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General Conditions In Construction Contract Prevail Over Rules Of Bid Depository

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by Journal Of Commerce last update:Jun 8, 2011

The central issue in this lawsuit was whether the general conditions of the standard form of construction contract must prevail over the rules and regulations of the bid depository if there is conflict between the two.

General Conditions In Construction Contract Prevail Over Rules Of Bid Depository

by Paul Sandori

R. G. Lamarche and Associates Ltd. v. Lundy Construction (Ontario) Limited

Contractor submitted bid of subcontractor as part of own general contract bid ? contractor decided not to use subcontractor who could not secure bonding ? subcontractor sued citing bid depository rules and regulations ? court decided general conditions in construction contract prevail when in conflict with rules of a bid depository ? contractor?s objections were reasonable ? action dismissed

The central issue in this lawsuit was whether the general conditions of the standard form of construction contract must prevail over the rules and regulations of the bid depository if there is conflict between the two.

In June 1996, R.G. Lamarche and Associates Ltd. submitted a bid to the general contractor, Lundy Construction (Ontario) Limited, to carry out all mechanical work on the renovations and additions to a school owned by the Ottawa Board of Education. The bid amount was $2,000,044.

The invitation to bid clearly indicated:

(a)??? that the rules and regulations of the Ottawa Valley Bid Depository must apply, and

(b)??? that general contract bidders must name their bid depository subcontractors and their prices.

Lundy received Lamarche?s bid ? the lowest from the bid depository ? and submitted Lamarche?s price as part of its own general contract bid of $11,500,000.

Lundy?s bid included a list of the principal subcontractors it proposed to use. It also stated that Lundy was satisfied with their credentials and
that they fully met the requirements of the contract documents. Included in this list was Lamarche
but, in the end, Lundy used another mechanical subcontractor.

Lundy?s principal reasons for not using Lamarche was that the subcontractor could not secure bonding for its portion of the work. Michael Lundy, president of Lundy Construction, wrote to the Ottawa Board of Education and asked the Board to accept another subcontractor for the following reasons:

(a)        Lamarche had been in business for less than three years;

(b)       it could not give proof of its financial and managerial capabilities to perform a complex mechanical renovation and addition;

(c)        it shared staff with another firm, rented its facilities and equipment, subcontracted out virtually all its mechanical work, and was not certified by any union.

(d)       Further along in that letter Mr. Lundy stated:

This modus operandi is not objectionable to me but [Lamarche?s] risks and ambition are not going to be guaranteed by me? I absolve the Ottawa Board of Education of any claim that might arise from my decision in this regard.

Partly as a result of receiving this indemnification, the Board allowed Lundy to use another mechanical subcontractor. Lamarche sued.

Section 12(d) of the Ontario Bid Depository Standard Rules and Procedures states:

A prime contractor is bound to place a subcontract with the trade contractor whose price he received through the bid depository and carried in his bid.

The Construction Contract, on the other hand, allowed the Owner to reject a subcontractor:

10.3? The owner may, for reasonable cause, object to the use of a proposed subcontractor and require the contractor to employ one of the other subcontractor bidders.

10.4? The contractor shall not be required to employ as a subcontractor a person or firm to whom he may reasonably object.

The trial judge, Mr. Justice Cunningham, was satisfied that the decision of the Alberta Court of Appeal in Bate Equipment Ltd. v. Ellis-Don Ltd. was the law in Canada on this subject ? leave to appeal from this decision to the Supreme Court of Canada was refused. In Bate Equipment, the court decided that where there exists a conflict between the general conditions in the Construction Contract and the Rules of a Bid Depository, the general conditions prevail.

A similar result was reached in Ontario, in the decision of the Court of Appeal in Naylor Group Inc. v. Ellis-Don Construction Ltd. In that case, the court concluded that the prime contractor may, if it has a reasonable objection to the subcontractor, submit the bid of another subcontractor to
the owner.

Justice Cunningham decided to follow these precedents in spite of the fact that the 1995 version of the Ontario Bid Depository Rules and Regulations, particularly clause 12(d), appear to make the use of the carried subcontractor mandatory.

He commented, however:

Under no circumstances should bid shopping
be tolerated and clearly, unless circumstances otherwise dictate, the lowest bid should be accepted. Nevertheless there always will be circumstances where the lowest bid does not necessarily have to be accepted ? that is why General Condition 10.3 of the Standard Form of Contract provides the owner with an opportunity to employ one of the other subcontract bidders so long as he has reasonable cause to object to the lowest bidder.

To rigidly hold general contractors to the provisions of clause 12(d) of the Bid Depository Rules and Regulations would throw commercial reality out the window, added the judge. The bid depository rules were not meant to lock a general contractor into a requirement from which it could not escape: What would occur, for example, if the president of the subcontracting firm had an accident so that it could not perform? What recourse would there then be if s. 12(d) were to be rigidly applied?

Accordingly, if a general contractor can demonstrate reasonable cause for its objection to the use of the proposed subcontractor, it may employ someone else. The issue between Lundy and Lamarche then became one of reasonableness.

Counsel for Lamarche questioned the reasonableness of Lundy?s objections. How, he asked, could the lack of bonding be a reasonable objection when it was not even a requirement in any of the contract documents? He claimed that Lundy was simply trying unilaterally to amend the bid call.

The trial judge had a different opinion. The school was a major construction project, a very complicated job involving a great deal of co-ordination between the various subcontractors. Lundy was not bid shopping: in fact, substitute subcontractor?s price was greater than that submitted by Lamarche. In the circumstances, Lundy?s objections were reasonable ? but this did not mean that Lamarche was unable to do this job.

Lundy was entitled to consider the risks of proceeding with Lamarche without bonding, to be too great. Not only was the project a difficult and complex undertaking, it also required a great deal of manpower. Justice Cunningham said:

In all of the circumstances, I cannot conclude that it was unreasonable for Mr. Lundy to have come to the conclusion he did. Accordingly, the action against Lundy Construction (Ontario) Limited is dismissed.

There still remained one last issue to decide. Lamarche had also sued the Ottawa Board of Education for breaching its duty of care to the subcontractor in not enforcing the bid depository rules in the bidding process. This approach was tried by the subcontractor in Twin City Mechanical v. Bradsil (1967) Ltd. and was successful at trial, but the decision was overturned by the Ontario Court of Appeal.

?It is unnecessary for me to decide whether the Board owed a duty of care in this case,? said Justice Cunningham, ?but even if one did exist, I am satisfied there was no breach of any such duty.? The action against the Board was therefore dismissed as well.

Ontario Superior Court of Justice

Cunningham J.

September 7, 2000

last update:Jun 8, 2011

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