Defence Construction, 2011 NLCA 67

Date: 2011 1011 Docket: 09/08 , 09/17 & 09/44 Citation: Defence Construction

(1951) Limited v. Air-Tite Sheet Metal Limite d , 2011 NLCA 67 IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR COURT OF APPEAL BETWEEN : DEFENCE CONSTRUCTION

(1951) LIMITED APPELLANT/ FIRST RESPONDENT BY CROSS APPEAL AND : AIR-TITE SHEET METAL LIMITED FIRST RESPONDENT/ SECOND RESPONDENT BY CROSS APPEAL AND : N.D. DOBBIN LIMITED SECOND RESPONDENT/ APPELLANT BY CROSS APPEAL Coram: Welsh, Rowe and Hoegg, JJ.A. Court Appealed From: Supreme Court of Newfoundland and Labrador Trial Division (General) 199101T1324 Appeal Heard: June 8 and June 9, 2011 Judgment Rendered: October 11, 2011 Reasons for Judgment by Welsh, J.A. Concurred in by Rowe, J.A. Reasons concurring in the result by Hoegg, J.A. Counsel for the Appellant: Kathleen McManus Counsel for the First Respondent: Daniel Boone Counsel for the Second Respondent: Daniel Simmons Welsh, J.A.

[1] This appeal relates to the construction of an airport hangar where a flaw in the design of the heating system necessitatedremediation work. At issue is an award of damages for loss of profit to the subcontractor, Air-Tite, based on the failure of the primecontractor, Dobbin, to retain Air-Tite to undertake the remediation work. In addition, the owner of the contract, Defence Construction,has appealed the decision that it is jointly liable for the payment of damages to Air-Tite based on the conclusion that the owner breacheda duty of care owed to the subcontractor.

The final issue relates to whether Dobbin, successful in defending against a suit by the owner,Defence Construction, is nonetheless responsible for the costs of Air-Tite which it joined as a third party in relation to that issue. BACKGROUND [2] In 1986, Defence Construction, a wholly owned subsidiary of the Canadian government, entered into contracts for the designand construction of a large aircraft hangar at Happy Valley-Goose Bay, Labrador. This appeal relates to problems with the heatingsystem which was designed by Shawmont Newfoundland Design Associates. N.D.

Dobbin Limited, which successfully bid on theDefence Construction contract, subcontracted the work on the heating system to Air-Tite Sheet Metal Limited. [3] The trial judge explained the problem which led to court actions (2008 NLTD 135): [4] The hangar’s heating system, which I have indicated was built by Air-Tite, developed a significant problem in its heat transferfluid which resulted in significant remedial work having to be done in order to correct it.

In the main action, I found that the cause of theproblem was a build up of a black sludge in the glycol/water solution used as the heat transfer fluid caused by corrosion in the pipescarrying the fluid. I determined that the sludge resulted from a faulty design by the designers [Shawmont] of the hangar and heatingsystem. … [4] After the problem was detected, Defence Construction commenced an action against Shawmont and Dobbin for faulty designand/or faulty construction of the heating system.

Dobbin joined Air-Tite as a third party to that action, claiming contribution andindemnity for any liability for damages awarded against Dobbin. In a separate action against Dobbin and Defence Construction, Air-Titeclaimed damages for wrongful termination of its subcontract with Dobbin and negligent administration of the prime contract by DefenceConstruction.

The two actions were consolidated, though separate decisions were filed by the trial judge (2008 NLTD 135, at paragraph5). [5] Regarding the action commenced by Defence Construction, the trial judge determined that Shawmont was negligent indesigning and providing specifications for the heating system, and awarded damages to Defence Construction. He dismissed the actionby Defence Construction against Dobbin because Dobbin had followed the Shawmont design and had “carried out its work in areasonable and workmanlike fashion” ((2008), 2008 NLTD 136 , 278 Nfld. & P.E.I.R. 55, at paragraph 257).

As aconsequence, the third party action by Dobbin against Air-Tite was also dismissed. However, in that decision, which was not appealedby Shawmont, the trial judge ordered Dobbin to pay Air-Tite’s costs on the third party claim.

Dobbin’s appeal of that decision on costswas heard with these appeals. [6] Regarding the claims by Air-Tite against Dobbin and Defence Construction, the trial judge explained (2008 NLTD 135): [8] … [Air-Tite] entered into the work in 1989 and by March of 1990 the work was substantially complete with only some fairlyminor deficiencies to be completed and the system was to be balanced and commissioned, i.e., turned over to the German Air Force. [9] Over the spring and summer, Air-Tite tried to balance the system (i.e., ensuring that there is no air in the system and it deliversconsistent heat to all parts of the building) in preparation for commissioning and turning over to the German Air Force which had alreadygone into occupation of the building.

They began to experience leaking of the pump seals and were unable to achieve balancing of thesystem. [10] On 5 October 1990 in a meeting in the offices of Dobbin, Mr. Derm Dobbin, the President of [Dobbin] terminated Air-Tite’scontract and refused to let them back in on the work site. This was later confirmed in writing. Air-Tite wrote to Defence Constructioncomplaining of the termination. Dobbin retained the services of another subcontractor, D.A.

Williams Limited, to complete the Air-Titedeficiencies and to complete the remedial work to the heating system which Dobbin had been contracted by Defence Construction toundertake. A dispute also arose between Air-Tite and Dobbin over the original value of the contract.

In addition, Air-Tite claimeddamages for extra work for which it claimed it had not been paid and for lost profit on the remedial work which it submitted it wouldhave been awarded had its contract not been terminated. [7] On the points relevant to this appeal, the trial judge concluded that: [77] Dobbin wrongfully terminated Air-Tite’s contract giving rise to a claim in damages.

Defence Construction failed in its duty toAir-Tite to administer its contract with Dobbin fairly by allowing Dobbin to terminate its contract with Air-Tite without cause. [78] Air-Tite is entitled to damages against Dobbin and Defence Construction jointly and severally for breach of contract andnegligence respectively in the amount of $61,416.19. Air-Tite is entitled to general damages against Dobbin and Defence Constructionjointly and severally in the amount of $10,000.00. [8] Defence Construction has appealed the determination that it is liable in tort to Air-Tite.

Dobbin has appealed the decisionthat it is liable to Air-Tite for the loss of profit related to the remediation work. As noted above, Dobbin has also appealed the order thatit pay Air-Tite’s third party costs in the Shawmont decision. ISSUES [9] At issue is whether the trial judge erred in respect of:

(1) The

interpretation and application of the law regarding liability in tort for pure economic loss;

(2) The

interpretation of the subcontract and the application of the law regarding loss of opportunity; and

(3) The application of the law with respect to responsibility for costs of a third party. ANALYSIS Defence Construction’s Liability in Tort [10] The general conditions of the contract between Defence Construction and Dobbin form the basis for the trial judge’s findingthat Defence Construction is liable in tort for negligent administration of the subcontract between Dobbin and Air-Tite.

Article GC4provides: 4.1 Subject to this General Condition, the Contractor may subcontract any part of the work. 4.2 The Contractor shall notify the Engineer of his intention to subcontract. 4.3 A notification referred to in GC4.2 shall identify the part of the work and the subcontractor with whom it is intended to subcontract. 4.4 The Engineer may, within six days of receipt by him of a notification referred to in GC4.2, object to the intended subcontracting. 4.5 If the Engineer objects to a subcontracting pursuant to GC4.4, the Contractor shall not enter into the intended subcontract. 4.6 The Contractor shall not, without the written consent of the Engineer, change a subcontractor who has been engaged by him inaccordance with this General Condition. 4.7 Every subcontract entered into by the Contractor shall adopt all of the terms and conditions of this contract that are of generalapplication. 4.8 Neither a subcontracting nor the Engineer’s consent to a subcontracting by the Contractor shall be construed to relieve the Contractorfrom any obligations under the contract or to impose any liability upon Her Majesty. (Emphasis added.) [11] The trial judge first determined that Dobbin wrongfully terminated Air-Tite’s subcontract.

Applying that determination withrespect to Air-Tite’s action against Defence Construction, he concluded that Defence Construction breached a duty of care owed to Air-Tite: [56] On the same day that Dobbin terminated Air-Tite’s contract, Air-Tite wrote to Mr. Terry Pardy, Defence Construction’s projectmanager, to complain about the action and to set out what they felt was the reason for the termination. Air-Tite made serious charges ofmisadministration respecting their contract with Dobbin.

Defence Construction did not take any steps to investigate Air-Tite’scomplaints … [57] Defence Construction had the authority under its contract with Dobbin to disallow Dobbin from substituting subcontractors. While they might have ultimately allowed them to take this action, it was negligent of Defence Construction not to have investigated theserious allegations being made against Air-Tite, one of its main subcontractors, the manner of termination and the allegations by Air-Titeagainst Dobbin.

While Defence Construction had repeatedly complained to Dobbin about Air-Tite’s failure to keep an adequate workforce on site and the resulting delays, they did not take any steps at the time to force Dobbin to take action against Air-Tite and they mustbe taken as having tolerated these alleged breaches of contract by Air-Tite.

In fact, Albert Madson, Defence Construction’s formerproject manager, testified that he did not consider the delays occasioned by Air-Tite’s performance to be serious in nature. [58] Eventually, Defence Construction approved of the substitution of subcontractors some months later by which time the newsubcontractor was already working on site. Defence Construction owed a duty to Air-Tite to administer its contract with Dobbin fairly:Naylor Group Inc. v. Ellis-Don Construction Ltd. (1999), (ON CA), 45 C.L.R. (2d) 42 (Ont. C.A.) at p. 61,confirmed [2001] 2 S.C.R. 943, 2001 SCC 58 (S.C.C.).

Defence Construction required Dobbin to use the Bid Depository System intendering the contract which I have found was devised to the knowledge of Defence Construction to protect sub-contractors from thevery thing of which Air-Tite was complaining.

Defence Construction failed in its duty to Air-Tite to administer its contract with Dobbinfairly and is responsible jointly and severally with Dobbin for any damages resulting to Air-Tite because of it. (Emphasis added.) [12] In this appeal Defence Construction submitted that the trial judge erred by relying on Naylor Group because that decisionconcerned contractual obligations between a prime contractor and a subcontractor rather than a duty of care in negligence.

Binnie J., forthe Court in Naylor Group, stated clearly: [38] There lurked in the background to some of the respondent’s submissions in this Court occasional allegations which seemedgrounded in tort, including negligent misrepresentation. However, tort was neither pleaded nor argued in the courts below and tort lawwill play no role in the disposition of this appeal. [13] In relying on the decision in Naylor Group to establish that Defence Construction owed a duty of care to Air-Tite, the trialjudge erred by failing to apply the appropriate line of judicial authority.

Air-Tite’s claim for loss of profit, being solely financial innature, is, for purposes of an action in negligence, characterized as a pure economic loss. The applicable authority is summarized inDesign Services Ltd. v. Canada, 2008 SCC 22, [2008] 1 S.C.R. 737, which incorporates earlier decisions of the Supreme Court ofCanada discussing principles underpinning the availability of an action in tort for pure economic loss. While the decision in DesignServices was released after the hearing in the trial division, it pre-dated release of the trial judge’s decision.

Unfortunately, it appearscounsel did not bring the decision to the attention of the trial judge.

[14] In Design Services, Rothstein J., for the Court, began with a

summary: [1] The issue in this appeal is whether an owner in a tendering process owes a duty of care in tort to subcontractors. The ownerawarded a construction contract to a non-compliant bidder. The appellants were subcontractors to the contractor which should have beenawarded the contract. The appellants do not have privity of contract with the owner and therefore, being unable to establish a claim forbreach 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) anew 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 anowner and subcontractors is not justified.

Therefore, I would dismiss the appeal. (Emphasis added.) (The prime contractor had reached a settlement with the owner and discontinued its action.) [15] Applying the principles discussed in Design Services, there is a two stage process first requiring a determination whether thesituation fits within or is analogous to “a relationship previously recognized as having a duty of care between the parties” (paragraph27). If there is no previously recognized duty, it is necessary to proceed to the second stage, application of the Anns test to determinewhether a duty of care should be recognized.

Recognized Categories of Duty of Care [16] The previously recognized categories in which a duty of care has been found to support a claim for pure economic loss areenumerated in Design Services: [31] … 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. [17] In this appeal, as in Design Services, none of these categories applies.

I note, in particular, that relational economic loss doesnot apply because that category requires injury or damage to property of a related third party which results in economic loss to theplaintiff. There was no such injury or damage to property in this case. (See the discussion in Design Services at paragraphs 33 to 44.) [18] It is necessary, then, to proceed to the second stage of the analysis, application of the Anns test which also has two componentsas explained in Design Services: [46] The Anns test was recently described by this Court in Childs [2006 SCC 18 , [2006] 1 S.C.R. 643], 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 whethera 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 considerationsthat negative the duty of care. The two-stage approach of Anns was adopted by this Court in Kamloops (City of) v.

Nielsen, (SCC), [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 thedamages 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 concernsnegating the creation of that duty at the second stage, then a new category of duty is recognized.

First Stage of the Anns Test [19] The first stage of the Anns test, dealing with proximity, is described by Rothstein J. in Design Services, quoting from Cooper v.Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537: [48] … At the first stage of the Anns test, two questions arise: (1) was the harm that occurred the reasonably foreseeable consequence of thedefendant’s act? and (2) are there reasons, notwithstanding the proximity between the parties established in the first part of this test, thattort liability should not be recognized here.

The proximity analysis involved at the first stage of the Anns test focuses on factors arisingfrom 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 in the original but added here.) See also: Childs v. Desormeaux, 2006 SCC 18 , [2006] 1 S.C.R. 643, at paragraph 12. [20] In Design Services, the owner conceded that it was reasonably foreseeable that awarding the contract to a non-compliant bidderon the prime contract would result in financial loss for the subcontractor, Design Services. As a result of this concession, Rothstein J.proceeded to consider the question of proximity, noting that foreseeability alone does not automatically result in a prima facie duty ofcare.

He considered factors that assist in determining whether there is sufficient proximity to establish a duty of care, including“expectations, representations, reliance, and the property or other interests involved” (paragraph 50).

The question is whether, given therelationship between the parties, it is “just and fair having regard to that relationship to impose a duty of care in law upon the defendant”(paragraph 50). [21] In Design Services, Rothstein J. concluded that the appeal could be disposed of at the first stage of the Anns test, despitesubmissions that the relationship between Design Services and the owner were “closer than in the usual owner/subcontractor situation”(paragraph 51).

Those submissions were based on the “team” approach that applied to the bidding process, requiring the subcontractor toattend a “partnering” session with the owner’s manager and stipulating that “key personnel could not be substituted without the expressadvance written consent” of the owner (paragraph 51). These submissions on proximity between the parties were assessed in light of thesecond element of the first stage in the Anns test, policy considerations.

The option for bids to be submitted as joint ventures whichwould make the subcontractor a party to the contract with the owner, was viewed as “an overriding policy reason that tort liability shouldnot be recognized in these circumstances” (paragraph 56). Rothstein J. concluded: [57] … [Design Services] had the opportunity to arrange their affairs in such a way as to be in privity of contract with [the owner]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 contractualrelationship with [the owner].

Tort law should not be used as an after-the-fact insurer. [22] In the case before this Court, there is no indication that a joint venture option was available to Air-Tite. The trial judge,without applying the Anns test, concluded that Defence Construction owed a duty of care to Air-Tite based on general condition 4.6 inDefence Construction’s contract with Dobbin. That

article provided that Dobbin “shall not” change a subcontractor approved byDefence Construction without the written consent of Defence Construction’s engineer. The similar, though more specific, term in DesignServices quoted in the previous paragraph was, among other things, relied on in that case to demonstrate proximity of the parties. Article4.6 is relied on by Dobbin for that purpose in this appeal. [23] In response, Defence Construction pointed out that

article 4.6 of the main contract is directed to the relationship between it andDobbin. The

article provided a means for Defence Construction to oversee the manner in which Dobbin executed its part of the bargain. If it had been intended to provide protection or responsibility for Air-Tite, the subcontractor could have been made a party to thecontract. Further, Defence Construction noted that

article 4.8 specifies that Defence Construction’s consent to a subcontracting byDobbin is not to be construed to impose any liability on Defence Construction.

These considerations work against a conclusion that theintention evidenced by the contract between Defence Construction and Dobbin was to create a proximity of relationship so as to imposeon Defence Construction a duty to take action to protect the contractual relationship Air-Tite had with Dobbin. [24] Air-Tite submitted in its factum that Defence Construction was liable to it because Defence Construction “to some degreecreated the circumstance where [Dobbin] could act to the detriment of [Air-Tite]”.

This argument attempts to shift responsibility forDobbin’s wrongful termination of its contract with Air-Tite to Defence Construction when the latter was not privy to the subcontract. InDesign Services, Rothstein J. cautioned: [56] … In my view, the observation of Professor Lewis N. Klar (Tort Law (3rd ed. 2003), at p. 201) – that the ordering of commercialrelationships is usually in the bailiwick of the law of contract – is particularly apt in this type of case.

To conclude that an action in tortis appropriate when commercial parties have deliberately arranged their affairs in contract would be to allow for an unjustifiableencroachment of tort law into the realm of contract. [25] Air-Tite also submitted that Defence Construction had a responsibility to it in fairness to either tender a new contract for theremediation work or to prevent Dobbin from arbitrarily terminating its subcontract. This submission does not assist for purposes ofassessing proximity between Air-Tite and Defence Construction.

While such a duty of fairness may have been a general expectation ofAir-Tite, there is no basis on which to conclude that Defence Construction and Air-Tite had a relationship that, as between those parties,created expectations or reliance which would impose the duties suggested by Air-Tite on Defence Construction. [26] It is clear from a reading of the whole of

article 4 of the contract between Defence Construction and Dobbin that the provisionwas intended to govern the relationship between those parties. There were no representations made by Defence Construction to Air-Tite,and no basis for reliance by the latter on that contract. The requirement in

article 4.6 for Defence Construction’s consent to a change ofsubcontractor is directed, not to the protection of the subcontractor, but to the maintenance of the contractual agreement between theowner and prime contractor. [27] The conclusion follows that the proximity between Defence Construction and Air-Tite necessary to impose the alleged duty ofcare on Defence Construction has not been established.

Terms of the contract between Defence Construction and Dobbin, directed to andgoverning the relationship between those parties, cannot be extended to the subcontractor in the manner suggested by Dobbin and Air-Tite. [28] Accordingly, the first stage of the Anns test, justifying a finding of a prima facie duty of care by Defence Construction to Air-Tite, has not been satisfied. It follows that this is not a situation where a new category of pure economic loss should be established,specifically, a duty of care between the owner and subcontractor.

On this basis, Defence Construction’s appeal is allowed. [29] It is unnecessary, then, to proceed to the second stage of the Anns test, whether there are policy considerations which ought tonegative or limit the duty. However, as in Design Services, given the nature of the issue, it may be useful to provide a comment on theapplication of the second component of the Anns test.

Second Stage of the Anns Test [ 30 ] One of the policy considerations to be taken into account at this stage of the Anns analysis is the possibility of “liability in an indeterminate amount for an indeterminate time to an indeterminate class” ( Design Services , at paragraph 60). In Design Services , Rothstein J. commented on the use of the “design-build tendering process” and its potential effect: [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 [the prime contractor], 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 indeterminacy 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. [ 31 ] The issue of indeterminacy identified in Design Services would be of equal application and concern in the circumstances of this appeal, with the same result. [ 32 ] Arguing that the decision in Design Services should be distinguished in this appeal, Dobbin submitted that the duty of fairness discussed in Crown Paving Ltd. v.

Newfoundland and Labrador , 2009 NLCA 5 , (2009), 282 Nfld. & P.E.I.R. 156 (NLCA), would apply to impose a duty on Defence Construction with respect to Air-Tite. I do not find Crown Paving to be of assistance in this appeal because that decision dealt with contractual duties as between parties to the contract in a tendering process, and not the question of liability in tort for pure economic loss.

In addition, Dobbin submitted in its factum that: [30] … Subcontractors’ participation in bid depository systems is in the interest of owners in that encouragement of fair competition promotes efficiency and helps keep contract prices lower. With that benefit to owners should come some responsibility to those subcontractors that participate in the system. [ 33 ] While the bid depository system clearly has benefits in the tendering process, it does not address the questions of indeterminacy referenced above in Design Services .

The system is directed to assisting contractors in the preparation of their bids and to preventing undesirable bid shopping in the tendering and contracting processes. Without more, it could not be said to impose a duty of care on the owner to ensure that a subcontractor is treated fairly, and, in particular, that a subcontract is not wrongfully terminated by the prime contractor. [ 34 ] Similarly, I do not accept Air-Tite’s submission that the owner’s duty of care would be limited to subcontractors who are named in the bid depository, to the exclusion of sub-subcontractors, suppliers and employees.

Air-Tite has not identified a principled basis on which to include some and exclude others. [ 35 ] If the intention had been to extend responsibility of Defence Construction to Air-Tite, that is, to extend the reach of the contractual language beyond the parties that are privy to the contract, clear language to that effect would be necessary. Otherwise, the concerns as to indeterminate liability expressed in Design Services would be engaged. [ 36 ] Finally, Air-Tite submitted that it “had no way to protect itself against the losses which it incurred”.

However, this ignores the cause of action Air-Tite had and pursued against Dobbin. A remedy, if available, would result from the ordinary operation of contract law between contracting parties. Possible insolvency of Dobbin, as suggested by Air-Tite, would not alter this reality and would not provide a basis on which to extend the law of tort to include the proposed new category of duty of care. [ 37 ] In

summary, the trial judge erred when he failed to apply the law regarding liability in tort for pure economic loss. This is not a situation that fits within or is analogous to a relationship previously recognized as imposing a duty of care between the parties. Neither is it a situation where a new duty of care should be established. Applying the Anns test, there is no sufficiently close relationship or proximity between Defence Construction and Air-Tite to justify imposing a duty of care on Defence Construction.

While it is unnecessary to consider the second component of the Anns test, issues of indeterminate liability would preclude the recognition of a new duty of care in these circumstances. In the result, Defence Construction’s appeal against the determination that it is liable in tort to Air- Tite is allowed. Dobbin’s Liability for Air-Tite’s Loss of Profit [ 38 ] By way of cross-appeal Dobbin appealed the determination that it is liable to Air-Tite for loss of profit related to the remediation work on the heating system.

Dobbin has not appealed the determination that it wrongfully terminated Air-Tite’s subcontract and is liable to Air-Tite for general damages. Defence Construction made no submissions on this issue. [ 39 ] The trial judge concluded: [60] I am satisfied that had Dobbin not terminated Air-Tite’s contract, Air-Tite would have been retained to do the work remediating the heating system and any extra work associated with it and performed by D.A. Williams. Prior to the termination, Dobbin had in fact

requested a price from Air-Tite to perform this work and the meeting in Dobbin’s office on 5 October was in part for the purpose of discussing this additional work. … [63] As well, the contract contemplates that the “work” defined under the contract included any work arising from an amendment or variation to the contract. I find that the manner in which Defence Construction proceeded (i.e., by way of change orders to the original contract) was an amendment or variation to the original contract.

This gave Air-Tite the right to this work unless the owner had removed them from the job for cause pursuant to General Condition 38, which had not happened at the time of the awarding of the work to Dobbin and in turn by Dobbin to D.A. Williams.

While this provision did not appear in the subcontract between Dobbin and Air-Tite, that contract incorporates by reference the provisions of the main contract where the subcontract is silent, which was the case here. [64] I am satisfied on the evidence that the work referred to in change orders 42 through 56 was required by the owner and performed by Dobbin through its subcontractor D.A. Williams.

If Air-Tite’s contract had not been unlawfully terminated, the work would have gone to Air-Tite to be performed. [ 40 ] I note here that, in the Shawmont decision, the trial judge concluded that the remediation work was not part of the original contract: [24] [Shawmont] submitted a remediation plan which was accepted by Defence Construction/DND and which was put into operation. Defence Construction gave Dobbin the contract to complete the remediation work which initially required a thorough cleaning of the sludge from the system.

Dobbin had terminated the services of Air-Tite on or about 5 October 1990 and had retained the services of another sub-contractor, D.A. Williams Limited (hereinafter “Williams”) to complete any outstanding work of Air-Tite as well as to complete the remediation work. … [205] The amount claimed in Change Order No. 43 must be reduced by the 10% markup by Dobbin on the work of Williams. [Defence Construction was] under no obligation to have Dobbin perform the remedial work.

In fact, Dobbin was not even on site during the work, at least not to perform or supervise it. [Defence Construction] could have contracted directly with Williams or for that matter with Air- Tite to perform this additional work and saved the 10% markup. This constitutes a failure on the part of [Defence Construction] to mitigate its losses and cannot be charged to [Shawmont]. … [ 41 ] Air-Tite’s submission in response to Dobbin’s appeal is two-fold. I will consider first the question of Air-Tite’s contractual right to the remediation work.

This is followed by the factual considerations associated with wrongful termination of the subcontract. Contractual Right to the Remediation Work [ 42 ] The relevant articles of the subcontract provide:

Article 1 – Work to be Performed The subcontractor shall supply all material, labour, tools and equipment necessary for the proper performance of the subcontract work pertaining to the following portions of the prime contract, namely: Division 15 all as per plans, specifications, approved shop drawings, addenda and construction schedule. The subcontract work shall be performed in accordance with: (

a) This agreement and the prime contract, and (

b) The plans, specifications and other documents described in Appendix “A” attached. The terms and conditions of the prime contract so far as they are applicable to this subcontract, shall be binding upon the contractor and the subcontractor as if the word “owner” appearing therein had read “contractor” and the word “contractor” had read “subcontractor”. In the event of any conflict between the terms of this Agreement and the prime contract, the prime contract shall govern .

Article 9 – Changes in the Work 9.1 The contractor, without invalidating this agreement, may make changes by altering, adding to or deducting from the subcontract work.

The subcontract price and subcontract time shall be adjusted accordingly. 9.2 No changes shall be made without a written order from the contractor. (Emphasis added.) [ 43 ] The relevant articles of the prime contract provide: GC30 Changes in the Work 30.1 Subject to GC5 [any amendment or change to the provisions of the contract must be in writing to be effective], the Engineer may, at any time before he issues his Final Certificate of Completion, 30.1.1 order work or material in addition to that provided for in the Plans and Specifications; and 30.1.2 dispense with or change the dimensions, character, quantity, quality, description, location or position of the whole or any part of

the work or material provided for in the Plans and Specifications or in any order made pursuant to GC30.1.1 if that additional work or material, dispensation, or change is, in his opinion, consistent with the general intent of the original contract. 30.2 The Contractor shall perform the work in accordance with such orders, dispensations and changes that are made by the Engineerpursuant to GC30.1 from time to time as if they had appeared in and been part of the Plans and Specifications. … 30.7 An order, dispensation or change referred to in GC30.1 shall be in writing, signed by the Engineer and given to the Contractor inaccordance with GC11.2. … GC38 Taking the Work out of the Contractor’s Hands 38.1 The Minister may, at his sole discretion, take all or any part of the work out of the Contractor’s hands, and may employ such meansas he sees fit to have the work completed if the Contractor … 38.1.7 has otherwise failed to observe or perform any of the provisions of the contract. (Paragraphs 38.1.1 to 38.1.6 set out specific instances of non-compliance with the contract.

As noted by the trial judge, this provisionwas not engaged in this case.) [44] In considering the effect of these provisions, I begin with the standard of review. In Midnight Marine Ltd. v. Underwriters,Lloyd’s, London (2010), 2010 NLCA 64 , 302 Nfld. & P.E.I.R. 85 (NLCA), Barry J.A., for the majority, discussed the standardof review to be applied in the appeal of a contract case. He concluded: [44] To agree with counsel for the respondents that the

interpretation of contractual language is generally a question of mixed law andfact does not, therefore, involve taking a new approach in this jurisdiction. But this does not mean that the appropriate standard ofreview automatically becomes that of palpable and overriding error in every case involving

interpretation of a contract. As noted inHousen and Southam, if a decision-maker omits to consider a relevant factor (such as the precise wording of a text) the decision-makerin effect applies the wrong law, and an error on a question of mixed fact and law then amounts to an error of law, reviewable on thecorrectness standard. (Emphasis added.) [45] In this case, the trial judge did not provide any analysis of the contractual language on which he based his conclusion. In theresult, his decision is properly reviewed on a standard of correctness. [46] The analysis begins with the language of the contracts.

Article 9 of the subcontract, which deals with changes in the work,gives the contractor the option of making changes to the original subcontract “by altering, adding to or deducting from the subcontractwork”. The control over whether to make such changes in the subcontract is in the hands of the contractor. The language does notsuggest that rights are bestowed on the subcontractor requiring the contractor to add to the subcontract. Rather, the effect of thelanguage is to impose on the subcontractor the obligation to perform additional work as requested by the contractor. It follows that Air-Tite cannot rely on

article 9 of the subcontract to establish a contractual right to the remediation work. However, this does not end thematter. [47]

Article 1 of the subcontract incorporates by reference the “terms and conditions of the prime contract so far as they areapplicable” to the subcontract, and, of particular importance, the prime contract governs where there is a conflict. However, a review ofthe

article dealing with changes to the work in the prime contract leads to the conclusion that the provisions are not in conflict. Indeed,article 30.1 of the prime contract is to the same effect as

article 9 of the subcontract. That is, the owner has the option of making changesto the work, but is not contractually bound to make a change so as to have work added to the contractor’s obligations. [48] In

summary,

article 30.1 of the prime contract and

article 9 of the subcontract respectively do not grant to the contractor orsubcontractor the right to obtain additional work on the contract or subcontract unless the owner or contractor makes a request.

Article38, dealing with taking work out of the contractor’s hands, does not affect this conclusion since that provision is concerned only withwork to which the contractor has a contractual right. [49] In this case, the change order, dated May 27, 1991, issued to Dobbin by Defence Construction under the prime contract states: Your contract is amended as follows: To authorize payment on a time and materials basis or by negotiated price where agreeable to both parties for all labour and material toclean, repair and recharge the heating system as required to return it to full operation and reinstate all equipment warranties.

This is an interim change order. An adjustment will be issued when the total costs of the work are determined. It is understood that responsibility for the necessity of this remedial work has not been determined. Defence Construction (1951)Limited reserves the right to collect any and all costs relative to this work for which the Contractor may be found liable. [50] As a result of the change order, Dobbin incurred a further obligation under the contract as stipulated by Defence Construction(article 30.1 of the prime contract).

However, if Defence Construction had decided to proceed using a method other than a request by

means of a change order, Dobbin would not have had a contractual right to the work. A similar result applies as between Dobbin and Air-Tite. The difference, of course, is that in that case, Dobbin did not choose to retain Air-Tite to perform additional work. In the absence of a request by Dobbin, Air-Tite had no contractual right to the work. [ 51 ] In

summary, the trial judge erred in failing to analyze the language of the contracts. On a proper construction of the language, Air-Tite did not have a contractual right to the remediation work. It is necessary, then, to consider the alternate basis on which the trial judge awarded Air-Tite damages for loss of profit.

Damages Associated with Wrongful Termination of the Subcontract [ 52 ] Assuming Air-Tite had no contractual right to the remediation work, the question is whether the trial judge erred in concluding, nonetheless, that Air-Tite was entitled to damages for loss of profit because, had the subcontract not been wrongfully terminated, Air- Tite would have been retained to do the work that was contracted to D.A. Williams.

This issue engages the application of principles regarding damages consequent on a loss of opportunity and, being primarily factual in nature, absent an error in principle, is subject to review on a standard of palpable and overriding error. [ 53 ] The reason for terminating the subcontract is central to the analysis of a loss of opportunity to do the remediation work. The trial judge determined that the subcontract was terminated due to a dispute over the contract price. Dobbin had requested that Air-Tite reduce the bid price by $25,000. Air-Tite refused.

In finding that Dobbin wrongfully terminated the subcontract, the trial judge explained: [53] … I find that any delay in that process [balancing and commissioning the heating system] was not the fault of Air-Tite and could not be relied on by Dobbin to ground termination of its contract with Air-Tite. As already stated, I find the true reason for Dobbin’s termination of Air-Tite’s contract was Air-Tite’s refusal to accede to Dobbin’s demand to reduce its contract price by $25,000.

The events leading up to the letter of termination on 5 October support that conclusion. [ 54 ] When Defence Construction determined that remedial action would have to be taken to clean the system and otherwise make it function as required, they asked Dobbin, as its contractor, to perform the work. Dobbin in turn asked Air-Tite for a price as its subcontractor. On 5 October, Norman and Ches Lucas [Air-Tite] visited Dobbin’s office to discuss outstanding invoices and general business matters. The issue of the $25,000 reduction in price on the main contract was raised by Derm Dobbin.

This gave rise to a heated argument which resulted in Mr. Dobbin ordering the Lucas[es] out of his office and terminating Air-Tite’s contract. Dobbin followed up that day with a formal letter of termination relying [on] “repeated non-performance” as the cause.

As I have stated, I find this to have been an excuse to mask the real reason for termination, which was Air-Tite’s refusal to reduce its price on the main subcontract . (Emphasis added.) [54] The trial judge relied on evidence supporting the conclusion that Air-Tite would have been retained to do the work had the contract not been terminated due to Air-Tite’s refusal to accept Dobbin’s demand to reduce the original subcontract price by $25,000.

He noted that, prior to terminating the subcontract, Dobbin had requested a price from Air-Tite for the remediation work, and a meeting had been arranged to discuss this, among other items. There was evidence that, in the ordinary course, the subcontractor that had done the subcontract work would be asked to submit a price for the additional work, and, assuming a price could be agreed upon, would be retained to do the work. For example, the trial judge explained: [61] Defence Construction did not go out to tender for this work but instead asked its contractor on the job, Dobbin, to complete it.

Dobbin in turn asked its subcontractor Air-Tite to discuss it and bid on it. Defence Construction chose to issue various change orders under the original contract to be paid on a time and materials basis. This was a reasonable approach as it was imperative that the problem be solved and it was uncertain exactly what issues would arise during the work. Responsibility for the problem had not at that time been fully assigned, although Defence Construction had indicated to [Shawmont], the designer that they expected [Shawmont] to fix it.

All the Defence Construction witnesses who testified agreed that the most expeditious way to complete the work would have been to have had the contractor which built the system (Air-Tite) do it. They knew the system intimately and their forces were already on site with tools and equipment at the ready. [ 55 ] The trial judge was satisfied that delays caused by Air-Tite, and about which Defence Construction complained, were “tolerated” and were not such as to affect the expectation that Air-Tite would be an appropriate contractor to complete the remediation work (paragraph 57).

As Air-Tite pointed out there is no evidence that any other subcontractor was approached to provide a price prior to the wrongful termination of the subcontract. Indeed, the remediation work was awarded to D.A. Williams without a competitive process. [ 56 ] I would emphasize that the finding of a loss of opportunity in the circumstances of this case is not based on a contractual obligation by Dobbin to award the remediation work to Air-Tite. Rather, on the facts as found by the trial judge, Air-Tite would have been retained to do the work contracted to D.A.

Williams if the subcontract had not been wrongfully terminated. There is no basis on which to conclude that the trial judge erred in reaching this conclusion on the evidence. Accordingly, Dobbin’s appeal against the award of damages for loss of profit is dismissed. Costs of Air-Tite as Third Party in the Shawmont Decision Leave to Appeal [ 57 ] Leave to appeal is required where a party seeks to appeal an order as to costs only (rule 57.02(1)(b)(

i) of the Rules of the Supreme Court, 1986 ). In the unusual circumstances of this case, it may be argued that leave is unnecessary. The uncertainty arises from the fact that the actions brought by Defence Construction against Shawmont and Dobbin were consolidated with those brought by Air-Tite against Dobbin and Defence Construction resulting, for practical purposes, in one action. Given the appeal on the merits by Defence Construction, it may be argued that leave to appeal the order as to costs would not be required. However, separate decisions were filed, only one of which was appealed. Since the order as to costs relates to the Shawmont decision which was not appealed, it may

be argued that Dobbin’s appeal regarding payment of Air-Tite’s third party costs is an order as to costs only, thereby requiring leave. [58] For purposes of this appeal, it is unnecessary to decide this issue because I am satisfied that, assuming leave is required, itshould be granted. Some clarification of the law on third party costs is warranted such that the interests of justice would require thatleave be granted (rule 57.02(4)(e)).

Appeal as to Third Party Costs [59] In awarding costs to Air-Tite based on its joinder as a third party in the Shawmont decision, the trial judge, withoutexplanation, ordered such costs to be paid by Dobbin. It can be inferred that he applied the general rule that a defendant, having joined athird party, will be responsible for that party’s costs unless the third party is found to be liable to the defendant. The plaintiff willgenerally not be held responsible for the third party’s costs even where the defendant successfully defends against the plaintiff’s action.

The underlying rationale is explained by McLachlin J., as she then was, in Milina v. Bartsch (1985), (BC SC), 63B.C.L.R. 122 (BCSC): [4] The normal rule is that a plaintiff who is unsuccessful against the defendant will not be charged with the costs of the third party. The plaintiff did not sue the third party, did not want him in the case and was not responsible for joining him. In these circumstances ithas been thought to be unfair to visit the third party’s costs on the plaintiff: [authority omitted]. … [60] However, there are exceptions to this rule. For example, in Knee v.

Humber Motors Ltd. et al. (1993), (NLSC), 107 Nfld. & P.E.I.R. 271, Roberts J., as he then was, ordered the plaintiff to pay the third party’s costs, explaining: [28] The plaintiff’s claim against the defendant for damages fails for the reasons outlined above. There is consequently no need toconsider the defendant’s claim for contribution or indemnity against the third party.

I am satisfied, however, that the defendant wasjustified in joining the third party and so both the defendant and the third party shall have taxed party and party costs against the plaintiff. [61] A similar result obtained in Gordonna Ltd. and Art Noseworthy Ltd. v. St. John’s et al. (1986), (NL SC), 60Nfld. & P.E.I.R. 91 (NLTD), where Steele J., as he then was, found that the third party was “properly joined and unquestionably was anecessary party to this action” (paragraph 77).

Examples of other exceptions to the general rule are enumerated in the Milina decision,including, as the fourth exception, “[w]here the third party proceedings follow naturally and inevitably upon the institution of plaintiff’saction, in the sense that the defendant had no real alternative but to join the third party” (paragraph 5). [62] Dobbin submitted in this appeal that such an exception applies in the circumstances of this case. It was unclear at the time ofDefence Construction’s action against Shawmont and Dobbin whether the fault lay with the design, the construction, or both.

Air-Tite,as Dobbin’s subcontractor and the party responsible for constructing the heating system would clearly have been a relevant party had thetrial judge determined that Dobbin was liable for faulty construction. In the circumstances, failure of Dobbin to join Air-Tite as a thirdparty would likely have resulted in a separate action against Air-Tite if Dobbin had been found liable.

This result would be inconsistentwith the principle that multiple proceedings are to be avoided. [63] While an award as to costs is a discretionary order to which deference to the decision of the trial judge applies, failure toconsider a relevant principle of law may warrant intervention on appeal. In this case, the circumstances suggest that an exception to thegeneral rule would apply. It was necessary, then, for the trial judge to address this issue. Failure to do so resulted in error.

In reachingthis conclusion, I hasten to add that, at trial, Dobbin failed to raise the question of whether the facts would engage an exception to theordinary rule. While the trial judge bears the responsibility of applying the law correctly, I reiterate the important role counsel plays inassisting the judge in that task. [64] In this case, I am satisfied that, had the trial judge turned his mind to the issue, the facts would have led to the conclusion thatDobbin was justified in joining Air-Tite as a necessary party to the action. Indeed, Dobbin had no real alternative but to join Air-Tite.

This is a situation in which an exception to the general rule regarding third party costs applies. Accordingly, Dobbin’s appeal as to theorder regarding Air-Tite’s third party costs in the Shawmont decision is allowed. Those costs shall be paid by Defence Construction.

SUMMARY AND DISPOSITION [65] In

summary,

(1) Defence Construction’s appeal against the decision that it is jointly liable for the payment of damages to Air-Tite based on theconclusion that the owner breached a duty of care owed to the subcontractor is allowed. The trial judge erred when he failed to apply thelaw regarding liability in tort for pure economic loss. Applying that law leads to the conclusion that Defence Construction did not owe aduty of care to Air-Tite.

(2) Dobbin’s appeal against the decision that it is liable for damages to Air-Tite for loss of opportunity regarding the remediation work isdismissed. While Dobbin was not under a contractual obligation to award the remediation work to Air-Tite, on the facts as found by thetrial judge, Air-Tite would have been retained to do the work had the subcontract not been wrongfully terminated.

(3) Regarding Air-Tite’s third party costs in the Shawmont decision, leave, if necessary, is granted. The appeal is allowed. Dobbin wasjustified in joining Air-Tite as a necessary party to the action. This was a situation in which an exception to the general rule regardingthird party costs applies. Those costs shall be paid by Defence Construction. [66] Each party shall bear its own costs of these appeals, given the mixed success of each. _____________________________

B. G. Welsh, J.A. I Concur: ___________________________ M. H. Rowe, J.A. Hoegg, J.A.: (Concurring in the result) [ 67 ] I agree with my colleagues on all matters except their finding that Defence Construction has no liability in tort to Air-Tite because proximity between them has not been established. I am of the view that proximity is established. However, I would deny Air- Tite’s remedy in tort on the basis of residual policy concerns which negate the creation of a new duty of care.

Let me explain. [ 68 ] The trial judge found Defence Construction had a duty in tort to administer Dobbin’s contract with Air-Tite fairly on the basis of provision GC4.6 in the contract between Defence Construction and Dobbin which affected Air-Tite as a subcontractor and because the parties were bound together by having used the Bid Depository System.

Defence Construction had required Air-Tite and Dobbin to submit their bids through the Bid Depository System, and Dobbin carried Air-Tite’s bid as part of its bid to Defence Construction and was awarded the contract by Defence Construction on that basis. (See paragraphs 57 and 58 of the trial judgment.) [ 69 ] It is important to appreciate what a Bid Depository System is and how it affects participants.

In Naylor , the court described it at paragraph 6: … a structured bidding process … designed to achieve fairness on building construction projects where the owner requires a lump-sum tender based on plans and specifications, and where a multitude of prime contractors, trade contractors and suppliers are expected to get involved in the tendering process. In the next paragraph the court described how it would work for an owner who wished to make use of the Bid Depository System: … pre-qualified subcontractors were to submit on a standard form document (for ease of comparison) a breakdown of their prices.

Identical project documentation was made available to all interested bidders in each of the subtrades. Their tenders were sealed and delivered to the Bid Depository office by a specified date and time and deposited in a designated locked box.

On the due date, the subtrade bid documents were made available to interested prime contractors who selected the subcontractors (not necessarily the lowest bidder) they wanted to carry as part of their own bid to the owner. … Each prime contractor was required to undertake “to place a Sub- Contract with one of the trade contractors who used the Bid Depository” … Each participant in the tendering process bound itself by contract to certain obligations and acquired thereby certain rights.

The content of those rights and obligations is the subject matter of this litigation. (Emphasis added.) [ 70 ] In Naylor , subcontractor Naylor successfully sued the contractor, in contract, for not carrying it on the project despite the contractor being awarded the contract on the basis of Naylor’s involvement. All parties were participants in the Bid Depository System.

The Supreme Court of Canada found that parties in the Bid Depository System acquired certain contractual rights as a result of being bound together as participants. [ 71 ] In this case, Defence Construction required all contractors and subcontractors including Dobbin and Air-Tite to submit their bids through the Bid Depository System. Without commenting on what contractual rights Air-Tite acquired in relation to Defence Construction by virtue of the Bid Depository system, Air-Tite as a subcontractor did not otherwise have privity of contract with Defence Construction.

After Air-Tite was terminated by Dobbin, Air-Tite sued Dobbin in contract and Defence Construction in tort for its economic loss arising from the termination. Air-Tite alleged that Defence Construction failed to properly administer the contract between it and Dobbin by permitting Dobbin to wrongfully terminate it and substitute another subcontractor. [ 72 ] Because Air-Tite’s claim is for economic loss in tort, it is necessary to decide whether Defence Construction owes a duty of care to Air-Tite. [ 73 ] Claims for pure economic loss are a special category of tort law.

They are permitted only if they fall within a recognized existing category, unless a claimant can establish a new basis for entitlement. I agree with my colleagues’ conclusion that none of the recognized economic loss categories applies in this situation. [ 74 ] Whether a new duty of care ought to be created so as to permit Air-Tite’s tort suit requires application of the Anns test to the facts. The majority judgment sets out the Anns law and discusses it within the context of Design Services (see paragraphs 18 to 21). As stated, the Anns test has two parts.

The first part addresses proximity, which is to be determined if the plaintiff’s loss is reasonably foreseeable as a result of the defendant’s conduct, if the relationship between the parties is sufficiently close and if there are no policy reasons specific to the parties which would negate recognition of tort liability. My colleagues say there is no proximity between Defence Construction and Air-Tite, and thus Defence Construction has no liability in tort. They rely on Design Services to support their analysis. [ 75 ] Design Services is a tender case.

Design Services was a subcontractor to a compliant bidder on a main contract. The contract owner awarded the contract to a non-compliant bidder. Both the compliant contractor and Design Services sued the owner; the compliant contractor’s suit was in contract and Design Services’ suit was in tort because Design Services had no privity with the owner. The owner settled with the main contractor and Design Services litigated, successful at trial but unsuccessful on appeal.

The Supreme Court of Canada dismissed Design Services’ appeal, finding that there was no proximity between Design Services and the owner because there was a policy reason specific to the parties which negated proximity. The Supreme Court of Canada found that because Design

Services did not avail of the opportunity it had to submit its bid in joint venture with the main contractor, which would have resulted inDesign Services enjoying full contractual protection vis-a-vis the owner, it should not be permitted to claim in tort. [76] In this case, foreseeability of economic loss to Air-Tite as a result of Defence Construction ignoring its obligation under GC4.6is, in my view, straightforward.

Air-Tite, having bid through the Bid Depository System, had expectations based on GC4.6 and GC4.7and relied on them, even if on a strict contractual analysis without more, they can be said to be for Defence Construction’s benefit. Air-Tite’s reliance is substantiated by its correspondence to Defence Construction requesting Defence Construction’s intervention andprotection immediately upon its termination by Dobbin.

As well, Defence Construction’s own officials acknowledged at trial that theyought to have investigated the circumstances of Air-Tite’s termination by Dobbin and Dobbin’s request to hire another subcontractor. Defence Construction did nothing. They did not investigate. They ultimately agreed to Dobbin’s substitution of another subcontractor,but not until several months later and after knowing that the new subcontractor had already begun to work on the project. [77] From Naylor, it is clear that the parties to the Bid Depository System acquire certain contractual rights because they are boundto each other.

Additionally, GC4.6 of the contract stipulated that Dobbin cannot change a subcontractor without Defence Construction’swritten permission. Dobbin terminated Air-Tite’s contract and substituted another subcontractor when the contract was nearingcompletion. At that point, Defence Construction, Dobbin and Air-Tite had been working together on the project for over a year. [78] In my view, this case is different than Design Services in two respects, and those differences justify a finding of proximitywhereas the circumstances in Design Services did not.

Unlike Design Services, Air-Tite was carried on Dobbin’s successful bid andworked side by side with Defence Construction and Dobbin on the project for well over a year. Although I accept DefenceConstruction’s argument that GC4.6 governs the relationship between Defence Construction and Dobbin, that does not mean that it doesnot affect Air-Tite. As well, again unlike the situation in Design Services, Air-Tite, Dobbin and Defence Construction werecontractually bound to each other, according to Naylor, as a result of being participants in the Bid Depository System.

These are featuresof proximity which were not present in Design Services and, unlike Design Services, Air-Tite had no opportunity to joint venture withDobbin, nor did it decline any other opportunity to protect itself. No other policy reason as between Air-Tite and Defence constructionhas been advanced to negate proximity. [79] Accordingly, I see the requisite proximity between Air-Tite and Defence Construction as established, with the result thatDefence Construction would owe a prima facie duty of care to Air-Tite. [80] Proximity being established, the second part of the Anns test is now engaged.

This stage involves consideration of broad policyreasons as to whether an owner owes a duty of care for recovery of economic loss in tort to a subcontractor. [81] Indeterminate liability is argued to be a policy reason why tort liability should not be imposed on Defence Construction in thissituation. I am not persuaded that liability in this case and others like it would be indeterminate. I agree with Air-Tite’s argument thatdeterminacy of the class of plaintiffs is readily seen as being confined to the parties who participate together in a Bid Depository Systemand thereby acquire rights and assume obligations.

In my view this is a principled basis on which to limit tort liability, and prevents itfrom being extended beyond those who are direct participants in the Bid Depository System. The Bid Depository System is a systemdesigned to protect subcontractors as well as the owners and contractors, and that is what it should do. [82] However, I am persuaded that there is another policy reason for denying tort liability to Air-Tite in this situation. As argued byDefence Construction, the ordering of commercial relationships is usually the bailiwick of contract law. That is the settled expectation ofcommercial parties.

While it is possible that contract and tort duties can arise simultaneously (Martel Building Ltd. v. Canada, 2000SCC 60, [2000] 2 S.C.R. 860 at paragraph 106), tort duties arising in the context of commercial relationships must arise independently ofthe contract, as stated by the Supreme Court of Canada in the following quote from (Central Trust Co. v.

Rafuse, (SCC),[1986] 2 S.C.R. 147 at page 205: What is undertaken by the contract will indicate the nature of the relationship that gives rise to the common law duty of care, but thenature and scope of the duty of care that is asserted as the foundation of the tortious liability must not depend on specific obligations orduties created by the express terms of the contract. … A claim cannot be said to be in tort if it depends for the nature and scope of theasserted duty of care on the manner in which an obligation or duty has been expressly and specifically defined by a contract. [83] In this case, the nature of Air-Tite’s relationship with Defence Construction which arguably gives rise to a duty of care has itsfoundation in contract, both in the provisions of the contract between Defence Construction and Dobbin, as well as by virtue of the BidDepository System.

As well, it is not as if Air-Tite cannot pursue other remedial avenues, as is demonstrated by this decision. [84] In these circumstances, the law of tort cannot be extended to enable Air-Tite to recover its economic loss from DefenceConstruction in tort. [85] Accordingly, I would conclude that Air-Tite’s claim fails at the second stage of the Anns test. In the result, I concur with mycolleagues. ______________________________ L. R. Hoegg, J.A.