Toronto Transit Commission v. Gottardo Construction Limited et al.

[Indexed as: Toronto Transit Commission v. Gottardo Construction Ltd.]

77 O.R. (3d) 269

[2005] O.J. No. 3689

Docket: C41246

Court of Appeal for Ontario,

Borins, Feldman and Rouleau JJ.A.

September 7, 2005

Construction law -- Tenders -- Formation of contract -- Mistaken bid -- Defendant submitting lowest bid but subsequently informing plaintiff that it had made error in tender amount -- Tender instructions and form of tender making it clear that parties intended to initiate contractual relations when tenders were opened -- Contract A formed at that point -- Fact that tender instructions provided that plaintiff could demand production of certain documentation after opening of tenders not having effect of delaying formation of Contract A.

Contracts -- Rescission -- Mistake -- Defendant tenderer discovering after formation of Contract A that it had made error in tender amount -- Financial hardship to defendant which would result from enforcement of contract not so unconscionable that remedy of rescission was appropriate. [page270]

The defendant responded to a call for tenders by the plaintiff. When the tenders were opened, the defendant was discovered to be the lowest bidder. Shortly after the tenders were made public, the defendant advised the plaintiff that it had made a $557,000 error in the tender amount and that, as a result, it was not obligated to honour the tender price. When the defendant refused to sign the contract, the plaintiff awarded the contract to the next lowest bidder and sued the defendant for the difference between the defendant's purchase price and the price at which the work was ultimately carried out. The trial judge found that Contract A had not come into existence upon the opening of the sealed tenders. She determined that because the tender instructions provided that the plaintiff could demand the production of certain documents after the opening of the tenders, Contract A would not be formed until sometime after these additional documents were provided. Once the documents were provided to the plaintiff, it was apparent that an error had been made in the tender amount. She found that the defendant's mistake was discernable on the face of the documents before the formation of Contract A and, therefore, the plaintiff could not compel the defendant to honour the price. She dismissed the action. She went on to find that even if she were wrong and Contract A was formed before the error became apparent, she would have granted the defendant rescission on equitable grounds. The plaintiff appealed.

Held, the appeal should be allowed.

The essential question was whether the parties intended to initiate contractual relations by the submission of a bid. The tender instructions are critical in any analysis of the contractual relations between the parties. If Contract A is formed, the tenderer is taken to have agreed to comply with all of the requirements set out in the tender documents. The trial judge's reasons did not address the critical issue of when the parties in fact intended to initiate contractual relations. She apparently confused the creation of Contract A and the process of analysis that leads to the acceptance of the tender and the formation of Contract B. Acceptance or rejection of the bid is not what leads to the creation of Contract A. Acceptance or rejection is the end point of the tender process. Once the tender is accepted, the parties enter into Contract B. The fact that certain steps are taken and certain documents are to be produced by the tenderer after the submission and opening of tenders will not delay the formation of Contract A when the clear intent of the parties is to be bound as of the opening of the tenders. In this case, it was clear from the tender instructions and the tender form which the defendant signed and submitted that the parties intended to initiate contractual relations the moment that the tenders were opened. The defendant's tender amounted, in law, to an acceptance of the call for tenders and gave rise to Contract A. The fact that the plaintiff could, pursuant to the tender instructions, request and review additional background documentation did not delay the creation of Contract A.

The defendant's failure to provide the additional documentation requested by the plaintiff did not make its bid non-compliant after Contract A was formed, so that the bid could no longer be accepted by the plaintiff. The failure to provide the additional documentation was a breach of Contract A. It would defeat the integrity of the bidding system to allow a bidder who has complied with all the tender requirements in the submission of its tender to breach its obligations pursuant to Contract A and then treat this breach as freeing it from its commitment. While the cost summary provided by the defendant indicated a different total tender price from that contained in the form of tender, the cost summary was provided after Contract A was formed and the manner in which it was completed did not comply with the tender instructions. The defendant could not use a non-compliant document to show an error on the face of the tender. [page271]

While enforcement of the contract would cause the defendant financial hardship, the burden imposed on the defendant by the enforcement of the contract freely entered into was not so grossly disproportionate so as to make enforcement unconscionable. There were no grounds for the equitable remedy of rescission.

APPEAL from the judgment of Kiteley J. (2003), 2003 64236 (ON SC), 68 O.R. (3d) 356, [2003] O.J. No. 6184 (S.C.J.) dismissing an action for damages for breach of contract.

M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 619, [1999] S.C.J. No. 17, 69 Alta. L.R. (3d) 341, 170 D.L.R. (4th) 577, 237 N.R. 334, [1999] 7 W.W.R. 681, 49 B.L.R. (2d) 1, 44 C.L.R. (2d) 163, 3 M.P.L.R. (3d) 165; Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60, 193 D.L.R. (4th) 1, 262 N.R. 285, 36 R.P.R. (3d) 175, 2000 SCC 60, 3 C.C.L.T. (3d) 1; Ontario v. Ron Engineering & Construction (Eastern) Ltd., 1981 17 (SCC), [1981] 1 S.C.R. 111, 119 D.L.R. (3d) 267, 35 N.R. 40, 13 B.L.R. 72, apld Authorities referred to Fridman, G.H.L., The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999)

Harvey J. Kirsh and Roger Gillott, for Toronto Transit Commission. H. James Marin and Wendy R. Cole, for Gottardo Construction Ltd. Matthew R. Alter, for CGU Insurance Company of Canada.

The judgment of the court was delivered by

[1] ROULEAU J.A.:-- On December 20, 2000, the Toronto Transit Commission ("TTC") opened the tenders it had received for a major project. Gottardo Construction Limited ("Gottardo") was the lowest bidder. Shortly after the tenders were made public, Gottardo advised the TTC that it had made a $557,000 error in the tender amount. Gottardo maintained that, because of the error it was not obligated to honour the tender price of $4,811,000. The TTC took the position that Gottardo was bound. When Gottardo refused to sign the contract, the TTC awarded the contract to the next lowest bidder and sued Gottardo claiming, among other alternative relief, damages of $434,000, being the difference between Gottardo's tender price and the price at which the work was ultimately carried out. CGU Insurance Company of Canada ("CGU") was also sued by TTC, as it was the company that had issued Gottardo's bid bond.

[2] The trial judge found that the TTC's tender instructions were such that a first contract, referred to in the case law as "Contract A", had not come into existence upon the opening of the sealed tenders. Additional documents had to be provided by Gottardo before [page272] Contract A came into existence. These additional documents were required by the tender instructions. Once the documents were provided to the TTC, it was apparent that an error had been made in the tender amount. The trial judge found that Gottardo's mistake was discernable on the face of the documents before the formation of Contract A, and therefore that the TTC could not compel Gottardo to honour the price and could not recover against CGU on the bid bond. Consequently, she dismissed TTC's claim against Gottardo and CGU.

[3] The trial judge, in obiter, went on to find that even if she was wrong, and Contract A was formed before the error became apparent, she would have granted Gottardo rescission on equitable grounds. She also would have relieved CGU of any obligation under the bid bond since the instructions to tenderers did not contain an explicit forfeiture provision. The TTC appealed.

[4] The trial judge awarded Gottardo and CGU only 50 per cent of their costs on the basis that it was Gottardo's error that ultimately caused the litigation. The defendants have sought leave to cross-appeal on the costs issue.

[5] On appeal, CGU conceded that the trial judge erred when, in obiter, she stated that the absence of an explicit forfeiture provision in the TTC's instructions to tenderers discharged CGU from any obligations under the bid bond. As a result, that ground of appeal did not have to be argued.

[6] The issues on appeal are, therefore, as follows: (1) whether Contract A was entered into when the tenders were opened; (2) whether Gottardo's error was apparent on the face of the tender documents so as to prevent the formation or enforcement of Contract A; and (3) whether equitable rescission was available to Gottardo on the facts of this case.

The Law

[7] The leading authority in the area of tenders is the Supreme Court of Canada's decision in Ontario v. Ron Engineering & Construction (Eastern) Ltd., 1981 17 (SCC), [1981] 1 S.C.R. 111, 119 D.L.R. (3d) 267. In that case, the court stated that it was important that integrity in the bidding system be protected to the extent possible under the law of contract and determined that a unilateral contract, referred to as Contract A, arose automatically upon the submission of the tender. The contract was between the contractor who submitted the tender and the owner. The tenderer could not withdraw the tender for a specific period of time as provided in the instructions to tenderers. If the tender was accepted within that specified period of time, the parties would enter into a construction [page273] contract, referred to as "Contract B". If the tender was not accepted within that period of time, the tenderer could recover any deposit or tender bond that had accompanied the tender. If, after Contract A was formed, the tenderer alleged that it had made a mistake in the bid, the court would look for evidence of the mistake on the face of the tender documents and the circumstances in existence at the moment when the tenders were opened and Contract A was formed and not at a later date.

[8] Ron Engineering was considered by the Supreme Court of Canada in its later decision of M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 677 (SCC), [1999] 1 S.C.R. 619, [1999] S.C.J. No. 17. In that decision, the court made it clear that Contract A also imposed obligations on the owner. It explained that Contract A did not come into existence in all tender situations, nor was a tender always irrevocable as a term of the tender contract. In all cases, the court had to look at the terms and conditions of the tender call. The court stated at para. 19 that what matters is "whether the parties intend to initiate contractual relations by the submission of a bid. If such a contract arises, its terms are governed by the terms and conditions of the tender call."

[9] The Supreme Court of Canada addressed the issue again in Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860, [2000] S.C.J. No. 60. After quoting the above-mentioned passage from M.J.B. Enterprises Ltd., it stated that the tender instructions are critical in any analysis of the contractual relations between the parties. If Contract A is formed, the tenderer is taken to have agreed to comply with all of the requirements set out in the tender documents.

Position of the Parties

[10] The appellant submits that the trial judge erred in not finding that Contract A came into existence when the sealed tenders were opened. The trial judge further erred in using a cost breakdown provided by Gottardo after the tenders were opened to find that Gottardo's error was apparent on the face of the tender documents and that this entitled Gottardo to withdraw the tender.

[11] The respondents submit that the trial judge was correct in her decision. The tender process put in place by the TTC consisted of two phases. The first phase was the opening of the tenders. The second phase was the provision of additional information required pursuant to the tender instructions. Contract A would not come into existence until after the second phase was complete. In compliance with its obligation to provide the phase two documents, Gottardo sent the TTC a cost breakdown. This cost breakdown clearly showed that the original tender price [page274] was a mistake. As a result, the TTC knew of Gottardo's mistake before Contract A was entered into and the TTC could not, therefore, require Gottardo to honour its tendered price. In the alternative, the respondents say that rescission ought to be ordered on the facts of this case.

Analysis

(i) Trial judge's reasons

[12] The trial judge determined that because the tender instructions provided that the TTC could demand the production of certain documents after the opening of the tenders, Contract A would not be formed until sometime after these additional documents were demanded and provided. The reasons, however, do not address the critical issue as set out by the Supreme Court of Canada in M.J.B. Enterprises Ltd.: when did the parties in fact intend to initiate contractual relations? Rather, the trial judge appears to have confused the creation of Contract A and the process of analysis that leads to the acceptance of the tender and the formation of Contract B. This confusion is apparent from the following two passages from her reasons:

Once the Tender was submitted, further steps were envisaged: a demand for clause 7.2 documents to be provided within two business days, a response by the tenderer to that demand, then tender evaluation pursuant to clause 8 and clause 11, and then acceptance or rejection of a bid. All of that is part of the first phase. [^1]

Based on the documents provided by the TTC, I find that Contract A could only be created when the following steps had occurred: TTC issues the Instructions to Tenderers; in response, a contractor makes a bid; TTC demands the clause 7.2 documents and information; the contractor responds to the demand; TTC conducts the evaluation and acceptance pursuant to clause 8 along with clause 11. [^2]

(Emphasis added)

[13] Acceptance or rejection of the bid is not what leads to the creation of Contract A. Acceptance or rejection is the end point of the tender process. Once the tender is accepted, the parties enter into the construction contract referred to as Contract B. The fact that certain steps are taken and certain documents are to be produced by the tenderer after the submission and opening of tenders will not delay the formation of Contract A when the clear intent of the parties is to be bound as of the opening of the tenders. [page275]

(ii) When was Contract A formed?

[14] When the parties intend to initiate contractual relations, is determined by analyzing the tender instructions and the other evidence presented at trial. From this analysis, the court can establish whether there was an intention to initiate contractual relations by the submission of a bid and thereby determine if and when Contract A was formed.

[15] The tender instructions set out in considerable detail the process which was to be followed. Pursuant to those instructions, each tenderer submitted a signed form of tender in a sealed envelope by 2:00 p.m. on December 20, 2000. Some 15 minutes later the tenders were opened in public and at that moment it was revealed that Gottardo's tender was the lowest.

[16] Paragraph 7.1 of the tender instructions listed the documents that were to be submitted together with the form of tender. Paragraph 7.2 of the tender instructions stipulated that the tenderers had to furnish additional listed documents upon the TTC's request.

[17] The tender instruction stipulated that:

(a) after the tender closing date of December 20 at 2:00 p.m., the tender could not be withdrawn until expiration of the tender validity period of 120 days;

(b) the 120-day period was to allow the TTC to evaluate the various tenders;

(c) the form of tender submitted by the tenderer had to be accompanied by a bid bond or other specified form of security deposit.

[18] One critical document was the form of tender, which Gottardo signed and submitted in a sealed envelope. It set out that Gottardo:

(a) had read the tender documents (which included the tender instructions) and accepted the terms;

(b) was tendering and offering to do the work for the tender price of $4,811,000;

(c) agreed to comply with all the terms and conditions set out in the tender documents;

(d) had attached all of the documents that the tender instructions said must accompany the form of tender; [page276]

(e) agreed to provide additional documents listed in para. 7.2 within 48 hours of a request by the TTC; and

(f) agreed that "this Tender is valid for acceptance for a period of one hundred and twenty (120) calendar days from the date of closing of Tenders and that the [TTC] may at any time within the said period accept this Tender whether or not any other Tender has been previously accepted". [^3]

[19] It is clear from these documents that the parties intended to initiate contractual relations the moment that the tenders were opened. The tender was capable of acceptance by the TTC at any time from that point forward for a period of 120 days and could not be withdrawn by Gottardo. The TTC, for its part, was bound to award the contract in accordance with the tender provisions. Gottardo's tender amounted, in law, to an acceptance of the call for tenders and gave rise to Contract A.

[20] Before awarding the contract and entering into Contract B, the TTC could analyze and review the various tenders and could, pursuant to the tender instructions, request and review additional background documentation. Although the analysis to be undertaken by the TTC as contemplated by the tender instructions made this case factually different from Ron Engineering, these differences did not, as the trial judge suggested, delay the creation of Contract A. They would only delay the formation of Contract A if, taken together with all the other facts and circumstances, they reflected an intention by the parties to defer the creation of contractual relations.

[21] On the facts of this case, it is clear that Gottardo understood the tender process and the fact that contractual relations had been created by its signature and submission of the form of tender on December 20. The documentation is quite clear and Gottardo was familiar with tenders and the tendering process. Gottardo's understanding is also reflected by the statement contained in its letter sent to the TTC upon discovery of the error in the tender price. In that letter, Gottardo asked the TTC: "Please take no action against our bid bond." This indicates an understanding that a contractual relationship had been entered into.

(iii) Was there an error on the face of the tender to prevent the formation or enforcement of Contract A?

[22] The respondents argued that even if Contract A was formed on the opening of the tenders and that no error was [page277] apparent from the Form of Tender submitted, the contract was nonetheless unenforceable as a result of Gottardo's response to the TTC's later request for documents pursuant to para. 7.2. The para. 7.2 documents consisted of various lists, including a list of contracts presently underway, a list of users for whom the tenderer had executed works of a similar order or nature, as well as a cost summary which would serve as a basis for working out progress payments.

[23] Shortly after the tenders were opened, the TTC requested the documents listed in para. 7.2. Gottardo did not provide any of the documents requested with the exception of the cost summary. According to Gottardo, two things flowed from this:

(a) since Gottardo did not provide any of the para. 7.2 documents other than the cost summary, it was not in compliance with the tender instructions and, as a result, Gottardo's bid became non-compliant after Contract A was formed. Once the bid became non-compliant, it could no longer be accepted by the TTC; and

(b) the cost breakdown provided by Gottardo to the TTC in response to the para. 7.2 request showed a different total tender price from the one contained in the form of tender. Since this additional document was provided pursuant to the tender instructions and at the TTC's request, the error, which was not apparent at the point when the tenders were opened, became apparent on the face of the subsequently produced para. 7.2 documents.

[24] I will deal with each of these submissions in turn.

(a) Failure to provide the additional documentation

[25] The instructions to tenderers contemplated that once the tenders had been submitted and opened, the TTC could require the tenderers to provide additional documentation to be used in its evaluation process and in the preparation of Contract B. By signing the form of tender, the tenderers specifically agreed to provide the documents should these be requested by the TTC as provided in the instructions to tenderers.

[26] Once the para. 7.2 documents were requested from a compliant tenderer, the failure to provide these documents was a breach of Contract A, and could not change the status of the bid and render it non-compliant. The breach by the tenderer of Contract A, whether at an early stage in refusing to produce required documentation or at a later stage in refusing to sign Contract B, [page278] does not make the bid non-compliant. It would defeat the integrity of the bidding system to allow a bidder who has complied with all the tender requirements in the submission of its tender to thereafter breach its obligations pursuant to Contract A and then treat this breach as freeing it from its commitment.

(b) The error disclosed by the cost summary

[27] It is clear that the cost summary provided by Gottardo indicated a different total tender price from that contained in the form of tender submitted on December 20. This document, however, was provided after Contract A was formed and the manner in which it was completed did not comply with the tender instructions. Although the tender instructions required the tenderer, on request, to submit a cost summary, the instructions also clearly stipulated that the cost summary "shall aggregate the total tendered price for the contract". A non-compliant document cannot, in my view, be used by Gottardo to show an error on the face of the tender.

[28] Having concluded that Contract A was formed when the tenders were opened and that there was no error apparent on the face of the tender, the facts, as determined by the trial judge, establish that Gottardo was in breach of the contract and that the damages flowing from this breach totalled $434,000.

(iv) Was rescission available to Gottardo on the facts of this case?

[29] The trial judge said, in obiter, that if she had found that Contract A had been formed, she would then have granted rescission in light of the financial hardship that this mistake would cause to Gottardo.

[30] It is well established that rescission may only be granted in cases of unilateral mistake when the unmistaken party engaged in fraud or some other unconscionable conduct or where the unmistaken party contributed to the mistake. As set out in G.H.L Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999), at pp. 273-74:

As long as the unmistaken party knows of the mistake, without having caused it, the party cannot resist a suit for rectification on the grounds of mistake. The same will apply if the other party had good reason to know of the mistake and to know what was intended. The converse of the proposition as to knowledge of the other party's mistake is that if the unmistaken party is ignorant of the other's mistake, the contract will be valid and neither rescission nor rectification will be possible.

[31] In the case of tenders, the rights of the parties crystallize and Contract A is formed upon the opening of the tenders. Nothing [page279] on the face of the documents then in existence, including the form of tender, suggested that the tender amount was in error. At that point in time no one was aware of an error and the tender was compliant and capable of acceptance.

[32] The trial judge's reasons make it clear that the mistake was unilateral and that there was no fraud. The trial judge, however, found that since the mistake was honestly made and inadvertent and because enforcement would cause Gottardo financial hardship, she would grant rescission. With respect, I do not agree. In my view, there are no unique circumstances in this case which distinguish it from Ron Engineering and which would operate so as to entitle the tenderer to have the contract rescinded. While it is conceded that some financial hardship will flow from enforcement of the contract, this is not sufficient to warrant rescission. The burden imposed on Gottardo by the enforcement of the contract freely entered into is not so grossly disproportionate so as to make enforcement of it by the courts unconscionable. In the circumstances, there are simply no grounds for equitable intervention.

[33] In the result, I would allow the appeal, set aside the decision of the trial judge and issue judgment in favour of the appellant in the amount of $434,000 against both defendants together with pre - and post-judgment interest. I would also award the TTC costs of the trial on the partial indemnity scale in an amount to be agreed upon by the parties or as assessed.

[34] In light of the disposition of the appeal that I propose, I need not deal with the cross-appeal on costs.

[35] The TTC's draft bill of costs for the appeal claims $82,109.80, which is roughly twice as much as either of the respondent's draft bills of costs and roughly twice as much as either respondent was awarded in trial costs. In my view, the amount sought by the appellant is, in the context of this case, too high. I would award costs of the appeal to the TTC on the partial indemnity scale and fix them at $35,000 inclusive of GST and disbursements.

Appeal allowed.

Addendum

November 18, 2005

[1] ROULEAU J.A.: -- The reasons for judgment in this appeal were released on September 7, 2005.

[2] Following the issuance of its reasons for judgment, the court received correspondence from CGU Insurance Company of [page280] Canada requesting that para. 5 of the reasons be modified to make it clear that, at the hearing, CGU advised the court that only the narrow issue of the trial judge's obiter referred to in para. 3 of the reasons would not be argued. After a review of my notes of the hearing, I agree that para. 5 could be misinterpreted. The concession was directed specifically to the trial judge's obiter concerning the absence of an explicit forfeiture provision in the instructions to tenderers and did not relate, generally, to the trial judge's interpretation of the bid bond. Counsel for the Toronto Transit Commission's understanding is similar to mine. As a result, I am amending para. 5 of the reasons as follows:

[5] On appeal, CGU conceded that the trial judge erred when, in obiter, she stated that the absence of an explicit forfeiture provision in the TTC's instructions to tenderers discharged CGU from any obligations under the bid bond. As a result, the ground of appeal did not have to be argued.

[^1]: The trial judge's reasons, para. 31. [^2]: The trial judge's reasons, para. 34. [^3]: Form of Tender, p. 4, Appeal Book and Compendium II, tab 38.