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When is a contract created between contractors and subcontractors in a tender?

in Commercial Practice by Jeremy Lum-Danson / July 27,2015

Tenders are common place in the construction industry. Prime contractors and subcontractors should be aware of when contractual obligations arise during a tender process.

Ontario v. Ron Engineering, [1981] 1 S.C.R. 111 introduced the concept known as “Contract A/Contract B”. The invitation to tender by the person calling for the tender (the “owner”) is considered “the offer.” The submitting of the tender by the prime contractor is the acceptance of that offer. This is called Contract A or the bidding contract. The tender is irrevocable during the period of time described in the tender documents. Contract B is the actual construction contract that the parties enter into if the tender is accepted by the owner. It binds the prime contractor and the owner who put out the tender.

In Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 SCR 943 Justice Binnie made clear that the principles set out in Ron Engineering apply equally to dealings between prime contractors and subcontractors, as they do between the owner and the prime contractor.

In Naylor, the Supreme Court held that Contract A is created when a prime contractor carries the bid of a subcontractor in the tender with the owner. But what does it mean to carry the bid of a subcontractor in a tender?

When a prime contractor incorporates a subcontractor’s bid in its compliant tender to the owner and the subcontractor knows and expects that the contractor is relying on its bid, the subcontractor’s bid has been carried and its bid with the prime contractor is deemed irrevocable. If the prime contractor is awarded Contract B, that contractor must then enter into Contract B with the subcontractor(s) it carried in its tender to the owner.

Naylor demonstrates that contractual obligations arise between prime and subcontractor when the general contractor carries the bid of the subcontractor in its own bid in the tender. As such, a general contractor is liable to a subcontractor for a breach of contract if it fails to contract with that subcontractor after winning the tender.

A prime contractor may escape liability for not awarding Contract B to a subcontractor for which it carried if it can show that the owner has a reasonable objection to that subcontractor.

Reasonable objections are case specific. In general, they are based upon facts unknown to the prime contractor when it carried the subcontractor’s bid that would affect the subcontractor’s ability to perform the subcontract work as tendered.

In short, the legal status of carrying a bid depends on the tender documents. In most cases, if a prime contractor incorporates, relies on or uses the bid of a subcontractor in its tender bid with the owner (i.e., if it carries the subcontractor’s bid), the prime contractor must contract with that subcontractor if it wins the tender with the owner.