Law Update: Sub-Contractors in the Design-Build Tendering Process

Some legal decisions have direct impact on how a company conducts business. The Supreme Court of Canada in Design Services Ltd. v. Canada, [2008] 1 S.C.R. 737, [hereinafter Design Services] held that an owner in a design-build tendering process does not owe a duty of care to subcontractors in the event the contract is awarded to a non-compliant bidder. This decision is significant for a variety of reasons. Practically, it will govern how subcontractors submit their tenders in a design/build construction project.

In Design Services, the Supreme Court of Canada had occasion to consider for the first time, whether a duty of care was owed to subcontractors where a design build contract was awarded to a non compliant bidder within a tort context.

The Court held that such a duty did not exist because the purely economic losses did not fall within the pre-existing categories of compensable negligence claims. The Court then declined to create a new duty of care, primarily because the subcontractors had the ability to protect their interests by submitting the pre-qualification bid through a Joint Venture with the general contractor but failed to do so.

What does this mean for today’s subcontractor? In a design-build setting, the subcontractor bidding on the project should enter into a Joint Venture with the general contractor/primary bidder. This would establish a contractual link between the Owner and the bidder. The typical Contract “A” relationship. Once this relationship is established, then rights and remedies can be enforced by virtue of breach of contract directly. As the Court stated in Design Services, the subcontractors were attempting to “after the fact, to substitute a claim in tort law for their inability to claim under “Contract A”. After all, the obligations the appellants seek to enforce through tort exist only because of “Contract A” to which the appellants are not parties.”

Think of the losses the subcontractors suffered simply because the parties did not structure their relationships better. Lost profits, lost time, lost opportunity to bid on other projects, lost costs associated with assembling bids from sub subcontractors. That is a fair amount of losses that could have been remedied through a simple joint venture agreement.

Lesson learned: Don’t look to after the fact remedies. Give some thought to how the manner in which bids are submitted may affect your rights and more importantly your profits.

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