SUPREME
COURT OF CANADA
Citation:
Design Services Ltd. v. Canada,
[2008] 1
S.C.R. 737, 2008 SCC 22
|
Date: 20080508
Docket: 31618
|
Between:
Design Services
Limited, G.J. Cahill & Company Limited,
Pyramid
Construction Limited, PHB Group Inc.,
Canadian Process
Services Inc. and Metal World Incorporated Inc.
Appellants
and
Her Majesty The
Queen
Respondent
Coram: McLachlin C.J. and Binnie, Deschamps, Fish,
Abella, Charron and Rothstein JJ.
Reasons for
Judgment:
(paras. 1 to 67):
|
Rothstein J. (McLachlin C.J. and Binnie, Deschamps, Fish,
Abella and Charron JJ. concurring)
|
______________________________
Design Services Ltd. v. Canada, [2008] 1 S.C.R. 737, 2008 SCC
22
Design
Services Limited, G.J. Cahill & Company Limited,
Pyramid
Construction Limited, PHB Group Inc., Canadian
Process Services Inc. and Metal World Incorporated Inc. Appellants
v.
Her Majesty The Queen Respondent
Indexed as: Design Services Ltd. v. Canada
Neutral citation: 2008 SCC 22.
File No.: 31618.
2007: November 9; 2008: May 8.
Present: McLachlin C.J. and Binnie, Deschamps, Fish,
Abella, Charron and Rothstein JJ.
on appeal from the federal court of appeal
Torts — Negligence — Duty of
care — Tendering process — Recovery for pure economic loss — Owner awarding
construction contract to non‑compliant bidder following “design‑build”
tendering process — Subcontractors to contractor which should have been awarded
contract suing owner in tort for economic loss suffered — Whether owner owed
duty of care to subcontractors — Whether claim fits within recognized duty of
care category — Whether new duty of care between owner and subcontractors
should be recognized.
Public Works (PW) launched a “design‑build”
tendering process for the construction of a building. The tendering documents
indicated that proponents could bid on the contract alone or in conjunction
with other entities as a joint venture. PW awarded the contract to a non‑compliant
bidder. O, the contractor which should have been awarded the contract, and the
subcontractors associated with it, sued. No partnership or joint venture had
been entered into between O and the subcontractors. O settled with PW, but the
subcontractors continued with the litigation. The trial judge found that PW
owed a duty in tort, but not in contract, to the subcontractors. The Court of
Appeal set aside the decision, concluding that a new duty of care should not be
recognized in these circumstances.
Held: The appeal
should be dismissed.
The subcontractors’ claims do not fall within a
preexisting category in respect of which a duty of care has been recognized.
Since the subcontractors’ damages were solely financial in nature, they qualify
as pure economic losses. Of the five pre‑existing categories of pure
economic loss, relational economic loss is the only one within which the
subcontractors’ claims could possibly fall. Relational economic loss occurs in
situations where the defendant negligently causes personal injury or property
damage to a third party and the plaintiff suffers pure economic loss by virtue
of some relationship, usually contractual, it enjoys with the injured third party
or the damaged property. Since O’s property was not damaged here, the
subcontractors do not fit within this category. Absent damage to O’s property,
even a finding of joint venture or situation analogous to a joint venture
between O and the subcontractors would not bring them within the relational
economic loss category. [30‑31] [33‑34] [42] [44]
The recognition of a new duty of care between an owner
and subcontractors in the context of a tendering process is not justified.
While there are certainly factors that indicate a close relationship between PW
and the subcontractors, at the first stage of the Anns test a court must
also examine whether there are any policy considerations specific to the
parties such that tort liability should not be recognized. Here, the fact that
the subcontractors had the opportunity to form a joint venture, and thereby be
parties to the “Contract A” made between PW and O, which would have
entitled them to claim in contract, is an overriding policy reason that tort
liability should not be recognized in these circumstances. The obligations the
subcontractors seek to enforce through tort exist only because of
“Contract A”. Allowing them to sidestep the circumstances they
participated in creating and make a claim in tort would be to ignore and
circumvent the contractual rights and obligations that were, and were not,
intended by PW, O and the subcontractors. 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. 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. [3] [53] [56‑57]
[66]
Cases Cited
Referred to: Martel
Building Ltd. v. Canada, [2000] 2 S.C.R. 860, 2000 SCC 60; Kamloops
(City of) v. Nielsen, [1984] 2 S.C.R. 2; Cooper v. Hobart, [2001] 3
S.C.R. 537, 2001 SCC 79; Edwards v. Law Society of Upper Canada, [2001]
3 S.C.R. 562, 2001 SCC 80; Odhavji Estate v. Woodhouse, [2003] 3 S.C.R.
263, 2003 SCC 69; Childs v. Desormeaux, [2006] 1 S.C.R. 643, 2006 SCC
18; Donoghue v. Stevenson, [1932] A.C. 562; Anns v. Merton London
Borough Council, [1978] A.C. 728; The Queen in right of Ontario v. Ron
Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111; M.J.B.
Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619; D’Amato
v. Badger, [1996] 2 S.C.R. 1071; Canadian National Railway Co. v. Norsk
Pacific Steamship Co., [1992] 1 S.C.R. 1021; Winnipeg Condominium
Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85; Caltex
Oil (Aust.) Pty. Ltd. v. The Dredge “Willemstad” (1976), 11 A.L.R. 227; Morrison
Steamship Co. v. Greystoke Castle (Cargo Owners), [1947] A.C. 265; Ultramares
Corp. v. Touche, 174 N.E. 441 (1931).
Authors Cited
Beatson, J. Anson’s Law of Contract, 28th
ed. New York: Oxford University Press, 2002.
Feldthusen, Bruce. “Economic Loss in the Supreme
Court of Canada: Yesterday and Tomorrow” (1990‑91), 17 Can. Bus. L.J.
356.
Fridman, Gerald Henry Louis. The Law of Torts in
Canada, 2nd ed. Toronto: Carswell, 2002.
Hepburn, Samantha J. Principles of Property Law,
2nd ed. Sydney, N.S.W.: Cavendish Publishing (Australia), 2001.
Klar, Lewis N. Tort Law, 3rd ed. Toronto:
Thomson Carswell, 2003.
Linden, Allen M., and Bruce
Feldthusen. Canadian Tort Law, 8th ed. Markham, Ont.: LexisNexis
Butterworths, 2006.
APPEAL from a judgment of the Federal Court of Appeal
(Létourneau, Sexton and Malone JJ.A.) (2006), 272 D.L.R. (4th) 361, 352
N.R. 157, 42 C.C.L.T. (3d) 1, 58 C.L.R. (3d) 153, [2006] F.C.J. No. 1141
(QL), 2006 CarswellNat 2566, 2006 FCA 260, reversing a decision of Mosley J.
(2005), 275 F.T.R. 183, 46 C.L.R. (3d) 171, [2005] F.C.J. No. 1108 (QL),
2005 CarswellNat 1807, 2005 FC 890. Appeal dismissed.
Geoffrey E. J. Brown, Q.C., and Gerry R. Fleming, for the appellants.
Christopher Rupar, for
the respondent.
The judgment of the Court was delivered by
Rothstein J. —
I. Introduction
[1]
The issue in this appeal is whether an owner in a tendering
process owes a duty of care in tort to subcontractors. The owner awarded a
construction contract to a non‑compliant bidder. The appellants were
subcontractors to the contractor which should have been awarded the contract.
The appellants do not have privity of contract with the owner and therefore,
being unable to establish a claim for breach of contract, have asserted a claim
in tort for the economic loss they have suffered.
[2]
There are two ways that such a claim can succeed. Either (1) the
claim fits within a recognized duty of care category, or (2) a new duty of care
is recognized.
[3]
The claim in this appeal does not fall within a recognized
category of duty of care, and the recognition of a new duty between an owner
and subcontractors is not justified. Therefore, I would dismiss the appeal.
II. Facts
[4]
Public Works and Government Services Canada (“PW”) launched a
tendering process in May 1998 for the construction of a naval reserve building
in St. John’s, Newfoundland, to be named HMCS Cabot.
[5]
PW decided to use what is called a “design‑build” tendering
process. The key difference between a traditional tendering process and a
design‑build project is that in the latter, the bid proponent is
responsible for both the design and the construction of the project. It is the
proponent that must bring together the design and construction professionals in
a collaborative effort to complete the bid. This type of tendering process is
advantageous for the owner since instead of having an architect, a general
contractor and other consultants, an owner will only deal with one entity
usually called the design‑builder. This single point of contact allows
the owner to funnel all its concerns (e.g. design revisions, project feedback,
budgeting, permits, construction issues) through the design‑builder.
Also, as described by Mr. Carl Mallam, the president of Olympic Construction
Ltd. (“Olympic”), the proponent/general contractor to which the appellants
would have been subcontractors, a design-build project offers other advantages
to the owner: “it usually took less time to complete and posed less risk that
the project would go over budget as the bids offered a ‘package’ deal and lump
sum price covering everything from the design to final inspection and ‘turnkey’
operation” (trial reasons (2005), 275 F.T.R. 183, 2005 FC 890, at para. 45).
[6]
This was a two-stage tendering process. First, under a Request
for Statement of Qualifications (“SOQ”), the bid proponents were asked to
provide evidence of the capabilities, qualifications and experience of key
individuals within their proposed design‑build teams. From this
information, PW would select proponents to continue to the next stage of the
process known as the Request for Proposal (“RFP”). Once the proposals were
submitted, PW would evaluate them and award the contract to the winning
proponent.
[7]
The tendering documents supplied by PW at the SOQ stage indicated
that proponents could bid on the contract alone or in conjunction with other
entities as a joint venture. In the present case, the joint venture option was
not pursued. No partnership or joint venture was entered into between Olympic
and the appellants.
[8]
Olympic submitted its reply to the SOQ on June 24, 1998.
Olympic’s SOQ documents identified the appellants as part of Olympic’s design‑build
team, with the exception of the mechanical subcontractor, Canadian Process
Services Inc.
[9]
Four proponents were chosen to proceed to the RFP stage, among
them Olympic and Westeinde Construction Ltd.
[10]
Olympic submitted its reply to the RFP on August 12, 1998. The
bid indicated that Olympic was the sole proponent. Olympic also posted the
bond and the evidence of financial capability.
[11]
PW awarded the contract to the non‑compliant bidder,
Westeinde. As a result, Olympic and the appellants commenced litigation against
PW. On November 17, 2004, Olympic reached a settlement with PW and
discontinued its action. The appellants continued with the litigation.
[12]
For the purpose of the present litigation, the Court is to assume
that the contract was awarded to a non‑compliant bidder and that the
contract should have been awarded to Olympic. PW reserves the right to argue
otherwise at a later date without prejudice.
III. Judgments
Below
A. Federal
Court of Canada (2005), 275 F.T.R. 183, 2005 FC 890
[13]
The trial judge, Mosley J., determined that PW owed a duty in
tort, but not in contract, to the appellants. He held that there was no
contractual privity between the appellants and PW. The trial judge’s
contractual findings were upheld by the Court of Appeal and are not challenged
in this Court.
[14]
Turning to tort, Mosley J. stated that it was clear that the
recognition of liability in tort by owners to subcontractors in the tendering
process is, as yet, an undeveloped area of the law, and there is little support
for the appellants’ position in the jurisprudence. Accordingly, the question
was whether a new duty of care ought to be recognized.
[15]
Mosley J. accepted the appellants’ argument that it was
reasonably foreseeable in the circumstances of this case that PW’s issuing the
contract to a non‑compliant bidder would result in financial losses to
the appellants. With respect to proximity, Mosley J. stated that
notwithstanding his finding that Olympic and its team members did not enter
into a formal joint venture, the process adopted by Olympic and the appellants
in this case was analogous to a joint venture. Therefore, he found that
“[PW’s] requirements in the pre‑qualification and tendering process
created a relationship between [PW] and the [appellants] that meets the
proximity standard” (para. 115).
[16]
Mosley J. did not accept PW’s contention that liability would be
indeterminate, because of the “unique” design-build approach adopted by PW in
the tendering process. In his view, the class of appellants and the scope of
the liability were readily ascertainable.
[17]
Mosley J. added the following:
I conclude, therefore, that this is a case that cries out for a
remedy. By reason of its close management of the participation of the
plaintiffs in the tendering process, the defendant owed the plaintiffs a duty
of care in tort not to award the contract to a non‑compliant bidder.
Providing a remedy does not raise the risk of indeterminate liability because
of the particular facts of this case. [para. 119]
B. Federal
Court of Appeal (2006), 272 D.L.R. (4th) 361, 2006 FCA 260
[18]
Sexton J.A., for the court, noted that the trial judge had made
errors of mixed fact and law. Therefore, he could only interfere if those
errors were palpable and overriding.
[19]
Sexton J.A. stated that the trial judge had made a palpable and
overriding error in concluding that PW had intended to create a form of
“partnership” between itself and the successful design‑build team. In
Sexton J.A.’s view, the “partnering” session called for by the RFP “had nothing
to do with [PW] partnering with design‑build team members and everything
to do with the efficient completion of the project” (para. 53). Sexton J.A.
noted that there was a two-tier relationship: the first between PW and Olympic;
the second between Olympic and the appellants. There was no direct relationship
between the appellants and PW. Sexton J.A. accordingly concluded that the
situation was not analogous to that of a joint venture.
[20]
Turning to whether a new duty of care should be recognized in
these circumstances, Sexton J.A. stated that several considerations went
against a finding of proximity necessary to substantiate a new duty of care.
First, given the two-tier relationship between the appellants and PW, the facts
did not support a finding of proximity between the parties. Second, policy
considerations negated imposing a duty of care, as the appellants were in an
excellent position to protect themselves by forming a joint venture with
Olympic or by submitting bids to other proponents. Accordingly, Sexton J.A.
concluded that the relationship between PW and the appellants was not such as
to justify a finding of a prima facie duty of care on PW.
[21]
The Court of Appeal also held that the trial judge had made a
palpable and overriding error by overestimating the alleged “uniqueness” of
this tendering process.
IV. Analysis
A. The
Framework for Determining Duty of Care
[22]
It is agreed between the parties that Canadian jurisprudence has
as yet not recognized a duty of care between an owner and subcontractors. The
issue is whether it should.
[23]
In Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860,
2000 SCC 60, at para. 108, this Court left the door open to a duty of care
arising between subcontractors and an owner:
Finally, we note that Desjardins J.A. relied on two
cases to support the view that a duty to treat all bidders fairly and equally
has been recognized in the context of tort claims. However, we note that both
cases have subsequently been reversed by appellate courts: Twin City
Mechanical v. Bradsil (1967) Ltd. (1996), 31 C.L.R. (2d) 210 (Ont. Ct.
(Gen. Div.)), rev’d (1999), 43 C.L.R. (2d) 275 (Ont. C.A.); Ken Toby Ltd. v.
British Columbia Buildings Corp. (1997), 34 B.C.L.R. (3d) 263 (S.C.), rev’d
(1999), 62 B.C.L.R. (3d) 308 (C.A.). In addition, reliance in tort was
necessary because both cases involved situations where a subcontractor sought
redress against the tender calling authority who had received bids from the
general contractor. Since there was no privity of contract between the
subcontractor and the owner, liability could only be founded in tort. In both
cases, the appellate courts refrained from deciding whether or not a duty of
care was owed in such situations, and preferred to limit their decisions to the
fact that a breach could not be established. We believe that the issue of
whether a duty of care can arise between a subcontractor and an owner must be
left to a case in which it arises. [Emphasis added; emphasis in original
deleted.]
This is such a
case.
[24]
The general principles applicable when determining whether a
duty of care exists have been analyzed by this Court in a series of decisions.
See for example Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Cooper
v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79; Edwards v. Law Society of
Upper Canada, [2001] 3 S.C.R. 562, 2001 SCC 80; Odhavji Estate v.
Woodhouse, [2003] 3 S.C.R. 263, 2003 SCC 69; Childs v. Desormeaux,
[2006] 1 S.C.R. 643, 2006 SCC 18.
[25]
As McLachlin C.J. wrote in Childs, at para. 9, the
question to be wrestled with is how to define the persons to whom the duty is
owed. As she explained in para. 10, with reference to Donoghue v. Stevenson,
[1932] A.C. 562 (H.L.), proximity remains the foundation of the modern law of
negligence. A legal duty extends to my “neighbour”. And legal neighbourhood
is “restricted” to “persons who are so closely and directly affected by my act
that I ought reasonably to have them in contemplation as being so affected when
I am directing my mind to the acts or omissions which are called in question” (Donoghue,
at p. 580, per Lord Atkin).
[26]
Proximity has generally been understood in the context of an
overt act that directly causes physical loss to a plaintiff (A. M. Linden and
B. Feldthusen, Canadian Tort Law (8th ed. 2006), at p. 304). However,
the notion of proximity has been extended to cover certain limited circumstances
in which a defendant, without causing a plaintiff to suffer personal injury or
property damage, did cause financial loss to the plaintiff. Further, Canadian
law recognizes that new categories where a duty of care is recognized may be
established by application of the analysis set out in Anns v. Merton London
Borough Council, [1978] A.C. 728 (H.L.).
[27]
However, as stated in Childs, at para. 15, before
determining if a new duty of care should be recognized, it must first be
determined whether the present situation fits within, or is analogous to, a
relationship previously recognized as having a duty of care between the
parties. If it does, a duty of care will be established. By first determining
whether the situation fits within or is analogous to a previously recognized
category, the analysis otherwise required by Anns is avoided.
B. Does This
Claim Fall Within a Recognized Duty of Care
[28]
The Queen in right of Ontario v. Ron Engineering &
Construction (Eastern) Ltd., [1981] 1 S.C.R. 111, first established the
“Contract A/Contract B” analysis for tendering processes. Under this approach,
“Contract A” is formed once the proponent submits its bid to the owner.
“Contract B” comes into being once the owner awards the contract to the
successful bidder. Here, the trial judge found, at para. 99, that there was
clearly a “Contract A” between Olympic and PW. PW does not dispute this
finding.
[29]
As developed in M.J.B. Enterprises Ltd. v. Defence
Construction (1951) Ltd., [1999] 1 S.C.R. 619, and Martel, “Contract
A” can impose certain implied terms on the owner such as the obligation to
treat all bidders fairly and equally, as well as the obligation to only accept
compliant bids. In this case, PW breached its “Contract A” with Olympic by awarding
“Contract B” to a non‑compliant bidder. This breach affected the
appellants since their opportunity to recoup the costs of preparing their bids
and their opportunity for profit from participating in the construction project
depended on Olympic being awarded “Contract B”.
[30]
The appellants’ costs and lost opportunity for profit were solely
financial in nature. They were not causally connected to physical injury to
their persons or physical damage to their property. As such, they qualify as
pure economic losses (D’Amato v. Badger, [1996] 2 S.C.R. 1071, at para.
13; Martel, at para. 34; Linden and Feldthusen, at pp. 441‑43).
[31]
In Canadian National Railway Co. v. Norsk Pacific Steamship
Co., [1992] 1 S.C.R. 1021, at p. 1049, La Forest J. recognized five
different categories of negligence claims for which a duty of care has been
found with respect to pure economic losses:
1. The
Independent Liability of Statutory Public Authorities;
2. Negligent Misrepresentation;
3. Negligent
Performance of a Service;
4. Negligent
Supply of Shoddy Goods or Structures;
5. Relational
Economic Loss.
See also B.
Feldthusen, “Economic Loss in the Supreme Court of Canada: Yesterday and
Tomorrow” (1990‑91), 17 Can. Bus. L.J. 356, at pp. 357‑58; Winnipeg
Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R.
85, at para. 12; D’Amato, at para. 30; Martel, at para. 38. As
explained in Martel, at para. 45: “The reason for the broader five
categories is merely to provide greater structure to a diverse range of factual
situations by grouping together cases that raise similar policy concerns. These
categories are merely analytical tools.”
[32]
The appellants’ economic losses do not fall within the first four
categories. This case obviously does not involve a negligent
misrepresentation, a negligent performance of services or a negligent supply of
shoddy goods or structures. Neither is this a case of independent liability of
statutory public authorities, which deals with the government’s “unique public
power to convey certain discretionary benefits, such as the power to enforce
by-laws, or to inspect homes or roadways” (Feldthusen, at p. 358). Here, the
government is not inspecting, granting, issuing or enforcing something mandated
by law. Instead, the present situation is akin to commercial dealings between
private parties, not the exercise of unique government power.
[33]
This leaves relational economic loss as the only preexisting duty
of care category within which the appellants’ claims could possibly fall.
Linden and Feldthusen, at p. 477, define relational economic loss as a
situation in which “the defendant negligently causes personal injury or
property damage to a third party. The plaintiff suffers pure economic loss by
virtue of some relationship, usually contractual, it enjoys with the injured
third party or the damaged property.”
[34]
The appellants do not fit within the relational economic loss
category because no property of Olympic was actually damaged in this case.
From its origin, relational economic loss has always stemmed from injury or
property damage to a third party.
[35]
The reason appears to be that physical damage tends “to ensure a
reassuringly proximate nexus between tortious act and recoverable damage” (Caltex
Oil (Aust.) Pty. Ltd. v. The Dredge “Willemstad” (1976), 11 A.L.R. 227
(H.C.), at p. 255). This is not to say that in the development of new
categories under the Anns test, physical injury or property damage would
necessarily be a requirement to justify a finding of proximity. However,
insofar as the existing category of relational economic loss is concerned,
injury or property damage to a third party has been a requirement.
[36]
In Morrison Steamship Co. v. Greystoke Castle (Cargo Owners),
[1947] A.C. 265 (H.L.), the Greystoke Castle, a ship, had to be put into dry
dock for repairs after it collided with another ship, the Cheldale. The cargo
owners of the Greystoke Castle were able to recover from the owners of the
Cheldale some of the general average expenditures incurred from the discharging
and reloading of their cargo while the Greystoke Castle was in dry dock.
[37]
In Caltex, a dredge damaged an underwater pipeline that
was providing petroleum from a refinery to an oil terminal across the bay. As
a result, the pipeline was no longer able to carry petroleum to the terminal.
Although the pipeline was owned by the refinery, the oil terminal was able to
recover the cost of arranging alternative means of transportation of the
petroleum from the owners of the dredge and from the company which had plotted
the inaccurate navigation chart for the dredge.
[38]
In Norsk, a barge damaged a railway bridge owned by Public
Works Canada but primarily used by Canadian National Railway Company (“CN”).
As a result, CN’s trains had to be rerouted, incurring additional expenses. CN
recovered these costs from the owners of the barge.
[39]
In all of the above cases, damage to a third party’s property led
to the financial losses of the plaintiffs and these losses were recoverable in
negligence. Here, we are dealing with the award of a bid to a non-compliant
bidder, which constitutes a breach of “Contract A” between PW and a third party,
Olympic. Granted, the breach of contract by PW resulted in the appellants’
being unable to recoup the costs of preparing the bid and the loss of an
opportunity to profit from participating in the construction project. But the
breach of Olympic’s contractual rights arising out of “Contract A” cannot be
interpreted as damage to Olympic’s property. As explained in Anson’s Law of
Contract (28th ed. 2002), at p. 24:
The law of
obligations must be distinguished from the law of property which governs the
acquisition of the rights persons have in things, which may be land or
moveables, and may be a tangible physical object or an intangible, such as a
debt, shares in a company or a patent. Whereas a person’s property right in a
thing is generally valid against the whole world, the rights under the law of
obligations, including contract, are personal and valid only against a specific
person or persons.
Or explained
another way by S. J. Hepburn in Principles of Property Law (2nd ed.
2001), at p. 21:
In order to
establish a proprietary interest it must be proven that the holder has an
enforceable, in rem right to exclude the rest of the world; it is this
right alone which distinguishes in rem rights from other enforceable
legal rights. Contractual rights are not enforceable against the rest of the
world; they are only enforceable against the parties to the contract and are
therefore in personam in nature. Contracts which deal with land or
personal property may confer similar rights of use and enjoyment; however,
without the right to exclude, such rights will only be in personam.
[40]
The rights arising out of “Contract A” between Olympic and PW are
not in rem rights meant to exclude the rest of the world. “Contract A”
only imposed in personam obligations between PW and Olympic. Since
“Contract A” is not property, no property was damaged. Because no property was
damaged, the appellants’ claims do not fall within the existing category of
relational economic loss.
[41]
At paras. 114-15, the trial judge concluded that there was
sufficient proximity between PW and the appellants because the relationship
between Olympic and the appellants was analogous to a joint venture. (The
Court of Appeal appears to have thought that the trial judge contemplated a
joint venture involving PW as well as Olympic and the appellants. On my
reading of his reasons, I think the trial judge was only referring to a joint
venture between Olympic and the appellants.) He based this finding on para. 36
of Cooper, which lists preexisting categories where proximity has
already been recognized and which stipulates that “[w]hen a case falls within
one of these situations or an analogous one and reasonable foreseeability is
established, a prima facie duty of care may be posited.”
[42]
It seems that the trial judge believed that a joint venture or a
relationship analogous to a joint venture was in and of itself a category where
proximity had already been recognized. It is not. The only recognized
category that involves joint venture is the relational economic loss category
“where the relationship between the claimant and the property owner constitutes
a joint venture” (Cooper, at para. 36). However, there must be damage
to the property of the third party. Absent such damage, a finding of joint
venture or situation analogous to a joint venture does not bring the claimant
within the relational economic loss category.
[43]
The trial judge should have first considered whether there was
property damage suffered by Olympic. In not doing so, he erred in law. Had he
done so, he would have found that the claim did not fit within the relational
economic loss category because there was no property damage suffered by
Olympic.
[44]
I conclude that the appellants’ claims do not fall within a
preexisting category in which a duty of care has been recognized.
C. Should a
New Duty of Care Be Recognized?
[45]
Having found that the present situation does not fit within one
of the five preexisting categories of pure economic loss, it is necessary to
assess whether a new category of pure economic loss should nonetheless be
established, specifically a new duty of care between an owner and
subcontractors. This requires the analysis mandated in Anns.
[46]
The Anns test was recently described by this Court in Childs,
at para. 11:
In Anns v. Merton London Borough Council, [1978] A.C. 728
(H.L.), Lord Wilberforce proposed a two‑part test for determining whether
a duty of care arises. The first stage focuses on the relationship between the
plaintiff and the defendant, and asks whether it is close or “proximate” enough
to give rise to a duty of care (p. 742). The second stage asks whether there
are countervailing policy considerations that negative the duty of care. The
two‑stage approach of Anns was adopted by this Court in Kamloops
(City of) v. Nielsen, [1984] 2 S.C.R. 2, at pp. 10‑11, and recast 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?
[47]
In essence, if a prima facie duty of care is found at the
first stage of the Anns test and there are no residual policy concerns
negating the creation of that duty at the second stage, then a new category of
duty is recognized.
1. First
Stage of the Anns Test
[48]
The analytical process for the appellants to establish that there
is a close and direct relationship between the parties and thus that there is
a prima facie duty of care is explained by McLachlin C.J. and Major J.
at para. 30 of Cooper:
At the first
stage of the Anns test, two questions arise: (1) was the harm that
occurred the reasonably foreseeable consequence of the defendant’s act? and (2)
are there reasons, notwithstanding the proximity between the parties
established in the first part of this test, that tort liability should not be
recognized here? The proximity analysis involved at the first stage of the Anns
test focuses on factors arising from the relationship between the plaintiff and
the defendant. These factors include questions of policy, in the broad sense of
that word. If foreseeability and proximity are established at the first stage,
a prima facie duty of care arises. [Emphasis deleted.]
(a) Reasonable Foreseeability
[49]
The usual indication of proximity is foreseeability. Here, the
trial judge found that it was reasonably foreseeable that the award of the
contract to a non‑compliant bidder would result in financial losses for
the appellants (para. 110). At the Court of Appeal, PW conceded reasonable
foreseeability of harm (para. 48). In this Court, PW does not resile from that
concession. However, “[f]oreseeability does not of itself, and automatically,
lead to the conclusion that there is a duty of care”: G. H. L. Fridman, The
Law of Torts in Canada (2nd ed. 2002), at p. 320.
(b) Other Considerations Relevant to Proximity
[50]
At para. 34 of Cooper, McLachlin C.J. and Major J.
considered several factors for evaluating the closeness of the relationship
between the parties in order to determine whether it was just and fair to find
a duty of care:
Defining the relationship may involve looking at
expectations, representations, reliance, and the property or other interests
involved. Essentially, these are factors that allow us to evaluate the
closeness of the relationship between the plaintiff and the defendant and to
determine whether it is just and fair having regard to that relationship to
impose a duty of care in law upon the defendant.
[51]
From the perspective of the appellants, several factors seemed to
have led them to believe that their relationship with PW was closer than in the
usual owner/subcontractor situation. PW was not only selecting a design‑builder
but also a design‑building team. Information on the respective roles and
experience of the appellants had to be provided to PW at the SOQ stage. The
selection process for choosing the four proponents to advance to the RFP stage
was heavily reliant on the ability of the proponent’s team. At least 70 of the
150 points for the SOQ evaluation were directed at the team members’ ability to
do the work individually and as a team. Also, the design-build team members
and their key personnel could not be substituted without the express advance
written consent of PW. In addition, the appellants had to attend a
“partnering” session with PW’s project manager.
[52]
Further, the appellants expended considerable time and energy
preparing their bids. In so doing, they relied on PW’s documentation and
representations which implied a fair methodology in the selection process of
the bids. The appellants were reliant on PW respecting the “Contract A”
between itself and Olympic. Any breach of “Contract A” directly affected the
appellants since they were not to be compensated for their work in preparing
the RFP unless Olympic was awarded the bid. Given that the tendering process
required significant effort and that only the team selected would be rewarded,
the appellants expected the selection process to be fair (trial reasons, at
para. 62).
[53]
Although the factors above are the type of factors that one would
expect to find in a proximate relationship, as explained in Cooper, at
the first stage of the Anns test the Court must also examine whether
there are any policy considerations specific to the parties such that tort
liability should not be recognized.
[54]
Linden and Feldthusen, at p. 444, indicate that when assessing
proximity in the context of a pure economic loss, “[i]t may also be relevant
whether the plaintiff had an opportunity to protect itself by contract from the
risk of economic loss and declined to do so.” This reflects Justice La Forest’s
caution in Norsk, at p. 1116, that “the plaintiff’s ability to foresee
and provide for the particular damage in question is a key factor in the
proximity analysis”.
[55]
Importantly, the SOQ documents provided an opportunity for a
general contractor and its subcontractors to submit their bid as a “joint
venture proponent”. Section 3(1) of the SOQ reads:
While there is no requirement for firms to
participate in this procurement in joint venture, firms may elect to do so if
they see fit.
Olympic and the
appellants did not choose the joint venture option. Therefore, Olympic was the
only one submitting the bid and thus the only one with which PW formed a
“Contract A”. (Before this Court, the appellants did not argue that they were
parties to the “Contract A” between PW and Olympic.)
[56]
The fact that the appellants had the opportunity to form a joint
venture, and thereby be parties to the “Contract A” made between PW and
Olympic, is an overriding policy reason that tort liability should not be
recognized in these circumstances. Allowing the appellants to sidestep the
circumstances they participated in creating and make a claim in tort would be
to ignore and circumvent the contractual rights and obligations that were, and were
not, intended by PW, Olympic and the appellants. In essence, the appellants
are attempting, 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. In my view, the observation of Professor
Lewis N. Klar (Tort Law (3rd ed. 2003), at p. 201) — that the ordering
of commercial relationships is usually in the bailiwick of the law of contract
— is particularly apt in this type of case. 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.
(c) Conclusion as to the First Stage of the Anns Test
[57]
There are certainly factors that indicate a close relationship
between PW and the appellants, such as the appellants’ expectation that PW was
choosing a design-build team at the SOQ stage and the reliance of the
appellants on a fair selection methodology in the tendering process.
Nonetheless, the appellants’ ability to foresee and protect themselves from the
economic loss in question is an overriding policy reason why tort liability
should not be recognized in these circumstances. The appellants had the
opportunity to arrange their affairs in such a way as to be in privity of
contract with PW relative to “Contract A”, but they chose not to do so and they
are now trying to claim through tort law for lack of a contractual relationship
with PW. Tort law should not be used as an after-the-fact insurer.
[58]
I conclude that the appellants have failed to satisfy the first
stage of the Anns test justifying a finding of a prima facie duty
of care.
2. Second
Stage of the Anns Test
[59]
Having found no prima facie duty of care at the first
stage of the Anns test, it is unnecessary to continue with the second
stage of examining residual policy concerns that could negate the creation of a
new duty of care. However, it may be useful to comment on one residual policy
concern — indeterminate liability.
[60]
The recognition of a duty of care of an owner to subcontractors
in a tendering process could lead to what Cardozo C.J. of the Court of Appeals
of New York coined as “liability in an indeterminate amount for an
indeterminate time to an indeterminate class” (Ultramares Corp. v. Touche,
174 N.E. 441 (1931), at p. 444).
[61]
The trial judge discounted the indeterminate liability concern.
At para. 118, he stated:
In this case, however, I do not accept that liability would be
indeterminate because of the particular — and according to the evidence before
me, unique — approach adopted by the defendant in the tendering process. The
defendant defined the class of the members of the design build team whose
qualifications would be examined, who had to provide terms of reference, review
the plans and drawings, had to certify that they would perform the work and
could not be substituted without approval by the defendant. Those obligations
did not extend to the broad range of sub‑subcontractors, suppliers and
employees. The scope of the liability is also readily ascertainable by
quantifying the plaintiffs’ reasonable expectation of lost profits or fees.
[62]
PW contends that when dealing with cases of pure economic loss,
the principal concern is indeterminate liability, since unlike physical damage,
it “can spread well beyond any confined physical area or group of victims and
seep into an ever expanding circle of plaintiffs” (respondent’s factum, at
para. 82). This would lead to uncertainty in the marketplace. I agree that in
the case of pure economic loss, there is a greater risk of indeterminate
liability than in cases of physical injury or property damage. Therefore, in
cases of pure economic loss, to paraphrase Cardozo C.J., care must be taken to
find that a duty is recognized only in cases where the class of plaintiffs, the
time and the amounts are determinate.
[63]
In the present situation, the subcontractors were identified and
vetted by PW at the SOQ stage of the tendering process. The subcontractors
could not be substituted without the consent of PW. On its face, this seems to
indicate that the class of plaintiffs was determinate. However, one of the
appellants, Canadian Process Services Inc., was not named as part of the
design-build team at the SOQ stage. Only its parent company, G.J. Cahill &
Co., was named. This suggests that the class of plaintiffs was not as well
defined as found by the trial judge since a subsidiary of one of the
design-build team members also made a claim. In my view, since the class of
plaintiffs seems to seep into the lower levels of the corporate structure of
the design-build team members, this case has indications of indeterminate
liability.
[64]
Moreover, contrary to the findings of the trial judge, the Court
of Appeal concluded that the design‑build tendering process was not
unique. In the Court of Appeal, Sexton J.A. noted that Carl Mallam, the
president of Olympic, testified that the design-build tendering process was
used by both private and public entities throughout the country and that both
the federal Crown and the Province of Newfoundland and Labrador used tendering
processes with similar provisions (paras. 76-82). Given that this type of
tendering process is not unique and that there are many types of arrangements
that can arise between owners and contractors and in turn between contractors
and subcontractors, a recognition of an owner’s duty of care towards
subcontractors could lead to a multiplicity of lawsuits in tort, an undesirable
result.
[65]
That the facts here suggest indeterminacy is, I think,
symptomatic of a more general concern in the construction contract field. Even
where subcontractors are named and known by an owner, those subcontractors will
have employees and suppliers and perhaps their own subcontractors who also could
suffer economic loss. And these suppliers and subcontractors will have their
own employees and suppliers who might claim for economic loss due to the
wrongful failure of the owner to award the contract to the general contractor
upon which they were all dependant. The construction contract context is one
in which the indeterminancy of the class of plaintiffs can readily be seen.
[66]
Even if a prima facie duty of care had been found at the
first stage of the Anns test, in my view, it would have been negated at
the second stage because of indeterminate liability concerns.
V. Conclusion
[67]
The appellants’ claims do not fit within one of the preexisting
categories of duty of care for pure economic loss. Nor is a finding of a new
duty of care justified between an owner and subcontractors in the context of a
tendering process. I would dismiss the appeal with costs.
Appeal dismissed with costs.
Solicitors for the appellants: Stewart McKelvey,
St. John’s.
Solicitor for the respondent: Deputy Attorney General of
Canada, Ottawa.