Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town)

Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town) Court Supreme Court Date 2006-10-26 Citation 2006 NSSC 321 Docket 218106 Judge/Registrar/Adjudicator Scanlan, J. Edward (Honourable Justice) (SC) Document Type Decision Decision Content IN THE SUPREME COURT OF NOVA SCOTIA Citation: Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town), 2006 NSSC 321 Date: 20061026 Docket: 218106 Registry: Halifax Between: Borcherdt Concrete Products Limited, a body corporate Plaintiff v. Town of Port Hawkesbury, a body corporate Defendant DECISION Judge: The Honourable Justice J. E. Scanlan Heard: October 4 & 5, 2006, in Halifax, Nova Scotia Counsel: Mr. David A. Farrar, Q.C./Mr. John Shanks, Solicitors for the Plaintiff Mr. Douglas A. Caldwell, Q.C./Ms. Adrianna L. Meloni, Solicitors for the Defendant By the Court: [1] The plaintiff has brought an action against the defendant regarding an alleged failure to comply with proper tendering process regarding supply and installation of concrete bleachers and steps for the arena portion of the Port Hawkesbury Civic Centre. The issue is whether the defendant breached its duty of fairness to the plaintiff when it negotiated a contract with a different supplier to do a portion of the work and supply the products which the plaintiff had tendered on. As a general contractor the defendant performed some of the work on which the plaintiff tendered. Facts [2] The plaintiff is a closely held private company specializing in constructing pre-caste concrete products. The defendant is a municipal corporation and in 2003/2004 was in the process of constructing a new civic centre municipal complex located in the town. The civic centre includes an arena. The plans for the arena included installation of concrete bleachers providing seating capacity for approximately one thousand spectators. Pre-caste concrete products is something of a speciality industry in Nova Scotia and in August, 2003, the supervising architect of the project sent invitations to tender to the plaintiff and one other company. The tenders were to close at 2:00 p.m. on Wednesday, August 20, 2003. The tender included manufacture delivery and installation of pre-caste concrete bleachers and steps. The tender package also included a clause which reads as follows: Right to Reject Tender: The Owner reserves the right to reject any and all Tenders that, in its sole discretion, are not in the best interests of the Town of Port Hawkesbury. [3] There were a number of addenda to the tender. On the morning of August 20, 2003 the plaintiff faxed its form of tender as per the tender instructions to the town. It was agreed by both parties that there was no issue as to compliance with the tender requirements nor were there any issues or concerns as regards the quality of the work the plaintiff would be able to perform. At approximately 2:19 p.m. on August 20th, nineteen minutes after the invitation to tender was to have closed, the plaintiff received addendum number three to the invitation to tender. This addendum proported to have changed the closing date for invitation to tender to August 27th, 2003 at 2:00 p.m. The defendant acknowledged that the purpose of extending the closing, whether valid or not, was to allow the second party who was invited to tender to make a bid. There never was a tender package received from the second invitee. [4] It became apparent to the defendant that the plaintiff’s tender bid was substantially over budget. In this regard I accept the evidence of Mr. Thomas Fiander who was the project manager/construction manager. The budget which he was working with was referred to as the Hanscomb budget report dated May, 2003. The plaintiff expressed concern as to the defendant’s reliance upon the Class “C” estimate as prepared by Hanscomb for the defendant. It makes no material difference in this case whether the Class “C” estimate prepared by Hanscomb was in any way deficient. In saying that I note Mr. Fiander testified the Port Hawkesbury Civic Centre was, approximately, a fifteen million dollar project. He said before any such project is undertaken it is necessary to get estimates as regards costs. Hanscomb prepared a Class “C” estimate which is intended to give some guidance as regards what the project should cost. Mr. Fiander acknowledged a Class “A” estimate would be much more detailed and accurate. I am satisfied that it would not be necessary for the town to get a Class “A” estimate before being entitled to rely upon the numbers in the estimates during the tendering process. In the absence of evidence to the contrary, or evidence that the estimates were in error, if the town was acting in good faith during the tendering process it was entitled to assume the budgetary amount in the Class “C” estimate was appropriate. [5] At trial the plaintiff pointed to an error in the estimates noting the Hanscomb estimates were based on 7,686 square feet of bleachers with a unit rate of $22.00 per square foot for a total amount of $169,092.00. The plaintiff concedes that it was only after the litigation started that the defendant would have realized the square footage was slightly in excess of 10,000 square feet as opposed to the 7,686 square feet. Aside from that error detected many months after the fact, the town acted in good faith, believing the estimate was reasonable and reliable. [6] I make these points not because it materially affects the outcome of the case but simply to point out to the parties that I have not misunderstood the nature of a Class “C” estimate nor have I determined that the defendant knew or should have known that the square footage was in excess of the amount as set out in the Class “C” estimate. [7] There are a number of facts which are essential to defining the character and outcome of the case. I start by noting that, even after the closing date was extended, no additional tenders were received by the town. Mr. Fiander, on behalf of the defendant, contacted Mr. Borcherdt and explained to him that the amount which he bid was in excess of the budgetary estimate and has asked him if he would be able to adjust his price after the August 20th date. Mr. Borcherdt indicated to Mr. Fiander that the price could be reduced if the in-floor heating was removed and he submitted a new tender without heating tubes. The first tender was $259,000.00 and the second tender without in-floor heating was $229,448.00. Prior to the end of the extended closing date the plaintiff realized he would incur increased production cost resulting from the fact they were successful bidders on another arena project. Mr. Borcherdt determined his company would have to build additional pre-casting forms in order to complete both projects on time. The Port Hawkesbury Civic Arena the tender package indicated that time was of the essence. Because of this the plaintiff increased tender amounts by $10,000.00 so that the tenders were effectively $269,000.00 with in floor heat and $239,000.00 without in floor heat. [8] As noted above there was no question as to compliance, ability to perform or quality concerns. Contract “A” was complete as of the closing date of August 27th. The plaintiff would have been obliged to perform the contract as per the tender package had the town accepted the tender. The town did not reject the plaintiff’s tender until September 29th. [9] Shortly after the closing date of August 27th the town began negotiating with a third party, one of the plaintiff’s competitors, regarding the supply and installation of concrete bleachers and stairs for the arena. The plaintiff was not informed of these third party negotiations and the town was not negotiating with the plaintiff. Not only was the defendant negotiating with a third party, in the end the defendant performed a portion of the work which was included in the original tender package. In that sense they were negotiating “with themselves”. It is worth noting in that regard that the town was the general contractor on this project. Because as the town came to perform part of the work which was tendered by the plaintiff the town was in essence shopping the tender to themselves as much as they were shopping it to the third party. The town knew what the plaintiff tender amount was. The plaintiff was at a distinct disadvantage in not having the town go back to the plaintiff to renegotiate the contract or allow them to take part in the discussion as between the town and the third party. [10] The defendant suggests that in the end the town, along with the third party, was able to complete the bleachers and stairs aspect for the civic centre for a cost that was within $2,000.00 of the Hanscomb Class “C” estimate. I am not fully convinced that figure accurately reflects the full cost of production when one considers the true cost of having town employees perform part of the work. In the context of this litigation the issue is not however what the eventual cost was but whether the town dealt fairly with the plaintiff in the context of the tender process. [11] The privilege clause in the tender package affords substantial discretion to the town. It does not give an unfettered discretion to simply disregard the rights and interests of the plaintiff in the tendering process. I again refer to the fact that after the extended closing date expired the town did not advise the plaintiff that its tender was not accepted. Mr. Fiander, on behalf of the town, indicated that he felt there would be no purpose served in going back to the plaintiff because after discussing the issue with Mr. Borcherdt he could not anticipate the plaintiff would have been able to reduce his price so as to come within budget. I ask rhetorically, how could the town act fairly as regards the plaintiff without rejecting his bid or going back to the plaintiff to indicate they were negotiating with a third party and considering the option of having town workers perform part of the contract. This was all done during a time when Contract A still was valid and the plaintiff tender had not been rejected. [12] The leading case on the law of tendering in Canada is R. v. Ron Engineering and Construction (Eastern) Limited, [1981] 1 S.C.R. 111. In that case Justice Estey, writing for the Court, formulated the modern expression of tendering law in discussing the concept of Contract “A” and Contract “B” within the tendering process. He wrote at paragraph 16 of the decision: The tender submitted by the respondent brought Contract A into life. This is sometimes described in law as a unilateral contract, that is to say a contract which results from an act made in response to an offer, as for example in the simplest terms, “I will pay you a dollar if you will cut my lawn.” No obligation to cut the lawn exists in law and the obligation to pay the dollar comes into being upon the performance of the invited act. Here the call for tenders created no obligation in the respondent or in anyone else in or out of the construction world. When a member of the construction industry responds to the call for tenders, as the respondent has done here, that response takes the form of the submission of a tender, or a bid as it is sometimes called. The significance of the bid in law is that it at once becomes irrevocable if filed in conformity with the terms and conditions under which the call for tenders was made and if such terms so provide. There is no disagreement between the parties here about the form and procedure in which the tender was submitted by the respondent and that it complied with the terms and conditions of the call for tenders. Consequently, Contract A came into being. The principal term of Contract A is the irrevocability of the bid, and the corollary term is the obligation in both parties to enter into a contract (Contract B) upon the acceptance of the tender. Other terms include the qualified obligations of the owner to accept the lowest tender, and the degree of this obligation is controlled by the terms and conditions established in the call for tenders. [13] Ron Engineering makes it clear that parties to a tender process have responsibilities to each other even before the ultimate contract is executed. The extent of the rights or responsibilities is not necessarily included in the express words of the tender package. For example the privilege clause does not afford the defendant in this case a right to rely on the privilege clause and disregard the implied duty of fairness owed to the plaintiff. [14] Privilege clauses have been considered in a number of recent decisions including Martel Building Ltd. v. R., [2002] S.C.R. 860, where the Court commented on the general duty of fairness. At paragraph 80 the Court noted: In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. [1999] 1 S.C.R. 619 (S.C.C.), this Court confirmed that Contract A also imposes obligations on the owner. ... The Court also held that, while the terms stipulated in tender documents created express obligations in the context of Contract A, this contract, like all contracts, could also include implied obligations. The inclusion of implied terms may be based on custom or usage, as the legal incidents of a particular class or kind of contract, or based on the presumed intention of the parties where it is necessary to give a contract business efficacy or where it meets the “officious bystander” test: Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711 (S.C.C.), at p. 775; M. J. B. Enterprises Ltd., supra, at para. 27. ... The Court noted that in determining the intention of the parties, attention must be paid to the express terms of the contract. In light of the privilege clause, the Court rejected the proposition that the party who had instigated the tender call was required to accept the lowest compliant tender. The express language of the tender documents, which manifested a contrary intention, governed. However, an obligation to accept only complaint bids could be implied based on the presumed intention of the parties. This obligation was not incompatible with the privilege clause. ...It is now well established that parties to a tender process may have reciprocal obligations arising from Contract A either expressly or impliedly. In the case at bar, Desjardins J. A. held that the appellant owed the respondent a duty of care in tort to treat all bidders fairly and equally. However, she explained that such a duty arose out of a coextensive implied contractual obligation. [15] In the case before the Court I am satisfied there was a duty owed to the plaintiff to ensure fair and equal treatment. In the context of the implied terms associated with Contract A in this case, I ask what does fair and equal treatment include? In Chinook Aggregates Ltd. v. Abbotsford (Municipal District) (1989), 35 C.L.R. 241 (B.C.C.A.), the Court concluded that an owner had breached the implied contractual obligation under Contract A by adopting a policy of preferring local contractors whose tenders were within ten percent of the lowest tender in awarding the contract, when that preference was not revealed by, nor stated in the tender documents. [16] In the circumstances of this case an implied term of the contract was that the defendant undertook not to entertain non-compliant tenders nor to use information obtained from the tender and shop that bid around to other contractors so as to obtain the lower price. When the defendant decided it would perform part of the work which was included in the tender they in effect became a competitor. They were non-compliant bidders in the process that saw the plaintiff continue to be exposed to risk and liability on Contract A. In addition they breached the implied terms of fairness when they negotiated with the third party without disclosing the negotiations to the plaintiff. [17] In assessing the issue of fairness I refer to guidelines often used in the provincial construction industry. I reference the Construction Contract Guidelines as prepared by the Province of Nova Scotia Office of Economic Development, Procurement Branch. These guidelines referred to in evidence were dated May 31, 2004, but the defendant does not suggest the guidelines were different at the time of the tender. I refer specifically to Contract Construction Guidelines, no. 34 and 38: CCG 34 BID EVALUATION .1 The Contracting Authority reserves the right to reject any and all Bids or accept any Bid which in the sole opinion of the Contracting Authority is in its best interest. .2 In the evaluation of a bid, the Contracting Authority will consider but not be limited to the following criteria: .1 Bid price submitted. .2 Compliance with Bid Documents. .3 The experience of the bidder with similar projects in size and shape. .4 Completion date. [18] As noted under CCG34 in rejecting a bid the Contracting Authority is entitled to consider the bid price as one of the criteria in rejecting any bid. CCG38 provides as follows: EFFECT OF BIDS HIGHER THAN THE ESTIMATED CONTRACT VALUE .1 Where all Bids submitted in response to an invitation to bid are higher than the estimated contract value, bids shall not necessarily be invalidated for this reason. .2 If the lowest competent Bid is within 15% of the estimated contract value, the Contracting Authority may choose to: .1 Award the contract for the bid amount. .2 Negotiate changes in the scope of the work with the lowest competent bidder to achieve an acceptable contract price. .3 Failing negotiation, or if the lowest Competent Bid is greater than 13% over the estimated contract value: .1 The Contracting Authority may make changes in the scope of work and invite the three lowest competent original Bidders to rebid. .2 If these invited Bids fail to bring a Bid to within 15% of the estimated contract value and subject to confirmation of the Contracting Authorities budget, the Contracting Authority may take whatever action which in its opinion will result in an acceptable contract price. [19] As I noted above, I accept that however imprecise a Class C budget might be it was the budget relied upon by Mr. Fiander and the town. I find no fault in their reliance and using that as a parameter to establish a budgetary amount for work for the purpose of assessing bids. Obviously the plaintiff’s tender was not within fifteen percent of the estimated contract value as referenced in CCG 38. The guidelines would suggest CCG 38.3(1) and (2) would apply and the defendant could make changes in the scope of the work and invite, in this case, the only bidder to rebid. If this process failed to bring the tender within fifteen percent of the estimated contract value, then the budget should have then been confirmed by the contracting authority. It was at that stage the Class C budget may have been subjected to closer scrutiny. The defendant then could take whatever action, which in its opinion, would result in an acceptable contract price. That is not to suggest the duty of fairness would not continue and for example require the town to formally reject the plaintiff’s bid at that stage. [20] In the circumstances of this case, what I suggest as a bare minimum for the defendant was to advise the plaintiff there was to be a change in the scope of the work. The scope of the work was altered by the defendant as it negotiated with the third party. For example, there was a requirement in the initial bid for pressure testing of the in floor heating tubing in the pre-caste concrete. That requirement for a twenty-four hour pressure testing was deleted for the third party. In addition, the defendant did portions of the installations. In this regard it is of some importance to note they used town employees. In doing so they could do that at cost, without any requirement for a profit component or contribution to overheads in relation to town employees. [21] The plaintiff was never given an opportunity to engage in any process similar to the process as set out in CCG 38. In saying this I emphasise that the Construction Contract Guidelines are guidelines and nothing more. Even though they are only guidelines they are a measure in assessing what may be appropriate in terms of fair treatment of the plaintiff. [22] The tendering process is in jeopardy if the Court condones the actions of the defendant in this case. In that regard I refer to the comments of Justice Gruchy in Western Plumbing & Heating Ltd. v. Industrial Boiler-Tech Inc. (1999) 180 N.S.R. (2d) 41, para 46 and 47: The value of the integrity of the bidding system was address in R. v. Ross Engineering & Construction Ltd., by Estey, J. of the Supreme Court of Canada when he said: I share the view expressed by the Court of appeal that integrity of the bidding system must be protected where under the law of contracts it is possible to do so. I must agree with that view. The companion view is that an attack on the integrity of the bidding system should not be protected, where possible. The process of bid shopping is destructive of the tendering system. In my view the process followed by Western amounted to bid shopping and as described to me borders on deceit. [23] In this case, the processes followed by the defendant amounted to bid shopping. There is no evidence the defendant disclosed evidence to the third party as regards the details of the plaintiff’s bid. Inevitably they at least had that information to use as a yardstick in measuring the third party bid. [24] The defendant suggests the fact that in the end the work was done within a couple of thousand dollars of budget is indicative of the fact the tender was justified in invoking the privilege clause to protect the town. Had CCG 38 been adhered to one of the things that was required in CCG 38.3.2 is confirmation of the contracting authorities budget. It is apparent from looking at the Class C budget there was a substantial error in the square footage so that in the end the defendant and the third party in effect did the work substantially under budget. Conclusion [25] I am satisfied the process as adopted by the defendant is a sufficiently egregious attack on the integrity of the bidding system that it cannot be condoned. If the actions of the defendant are condoned in a case such as this then it would invite various abuses. A general contractor might obtain bid information and then use it to negotiate a better contract either for itself or with third parties at the expense of the bid system. The integrity of the bid system could be undermined to the extent that it would no longer be effective. The issues in this case go well beyond the rights accorded to the defendant by the privilege clause. The actions of the defendant are in no way consistent with the guidelines set out in CCG 38. There is nothing about the actions of the defendant which suggest they properly took into account the potential liability of the plaintiff under Contract A. They kept the plaintiff exposed to that liability while they embarked on a process that was totally separate and apart from the tendering process. That activity cannot be condoned so long as Contract A was not rejected. [26] My comments in no way reflect upon the credibility of the project manager, Thomas Fiander. I am satisfied that Mr. Fiander felt he was legitimately acting within the scope of the privative clause in looking to protect the interests of the Town of Port Hawkesbury. Mr. Fiander felt he could rely upon that privative clause and do whatever he felt was in the best interest of the town. I accept his evidence as being very forthright and credible. Mr. Fiander is experienced in the construction industry and I did not understand him to be in any way attempting to mislead the Court. I refer back to the comments I made earlier in the decision and simply point out that once the tender was let out and Contract A was formed, the plaintiff in this case was exposed to certain risks. The defendant was then not entitled to disregard the interests of the plaintiff and use that bid package to shop the bid to themselves or other non-bidding parties. In doing so Mr. Fiander simply did not appreciate the extent of the obligation not to the plaintiff. Damages [27] The defendant’s position in relation to the damages claim is that the plaintiff must prove damages on a balance of probabilities. The defendant suggests that the plaintiff would not have been a successful bidder in any event because the bid was substantially over budget and the contract would not have been awarded to the plaintiff under any circumstances. I again refer to the fact that had the budget been subjected to closer scrutiny the budgetary error in the square footage may have been noted. Had that occurred the plaintiff’s tender may have appeared more reasonable. Although the work did come within $2,000 of the town budget some of the specs were changed for the third party. For example, they were not required to pressure test the in-floor heating in the pre-caste sections. In addition, the contract was split so the town employees performed part of the installation work. Even though there was an allocation made for labour costs for town employees there was no contribution to other overheads or profit for those employees. In the end it is difficult to determine whether in fact the town came within $2,000 on the Hanscomb budget. Even if that was accurate it is not an answer to the claim that the defendant breached its duty of fairness owed to the plaintiff in the tender process. [28] I am not convinced the plaintiff would not have been awarded a contract. I point again to the fact that the square footage estimated by the defendant was in error and the plaintiff was one of only two companies initially deemed able to do the work. Had the defendant continued to work with the plaintiff in eliminating or reducing testing of in floor heat tubes and eliminating caulking warranties in addition to alteration of delivery schedules as eventually occurred, it may well be that the plaintiff could have been successful in winning the contract. In addition a complete analysis of the cost of using town employees may have disclosed that the eventual cost was closer to the plaintiff’s bid costs than the defendant now suggests. [29] There is a duty of fairness owed to the plaintiff. The tendering process is an essential component in the construction industry and must be protected so the integrity of the process itself is maintained. In this case it is clear the plaintiff expended hours on the tender process that were lost. In that regard I note Mr. Borcherdt spent four hours consulting with a Mr. McKeen plus six hours of his own time in preparing the tenders. I am satisfied that as a minimum the plaintiff should be compensated for that 10 hour work even though the plaintiff would not have recouped those monies had it not been a successful bidder. That wasted time and effort though should now be compensated because that time was expended in a flawed process. Had the plaintiff realized they were not involved in the process that would be respected to the end, I doubt they would have expended any of the ten hours. For that work the plaintiff would, at a minimum, be entitled to ten hours at $100.00 per hour. I am, however, satisfied the proper measure of damages in this case exceeds the cost of preparing the tenders. In Santec Construction Managers Ltd. v. Windsor (Town) [2005], 235 N.S.R. (2d) 100, Justice Coughlan discussed the proper measure for damages. Referring to Naylor Group Inc. v. Ellis-Don Construction Ltd. [2001] 2 S.C.R. 943 (S.C.C.) he noted at paragraph 53 and 54: 53. The well accepted principle is that the respondent should be put in as good a position, financially speaking, as it would have been in had the appellant performed its obligation under the tender contract. The normal measure of damages ... is the contract price less the cost to the respondent of executing or completing the work, ie., the loss of profit. ... 54. The plaintiff’s loss of profit must be determined. [30] The measure of damages in this case is to be based on loss of profit. There were two components to the contract as was tendered by the plaintiff. The first was the bleacher portion of the contract. As proof of loss the plaintiff referred to the spread sheets created to determine the tender amounts. Based on those spread sheets the plaintiff claims for the labour contribution to overhead on the bleacher and stairs together with a general markup on the total cost as follows: Bleacher manufacture 1,620 hours - total labour charge - $25.00 per hour minus actual labour costs of $13.50 for a total profit on labour of $ 18,630.00. In addition on the bleacher portion of the contract the plaintiff claims a mark-up on the total cost in the amount of $175,526.00 at the rate of 35% or $61,434.00. (Allowed) The second component to the tender would be the aisle steps which the plaintiff claimed 83 hours at $25.00 an hour less actual labour costs of $13.50 for a total claim of $954.50. In addition the plaintiff claims a mark-up on the total costs of the stairs at the rate of 35% for a total of $7,102.00. (Allowed) [31] The plaintiff has the burden of proving damages. The measure of damages is loss of profit. All though I am convinced that loss of profits is the appropriate measure in this case, I am not satisfied there was sufficient evidence before the Court to satisfy me that the gross profits as claimed were in fact accurate. In this regard I refer specifically to the labour contribution to overhead. As I review the spread sheets I am not convinced the spread sheets include all direct costs of production. For example, direct costs would include things other than the materials as noted in the spread sheet. Inevitably there would be real costs associated with the production, including the extra consumption of electricity, extra administrative work, extra use of production forms. The list could go on. A difficulty in this case is that there is simply a lack of evidence indicating what these additional direct costs would be. It would be unreasonable to expect they were not real costs reducing gross profits. The spread sheet in fact refers to “total cost” which I am satisfied is reflective of the actual cost of production. The profit amounts are calculated by reference only to the markup on the “total cost”. In that regard I am satisfied the award in this case should not include a mark up on the labour portions of the contract as the plaintiff has not convinced me those amounts do not relate to true production costs . Applying that reasoning the losses are limited to the 35% markups on the total cost of production, that being $61,434.00 on the bleacher component and $7,102.00 on the aisle steps for a total of $68,536.00. That mark-up on the total costs would have included the $1,000.00 referred to earlier in relation to the consulting work with Mr. McKeen and the work in preparing the tender. It would be inappropriate to compensate for that amount twice. The total damages therefore is limited to $68,536.00. [32] The plaintiff has also claimed HST at the rate of 15%. This award of damages does not relate to goods or services sold or any breach of payment obligation in relation to sale of any goods or services. This is an award of damages related to the breach of an implied term of good faith in a tendering process. I am not convinced such an award of damages should attract HST. [33] I am prepared to hear submissions from counsel on the issue of costs and prejudgment interest if the parties are unable to agree on the amounts. J. 10/26/06