Supreme Court Shuts Door on Subcontractor Claims

In its much anticipated May 2008 decision in Design Services v. Canada, 2008 SCC 22 the Supreme Court of Canada shut the lid on a Pandora’s Box of potential future litigation when it denied the right of subcontractors to leapfrog general contractors and directly sue purchasing institutions over irregularities in the tendering process. The outcome is a positive result for purchasers, who would have faced an exponentially expanded pool of potential plaintiffs if the Supreme Court had recognized a tort based duty of care owed to subcontractors.

Traditional Subcontractor Standing

Traditionally, the legal standing of subcontractors in a tendering process has followed a privity of contract analysis. Prime bidders have the right to sue the purchasing institution for tendering irregularities under the notional “Contract A” that governs the formal tendering process. In turn, “named subcontractors” (those who are incorporated into the prime bidder’s tender) have standing against the prime bidder and are entitled to their subcontract if the prime bidder is awarded the contract. Named subcontractors can launch a legal challenge against the prime contractor if, after contract award, the prime fails to award them the subcontract contemplated in the tender. However, to date, the courts had generally refused to recognize leapfrog claims launched by subcontractors directly against the purchaser since there is no privity of contract between these parties. However, Design Services gave rise to circumstances that challenged these long standing assumptions.

Subcontractors Sue Government Over Contract Award

The case involved a federal government design-build tender call for the construction of a naval reserve building in St. John’s, Newfoundland. A prime bidder and its subcontractors brought an action challenging an improper contract award made to a non-compliant competing bidder. The prime bidder reached an out-of-court settlement with the government. The subcontractors, who were left out of that settlement, continued their action. The trial court determined that the subcontractors were not primary parties to the bidding process and therefore could not bring a “Contract A” claim against the government. However, it found that the onerous requirements of the design-build tender call, which included a prequalification process, had given the subcontractors sufficient standing in the tendering process to create a duty of care in tort law. The trial court found the government breached this duty of care when it awarded the tendered contract to a non-compliant competing bid. It awarded damages to the subcontractors.

The Federal Court of Appeal disagreed, finding that the government owed no duties to the subcontractors under contract or tort law and was therefore not liable to those subcontractors. It overturned the trial decision. However, in January 2007, the Supreme Court of Canada granted the subcontractors leave to appeal the Federal Court of Appeal decision. This raised significant concerns across purchasing circles over the prospect of Canada’s highest court recognizing a subcontractor duty of care and thereby unleashing an expanded pool of potential plaintiffs onto purchasing institutions.

The Supreme Court Decision

Concerns over an impending onslaught of subcontractor claims ultimately proved to be greatly exaggerated. In an open and shut judgment, the Supreme Court was quick to reject the idea that subcontractors could advance tendering claims against purchasing institutions under any existing or new tort based duties. To support this finding, the Supreme Court noted that the particular tender call rules permitted the submission of joint venture bids. Had the subcontractors entered into contractual relations with the prime contractor to submit a joint venture bid, then they would have had legal standing to bring a contract based claim under “Contract A”.
However, since the bidding team chose to organize itself in a prime-subcontractor arrangement in the particular bidding process, the Supreme Court found no reason to introduce a new tort duty to override the pre-existing contractual relations established by the bidding team. As the Court stated, ‘[t]o conclude that an action in tort is appropriate when commercial parties have deliberately arranged their affairs in contract would be to allow for an unjustifiable encroachment of tort law into the realm of contract.’ The Supreme Court therefore ruled against introducing a new tort duty, noting that ‘tort law should not be used as an after-the-fact insurer’ to override the prior commercial arrangements established by a bidding team.

The Sanctity of Contract

As the Supreme Court noted, a new tort based duty would have blown the lid off any hopes of containing tendering related lawsuits. Had this case gone the other way, an indeterminate number of potential plaintiffs operating down the supply chain from the prime bidder could have queued up to take a run at purchasing institutions over contract award decisions. By preserving the sanctity of contract and limiting the pool of potential plaintiffs, the ruling in Design Services restores a measure of sanity to the tendering process.

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