On May 8, 2008 the Supreme Court of Canada held that an owner in a tendering process does not owe a duty of care in tort to subcontractors.
In Design Services Ltd. v. Canada, Public Works and Government Services Canada (the Owner) launched a tendering process for the construction of a naval reserve building in St. John's, Newfoundland. Olympic Construction Ltd. (Olympic) submitted a bid but was not awarded the contract. For the purposes of the case, the Court was asked to assume that the contract was awarded to a non-complaint bidder and that the contract should have been awarded to Olympic. The appellants were subcontractors (the Subcontractors) of Olympic who had no privity of contract with the Owner. Absent privity of contract with the Owner, the Subcontractors sued the Owner in tort for the economic loss they claimed to have suffered.
The trial judge held that the circumstances warranted the recognition of a new duty of care owed by an owner to a subcontractor. The Federal Court of Appeal disagreed, and the matter was appealed to the Supreme Court of Canada.
The Supreme Court of Canada considered whether the Subcontractors' claim against the Owner fit within an existing category of duty of care and also considered whether a new duty of care ought to be recognized. Although the Supreme Court of Canada described the procurement process at issue as a "tendering process," the Court also made reference to terms such as "RFP," "proposal" and "proponent" in its reasons.
Subcontractors' Claim Does Not Fall Within Recognized Duty of Care
The Supreme Court of Canada held that the Subcontractors' claim did not fall within a recognized duty of care category for pure economic loss. The Court considered the five different categories of negligence claims for which a duty of care has been found for pure economic loss. The Court noted that relational economic loss was the only pre-existing duty of care category within which the Subcontractors' claims could possibly fall. The Court observed that relational economic loss has "always stemmed from injury or property damage to a third party" and that in this case, the Subcontractors did not fit within the relational economic loss category because none of Olympic's property was damaged.
New Category of Duty of Care Should Not Be Recognized
The Supreme Court then considered whether a new category of pure economic loss should nonetheless be established. The Court held that the recognition of a new duty of care between an owner and subcontractors in the context of a tendering process was not justified. Justice Rothstein applied the analysis mandated in the case of Anns v. Merton London Borough Council, recasting that analysis as follows:
(1) is there a sufficiently close relationship between the parties or proximity to justify imposition of a duty and, if so,
(2) are there policy considerations which ought to negative or limit the scope of the duty, the class of persons to whom it is owed or the damages to which breach may give rise?
Justice Rothstein noted that there were certainly factors that indicated a close relationship between the Owner and the Subcontractors; however, the Subcontractors' ability to foresee and protect themselves from the economic loss in question was an overriding policy reason why tort liability should not be recognized in these circumstances. Moreover, Justice Rothstein explained that the construction contract context is one in which the indeterminacy of the class of plaintiffs can be readily seen. He went on to state that,
Even if a prima facie duty of care had been found at the first stage of the Anns test, it would have been negated at the second stage because of indeterminate liability concerns.
He upheld the Federal Court of Appeal's conclusion that the tendering process in these circumstances was not unique and "recognition of an owner's duty of care towards subcontractors could lead to a multiplicity of lawsuits in tort."
Justice Rothstein summarized the Court's analysis, saying
To 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.
Significance
This decision will be of interest to owners, contractors and subcontractors involved in construction procurement processes. The decision of the trial judge, which held that an owner owed a duty in tort to subcontractors, had generated much interest in the construction industry. However, the Supreme Court of Canada has now held that there is no such duty in a construction tendering process.
Paul Ivanoff is a partner in Osler's Litigation Department and is a member of the firm's Construction & Infrastructure Specialty Group. Roger Gillott is a partner in the Construction and Infrastructure Group at Osler and has significant expertise in construction litigation, arbitration and dispute resolution proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
