June 27, 2012

Infighting escalates into legal claims

Bid Protest Bulletin | Paul Emanuelli

Bid disputes are not always limited to claims between owners and bidders. Infighting within tendering teams can also escalate into costly legal battles. The following cases provide some recent examples.

In its decision in A. Dynasty Roofing (Windsor) Ltd. v. Marathon Construction Services (1991) Inc., the Ontario Superior Court of Justice determined that a successful bidder was under an implied duty to use the subcontractor named in its tender. After winning the contract award, the general contractor replaced the subcontractor for refusing to lower its price. The court held that the contractor’s bid shopping “created a sham of the bidding process”. The contractor was found liable for the subcontractor’s lost profits and fixed overhead costs.

In its decision in Knappett Construction Ltd. v. Axor Engineering Construction Group, the British Columbia Supreme Court considered a claim by a bidder against a joint bidder who had entered into unilateral discussions with the owner. The court found that the joint bidders had agreed to work together if their tender was selected and that the defendant bidder had breached this obligation. The plaintiff was awarded $500,000 in lost profit damages.

In its decision in Aronovitch & Leipsic Ltd. v. Berney, the Manitoba Court of Queen’s Bench considered a dispute over a Manitoba government request for proposals for the development of a school campus in downtown Winnipeg. A change in government resulted in a change in project scope. The project, which was originally planned as a privately-owned development-and-lease back arrangement, was changed to a publicly-owned development-only deal. The plaintiff, who had planned to contribute to the cancelled leasing arrangement, was frozen out of the final deal by the other proponents. It sued. The court took into account the plaintiff’s time and relative risk exposure and found that the plaintiff was entitled to $115,000, representing five per cent of the $2.3 million fee paid to the other members of the tendering team.

The decision of the Ontario Court of Appeal in Schaible Electric Ltd. v. Melloul-Blamey Construction Inc. provides a relatively straightforward application of the named subcontractor rule. In this case, the subcontractor who had been named in the winning bidder’s tender was bypassed for another subcontractor and sued. At trial it was awarded $45,000 in lost profit damages. The Ontario Court of Appeal upheld the trial decision, finding that there was sufficient evidence to conclude that the general contractor had not acted in good faith when it rejected the subcontractor.

The decision of the Ontario Superior Court of Justice in Good Mechanical, A Division of 524556 Ontario Inc. v. The Canadian Imperial Bank of Commerce dealt with a dispute arising out of a federal government public works project. The low bidder’s tender was rejected because it had submitted an unsigned bank draft as bid security. The low bidder sued its bank for failing to provide a proper bank draft. It was awarded $100,000 in lost profit damages from the bank due to the error.

The decision of the Ontario Superior Court of Justice in McPherson v. Scully dealt with a dispute within a tendering team between two parties who had submitted a winning tender for an Ontario Ministry of Health nursing home bed construction contract. After winning the contract, one of the bidders insisted on renegotiating the financing contribution of the other bidder. The other bidder refused, was cut out of the deal and sued its bidding partner. The court awarded the plaintiff bidder $6.3 million in lost profits for being improperly frozen out of the final deal.

As these cases illustrate, infighting within tendering teams can result in costly litigation. Parties should therefore pick their business partners carefully.

Paul Emanuelli's procurement law practice focuses on all aspects of the tendering cycle including bid dispute resolution. This article is extracted from Emanuelli's Government Procurement textbook published by LexisNexis Butterworths. Reach Paul at paul.emanuelli@procurementoffice.ca.

Print | Comment