breakfast for the mind: construction seminar 2016

Breakfast for the Mind:

Construction Seminar 2016

1

Welcome

Dennis Picco - Emcee

26 April 2016 2

Best Practices for

Submitting a Compliant Bid

Leanne Krawchuk, Partner

26 April 2016 3

1. THE LAW OF TENDERING

a. Tendering – The Legal Framework

i. The Basics – “Contract A” and “Contract B”

ii. Bid Compliance

A. General

B. Test for Compliance

C. Time for Compliance

I. Examples of Non-Compliance

D. Discretion Clauses

4

OVERVIEW

• This involves two distinct contracts i.e., Contract A and Contract B.

• Contract A is the tendering contract. Contract B is the substantive construction contract.

• A call for tenders constitutes an offer on the part of the owner to enter into

Contract A.

• This offer is accepted by a tenderer submitting a compliant tender. Contract A is then

created.

• A compliant tender constitutes both an acceptance of Contract A and an offer

(typically irrevocable) to enter into Contract B.

• Contract A will form between the owner and each tenderer which has submitted a

compliant bid. There may be many Contract A’s if numerous compliant tenders

are submitted.

5

Contract A / Contract B Analysis

Ontario v. Ron Engineering [1981] 1 S.C.R. 111

Contract A / Contract B Analysis

• The rights of the parties under Contract A are determined by the terms of

the tender documents.

• Contract A also contains an implied term that the owner must act fairly and in

good faith during the tendering process.

• The principal term of Contract A is the irrevocability of the bid. The

corollary term is typically the obligation on both parties to enter into

Contract B upon the acceptance of the tender by the owner.

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Duties of Owner and Tenderer

• Contract A imposes obligations on both owners and tenderers.

• Owner’s duties typically include the implied obligation to accept only a

materially compliant tender and to treat compliant bidders fairly and

equally.

• The submission of a compliant tender also gives rise to duties on the

tenderer.

• Typically include the irrevocability of the tender and the obligation to enter

Contract B if awarded.

• Duties of both owners and tenderers are determined by the tender

documents.

7

Creation of Contract A

• The creation of Contract A requires two things:

• (1) the parties must intend to initiate contractual relations by the submission of

a bid; and

• (2) the tenderer must have submitted a compliant bid in accordance with the

call for tenders.

• There is also an implied term of Contract A that the owner will not accept

a non-compliant tender (M.J.B. Enterprises Ltd. v. Defence Construction

(1951) Ltd., [1999] S.C.J. No. 17).

8

Intention to Initiate Contractual Relations

• For the Contract A/Contract B framework to be triggered, the parties

must intend to initiate a contractual binding relationship by the

submission of a bid.

• This is determined by the terms of the tender documents.

• The Contract A/Contract B framework can be distinguished from

instances where the owner is simply intending to initiate the negotiation

process or making an “invitation to treat”.

9

Bid Compliance

• The issue of bid compliance is important in the law of tendering for two

primary reasons:

• (1) a tender which is not materially compliant with the terms and

conditions of the tender call will not give rise to Contract A.

• Consequently, a bidder who has submitted a materially non-compliant tender

cannot successfully sue for breach of Contract A as it does not exist.

• (2) it is an implied term of Contract A that the Owner will accept only a

materially compliant tender

• As such, a non-compliant tender will not be capable of acceptance. It would be

a breach of Contract A by the Owner to do so.

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• The test for compliance is material compliance.

• Strict compliance is not required. Non-compliance which is minor or is

with respect to non-essential matters may be permissible.

• Non-compliance will be material if:

• (i) there is a failure to address an important or essential requirement of the

tender documents; and

• (ii) there is a substantial likelihood that the failure would have been significant

in the deliberations of the owner in deciding which bid to select.

11

Test for Compliance:

Material, not strict compliance

• In Double N, the city’s call for tenders required all equipment to be used

on the job to be 1980 or newer. The conditions of the tender also

indicated that bidders were to provide the serial number and the city

license registration number for every piece of equipment, and that:

• “failure to [comply] either or in whole or in part may invalidate the bid”, and that

“the City reserves the right to reject any and all Tenders, and to waive any

informality.” [the discretion clause]

• In its bid, the successful bidder listed a 1980 unit as Item 1, and a “1977

or 1980 Rental Unit” as Item 2 and no serial or license registration

numbers for the units were provided. The City awarded Contract B to the

bidder and insisted upon the 1980 requirement. The bidder later

indicated that it would supply a 1979 Unit with no further action by the

City. Double N argued that the City accepted a non-compliant bid.

12

Double N Earthmovers Ltd v Edmonton (City), 2007

SCC 3

Double N Earthmovers Outcome

• The SCC determined that the bid was not materially non-compliant. The

absence of serial number and license information did not materially affect

price or performance of Contract B, and therefore was not a material

term that could not be waived subject to the discretion clause

• This suggests that an “informality” is something that does not materially

affect the price or performance of Contract B. If there is a discretion

clause in the tender, the Owner can waive informalities and accept a bid

that does not strictly comply with tender requirements.

• The provision of the 1979 unit instead of a 1980 unit was found to be an

issue relating to Contract B instead of the tendering process because:

• The bidder “offered units that were compliant on their face and open to

acceptance by the City. The City was not aware of Sureway's deceit until after it

had accepted Sureway's bid, nor did it collude with Sureway during the bidding

process to perpetrate an unfairness against other bidders.”

13

• In Silex, the bid bond in the successful bid was for only 60 days rather

than 90 days as required in the instructions to bidders.

• Court considered this material because it gave an advantage to the

bidder over others as the costs associated with a 60 day bond were less

and presumably incorporated into the ultimate price.

• The test of materiality is objective.

14

Silex Restorations Ltd. v. Strata Plan:

Objective Test

Time for Compliance

• The rights of the parties crystallize and Contract A is formed upon the

opening of the tenders. (See Toronto Transit Commission v. Gottardo

Construction Ltd., [2005] O.J. No. 3689 (C.A.).

• The critical time for compliance is the submission of the tender.

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• if it is not submitted on time;

• if it fails to follow the instructions to tender/instructions to bidders;

• if it is not submitted on the required tender form or fails to provide

material information;

• if it is conditional or contains qualifications;

• if it fails to include the requisite bid security;

• if it contains material alterations in the tender form; or

• if it is unclear as to a material term such as price.

16

Non-Compliance Invalidating Bid

Examples of non-compliance which may render a bid invalid include:

Examples of Non-Compliance Invalidating Bid

• M.J.B. – tender included a handwritten note which included a

qualification (if x, add $X/meter), which was contrary to instructions;

• Graham – failed to provide required site specific information and

environmental plan;

• Silex – included 60 day bid bond instead of 90 day bond;

• Vachon Construction Ltd. v. Cariboo – discrepancy in tender amount

expressed in both words and numbers not capable of acceptance;

• PCL Construction v. Alberta – failure to include the entire first page of a

bid resulted in a bid so incomplete it did not amount in law to a tender;

17

• J. Oviatt Contracting Ltd. v. Kitimat General Hospital Society – failure to

include a price for a temporary road as required in tender documents

made the bid non-compliant;

• MRK Holdings Ltd. v. Newfoundland and Labrador Housing – found to be

non-compliant based on conditional nature of bid, bidders were to prove

financing and provide cheque, instead, the bidder made their bid subject

to financing and return of deposit if no financing obtained;

• NAC Constructors Ltd. v. Alberta Capital Region Wastewater

Commission – failure to submit tender on time; and

• Steelmac Ltd. v. Nova Scotia (Attorney General) – bidder used wrong

form (and as a result was missing important information).

18

Examples of Non-Compliance Invalidating Bid

• Some examples of non-compliance which did not render a bid invalid

include:

• omission of information which is otherwise incorporated by reference or

contained in the tender documents; or

• deviations that did not compromise the integrity of the tendering process.

• British Columbia v. SCI Engineers & Constructors Inc. – change to bid by

stating revised total rather than amount by which tender was being

revised as instructed was not material;

19

Examples of Non-Compliance Not Invalidating Bid

Examples of Non-Compliance Not Invalidating Bid

• J. Oviatt Contracting – fact that bid was missing four pages when the

information was supplied elsewhere in the bid did not hinder substantial

compliance;

• Bradscot (MCL) Ltd. v. Hamilton Wentworth Catholic District School

Board – error in calculating GST did not invalidate bid as it was not an

operative part of tender; and

• Force Construction Ltd. v. Nova Scotia (Attorney General) – signature

missing from Appendix B did not render the tender materially non-

compliant.

20

Bid Compliance

To Summarize:

• A bid must be materially compliant with the tender documents in order

to create Contract A.

• Strict compliance is not necessary.

• Courts will consider the need to maintain the integrity of the tendering process

and ensure that no bidder obtains an unfair advantage.

21

• Discretion clauses are those which state that the owner can waive

irregularities and non-compliance in a tender.

• Are to be interpreted in accordance with the rest of the tender

documents.

• Limited to waiving irregularities and non-compliance which are non-

material, assessed on an objective basis.

22

Discretion Clauses

Discretion Clauses

• A discretion clause does not negate the obligation to treat all bidders

fairly and equally.

• A discretion clause is subject to an objective test.

• It does not permit the owner, in its sole discretion, to subjectively determine

whether or not irregularities are minor and inconsequential.

• Must specifically override implied obligations in order to be effective.

• Does not allow the owner to accept a bid which is late (unless expressly

stated).

• Acting outside the provisions of the Instructions to Bidders is a breach of the

duty to treat all bidders fairly and equally.

23

Creation of Contract A

• A discretion clause cannot be used to waive material non-compliance

and thereby create Contract A out of a tender which is otherwise

materially non-complaint.

• A discretion clause is a term of Contract A, and as such Contract A must be in

existence in order for the discretion clause to be operative in the first place.

Since a materially non-compliant bid does not constitute an acceptance of the

call for tenders, Contract A will not arise.

• Therefore, the owner cannot invoke the discretion clause (which is

a term of Contract A) to create Contract A.

24

• NAC Constructors considered the issue of whether a discretion clause

was broad enough to permit the acceptance of a late tender.

• Clause purported to allow the Commission to accept bids which may be non-

compliant by virtue of non-conformity with the required tender form.

• Court of Appeal held discretion clause did not permit acceptance of late

tender, because this right was not specifically referenced.

• Where no specific reference to timing, discretion clause will not allow

owner to override duty of fairness by admission of late tender.

25

Discretion Clauses

Restrictive Interpretation by Courts

Assignment vs. Subcontracting

“Pay-when-paid” clauses

Wes Fairbanks, Associate

26 April 2016 26

Principles of Subcontracting

a. The Subcontracting Relationship

b. Subcontract Drafting and Review

i. Examples of Key Provisions

A. “Pay-when-paid”

B. Mirroring the Prime Contract

27

Overview

Subcontracting

• Assignor assigns its rights under the construction contract to the

Assignee

• Assignment does not typically release the Assignor for obligations under

the contract

• Assignor still primarily liable for the obligations under the contract

• Assignor may request a release to be granted by the Owner

• **Assignment may require consent of the owner under the terms

of the construction contract**

28

Subcontracting: Subcontract v Assignment

Assignment

• Prime Contractor enters a new contract with the Subcontractor to

perform all or some of its obligations under the prime construction

contract

• There is no direct contractual relationship between the Owner and the

Subcontractor

• Subcontractor has no contractual right to look to the owner for payment for

work performed under the subcontract

• Owner has no right to sue the subcontractor for a default in performance under

the subcontract

• **The terms of the Prime Contract may require the Owner to approve any

Subcontractors**

29

Subcontracting: Subcontract v Assignment

Subcontract

• Most common method used to subcontract

• Often required by the terms of the Prime Contract

• Example:

GC 3.7 SUBCONTRACTORS AND SUPPLIERS

• 3.7.1 The Contractor shall preserve and protect the rights of the parties

under the Contract with respect to the work to be performed under

subcontract, and shall:

• .1 enter into contracts or written agreements with Subcontractors and Suppliers to require

them to perform their work as provided in the Contract Documents;

• .2 incorporate the terms and conditions of the Contract Documents into all contracts or

written agreements with Subcontractors and Suppliers; and (emphasis added)

• .3 be as fully responsible to the Owner for acts and omissions of Subcontractors, Suppliers

and of persons directly or indirectly employed by them as for acts and omissions of persons

directly employed by them as for acts and omissions of persons directly employed by the

Contractor.

-CCDC 2(2008) Stipulated Price Contract

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Incorporation of Prime Contract Terms into

Subcontract

• Other reasons to directly incorporate terms by reference

• Efficient to draft

• Provide a useful correlation of the Prime Contract to the Subcontract

• Ensure that indemnity, insurance, termination and other important provisions

“flow-through”

• Since the Contractor remains primarily liable on the Prime Contract, it will want to

ensure that it can seek indemnity from the Subcontractor for defaults under the

Subcontract to the same extent that indemnity may be sought against it by the Owner

under the Prime Contract

• This flow-through feature is particularly important for a “back-to-back” subcontract,

where all of the work under the Prime Contract is to be subcontracted to Subcontractor

31


Subcontract

• How to Incorporate by reference:

• Example:

• CONFLICT BETWEEN THE PRIME CONTRACT AND

SUBCONTRACT

• The requirements, terms and conditions of the Prime Contract as far as

they are applicable to this Subcontract, shall be binding upon the

Contractor and the Subcontractor as if the word “owner” appearing

therein had been changed to “Contractor” and the word “contractor”

appearing therein has been changed to “Subcontractor”. In the event of

any conflict between the terms of this Subcontract and the Prime

Contract, the Prime Contract shall govern.

-CCA 1 (2008) Stipulated Price Subcontract

32


Subcontract

• Hazards of incorporating terms by reference into the Subcontract

• Certain clauses of the Prime Contract may be unsuitable to the Subcontract

• E.g. liquidated damages clause, arbitration provision, security for lien provisions

• For this reason, need to go through Prime Contract line by line to ensure only desired clauses are

incorporated

• A court may interpret specific clauses to not be incorporated

• E.g. the objective intention of the parties must be to incorporate a specific clause, which may not

apply to matters which do not concern the coordination and undertaking of the physical work

• For clarity, provisions such as insurance, indemnity, liquidated damages and arbitration should be

specifically included or excluded to ensure incorporation is effective as envisioned by the parties

• Be careful with “Entire Agreement” clauses and inconsistency between the

Prime Contract and the Subcontract

• One or the other agreement must take precedence in the event of an inconsistency

33


Subcontract

• Purports to entitle the Contractor to refuse payment to the Subcontractor

if the Contractor has not been paid by the Owner

• Seeks to allocate the risk of Owner’s non-payment to the Contractor from

the Contractor to the Subcontractor

• Allows a Contractor to avoid being stuck with liability for Subcontractor

claims emanating from the Owner’s default which cannot be passed

through to the Owner

• **can work unfairly where the Subcontractor is in no position to assess

the financial strength of the Owner or where the Subcontractor is

precluded from calling on a Bond because of the ability of the surety to

assert the Contractor’s “pay-when-paid” defence**

34

“Pay-When-Paid” Clauses

• Interpretation No. 1:

• Unless and until the Contractor is paid, the Subcontractor has no right to be

paid

• Under this interpretation, the risk of non-payment by the Owner of the work to

be performed by the Contractor purports to entitle the Contractor to refuse

payment to the Subcontractor if the Contractor has not been paid by the

owner

• Interpretation No. 2:

• The Subcontractor will have to wait until the Contractor is paid but does not

give up its right to recover against the Contractor in the event the Owner

never pays the Contractor

• Because of this inconsistency, clear drafting is important

35


Inconsistent Treatment by the Courts

• “Payment by Owner to Contractor is a condition precedent to Contractor paying

Subcontractor. Subcontractor understands and agrees that it will be paid if,

and only after, Contractor is paid by Owner for that portion of the Work for

which Subcontractor is seeking payment. Subcontractor fully understands that

it bears the risk of non-payment by the Owner.”

• NOTE: it must be clear to the Subcontractor that it is accepting the risk of non-

payment by the Owner

• NOTE: the Prime Contract should be consulted to see whether a pay-when-

paid clause is permissible in the subcontract

36


Example: Interpretation No.1

• “Payment of the balance owing under the Subcontract shall be made within 20

days after payment has been received by the Contractor, or within a reasonable

time after the Contractor’s application for final payment under the Prime

Contract, or termination of the Prime Contract, or stoppage of the Project,

whichever is earlier. This provision shall not relieve the Contractor from its

obligation of payment to the Subcontractor in the event the Contractor does not

receive the balance of the contract funds from the Owner within a reasonable

period of time.”

-ACA Form A - 2013

37


Example: Interpretation No.2:

Coffee Break

5 Minutes

38

Changes to the scope:

Tips and traps

Dennis Schmidt, Partner

26 April 2016 39

• The task to be performed under a Contract or Subcontract in

the completion of a project, typically broken out into

specific tasks with deadlines

• Defined term in the Contract/Subcontract:

26 April 2016 40

Work

Scope of Work

• Scope of Work is typically set by the Contract/Subcontract by a

description of the Work, reference to other documents (e.g. drawings,

tender documents, quotes, etc.) or both:

41

Scope of Work Cont’d

• In the subcontract context, will have referral to the Prime Contract

between the Owner and Contractor

• Important to have a copy of or access to the Prime Contract as that will

have components that relate to the Subcontractor’s scope of work

42

Changes in the Scope

43

• During the course of a Project, it may be necessary to clarify, augment or

alter the Scope of Work for the Project

• If such clarifications do not involve a corresponding change to the budget

for the Project, this change can often be made via an amendment to the

Contract

• Project Managers should pay a great deal of attention to managing

Scope. Allowing the Project’s Scope to change mid-course usually

means added costs, greater risks and longer duration

• Change Directive (or Project Change Notice – PCN)

• Are used prior to reaching an agreement on any change in the Price or

Time to change the Work but remain in the original Scope

• Once agreement has been reached on Price and/or Time, then use a

Change Order

26 April 2016 44

Changes in the Scope Cont’d

• Change Order

• An addition or deletion to the Scope of Work that adjusts the Price and

can affect the Time, which can lead to a change in Schedule

• Is a change/amendment to the Contract

26 April 2016 45


26 April 2016 46


• Within right of the Owner (or Contractor in case of a Subcontract) to

make changes to the Scope of Work

26 April 2016 47

Change Order

• When using a Change Order, follow the Contract!

• If it is to be approved by Owner/Contractor/Subcontractor, or is to be

issued by the Consultant, be sure to follow those requirements

• A deviation from the Change Order requirements of the

Contract/Subcontract can lead to disputes over whether or not work was

authorized, payment, and method of compensation

• Failing to strictly follow the requirements of the Contract/Subcontract can

lead to headaches as to whether or not the Change Orders are properly

issued

• E.g. Change Orders were not issued by Consultant as required by the Contract

but by the Contractor

• Some of the Change Orders were signed by both Owner and Contractor

• Some were not signed but paid for by Owner

• Some were issued after work was performed

• Owner could not take the position that Contractor failed to strictly follow the

requirements of the Contract and, therefore, not liable to pay Change Orders in

dispute because Owner failed to follow the Contract as well

26 April 2016 48

Change Order Cont’d

26 April 2016 49

Change Directive

26 April 2016 50

Change Directive Cont’d

• If Change Directives (or Project Change Notices) are being used and

they result in a change in Price and Time, be sure that leads to a Change

Order that is approved in accordance with the Contract/Subcontract

26 April 2016 51

Change Directive Cont’d

Cash Allowances

52

• Can be included as “estimates” relating to a particular component of the

Work when a decision has not been made by the Owner (or Contractor in

the case of a Subcontract)

• Important to ensure that the estimate is reasonable based on the

available information

• May lead to dispute over final Contract payments at the end

• Contractor (or Subcontractor) will be entitled to the excess above the

cash allowance/estimate plus an amount for overhead and profit

• Actual amount incurred under the cash allowance/estimate is a credit to

the Owner/Contractor

• Another term for “Prime Cost (or PC) Sum”

26 April 2016 53

Cash Allowances Cont’d

• Use of Cash Allowances/PC Sums for quoting a change in the Price for

the purposes of a change in Scope

• Can result in an amendment of a Stipulated-Price Contract into a Cost-

Plus arrangement for the changed Scope

• E.g. was quote for additional work by way of a letter containing estimates of

costs for the new work; original Scope of Work being done under a Design-

Build Stipulated-Price Contract

• The letter was incorporated by referenced in a Change Order approved by the

Owner and Contractor

• Was held that the original Contract was amended such that original Scope was

still stipulated-price while additional work under the Change Order was PC Sum

or Cost-Plus

26 April 2016 54

Cash Allowances Cont’d

Take Home Message

• Be mindful of process under the Contract/Subcontract that deals with

changes

• If the Contract/Subcontract has a process, follow it strictly or run the risk

of a dispute or disputes over Price and Time

• Have a paper trail that deals with the change in case there is a dispute

(e.g. confirming letters, emails, meeting notes, etc.)

55

Q&A

Dennis Picco, Partner Leanne Krawchuk, Partner Wes Fairbanks, Associate Dennis Schmidt, Partner

26 April 2016 56

Thank you

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Breakfast for the Mind:

Construction Seminar 2016

58

breakfast for the mind: construction seminar 2016

Law