October 21, 2013
Subcontractor leapfrog claim rejected by court
Bid Protest Bulletin | Paul Emanuelli
In its May 8, 2008 decision in Design Services Ltd. v. Canada, the Supreme Court of Canada refused to recognize a new tort-based legal claim that would have allowed subcontractors to directly challenge purchasing institutions over tendering disputes.
The case involved a federal government tender call for the construction of a naval reserve building in St. John’s, N.L.
A prime bidder and its subcontractors brought an action challenging an improper contract award made to a competing bidder.
The prime bidder reached a settlement with the government.
The subcontractors 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 under existing tendering law rules.
However, the trial court concluded that the prequalification process initiated prior to the formal tender call had given the subcontractors a potential tort claim against the purchasing institution.
The trial decision was at odds with the traditional legal approach to subcontractors rights in the tendering process.
Typically, prime bidders have the right to sue the purchasing institution for tendering irregularities under the Contract A paradigm 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 bidder fails to award them the subcontract contemplated in the tender.
However, 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.
The Supreme Court confirmed this analysis and rejected the argument 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 bidder-subcontractor arrangement, the Supreme Court found no reason to introduce a new tort duty to override the pre-existing contractual relations established by the bidding team.
The Supreme Court therefore ruled against introducing a new tort duty, noting that “[t]ort law should not be used as an after-the-fact insurer” to override the prior commercial arrangements established by a bidding team.
As the Supreme Court also noted, to have recognized a new tort based duty would have allowed an indeterminate number of potential plaintiffs operating down the supply chain from the prime bidder to potentially have a cause of action against a purchasing institution.
As this case illustrates, the persons who could potentially launch tort claims against a purchasing institution are far broader in scope than under the contractual analysis of Contract A, which limits such claims to the prime bidder only.
By finding that the tort avenue for launching claims was extinguished by the privity of contract analysis under Contract A, the Supreme Court significantly limited the pool of potential plaintiffs that could seek damages against purchasing institutions for tendering infractions.
This article is extracted from Paul Emanuelli's Government Procurement textbook published by LexisNexis Butterworths. Reach Paul at email@example.com.
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