract A was formed with any bidder who submits a bid, not just with a compliant bidder

This is an important point since some decisions, including that of the trial judge in this case, have held that Contract A is only formed between the person issuing the invitation and a compliant bidder. That approach does not make sense since if it is only Contract A that requires the issuer to deal fairly with the bidder in determining compliance. So there must be a Contract A in order for the treatment of compliance to be a binding factor between the issuer of the tender and the bidder. The Court of Appeal was clear that Contract A is formed with any bidder who submits a bid:

“The significance of the appellant’s non-compliance with the tender documents is that, pursuant to the express or implied terms of that Contract A, it may not be awarded Contract B, even if it is the lowest bidder — not that no Contract A is formed. I come to this conclusion based on the language of the Instructions to Bidders, which form part of the tender documents. In this case, the tender offer contemplated that tenders submitted might not be compliant….Paragraph 7.3 of the Instructions to Bidders specifically requires that a bidder include a tender deposit with its tender. This requirement is clearly material. However, para. 11.2 of the Instructions to Bidders also provides that “Tenders not accompanied by a Tender Deposit in the required amount may be rejected.” The fact that the MTO specifically addresses the consequences of the submission of a materially non-compliant tender — when viewed in conjunction with the other provisions in the Instructions to Bidders discussed below — is evidence that it intended that a Contract A come into effect, even if the tender submitted is non-compliant.

Respectfully, the trial judge erred in concluding that the necessary consequence of Ron Engineering… referred to in Tercon, is that no Contract A can come into existence where a bid is not materially compliant with the tender documents, without considering the effect of the tender documents. In other words, the terms of the offer to consider bids made by the request for tenders, as reflected in the tender documents, must be scrutinized to determine whether the parties intended contractual relations to arise on the submission of a tender: see M.J.B. Enterprises…. In my view, subject to the governing documentation, contractual relations would usually come into existence on the submission of a bid. This is a desirable result: it provides greater certainty as to the rights and obligations of the bidders and the owner, and may reduce the frequency of litigation arising out of the award of tenders.”

  1. The person issuing the invitation to tender has a right, but not an obligation, to investigate the bids

The trial judge had held that in the decision in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, the Supreme Court had found that the owner issuing an invitation to tender does not have an implied duty to investigate allegations of non-compliance by a rival bidder, but that the owner has a right to do so. The Court of Appeal agreed:

“…the tender documents do not preclude the MTO from conducting an investigation. They do not expressly provide that the MTO will not investigate any complaints, and I see no basis for implying such a term….Like the trial judge, I reject the appellant’s argument that an owner cannot investigate allegations of non-compliance unless the bid documents specifically give the owner the right to do so or the owner has a written policy that it will do so.

  1. The effect of non-compliance clause and the privilege and discretion clause was that the owner might, but was not obliged to, waive the non-compliance and accept the bid

The privilege clause said that “the Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted.”

As the Court of Appeal noted, this paragraph “constitutes both what are often referred to in cases involving the law of tender as a “privilege clause” (the right not to accept the lowest or any tender) and a “discretion clause” (the right to waive formalities as the interests of the MTO may require).”

The Court held that this paragraph allowed, but did not require, the MTO to waive a “formalities”:

“In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder.”

In arriving at this conclusion, the Court of Appeal apparently considered that “formalities” are what might be called “informalities”, that is, something that is a mere formality and not significant.

Accordingly, the Court of Appeal held that the MTO had the right not to waive the non-compliance in Rankin’s bid.

  1. A formality which could be waived was one which arose honestly and which does not substantially affect cost or the resulting comparative bids and maintains the integrity of the bidding process.

The Court of Appeal gave two reasons for its decision that the non-compliance was in respect of a formality which could have been waived by the MTO.

First, it applied what it called the ‘generous view of “informality”’ of the Supreme Court of Canada in Double N Earthmovers and then held that the non-compliance could have been waived:

“because of the appellant’s honest intention to use Canadian steel and the fact that the outcome, and the cost to the MTO, would have been the same had it declared that the H-Piles are imported steel. The price preference for Canadian steel was a mechanism for evaluating the competing bids. It did not affect the actual price to be paid by MTO to the successful bidder. And the MTO expected that American H-Piles would be used in the project. The appellant’s non-compliance “did not materially affect the price or performance of Contract B” [quoting from Double N Earthmovers], and therefore amounts to an informality….”

The Court of Appeal then gave a second reason: waiving the non-compliance maintained        the integrity of the bidding process. It said:

“I would add the following. Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process. And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible. Here, the tender process was essentially fair and the appellant’s bid was materially less costly to the public purse. Given this, in my view, a balancing of the public interest in promoting the integrity of the public bidding process so that the government can generally obtain the best prices, against the public interest in the MTO obtaining the best price possible in this particular case for widening Highway 406, also weighs in favour of the conclusion that the appellant’s non-compliance was a formality”.

  1. The owner could not waive a material non-compliance

On its interpretation of the invitation to tender, the Court of Appeal held that the MTO could not waive a non-compliance that was not a mere formality:

“In my view, a requirement that the MTO would not accept bids that were non-compliant, if the non-compliance amounted to more than a “formality”, can in this case be implied in Contract A on the basis of the presumed intention of the parties.”

The Court of Appeal held that, by not waiving the non-compliance in Rankin’s bid, the MTO had adopted the more cautious route in a sensible effort to avoid litigation.

  1. The owner was not obliged to notify bidders of non-compliant bids within 10 days

The tender documents contained two stipulations, as follows:

6.3         Bidders whose Tender has been rejected by the Ministry will be notified of the reasons within 10 days of Tender Opening.

12.1       The Ministry will notify the successful bidder that the Tender has been accepted within 30 days of the Tender Opening.

Paragraph 6.3 appeared in Part 6 of the tender documents headed Unbalanced Bids and Discrepancies. Paragraph 12.1 appeared in Part 12 of the tender documents headed Contract Award Procedures. MTO did not advise Rankin that its bid was non-compliant within the 10 days. Accordingly, Rankin argued that the rejection of its bid was invalid and MTO was obliged to award the contract to it as the lowest bidder.

The Court of Appeal rejected Rankin’s arguments for a number of reasons.

First, it held that paragraph 6.3 only applied to unbalanced bids, not non-compliance:

“….given that para. 12.1 gives the MTO 30 days to determine the successful bidder, I agree with the trial judge that interpreting para. 6.3 to require the MTO to determine whether it will waive “formalities” and, if not, notify non-compliant bidders, within 10 days of tender opening, makes no sense. To require the MTO to notify all unsuccessful bidders of the reasons why it will not accept their bids within 10 days of Tender Opening, would effectively require the MTO to determine the successful bidder within 10 days, rather than 30 days as expressly provided for under para. 12.1.”

Second, paragraph 6.3 did not convert an invalid and non-compliant bid into a valid and compliant bid. As the court said, the clause “does not provide that a “rejection” is invalid if the bidder is not notified of the reasons for the rejection within 10 days of Tender Opening.”

  1. The Exculpatory clause excluded all liability

Paragraph 11.3 of the tender documents said:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents”.

The Court of Appeal applied the tests in the Supreme Court of Canada’s decision in Tercon to determine the proper interpretation and enforceability of this exclusion clause. It found that the paragraph was a complete defence to any claim in the present circumstance. Rankin did not argue that the clause was unconscionable or unenforceable due to public policy. Rather it argued that the paragraph did not apply if MTO breached the conditions of tender. The court rejected that argument:

“The language is in my view clear — both in the paragraph itself and in the context of the Instructions to Bidders as a whole. A bidder presumably would not sue unless it alleged that the MTO had breached a term — express or implied — of the tender documents by accepting another’s bid, or not accepting its bid. To interpret para. 11.3 as not applying where a breach by the MTO of the tender documents is alleged would effectively render it meaningless. Paragraph 11.3 is a commercial response to the increased litigation faced by owners arising out of the acceptance, and corresponding non-acceptance, of bids.”

The court did say that in some circumstances the “the conduct of the owner in the bid process is so aberrant that it would justify a court’s refusal to enforce an exculpatory provision in the tender documents on public policy grounds. This is not such a case.”

Comments

The first three principles adopted by the Court of Appeal are helpful clarifications of the tender law relating to Contract A.

Principles 4 to 6 are more contentious since they involve three possible layers of discretion. The first layer involves the determination of the boundary between the two categories. Clearly, the court is hesitant to interfere with the owner’s determination that the non-compliance is a mere formality or is a substantial non-compliance. The second layer of discretion is introduced by the court’s finding that the tender documents allow the owner to waive something which is a mere formality. But the third level of possible discretion goes the other way. The court interpreted these tender documents as not giving the owner the discretion to waive material non-compliances. Differently worded tender documents might change either of these latter two discretions, requiring the owner to waive a mere formality or allowing the owner to waive a material non-compliance, but it seems that tender documents would have to be clearly written to achieve the latter result.

Principle 7 involves principles of contract interpretation that were used to rescue MTO from what were less than well-drafted tender documents. Besides arising from an analysis of the different parts of those documents, the principle appears to be based on a distinction between the substantive and procedural provisions of tender documents. The owner’s failure to follow the procedures – giving the bidders notice of non-compliance – cannot convert what is a non-compliant bid into a compliant bid.

Principle 8 is probably the most important and contentious. The Court of Appeal appears to have held that the exclusion clause drafted by MTO is the elusive “magic bullet” that removes all the owner’s liability arising from breach of any term of a tender. The court was at pains to say that egregious conduct by the owner might, in another case, not be protected by this exclusion clause. But absent such conduct, the court appears to have held that this clause gives the owner complete protection in respect of the tender.

If that is so, then many questions arise. Is there a Contract A at all? What is the consideration for the contractor’s bid if the contractor has no effective remedies? If the owner inserts such a sweeping exclusion clause into the tender documents, should the contractor be able to say that there is no Contract A and withdraw its bid? Or is such an exclusion clause so sweeping that it is contrary to public policy or unconscionable from the standpoint of the law of contract formation – something not argued by Rankin. Further cases may have to explore the answers to those questions.

Rankin Construction Inc. v. Ontario, 2014 CarswellOnt 12595, 244 A.C.W.S. (3d) 79

Construction Law – Tenders – Waiver – Non-Compliance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 26, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can An Arbitrator Decide An Issue Falling Within A Statutory Regime?

The recent decision in Advanced Explorations Inc. v. Storm Capital Corp. dealt with the question of whether an arbitral tribunal has the authority to decide an issue arising out of a statutory regime over which a regulatory tribunal has specific authority. That question is a thorny jurisdiction issue in the law of arbitration. The decision was rendered by Justice Graeme Mew of the Ontario Superior Court who was, until his recent appointment to the bench, a well-known litigation counsel and arbitrator. His decision that the arbitral tribunal had authority to decide the issue is of additional interest due to his experience in the field of arbitration.

Background

Storm Capital (“Storm”) entered into a Finder’s Fee Agreement with Advanced Explorations Inc. (“AEI”) under which Storm was to seek investors for AEI. In the Finder’s Fee Agreement, the parties agreed to resolve “any dispute, difference of opinion or question … touching on this Agreement or any part thereof” by arbitration. The arbitrator’s decision “shall be binding and conclusive on all parties in interest and no appeal shall lie there from.”

One of the investors introduced by Storm to AEI made investments in the company. AEI refused to pay Storm a finder’s fee for the investments. The parties went to arbitration and the arbitrator held that Storm was entitled to compensation. The arbitrator found that there was a nexus between Storm’s introduction and the investments and that the transactions resulted from the introduction and that therefore Storm was entitled to the finder’s fee.

The arbitrator rejected AEI’s argument that Storm was required to be registered as an LMD/EMD under the Securities Actso as to ensure that it would be compliant with the applicable securities laws (the “securities issue”).

AEI then applied to court to set aside the arbitration award and Storm filed a cross-application to enforce it. Justice Mew dismissed the application and granted the cross-application to enforce the arbitration award.

The Decision

There are three important aspects of Justice Mew’s decision.

First, Justice Mew considered AEI’s submission that the award should be set aside as unreasonable. Justice Mew reviewed several conflicting decisions dealing with the question of whether the court has authority to set aside an arbitral award based upon unreasonableness, and in particular the decision of the Ontario Court of Appeal in Smyth v. Perth & Smiths Falls District Hospital (2008), 92 O.R. (3d) 656. In Smythe, the Court of Appeal considered whether the result was “reasonable” as that term has been defined in Dunsmuir v. New Brunswick, even though the parties had agreed that the arbitration would be the final determination of the issue and that there would be no appeal. Justice Mew noted that the Court of Appeal did not identify the source of its authority to review an arbitral award for reasonableness and he agreed with the view, stated by some commentators, that Smyth is “at best ambiguous” as authority for such a proposition. However, he concluded that even if Smyth was authority for an arbitrator’s award to be reviewed for reasonableness, the arbitrator’s award was reasonable for the reasons referred to by him in the balance of his decision.

Second, Justice Mew dealt with AEI’s submission that the arbitrator’s decision was wrong because the arbitrator had relied upon conduct and agreements other than the Finder’s Fee Agreement itself in interpreting that agreement and the arbitration clause in it, even though the arbitrator had found that the Finder’s Fee Agreement was “clear and unambiguous”.
Justice Mew held that the arbitrator had concluded that“ “the context and factual matrix into which the [Finder’s Fee Agreement] was born” was important to understanding the terms of the contract” and looked to a prior agreement for that reason. However, the arbitrator had “anchored AEI’s liability to Storm in the language of the Finder’s Fee Agreement, and at no point did he incorporate a term or condition from a prior contract.” Justice Mew held that “when ascribing meaning to the various terms of the contract, the arbitrator was entitled to take note of the parties’ sophistication and prior dealings with each other.”

Third, Justice Mew addressed AEI’s submission that the arbitrator usurped the role of the Ontario Securities Commission (OSC) and Toronto Stock Exchange-Ventures (TSX-V) by deciding whether Storm was required under law to be registered as a LMD/EMD. This “securities issue” pertained to whether Storm was eligible to receive compensation under the Finder’s Fee Agreement. AEI submitted this issue was “not capable of being the subject of arbitration under Ontario law.”

Justice Mew held that AEI had waived its right to raise this argument by placing the issue before the arbitrator, as it had done, and then not asserting any definitive position before the arbitrator during the hearing.

In any event, Justice Mew held that the arbitrator had the jurisdiction to decide this matter. He applied the principle of “competence-competence” which is well known to arbitration law, namely that an arbitral tribunal has jurisdiction to decide in the first instance what matters are within its jurisdiction. Here, the arbitrator had raised the question of his jurisdiction on the securities issue with the parties, and had implicitly found that he had jurisdiction when he made his award, and any review of that award would be undertaken on the standard of correctness.

Justice Mew then found that the arbitrator had the jurisdiction to deal with the securities issue and that nothing in the Ontario Securities Act(OSA) deprived the arbitrator of jurisdiction. His remarks (leaving out the citations to cases) bear repeating at some length:

“Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration Act, 1991 is designed … to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters, and to require them to hold to that course once they have agreed to do so……If the legislature wishes to preclude an issue from being the subject of arbitration, it must expressly state this intention…It is not enough that the subject matter over which arbitration is sought be subject to regulation or concern the public order……  AEI is correct that Ontario law establishes a comprehensive regime for the regulation of securities within the province, and that the OSC and the TSX-V are given wide-ranging powers of supervision…..However, no provision in the OSA or other statute was referred to that expressly precludes arbitration on matters of securities law. I also do not read the jurisprudence to evince a public policy that an arbitrator is unable to rule on securities matters…. On the contrary, the securities regulators are not given exclusive jurisdiction to decide questions of compliance with Ontario securities law. For example, under s. 128(1), the Superior Court of Justice may issue declarations on whether a person or company has complied with the OSA and the regulations promulgated thereunder. In addition, certain decisions of the OSC may be appealed to the Divisional Court, and the court on appeal has the power to “direct the Commission to make such decision or to do such other act as the Commission is authorized and empowered to do under this Act or the regulations and as the court considers proper”: OSA, ss. 9(1), 9(5). Private parties may also bring actions to redress injuries suffered from improper securities practices (even though the OSC could bring an enforcement action for the same misconduct): see OSA, ss. 130-138.14. 70.” (emphasis added)

Justice Mew also rejected AEI’s submission that AEI should not be placed in the position of contravening the securities laws of Ontario. The evidenced did not support a finding that AEI would violate securities laws if the finder’s fees were paid. In any event:

“the fact that AEI might have to choose between compliance with the arbitration award and compliance with its regulatory obligations goes to the question, not before the court at the present time, of whether AEI would be held in contempt of court if it refuses to pay. That is a separate matter from the question of whether the arbitrator lacked the jurisdiction, as a matter of Ontario law, to rule on the Securities Issue in the first place.”

On the issue of enforcement, Justice Mew held that, under section 50(3) of the Ontario Arbitration Act, 1991, once he had rejected the grounds for setting aside the award he had no discretion to refuse enforcement of a valid and final non-family arbitration award and he ordered that it be enforced.

Discussion

Each of the three issues addressed in this decision are important, but this comment will focus on the first and third.

The first issue is whether an arbitration award can be reviewed on the grounds of reasonableness. That issue was addressed by me in my blog of November 24, 2012 in which I discussed the Smythdecision. As Justice Mew mused in the present case, one is left to wonder where that authority is to be found. Section 46 of the Ontario Arbitration Act, 1991 sets forth very specifically and at some length the grounds for setting aside an arbitration award. Unreasonableness, or even an error in law, is not found in that section as a ground to set aside such an award. In the case of domestic arbitrations, the reason for that position appears to be clear: in their arbitration agreement, the parties may provide for appeals on matters of law (and fact), and if they do not then they can seek leave to appeal on a matter of law. And under the Ontario Act, they can agree that there shall be no appeals. So issues and mistakes of law are addressed as part of the arbitration process, not for setting aside arbitral awards. If there is an error or law, then the parties can appeal if they have so provided or seek leave to appeal if they have not provided at all, but not if they have specifically agreed that they cannot do so, as in this case.

The concept of review of a tribunal’s decision on the ground of unreasonableness is found in the law relating to the judicial review of the decisions of governmental officers, bodies and tribunals. As Justice Mew noted, there is no apparent source of authority for that sort of review in section 46(1) of the Ontario Arbitration Act, 1991.   Hopefully an appellate court will address this issue again soon.

The third issue is of equal importance: does a regulatory regime imposed by statute preclude arbitration? Here, Justice Mew made two decisions.

First, he held that unless such a statutory regime specifically excludes arbitration or does so by necessary implication, then parties can arbitrate an issue which pertains to their agreement even if it also pertains to the statutory regime of a government regulator. This decision is of considerable importance to persons engaged in businesses which are regulated to some extent or another, which includes just about any business today. For instance, the construction industry is impacted by zoning and building bylaws, and any businesses which hire employees are subject to labour relations statutes. Justice Mew has held that those regulatory regimes do not preclude the parties putting the same issues into their contracts and having them determined by arbitration as between themselves.

The second point is one of illegality. At some point, the dispute issue may involve an alleged illegality under the regulatory regime and the arbitrator may have to decide whether the illegality is so central to the claim being made that no relief should be granted. But that is an issue to be dealt with under the law of contract dealing with illegalities, which is another subject but one which an arbitral tribunal would apparently have no difficulty in determining. And even if the remedy awarded by the arbitrator would enforce an illegality, then the court may not find the respondent to be guilty of a contempt of court if the award is not obeyed. But that does not remove the arbitrator’s jurisdiction to address the issue in the first instance.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed. Chapter 10, part 3.

Advanced Explorations Inc. v. Storm Capital Corp.2014 CarswellOnt 8794, 2014 ONSC 3918

Arbitration – Jurisdiction of the Arbitral Tribunal – Enforcing and Setting aside Arbitral Awards – Illegality – Waiver – Regulatory Regime

 

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                   July 18, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can An Owner Look Behind A Bid And Find It Non-Compliant?

Is an owner entitled to look behind a bid submitted in response to an invitation to tender and determine whether it is compliant with the terms of the invitation to tender, even though on its face the bid is compliant? And if the owner does so, and determines that the bid is non-compliant, can the owner then disqualify the bid?  According to the recent decision of the Ontario Superior Court in Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139, the answer to both questions is yes.

This decision raises important issues about the discretion of an owner once it decides to look behind a bid. In Double N Earthmovers v. Edmonton (City), 2007 SCC 3, the Supreme Court of Canada held that the owner is not obliged to go behind a bid which is compliant on its face, to determine whether the bid really complies with the tender documents. The Rankin decision deals with the implications for the owner and the bidders if the owner decides to do so.

The Background

In 2005, Rankin was a pre-qualified bidder in an invitation to tender issued by the Ministry of Transportation of Ontario (MTO) for the widening of Highway 406 near Niagara Falls, Ontario.  The tender package provided an advantage for using Canadian domestic steel.  It did so by allowing a 10 per cent discount to the tender price to arrive at the Adjusted Total Tender. That adjustment did not apply, however, to imported steel and each bidder was required to declare the amount of imported steel in its bid.

The MTO specifications called for the supply of H-Piles made of rolled steel.  The H-Piles were to be driven into the ground to provide support for bridge structures. Rankin did not declare the H-Piles to be made with imported steel. In fact, they were manufactured in the United States. The value of the H-Piles in Rankin’s bid was about $500,000 out of a total adjusted bid of about $18.6 million or about 2.7 per cent.  All the other bidders declared the H-Piles to be made of imported steel.

The tenders were opened and Rankin’s bid was the lowest, both as to the total tender and the adjusted tender.  The MTO then received complaints that Rankin’s bid was non-compliant due to its failure to declare that its H-Piles were made of foreign steel.

MTO’s practice was not to ask for supporting documents or other proof of bidder’s declarations. Apart from one previous occasion, the MTO had never reviewed a bidder’s declaration of imported steel. Nevertheless, a local MTO investigator undertook an investigation and reported that the contract should be awarded to Rankin. That report was not accepted by the local MTO manager who recommended that Rankin’s bid be rejected and the contract be awarded to the next highest bidder. That recommendation was accepted and after consultation with the MTO’s legal department, the contract was awarded to the next highest bidder. No reasons for rejecting its bid were given to Rankin.

The MTO witnesses testified that Rankin’s bid was rejected to maintain the integrity of the bidding process. While the MTO had, under its Instructions to Bidders, the right to reject any or all tenders and to waive irregularities “in the Ministry’s interest”, the MTO witnesses said that a waiver of the non-compliance would compromise the bidding process.

The MTO argued that Rankin’s bid was non-compliant and accordingly, no Contract A came into being under Ron Engineering formulation. Therefore, MTO asserted that it owed Rankin no contractual duties.  Rankin argued that its bid was compliant on its face and that MTO was not entitled to investigate Rankin’s tender and then, based on that investigation, rule that tender to be non-compliant.

Reasons of the Trial Judge

The trial judge noted that the situation in the present case was the opposite of that presented in Double N.  There, the Supreme Court held that the owner was not obliged to go behind an apparently compliant bid. Here, the MTO had gone behind Rankin’s bid and investigated its compliancy and the issues were “whether an owner is disentitled to carry out such an investigation, and whether, if it does so at the instance of a rival bidder, [the owner] thereby breaches an obligation to the low bidder whose bid is found to be non-compliant as a result of the investigation.”

The trial judge held that the contract formed in the tender process, Contract A in the Ron Engineering analysis, should not be found to contain a term prohibiting the owner from “investigating whether a bidder is capable of fulfilling the material terms of its bid, in the face of information that it may not be.” In his view, such a term would not

“promote the integrity of the bidding process. Public sector owners, such as the MTO in this case, have a long-term interest in protecting of the integrity of the bidding process. Their concern is not necessarily restricted to the individual project under consideration, but with the maintenance of a vigorous and competitive tendering process on future projects.  Anything which would dissuade potential bidders from participating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest.”

The trial judge found that there was nothing in the MTO’s procurement policies which precluded the MTO from investigating Rankin’s bid, even if it was not MTO’s practice to do so. In addition, the trial judge said that, even if those policies had that effect, Rankin could not rely on them because the terms of the tender were governed by the tender documents, not MTO’s policies. Unless the MTO’s procurement policies were incorporated into the tender package, a deviation from those policies did not give rise to any breach of duty to a bidder.  Those policies were not expressly incorporated into the tender package, and an implied incorporation would “give rise to unnecessary uncertainty and potential confusion and would therefore be unjustified.” Accordingly such incorporation would satisfy neither the business efficacy nor officious bystander tests for implying a term into the tender contract.

The trial judge found that Rankin’s declaration of imported steel was “crucial” to the determination of the lowest bidder. The process for declaring imported steel was “integral and fundamental” to the tender scheme. Even though the resulting price difference was only $50,000 (10 per cent of the $500,000 value of imported steel H-Piles) and even though Rankin would still have had the lowest adjusted bid and total bid if H-Piles had been properly declared, that was not sufficient, for the following reasons:

“[The] materiality [of the non-compliance} is to be determined objectively having regard to the impact of the defect on the tendering process and the principles and policy goals underlying the process. The focus is not on the impact of the defect on the outcome of the particular tender process, but on the impact on the process itself, including the reasonable expectations of the parties involved in the process, including rival bidders….three elements [are] to be considered on an assessment of materiality of the non-compliance, namely, whether it undermines fairness of the competition or the process of tendering, impacts the cost of the bid or performance of Contract B, or creates a risk of action by other (compliant) bidders. This list is stated disjunctively, and accordingly, not all of them need to be present in order for there to be a finding of material non-compliance..…To require the MTO, at the stage of determining compliance with the tender documents, to undertake a consideration of whether an inaccuracy in the Declared Value of Imported Steel will in fact alter the ultimate outcome of the tender process, as a pre-condition to a finding of material non-compliance, would, in my view, be inappropriate and could introduce an element of uncertainty to the process and the imposition of an unjustified risk on the MTO.”

The trial judge then found that the owner, MTO, was “incapable of accepting a bid containing a material non-compliance” and that, therefore, “once the material non-compliance in the Rankin bid was discovered, the MTO was bound to rule it to be non-compliant and therefore not capable of acceptance.”

The trial judge also dealt with a paragraph of the tender documents which required the MTO to notify bidders whose tenders had been rejected within 10 days of the opening of bids.  He found that this paragraph did not apply because, by its heading it only applied to unbalanced tenders and discrepancies and not to non-compliant bids, and because the Rankin tender was not “rejected” but simply non-complaint.

The trial judge found that, in any event, the MTO was protected by an exclusion clause which read as follows:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in the acceptance of a Tender, except as provided in the tender documents.”

The trial judge applied the reasoning of the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69 and held that, unlike in that case, the exclusion clause covered MTO’s alleged misconduct and was a complete defence. Applying the unconscionability and public policy test in Tercon, the trial judge found that the exclusion clause was not invalid. In his view, even if the MTO erred in investigating whether Rankin’s bid was compliant, it did so, “not to subvert the integrity of the tender process in order to gain some unfair advantage, but rather to promote the integrity of the process.” Accordingly, its conduct was protected by the exclusion clause.

Comments

The background and the reason of the trial judge have been dealt with at some length because they address many of the “hot button” issues relating to tenders. Here are a few issues which arise by comparing the Rankin decision to the decision of the Ontario Court of Appeal in Bot Construction Limited v. Ontario (Transportation), 2009 ONCA 879:

  1. The trial judge found that the owner was prohibited from accepting Rankin’s tender once it found it to be non-compliant.  In Bot, the Court of Appeal was, again, dealing with a MTO tender and foreign steel components.  The successful contractor, Cavanaugh, specified welded steel components in its bid when the tender package called for rolled steel.  The Divisional Court held that this change made Cavanagh’s bid non-compliant, in the same fashion as the trial judge did in the Rankin case. The Court of Appeal in Bot reversed the Divisional Court and held that a standard of reasonableness should be applied to the MTO’s decision and that the decision that Cavanagh was compliant with the tender process fell within “a range of possible, acceptable outcomes that are defensible in respect of the facts and law.”
  2. The decision in Rankin may be at odds with the decision in Bot on another point, namely the degree to which the non-compliancy mattered.

Here is what the Court of Appeal said in Bot:

“The amount of steel required for the bridge beams was small (1.14 per cent of the total steel required for bridges by the Contract) and minor (0.26 per cent of the value of the Contract). …  Even if the use of Canadian steel required a change in the project specifications, this change would be a minor one and would be readily approved.  Finally, even if Cavanagh had declared imported steel for use on the bridge beams, it would not have affected the order of bidders because of the large gap ($2,259,000 in the total bids, $2,230,000 in the adjusted bids) between Cavanagh, the lowest bidder, and Bot, the second lowest bidder”.

These are the sort of factors that Rankin pointed to, unsuccessfully, so far as its bid was concerned.

3.  But where Bot and Rankin may come together is the different effect of a stated or unstated non-compliance.  In Bot, the successful bidder expressly and openly bid Canadian welded steel and asked for it to be accepted within the bid or that any non-compliancy be waived by the owner. In Rankin, Rankin’s tender contained a non-compliancy which was not apparent on the face of its bid. That non-compliance might have slipped through a DoubleN type of bidding process, namely one in which the owner does not examine into the bids which on their face meet the requirements of the bid.

So a bidder faces a choice if its tender contains a potential non-compliancy:

 If the bidder openly states the compliancy issue, then the bidder faces the possibility of being disqualified. But if the issue is accepted by the owner as not involving a non-compliancy, or if the non-compliance is waived by the owner, then the owner’s decision to accept the tender may be upheld as reasonable, according to Bot.

 If the bidder does not openly state the non-compliance issue, then the bid may be accepted as being apparently compliant, under Double N.  But if the owner does investigate and decides that the bid is non-complaint, then its decision may be upheld, according to Rankin.

See Heintzman and Goldsmith on Canadian Building Contract, 4th ed. chapter 1, part 1(f). 

Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139

Building Contracts   –   Tenders   –   Non-Compliant Tender   –   Waiver

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                           April 6, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Conduct After An Arbitration Award May Nullify That Award

A party to a contract may terminate the contract and then start an arbitration to confirm the validity of the termination.  If the arbitral tribunal grants such a declaration, then that party better watch out that it doesn’t continue to treat the contract as still continuing.  If it does, it may waive the termination, and the arbitration will be for naught.  So held the Saskatchewan Court of Queen’s Bench in Subway Franchise System of Canada Ltd. v. Laich.  Clearly, this decision is of considerable importance in construction projects, franchise agreements or in other ongoing contractual relationships.

The Background

In 2003, Subway entered into a franchise agreement with Laich for a Subway store in La Ronge, Saskatchewan.  In 2009, Subway terminated the franchise agreement.  The franchise agreement contained an arbitration clause providing for the arbitration of disputes in Connecticut.  In May 2010, the arbitrator upheld the termination of the franchise agreement by Subway.

Subway then sought to enforce that award in Saskatchewan pursuant to the Saskatchewan International Commercial Arbitration Act (ICAA), and statues relating to landlord and tenant and enforcement of foreign judgments.  In 2011, the Saskatchewan Court held that the award would not be enforced because Subway had continued to treat the franchise agreement as outstanding after the arbitration award.

The Court held that Subway had met the requirements of the Model Law in the ICAA.  The Court also found that no objections to the award could be raised since no request for recourse against the award had been brought within the time specified in the Model Law.  Nevertheless, the Court held that the arbitral award was not enforceable because, after the award, both parties continued to operate pursuant to the provisions of the franchise agreement.  Laich continued to make all remittances and there was no change in the support given by Subway to the franchise operation.   Laich continued to pay the royalties due under the franchise agreement.  In what was undoubtedly a form letter, Subway wrote to Laich extending “congratulations on a job well done”.

The Saskatchewan Court found that, by its conduct, Subway had “waived the termination decision by the arbitrator as it continued to work with and support the respondent in a profitable partnership.”

The Court also refused to enforce the arbitral award for damages, being $250 per day during the period that Subway did not recover possession.  The Court refused to enforce this award because to do so would doubly compensate Subway which had, during that period, received the remittances and royalties from Laich.  The Court also dismissed Subway’s application for possession of the premises.

While this dispute may be viewed by some as a franchise dispute of little significance, the decision has an importance to construction projects and to other situations where ongoing contractual relationships may exist.

One of the parties may not be willing to take the risk of unilaterally forcing the other party off the site or out of the premises.  That party may need an arbitral (or court) decision approving its view that the other party has repudiated the contract and that it is entitled to terminate the contract.  During the period that the dispute is being dealt with by the tribunal, the innocent party will have to leave the other party in place and not disturb the contractual setting.

But the moment that the innocent party obtains such a decision, then according to the Saskatchewan Court, it must immediately stop dealing with the other party in the normal course.  It must refuse any further payments or benefits from the other party and treat the relationship as at an end.  Its failure to do so may eliminate every value that it secured from the arbitral award.

Three thoughts come to mind:

First, is this decision commercially unreasonable?  Is it consistent with modern electronic technology?  Should we expect a huge international commercial business to turn off all its normal termination procedures so that a tiny franchisee (or sub-contractor, or agency) does not slip through the termination machinery and continue to be treated as a compliant contracting party?  Even though some of us might answer No to these questions, we should expect a trial judge to be unsympathetic to the large organization in these circumstances.

Second, as a technical matter, this case may not strictly be about waiver.  The parties were apparently bound by the arbitrator’s decision that the franchise agreement had terminated due to the principles of res judicata.  Rather, the parties conduct may be seen as the re-establishment of their agreement.  By continuing to abide by the agreement, they made a new agreement.

Third, surely there are easy ways for an organization to address the problem.  It can send out a notice at the very beginning of the termination process (and better still, again immediately after the arbitration award) stating that no conduct on its behalf, including the acceptance of money, extension of services or correspondence on its behalf, shall be considered to be a waiver of its position that the agreement is terminated or a waiver of any rights under an arbitral or court award, and that if it accepts any monies from the other party it does not do so in recognition of any continuing contractual rights of the other party and holds those monies in trust to be dealt with in accordance with the arbitral decision.  That sort of letter should be a standard form in the termination documents of any contractor, franchisor or principal.

Once again, this decision is a wake-up call to everyone engaged in a dispute arising from an ongoing contract:

Don’t continue to treat the contract as ongoing after a decision confirming its termination.  If you do, then the contract may be revived and the decision may be worthless.

Arbitration   –   Enforcement   –   Waiver

Subway Franchise System of Canada Ltd. v. Laich, 2011 SKQB 249

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                       March 25, 2012

www.heintzmanadr.com
www.constructionlawcanada.com