) ) RANKIN CONSTRUCTION INC. Plaintiff - v. -, 2013 ONSC 139

CITATION : RANKIN CONSTRUCTION INC. v. HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO, 2013 ONSC 139 COURT FILE NO.: 47754/06 DATE: 2013-01-07 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) RANKIN CONSTRUCTION INC. Plaintiff - and - HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO Defendant ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) P. Mahoney and M. Armitage, for the Plaintiff R. Carr and J. Glick, for the Defendant ) ) HEARD: July 16, 17, 18, 19, 20 and August 10, 2012 The Honourable Mr. Justice D.A.

BROAD REASONS FOR JUDGMENT Background [ 1 ] This action arises out of a tendering process for a contract for the widening of a portion of Highway 406 in the Niagara region of Ontario in 2005. It raises the issue of whether an owner is at liberty to investigate whether a bid submitted in response to a call for tenders is compliant with the tender terms or whether it must evaluate the bid based upon the face of the tender as submitted.

It also raises an issue respecting the application of an exculpatory clause in the invitation for tenders purporting to release the owner from liability arising from the tender process.

[ 2 ] The Plaintiff (“Rankin”), an experienced contractor with a long track-record of performing large public and private sector projects, was the low bidder, however, its tender was ruled by the Defendant (“Ministry”,“MTO” or the “Crown”), to be non-compliant with the tender documents. The contract was awarded by the MTO to a competitor with the second lowest tender price.

Rankin sues the Crown for damages representing its lost profit on the contract on the basis that the Crown breached its obligations to it by improperly ruling its tender to be non-compliant and awarding the contract to a competitor with a higher bid price. [ 3 ] The Crown asserts that it was entitled, and indeed obliged, in order to maintain the integrity of the tender process, to disqualify Rankin’s bid, on the basis that it failed to properly declare the value of the imported steel it proposed to utilize on the project which was a key requirement of the tendering process.

It also defends the action on the basis of an exculpatory clause in the Instructions to Bidders by which those participating in the tender process, including Rankin, waived the right to claim damages against it by reason of the acceptance or non-acceptance of any tender. Issues The issues for determination are as follows: 1. Was the MTO entitled to look behind the face of the Rankin tender and to carry out an investigation with respect to the accuracy of the Declaration Value of Imported Steel set forth in it? 2.

Did Rankin’s failure to properly disclose the value of imported steel constitute a material non-compliance with the tender documents, thereby preventing formation of a Contract A (on the Ron Engineering analysis) between Rankin and the Crown? 3. Under the tender documents, was disallowance of Rankin’s bid a proper method of dealing with the alleged non-compliance? 4. Was there a ten-day time limit on the Crown’s right to disallow a tender, and if so, did the Crown waive any non-compliance by failing to give timely notice of disallowance of Rankin’s bid? 5.

In the event that the Crown breached its obligations to Rankin, is Rankin’s claim barred by the exculpatory clause in the Instructions to Bidders? 6. If the Crown is liable, what damages did Rankin suffer? Facts [ 4 ] The facts are not largely in dispute. [ 5 ] Rankin served a comprehensive Request to Admit both facts and documents. The Crown delivered a Response to Request to Admit, by which it admitted many of the facts and documents set forth in the Request to Admit.

However, since the Response to Request to Admit was served beyond the time required by Rule 51 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the Crown was deemed to have admitted the truth of the facts set forth in the Request to Admit under that rule. At the commencement of trial the Crown moved for, and was granted, leave to withdraw four of the deemed admissions, but the balance of the deemed admissions remained intact. [ 6 ] Under the call for tenders for the project, only qualified contractors were permitted to submit bids. Rankin was one of the qualified bidders.

The closing date was stated to be October 6, 2005. The contract was to be a unit price contract, however, the tender documents set forth the projected quantities of all of the components, and accordingly, the tenders were to be for fixed prices, comprised of the aggregate of the unit prices for the various components, multiplied by the specified quantities. [ 7 ] The value of imported (non-domestic) steel that bidders proposed to use on the project was a critical factor in determining the low bidder.

The tender package contained a document entitled “Price Preference for Canadian Content” (“PPCC”) which set forth a formula for providing a competitive advantage to bidders commensurate with the proportion of Canadian-produced, or domestic, steel which they proposed to use on the project. It did this by requiring each bidder to include in its tender a “Declared Value of Imported Steel” in respect of various listed steel tender items.

The “Declared Value of Imported Steel” was subtracted from the Total Tender price and a 10% discount was applied to the difference (representing the total tender price excluding non-domestic steel products) to arrive at an Adjusted Total Tender for each bidder. Effectively, a deduction equal to 10% of the Total Tender, excluding the value of imported steel, was applied to the Total Tender to arrive at an Adjusted Total Tender. The greater the amount of imported steel included in the bid, the less the deduction and hence the higher the Adjusted Total Tender would be.

The Adjusted Total Tenders were to be utilized to determine the low bidder.

[ 8 ] Rankin’s bid was the lowest with respect to both its Total Tender and its Adjusted Total Tender. Its Total Tender was $20,647,950. Its Adjusted Total Tender was $18,600,155 based on a Declared Value of Imported Steel of $170,000. The $170,000 figure was comprised of one component which Rankin proposed to use and which it had determined was not manufactured or fabricated in Canada, namely reinforcing stainless steel bar.

Rankin’s Total Tender and Adjusted Total Tender were $1,947,050 and $1,795,550 less than those, respectively, of the next lowest bidder. [ 9 ] Rankin did not include the cost of H-Piles in its Declared Value of Imported Steel. H-Piles were specified in the tender package to be driven into the ground by a pile driver in order to provide subsurface stability for bridge structures forming part of the project. The H-Piles are in an “H” shape (on cross-section) and were specified to be made of rolled steel.

Another type of H-Pile, which was not specified, is constructed of steel plates welded together. [ 10 ] In the course of preparing its bid, Rankin was only able to secure one price for rolled steel H-Piles, from a supplier in Quebec named Skyline PHP Canada Ltd. (“Skyline”).

Skyline’s original quote to Rankin did not specify whether the H-Piles were domestic or imported, and when a representative of Rankin enquired of it by telephone, Skyline advised that the H-Piles proposed to be supplied by it would be “domestic.” This led Rankin to not include the cost of the H-Piles, being approximately $500,000, in the Declared Value of Imported Steel on its tender. It was later revealed that the Skyline H-Piles were manufactured in the United States.

In response to subsequent inquiries by Rankin, Skyline stated that since there were no manufacturers of rolled steel H-Piles in Canada, the product imported from the U.S. was to be “considered” domestic.

Notwithstanding Skyline’s stated position on this, it is common ground between the parties to this action that, regardless of the fact that there may have been no Canadian manufacturers of the product, the H- Piles still fell within the definition of “imported steel” in the PPCC, being “steel manufactured or fabricated outside Canada.” [ 11 ] The Declared Values of Imported Steel of each of the other three competing bidders were considerably higher than that of Rankin, as they each included the cost of the specified H-Piles in the calculation.

The Estimator/Project Manager of Rankin who had responsibility for the portion of the bid comprising the H-Piles had no personal knowledge that there were no Canadian manufacturers of rolled H-Piles, and neither did any other relevant person at Rankin, and accordingly Rankin relied on the verbal advice received from its proposed supplier Skyline that the product was “domestic” in preparing its bid. [ 12 ] Following the tender opening, the MTO published a list of the bidders showing Rankin as the low bidder on both the Total Tender and the Total Adjusted Tender.

In accordance with the Instructions to Bidders, the three lowest bidders were required to submit additional documentation to the MTO, including a detailed list of its unit prices for the various components of the project. These documents were utilized by the MTO to carry out a pre-award evaluation of the three lowest tenders. [ 13 ] Some time prior to October 11, 2005 the MTO received a complaint from a competing bidder Hard Rock Paving (“Hard Rock”) that Rankin’s bid was too low to do the work on the project.

Hard Rock followed up with a letter dated October 12, 2005 asserting that Rankin’s bid was not compliant for failure to include H-Piles in its declared Value of Imported Steel since H-Piles are not manufactured in Canada, and claiming that the contract should be awarded to it as the next lowest bidder.

The MTO received a letter dated October 19, 2005 from the Ontario Road Builders’ Association (“ORBA”) to a similar effect, asserting that, if it was found that Rankin’s bid did not properly declare the foreign origin of the H-Piles, its tender should be declared informal, or non-compliant, and the contract awarded to the next lowest bidder. It is noted that Hard Rock was a member of ORBA but Rankin was not. [ 14 ] Malcolm MacLean, the Director of Construction and Operations at the MTO office in St.

Catharines, testified that it was the Ministry’s practice to respond to communications from contractors, as well as from ORBA, although infrequent, respecting the tender process. MTO’s process for investigating instances of non-compliance with tender terms was complaint-driven. [ 15 ] Following receipt of Hard Rock’s letter, the manager of the MTO construction office in St. Catharines, Gary Todd, instructed Paul Stosney, the head of the estimating section, to investigate the imported steel declaration in Rankin’s bid.

With the exception of one instance in the early 1990’s, the MTO had never previously carried out a review of a bidder’s imported steel declaration, and its policy was not to ask for supporting documentation or other proof behind the declarations of bidders. [ 16 ] Following Mr. Stosney’s investigation, which included an interview with Rankin personnel, and receipt of a letter from Skyline to Rankin stating its position as described above, Mr. Stosney submitted a report to Mr. MacLean recommending that the contract be awarded to Rankin. Mr. Stosney reported directly to Mr. MacLean on the issue because Mr.

Todd had declared a conflict respecting any matter involving Hard Rock, due to his son having worked for it during the previous summer. [ 17 ] Mr. MacLean testified that he considered that Mr. Stosney had gone beyond the boundaries of his area of responsibility in the preparation of his report, and in making his recommendation with its supporting rationale. Mr. MacLean therefore returned the report to Mr. Stosney and did not pass it on to Carl Hennum, the Assistant Deputy Minister of the MTO Operations Division, to whom Mr. MacLean reported. Ultimately Mr.

Hennum, following consultation with the MTO in-house legal counsel, accepted the recommendation of Mr. MacLean that the Rankin bid should be ruled non-compliant based upon an inaccurate Declaration of Imported Steel. [ 18 ] As a consequence of the rejection of the Rankin bid, the contract was awarded to Hard Rock. Rankin was advised by telephone on October 25, 2005 that its bid had been determined to be non-compliant. This was confirmed by a letter from MTO on the same day.

No reason or explanation was offered by MTO to Rankin in the letter and there was no evidence that the reason was communicated in the telephone call. Mr. MacLean testified that he understood from the circumstances, and from subsequent correspondence from Rankin disputing the decision, that Rankin was aware of the reason for the decision to declare its tender non- compliant. It is acknowledged by the Crown that the only alleged non-compliance in the Rankin bid related to the accuracy of the Declared Value of Imported Steel. [ 19 ] Mr. MacLean and Mr.

Hennum each testified that the primary consideration behind the Ministry’s decision was the perceived need to maintain fairness among all bidders and the integrity of the tender process. In reference to the discretion clause at para. 11.1 of the Instructions to Bidders, by which the MTO retained the right to reject any or all tenders and to waive irregularities “in the Ministry’s interest”, Mr. MacLean testified that the key interest of the Ministry at the time was the maintenance of the integrity of the bidding process.

He considered that a waiver by the Ministry of the non-compliance in Rankin’s bid would not be fair to all bidders. He

questioned how confidence in the Ministry’s tender process could be maintained among contractors if the Ministry, having received acomplaint about a non-compliant bid, chose to ignore the issue and accept a bid determined to be non-compliant. [20] Mr. MacLean testified that Rankin never put forward a proposal or plan by which it could perform the contract in compliancewith its declaration of imported steel.

He testified that had Rankin done so, the MTO would have considered such a plan, and if the planwas deemed feasible or possible, it may have reconsidered its decision not to award the contract to Rankin, even after the communicationhad been made to Hard Rock that it was the lowest compliant bidder. [21] Mr. MacLean and Mr.

Hennum each admitted on cross-examination that MTO staff were aware at the time of preparation andissuance of the tender documents there were no domestic manufacturers of rolled H-Piles but did not inform the bidding contractors ofthat fact. [22] There was evidence that, although there were no domestic manufacturers of rolled steel H-piles, there was a domesticmanufacturer of welded H-piles, Algoma Steel. The welded H-piles would have met or exceeded the structural requirements of thedesign.

However, the use of welded H-piles by the successful contractor would have required the issuance of a change order, since thetender documents specified rolled steel H-piles. Analysis (

a) Was the MTO entitled to look behind the face of the Rankin tender and to carry out an investigation with respect to theaccuracy of its Declaration Value of Imported Steel? [23] In R. v. Ron Engineering & Construction (Eastern) Ltd. (SCC), [1981] 1 S.C.R. 111 the Supreme Court ofCanada introduced the Contract A/Contract B formulation for application to the tendering process whereby a contract (Contract

A) isformed between an owner inviting tenders and a contractor submitting a bid which is compliant with the tender documents. The terms ofContract A are governed by the terms and conditions of the tender call, but typically include an obligation on the low compliant bidderto enter into the contract for performance of the work (Contract

B) with the owner. [24] It was recently emphasized by the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Transportationand Highways) 2010 SCC 4 , [2010] 1 S.C.R. 69 at para. 17, that the submission of a compliant bid in response to a tender callmay give rise to a Contract A, but will not necessarily do so.

Whether a Contract A arises and if so, what its terms are, are dependentupon the express and implied terms and conditions of the tender call in each particular case. [25] If Rankin’s bid was non-compliant with the tender documents then, according to the Ron Engineering formulation, noContract A came into existence and the MTO owed no contractual duty to Rankin. [26] Rankin argues that its tender, on its face, was fully compliant with the tender documents, notwithstanding the mistake which itmade in completion of the Declaration Value of Imported Steel.

Rankin states that the MTO was not entitled to look behind its tenderand carry out an investigation to determine whether the Declaration Value of Imported Steel was accurate. It was bound to evaluate theRankin tender on its face. Since there was no defect or non-compliance on the face of its tender, Rankin argues that the MTO wasobliged to award the contract to it, on the basis, as laid down in the case of M.J.B. Enterprises Ltd. v. Defence Construction

(1951) Ltd. (SCC), [1999] 1 S.C.R. 619, that there was an implied term of Contract A that the contract would be awarded to thelowest compliant bidder. [27] The Supreme Court of Canada, in the case of Double N Earthmovers v. Edmonton (City) 2007 SCC 3, dealt with the questionof whether an owner had a duty to look behind a tender bid and carry out an investigation on whether the bid complied with the tenderdocuments. However, the situation in Double N was the reverse of that in this case.

In Double N, the owner (the City of Edmonton)accepted a tender which contained a material non-compliance relating to the age of the equipment proposed to be used by the bidderSureway. The non-compliance was not apparent on the face of the tender, and the City awarded the contract to Sureway. A competingbidder Double N sued the City arguing that the City had breached a duty to it because, had it carried out a proper investigation, the non-compliance of Sureway’s bid would have been apparent.

The majority of the Court (in a 5 to 4 split) held that the City did not breach anyduty to Double N, on the basis that each bidder is legally obliged to comply with the requirements of the tender documents if its bid isaccepted, and therefore bidders should not expect that an owner will investigate whether a bidder will comply. There was neither anexpress, nor an implied, obligation on the City in the tender documents to investigate the equipment bid prior to acceptance.

The majorityheld that all bids must receive equal treatment to protect the bidding process and, accordingly, an owner must weigh bids on the basis ofwhat is actually in the bid and not on the basis of subsequently discovered information. Allegations raised by rival bidders do not compelowners to investigate the bids made by others. [28] The situation in the present case is different.

The question is not whether there is a duty owed by an owner to all tenderers tocarry out investigations of bids for non-compliance, but rather whether an owner is disentitled to carry out such an investigation, andwhether, if it does so at the instance of a rival bidder, it thereby breaches an obligation to the low bidder whose bid is found to be non-compliant as a result of the investigation. [29] In Double N the City called for tenders on a lengthy contract to supply equipment and operators for its landfill operation.

Thetender documents included a requirement that all pieces of equipment had to be 1980 or newer. For Unit # 1, the piece of equipment waslisted by Sureway as a 1980 although it was in fact a 1979 machine. Sureway provided the other specifications, including the serialnumber and City of Edmonton registration numbers. For Unit # 2, Sureway bid a “1977 or 1980 Rental Unit”. While the cost listed wasconsistent with a 1980 unit, the registration and serial numbers corresponded instead to a 1977 unit. [30] Sureway’s bid was the lowest.

The second lowest bidder Double N asked the City to investigate, which it declined to do, eventhough it had the necessary information in its possession to verify the year of manufacture of the units in question against the representedserial and registration numbers. The contract was awarded to Sureway and, as it transpired, it was permitted by the City to utilize

equipment older than 1980, which had been specified in the tender call. [31] Justices Abella and Rothstein, writing for the majority, held, at para. 50, that “we do not think there is an implied dutyrequiring an owner to investigate to see if bidders will really do what they promised in their tender” adopting the observation in the Courtof Appeal that to impose such a duty on owners “would overwhelm and ultimately frustrate the tender process by creating unwelcomeuncertainties.” [32] After recognizing the primacy of the goal of protecting and promoting the integrity of the bidding process, Justices Abella andRothstein, at para. 52, found that “the best way to make sure that all bids receive the same treatment is for an owner to weigh bids on thebasis of what is actually in the bid, not to weigh them on the basis of subsequently discovered information.” At para. 53 they went on topoint out that allegations raised by rival bidders do not compel owners to investigate the bids made by others, as to do so “wouldencourage unwarranted and unfair attacks by rival bidders and invite unequal treatment of bidders by owners.

This would frustrate, ratherthan enhance the integrity of the bidding process.” [33] The majority and the minority in Double N each couched their rationales within the overall objective of the protection andpromotion of the integrity of the bidding process. This is a constant theme which marks the jurisprudence in the law of tenderingcommencing with Ron Engineering. Justice Charron, in her dissenting opinion, stated at para. 108 “the thread running through RonEngineering, M.J.B. Enterprises and Martel is the importance of business efficacy and the integrity of the tendering process.

In my view,it is through the lens of these concepts that this case must be viewed.” [34] The centrality of the need to uphold the integrity of the bidding process was recently noted by Justice Strathy in the case ofNorth America Construction

(1993) Ltd. v. York (Regional Municipality) (2009) 84 C.L.R. (3d) 89 (Ont. S.C.J.) when he stated, at para.30: The starting point in this analysis is to acknowledge the need to uphold the integrity of the tendering process and, as the Region's by-lawstates, to ensure the fairness, objectivity and transparency of that process. As the Court of Appeal has recently stated in Coco Paving(1990) Inc. v. Ontario (Minister of Transportation) (2009), 2009 ONCA 503 , 79 C.L.R. (3d) 166, [2009] O.J.

No. 2547 (Ont.C.A.), [Coco Paving], at para 13, that need is particularly acute in the tendering of contracts by public bodies: "Confidence in theintegrity of government bidding processes is a matter of considerable public importance". [35] The fact that there are differing perspectives on how best to promote and uphold the integrity of the bidding process isexemplified by the 5 to 4 split in the Supreme Court of Canada in Double N.

In her strongly-worded dissent, Justice Charron took atotally different approach with respect to the duty on an owner, than that expressed by the majority, stating at para. 116 “the obligation toaccept only a compliant bid would be meaningless if it did not include the duty to take reasonable steps to ensure that the bid iscompliant.” [36] The majority in Double N, as indicated above, declined to impose a duty on owners to investigate to see if bidders will reallydo what they promise in their tender and Justice Charron agreed, at para. 114, that generally “there is much merit to the contention thatan owner should be entitled to take a submitted bid at face value,” adding that “the tender documents must be carefully reviewed andconsidered in their totality.” Although an owner may be entitled to take a submitted bid at face value, in my view an entitlement to do somay be something quite different from an obligation to do so. [37] It is well established that Contract A includes an implied term that the owner will treat all bidders fairly and equally in theassessment of bids (see Martel Building Ltd. v R. 2000 SCC 60 , [2000] 2 S.C.R. 860 at para. 88).

However, does this require animplied term that the owner shall not, or may not, investigate whether a bidder is capable of fulfilling the material terms of its bid, in theface of information that it may not be? In my opinion, for the reasons set forth below, there is no basis for implying such a term, as to doso would not promote the integrity of the bidding process. [38] It must be remembered that the other important implied term in the tender process is the implied duty on an owner that it willaccept only a compliant bid, as recognized in M.J.B.

At para. 41 of that case, Justice Iacobucci, writing for the Court, stated: The rationale for the tendering process…is to replace negotiation with competition. This competition entails certain risks for theappellant. The appellant must expend effort and incur expense in preparing its tender in accordance with strict specifications and maynonetheless not be awarded Contract B…It appears obvious to me that exposing oneself to such risks makes little sense if the respondentis allowed, in effect, to circumscribe this process and accept a non-compliant bid.

Therefore I find it reasonable, on the basis of thepresumed intentions of the parties, to find an implied term that only a compliant bid would be accepted. [39] In my view, to require an owner to stay its hand and refrain from making enquiries in the face of information that it will beimpossible for a bidder to fulfill a material requirement of its bid, and to award the contract to such a bidder, does not promote theintegrity of the bidding process. Public sector owners, such as the MTO in this case, have a long-term interest in protecting of theintegrity of the bidding process.

Their concern is not necessarily restricted to the individual project under consideration, but with themaintenance of a vigorous and competitive tendering process on future projects. Anything which would dissuade potential bidders fromparticipating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest. Aswas observed by W. Donald Goodfellow, Q.C. in his

article “The Law of Tendering” at (2009) 84 C.L.R. (3d) 155: The Courts appear to be accepting the principle that in dealing with tender cases the Courts' function is to protect and maintain theintegrity of the tendering process as compared with dealing with the specific project in question. [40] The fact that the majority in Double N held that there is no implied duty on an owner to investigate allegations of non-

compliance by a rival bidder does not mean that an owner does not have the right to do so. This was confirmed in the case of Cityscape Contracting Ltd. v. Edmonton (City) 2007 ABQB 161 , [2007] 5 W.W.R. 612 (Alta. Q.B.). In that case Justice Trussler, in commenting on Double N , stated, at para. 28 : The majority held that there was no obligation on the City of Edmonton in that case to investigate allegations of non-compliance by a rival bidder, where the bid in question appeared to be compliant.

The majority also stated that although there might be a right to inspect to ensure compliance, that is not equivalent to imposing a duty to investigate. [ 41 ] In my view, to imply a term prohibiting an owner, such as the MTO in this case, from investigating a suggestion that it would be impossible for a bidder such as Rankin to fulfill a material condition of its bid – in this case to supply domestically manufactured rolled H-Piles, would be dangerous in terms of potentially degrading the integrity of the bidding process, and is not mandated by the case-law, including Double N.

The observation of Justice Charron, writing for the minority in Double N at para. 123, is particularly apt on this issue, when she stated: I fail to see how the integrity of the bidding process is protected by allowing a bidder to get rid of the competition unfairly and then hash it out with the owner after it has been awarded the contract.

Approaching the tendering process in this manner encourages precisely the sort of duplicity seen in the present appeal. [ 42 ] To impose a blanket prohibition on the right of a tender-calling authority to investigate whether it is possible for a bidder to fulfil the terms of its tender would threaten the integrity of the bidding process by encouraging the submission of bids which, while compliant on their face, may give bidders an unfair advantage over other bidders.

To maintain an entitlement, but not an obligation, for an owner to investigate whether compliance is possible, would encourage bidders to rigorously prepare and scrutinize their bids to achieve compliance or run the risk of having their bids ruled to be non-compliant. [ 43 ] To entitle owners to investigate allegations of non-compliance, but not require them to do so, would address the concern expressed by the majority in Double N respecting the danger of unwarranted attacks by rival bidders resulting in possible unequal treatment of bidders and frustration of the process , by giving owners to right to choose to investigate only allegations of non-compliance considered to be legitimate and bona fide. [ 44 ] Rankin argues that, by the MTO’s own practices and policies, the MTO did not routinely look behind the face of declarations of the value of imported steel and it was thereby disentitled from doing so in the absence of prior notice to the bidders.

In this respect Rankin points to the Ontario Government Management Board of Cabinet Procurement Directive and the Procurement Operating Policy, reproduced at Tabs 54 and 55 of Exhibit 2a. Although those documents post-date the tender process in this case, the evidence at trial indicated that they are substantially similar to equivalent documents in effect at the time. [ 45 ] The Procurement Directive was issued to give guidance to government departments and agencies on procurement practices.

One of its stated purposes was to “ensure that goods and services, including construction, consulting services, and information technology are acquired through a process that is fair, open, transparent, geographically neutral and accessible to qualified bidders.” The stated purposes of the Procurement Operating Policy included “to ensure consistency in the management of procurement related processes and decisions” and to provide “additional operational requirements, where applicable, for the mandatory requirements identified in the Procurement Directive.” [ 46 ] I do not find that the provisions of the Procurement Directive and the Procurement Operating Policy, according to their terms, precluded the MTO from carrying out a pre-award investigation of Rankin’s bid.

However, even if they did, I find that Rankin cannot rely upon them as a basis for finding a breach of duty to Rankin on the part of the MTO. As indicated above, the terms of Contract A are governed by the terms of the tender documents. Unless the internal policies adopted by the owner to guide itself on the procurement of construction services are incorporated by reference into the tender documents, a deviation from them does not give rise to a breach of a legal duty to a bidder, as they do not form part of Contract A.

In my view, to imply incorporation of the MTO policies into the tender documents would give rise to unnecessary uncertainty and potential confusion and would therefore be unjustified. Moreover the implication of such a term is not required to give the tender documents business efficacy, nor to satisfy the officious bystander test for the implication of contractual terms. [ 47 ] The case-law is clear that there is no free-standing duty of fairness in the bidding process independent of the contractual duty arising on the formation of Contract A (see Coco Paving

(1990) Inc. v. Ontario (Minister of Transportation) 2009 ONCA 503 at para. 4 , citing Hub Excavating Ltd. v. Orca Estates Ltd. 2009 BCCA 167 at paras. 39 and 40 ). Accordingly, even if there were a deviation from the Ministry’s internal policies and it were somehow considered to be unfair, it would not afford a remedy to Rankin. [ 48 ] I therefore find that the MTO was not precluded from carrying out an investigation of the accuracy of Rankin’s Declaration of Declared Value. (

b) Did Rankin’s failure to properly disclose the value of imported steel constitute a material non-compliance with the tender documents? [ 49 ] The case of Graham Industrial Services Ltd. v. Greater Vancouver Water District 2004 BCCA 5 , (2004) 40 B.L.R. (3d) 168 held that, where tender documents include a discretion clause, such as para. 11.1 of the Instructions to Bidders in this case, the clause simply recognizes that the test for determining whether a tender is valid is one of substantial compliance rather than strict compliance. [ 50 ] Para. 11.1 provided as follows:

11.1 The Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted. [ 51 ] In her dissenting reasons in Double N , Justice Charron confirmed at paras. 109-110 that “the test for compliance in the tendering process is ‘substantial’ rather than strict” and “substantial compliance requires that all material conditions of a tender, determined on an objective standard, be complied with.” [ 52 ] In the case of Cambridge Plumbing Systems Ltd. v.

Strata Plan VR 1632 (2009) 79 C.L.R. (3d) 190 (BCSC) Justice Dorgan stated as follows at para. 25: The material non-compliance test, as refined by our Court of Appeal in Graham , is the lens through which the scope of an owner’s discretion must be viewed. With respect to analyzing materiality, the court must look more generally and objectively at the impact of the defect on the tendering process and the principles and policy goals underlying it.

Materiality must be considered against the backdrop that a defective bid may expose the owners to an action brought by a compliant bidder or give the bidder a competitive advantage regarding overall price, thereby impacting both the reasonable expectations of the parties and undermining the integrity of the tendering process – the twin principles that underlie the tendering process. [ 53 ] At para. 32 Justice Dorgan concluded by saying that if the defect is essential, its materiality is measured objectively.

In the assessment of the consequences of the defect, the objectives underlying the tendering process as a whole and the reasonable expectations of the parties, particularly the other bidders in the process, are to be taken into consideration. “If the defect undermines fairness of the competition or the process of tendering…impacts the cost of the bid or performance of contract B…or creates a risk of action by other (compliant) bidders…the bid in issue will be materially non-compliant.” [ 54 ] The approach laid down by Justice Dorgan was quoted with approval by Justice Strathy in North America Construction at para. 43, as well as by Justice Cole in the case of Admiral Roofing Ltd. v.

Prince George School District No. 57 (2010) 95 C.L.R. (3d) 305 (B.C.S.C.) at para. 19 . [ 55 ] In the present case, the Price Preference for Canadian Content (PPCC) is not included in the Instructions to Bidders, but rather is set forth in a separate document. However, they both form part of the 275 page tender package.

The Instructions to Bidders are found at pages 1-6, and the PPCC at pages 7 and 8. [ 56 ] The Policy behind the PPCC is stated as “a 10% price preference for Canadian Content will be applied to the total value of all tender items, excluding the imported steel items defined below, for the purposes of calculating the Adjusted Total Tender.” [ 57 ] Under “Application of Policy” it is stated: In order to have the Tender considered by the Owner, all Bidders shall complete this

section of the Tender, including the Declared Value of Imported Steel, and submit this with the tender. The Contractor shall ensure that the Actual Value of Imported Steel does not exceed the Declared Value of Imported Steel. Both the Total Tender and the Adjusted Total Tender will be published. The lowest Adjusted Total Tender will be deemed the low tender. [ 58 ] Under the list of

definitions in the PPCC, “Declared Value of Imported Steel” is defined to mean “the value of imported steel declared by the Bidder at the time of bidding” and “imported steel” is defined to mean “steel manufactured outside Canada.” [ 59 ] It is clear that the PPCC forms an integral part of the tender package and is linked to the Instructions to Bidders. Submission of a Declared Value of Imported Steel is mandatory, and it gives rise to the Adjusted Total Tender of each bidder.

The Adjusted Total Tender is referenced in the Instructions to Bidders at para. 4.8 where it states that “the Ministry will publish a Bidders List showing the Total Tender and/or Adjusted Total Tender on the [Registry, Appraisal and Qualification System] RAQS website.” [ 60 ] Para. 12.1 of the Instructions to Bidders provides that the MTO will notify the successful bidder that its tender has been accepted within 30 days of the Tender Opening. [ 61 ] It is noteworthy that the Instructions to Bidders do not define how the successful bidder is determined.

It is the PPCC which describes how the low tender will be determined as follows: Both the Total Tender and the Adjusted Total Tender will be published. The lowest Adjusted Total Tender will be deemed the low tender. [ 62 ] The accuracy of the Declared Value of Imported Steel is therefore crucial to the determination of the low bidder, as it bears directly on the Adjusted Total Tender of each bidder. An understatement by a bidder of its Declared Value of Imported Steel would therefore give that bidder an advantage over others in the tender process.

[ 63 ] The PPCC formed an integral and fundamental element of the tender scheme for the project. Non-compliance with the requirement to provide an accurate Declared Value of Imported Steel would therefore be regarded prima facie as a material non- compliance.

Because of the importance of the PPCC to the tender scheme, the MTO was entitled to rely on an expectation that submitted declarations of the value of imported steel would be accurate. [ 64 ] Rankin argues that, in the circumstances, even had its declaration of imported steel been accurate, thereby increasing its Adjusted Total Tender by approximately $50,000 (being 10% of the understatement of imported steel in the declaration), it would still have had the lowest Adjusted Total Tender and would still have been the low bidder.

From that standpoint it argues that the inaccuracy in its declaration did not affect the outcome, and therefore was not material. [ 65 ] In my view Rankin’s argument ignores the guidance from the case-law, as exemplified by Cambridge Plumbing Systems, that materiality is to be determined objectively having regard to the impact of the defect on the tendering process and the principles and policy goals underlying the process.

The focus is not on the impact of the defect on the outcome of the particular tender process, but on the impact on the process itself, including the reasonable expectations of the parties involved in the process, including rival bidders. Justice Dorgan listed three elements to be considered on an assessment of materiality of the non-compliance, namely, whether it undermines fairness of the competition or the process of tendering, impacts the cost of the bid or performance of Contract B, or creates a risk of action by other (compliant) bidders.

This list is stated disjunctively, and accordingly, not all of them need to be present in order for there to be a finding of material non-compliance. [ 66 ] To require the MTO, at the stage of determining compliance with the tender documents, to undertake a consideration of whether an inaccuracy in the Declared Value of Imported Steel will in fact alter the ultimate outcome of the tender process, as a pre- condition to a finding of material non-compliance, would, in my view, be inappropriate and could introduce an element of uncertainty to the process and the imposition of an unjustified risk on the MTO. [ 67 ] Here it was found that Rankin could not deliver on its representation that the rolled steel H-Piles included in its bid price would be domestic, since there was no domestic manufacturer of rolled steel H-Piles.

The fact that domestic welded steel H-Piles could have been sourced from Aloma Steel does not assist Rankin because the tender documents specified rolled steel H-Piles and did not permit welded steel H-Piles to be substituted.

It was acknowledged in the evidence that a change from rolled to welded steel H-Piles during performance of the contract would have required issuance of a Change Order by the MTO. [ 68 ] On the basis of the foregoing, I find that the failure by Rankin to include the imported steel H-Piles in its Declared Value of Imported Steel constituted a material non-compliance with the tender documents. (

c) Under the tender documents, was disallowance of Rankin’s bid a proper method of dealing with the non-compliance? [ 69 ] The PPCC states under the heading “Application of Policy” that “where the Actual Value of Imported Steel exceeds the Declared Value of Imported Steel submitted with this Tender, the action taken by the Owner will be decided by the Qualification Committee.” [ 70 ] “Actual Value of Imported Steel” is defined in the PPCC as “the value of imported steel incorporated into the work as per the Canadian Customs Invoice in Canadian funds FOB the Canadian border.” [ 71 ] In the Plaintiff’s Request to Admit, at para. 60 (deemed to be admitted by the Defendant) it is stated that at the time of tender “the indicated process for situations where the Declared Value of Imported Steel is incorrect is to have the steel validated by field staff during the contract and then refer the matter to the qualification committee if a discrepancy is found between what was declared and what was eventually brought on the job.” [ 72 ] The evidence indicated that the Qualification Committee was established within the MTO with a mandate to make determinations on the qualification of contractors to bid on MTO contracts.

A discrepancy between the a contractor’s Declared Value of Imported Steel in its tender on a project and the Actual Value of Imported Steel could have an impact on its entitlement to bid on future MTO contracts. [ 73 ] Aside from the possibility of impacting on a contractor’s right to bid on future contracts, permitting the Actual Value of Imported Steel during performance of the contract to exceed the Declared Value of Imported Steel at the time of tender could put the contractor in breach of the warranty required of it in the Declaration of Imported Steel set forth in the PPCC that the actual value of imported steel ultimately used in the project will not exceed the value of imported steel in its Declaration.

There appears to be a drafting error with respect to the warranty where it states “The Bidder warrants the Declared Value of Imported Steel contained in this portion will not exceed the Actual Value of Imported Steel.” It is evident that the two concepts were transposed and it should more properly read “The Bidder warrants the Actual Value of Imported Steel will not exceed the Declared Value of Imported Steel contained in this portion.” [ 74 ] In my view, the two stated consequences for a contractor understating the value of imported steel, namely an impact on the contractor’s entitlement to bid on future MTO projects, and a finding of breach of its warranty, relate only to the performance of Contract B and do not relate to the question of whether a valid Contract A has been formed.

Therefore the drafting error on the warranty is of no consequence to this action. [ 75 ] It will be remembered that under Ron Engineering and the cases that followed it, Contract A only comes into existence when a contractor submits a compliant bid. A non-compliant bid is incapable of acceptance by an owner and therefore cannot give rise to a Contract A.

Accordingly, the stated consequences that flow from a contractor failing to deliver on its declaration of imported steel, that is, by actually using more imported steel than it represented it would in its bid, are not the only consequences to a bidder in understating the value of imported steel in its declaration. Having its bid declared non-compliant is another consequence since, under the law of tendering, an owner is incapable of accepting a bid containing a material non-compliance (see the reference to M.J.B. Enterprises above).

[ 76 ] On the basis of the foregoing I find that, once the material non-compliance in the Rankin bid was discovered, the MTO was bound to rule it to be non-compliant and therefore not capable of acceptance. (

d) Was there a ten-day time limit on the Crown’s right to disallow a tender, and if so did the Crown waive the non-compliance of Rankin’s bid by failing to give timely notice of the disallowance? [ 77 ]

Section 6.0 of the Instructions to Bidders is entitled “Unbalanced Tenders and Discrepancies”. [ 78 ] Paragraphs 6.1., 6.2 and 6.3 read as follows: 6.1 Tenders that contain prices that appear to be unbalanced, may be referred to the Qualification Committee and any Tenders that are so unbalanced that it may adversely affect the interests of the Ministry may be rejected. 6.2 The bidder will NOT be allowed to adjust the Total Tender Amount after Tender Opening.

The Itemized Bid Form will not be editable once submitted and approved. 6.3 Bidders whose Tender has been rejected by the Ministry will be notified of the reasons within 10 days of Tender Opening. [ 79 ] Rankin argues that, pursuant to paragraph 6.3, the MTO had only 10 days after Tender Opening to notify it that its bid had been “rejected” and since it did not do so, the “rejection” of its bid was invalid and it was bound to award the contract to it as the low bidder. [ 80 ] The evidence indicated that an “unbalanced tender” is one in which there is an unrealistic amount of money attributed to one or more items comprising the total bid price such that the bid is skewed to the potential advantage of the contractor and disadvantage of the MTO.

It was agreed that Rankin’s bid was not unbalanced. [ 81 ] In my view, the intent of para. 6.3 of the Instructions to Bidders must be discerned from a review of the document as a whole. By paragraph 12.1 the MTO is given 30 days from tender opening to notify the successful bidder that its tender has been accepted. Given that the MTO is afforded 30 days to notify the successful bidder, the imposition of a 10 day period to reject for any reason creates an inconsistency. The juxtaposition of paragraph 6.3 in the same

section and following the reference to “rejection” of unbalanced tenders, in this context must mean that if the MTO is to reject a tender on the basis that it is unbalanced, it must do so within 10 days of tender opening, giving reasons. The use of the word “discrepancies” in the title line to

section 6.0 does not add to the matter as there is no mention in the body of the

section to rejection due to “discrepancies.” [ 82 ] Moreover, it can be argued that what occurred was not a “rejection” of Rankin’s bid, but rather a ruling that it was found non- compliant and therefore not capable of being accepted under the law of tendering . This is borne out by the correspondence from the MTO to Rankin.

The letter of October 25, 2005 was not notice of a “rejection” of its bid, but stated that the “ministry has investigated the details with respect to your tender and has determined it to be non-compliant.” This approach was reiterated in its letter of November 2, 2005 where the MTO stated “your tender is not in accordance with the Instructions for Bidders and the Tender Documents, and accordingly is non-compliant.” [ 83 ] I therefore find that the non-compliance of Rankin’s bid was not waived by the MTO by reason of it not giving notice of its disallowance within 10 days of tender opening. (

e) Is Rankin’s claim barred by the exculpatory clause in the Instructions to Bidders? [ 84 ] In the event that I am in error on the question of material non-compliance, it is useful to consider whether Rankin’s claim would be barred, in any event, by the exculpatory clause at para. 11.3 of the Instructions to Bidders . [ 85 ] Para 11.3 reads as follows: 11.3 The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in the acceptance of a Tender, except as provided in the tender documents. [ 86 ] Had it been found that Rankin’s bid was compliant, then a Contract A would have been formed between it and the Crown.

On the authority of M.J.B. Enterprises, at para. 19, the terms of Contract A are governed by the terms of the tender call. The exculpatory clause at para. 11.3 of the Instructions to Bidders would therefore constitute a term of Contract A. [ 87 ] In Tercon the Supreme Court of Canada held, at para. 121, that the present state of the law requires a series of enquiries to be addressed when a plaintiff seeks to escape the effect of an exclusion clause or other contractual term to which it had previously agreed.

It is noted that, although the Court split on the result, in terms of whether the particular exculpatory clause in that case barred the plaintiff’s action, the Court was agreed on the legal analytical framework. Justice Binnie, in writing for the minority, laid out the enquiries to be undertaken at para. 122 as follows: 1) The court should determine whether, as a matter of

interpretation, the exclusion clause even applies to the circumstances established in evidence, which will depend on the court’s assessment of the intention of the parties as expressed in the contract; 2) The court should then consider whether the exclusion clause was unconscionable at the time the contract was made, as might arise

from situations of unequal bargaining power between the parties.

This second issue has to do with contract formation, not breach; and 3) If the exclusion clause is held to be valid and applicable, the court may undertake a third enquiry, namely whether the Court shouldnevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies onthe party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts [88] As noted by Justice Binnie at para. 127 of Tercon, Justice Wilson in the case of Hunter Engineering Co. v.

Syncrude CanadaLtd. (SCC), [1989] 1 S.C.R. 426 held that exclusion clauses, like all contractual provisions, should be given theirnatural and true construction and that courts should avoid giving them strained and artificial

interpretations in order to avoid the impactof what seems to them ex post facto to have been an unfair and unreasonable clause. [89] On its face, the exculpatory clause in the present case excludes claims for, amongst other things, damages suffered by anybidder “by reason of the acceptance or the non-acceptance by the Ministry of any Tender”.

The question becomes whether it intendedthat “acceptance or non-acceptance of any Tender” could encompass an incorrect or improper ruling by the Ministry that a claimant’stender was materially non-compliant and the awarding of the contract to a competing bidder. [90] As noted by Justice Cromwell, writing for the majority in Tercon at para. 64, a key principle of contractual

interpretation isthat “words of one provision must not be read in isolation but should be read in harmony with the rest of the contract and in light of itspurposes and commercial context.” [91] The exclusion clause is found in

section 11.0 of the Instructions to Bidders entitled “Acceptance or Rejection of Tenders”.Para. 11.1, commonly called a “privilege clause,” reserved the right to the Ministry to reject any or all tenders and “therefore, the lowestor any tender may not necessarily be accepted.” [92] As indicated above, para. 12.1 provided that “the Ministry will notify the successful bidder that the Tender has been acceptedwithin 30 days of the Tender Opening.” [93] It is evident from these provisions that “acceptance by the Ministry” means the awarding of Contract B to the successfulbidder. [94] Had the Ministry called off the project (perhaps for budgetary reasons) and not awarded the contract to any bidder, it wouldarguably not thereby incur liability to any of the bidders, including Rankin, by reason of the privilege clause which gave the Ministry theright to “reject any or all tenders.” It is therefore the fact that the contract was awarded to the competing bidder Hard Rock, and not toRankin (it argues in breach of the tender terms), which gives rise to Rankin’s claim for damages. [95] Given that “acceptance by the Ministry” of a tender means the awarding of the contract, it follows that “acceptance of anytender” can include acceptance of Hard Rock’s bid, by the awarding the contract to it, and non-acceptance of Rankin’s bid, by notawarding the contract to it.

Each of these actions by the MTO are therefore encompassed by the exculpatory clause. [96] The next question is whether the exculpatory clause was unconscionable at the time that Contact A was made, assumingRankin’s tender to have been compliant. [97] At para. 131 of Tercon, Justice Binnie disposes of the argument respecting unconscionability made by the plaintiff in thatcase, which was, as here, a contractor well experienced in public highway projects, as follows: While Tercon is not on the same level of power and authority as the Ministry, Tercon is a major contractor and is well able to look afteritself in a commercial context.

It need not bid if it doesn't like what is proposed. There was no relevant imbalance in bargaining power. [98] In my view, similar considerations apply here. As a sophisticated contractor, Rankin was free to participate, or not participate,in the tender process according to the terms set out in the tender documents, including the exculpatory clause. Sophisticated contractorsare used to dealing with complex and detailed specifications and contractual provisions.

This is not the type of case which requires thecourt to apply principles of unconscionability in order to protect a vulnerable party from the effect of what would otherwise be anenforceable contractual provision. [99] The final question is whether there is any overriding public policy that would justify the court’s refusal to enforce theexculpatory clause. It is noted that the majority and the minority in Tercon parted company on the first question, namely, whether on theinterpretation of the clause in the context of the entire agreement, it applied to the plaintiff’s claim.

Justice Binnie, writing for theminority, at para. 141, found that in that case the Ministry’s conduct “did not rise to the level where public policy would justify the courtin depriving the Ministry of the protection of the exclusion of compensation clause freely agreed to by Tercon in the contract.” [100] Assuming for the moment that the MTO in this case erred in embarking on an investigation of whether it was possible forRankin to comply with its declaration of imported steel, or in finding that Rankin’s bid was materially non-compliant with the tenderdocuments, could it be said that its conduct was such as to justify the intervention of the court on public policy grounds to preventreliance by the MTO on the exculpatory clause freely agreed to by Rankin?

In my view the answer is no. Any error that the MTO mighthave committed on that score was made, not to subvert the integrity of the tender process in order to gain some unfair advantage, butrather to promote the integrity of the process. It should be remembered that Rankin’s bid was substantially lower than all of thecompeting bids, and the disallowance of its bid worked to the economic disadvantage of the MTO. [101] I therefore find that, even if the Crown breached the tender terms by disallowing Rankin’s bid, Rankin’s claim is barred by theexculpatory clause at para. 11.3 of the Instructions to Bidders. (

f) What damages did Rankin suffer? [102] It is useful to make a finding on the question of the damages that Rankin suffered as a result of not being awarded the contract

for the project in the event that I am wrong on the question of liability. [ 103 ] As confirmed recently by the Ontario Court of Appeal in Hav-A-Kar Leasing Ltd. v. Vekselshtein 2012 ONCA 826 at para. 49 , relying on the seminal case of Wertheim v. Chicoutimi Pulp Co ., [1911] A.C. 301 at p. 307, the damages awarded to a plaintiff for breach of contract should place the plaintiff in the same position as if the contract had been performed.

In this case, Rankin’s damages would be comprised of the profits which would have earned had it been awarded the contract for the project. [ 104 ] Rankin’s damages expert John S. Seigel, C.A. of the firm of PriceWaterhouseCoopers (PWC) provided a Loss Quantification Report setting forth a calculation of the profits that Rankin lost as a result of not having been awarded the contract through the tender process.

In keeping with the principle that a plaintiff should be placed in the same position it would have been in had the contract been performed, Rankin’s position would have been affected by the actual circumstances subsequent to the date of the alleged breach. Accordingly, PWC addressed the quantification of the loss with the benefit of hindsight. As observed by W. Donald Goodfellow, Q.C. in his

article “ The Law of Tendering ”, referred to above, this approach is consistent with the cases of M.J.B. and Martel which confirmed that “the Courts will look at the actual conditions that were encountered after the close of tenders in determining the actual damages that the wronged tenderer should receive”. [ 105 ] Since the contract was a unit price contract, PWC quantified the lost profit based upon the actual quantities utilized in the performance of the contract by Hard Rock, at the unit prices tendered by Rankin, including the estimated margin on change orders approved by the MTO during the course of the project, and the material bonuses that Rankin would have likely earned had it been awarded the contract.

Material bonuses represent amounts awarded during contract performance to reward contractors for using materials of a higher quality than those specified in the tender, net of material penalties for the use of substandard materials. In its initial Loss Quantification Report, PWC included the actual material bonuses actually awarded to Hard Rock.

However, in its Reply Report to the Responding Report of the MTO’s expert James McAuley C.A. of KPMG, PWC revised its approach to one based upon an average level of material bonuses realized by Rankin on previous MTO projects. [ 106 ] PWC and KPMG were in agreement with respect to the basic theoretical approach to be utilized in quantifying Rankin’s lost profits, namely to calculate the expected “contribution margin” Rankin would have achieved in performance of the contract.

As stated in the KPMG Responding Report, the contribution margin approach calculates a loss by deducting costs which are considered to be variable from total revenue. Quoting from Terminology for Accountants 4 th edition, The Canadian Institute of Chartered Accountants, 1992, p. 133, “contribution margin” is defined as “the excess of sales price over related direct costs” and can be calculated as revenue less variable or direct costs (a “top-down” approach) or as net income plus fixed costs (a “bottom-up” approach).

As noted in the PWC Loss Quantification Report, certain fixed costs which were allocated in Rankin’s bid were not “saved” as a result of the project not being performed by it. Since contribution margin is the amount that a contract contributes toward fixed costs and profit, to the extent that the cost estimates in the bid include allocations of fixed costs or overheads, they must be added back to determine the true contribution margin. [ 107 ] PWC, in its analysis, began with the budget prepared by Rankin as part of its bid, including a projected profit margin of 7.3%.

It then tested the reasonableness of that budgeted profit margin by examining the actual profit margins earned by Rankin on other MTO projects and its overall gross profit margin, as shown on its audited financial statements for previous and subsequent years, and found it to be reasonable. [ 108 ] PWC then applied the budgeted costs and profit margin to the actual quantities used in the contract, obtained from MTO, resulting in a figure for revenue that Rankin would have received on the contract, before change orders and material bonuses, of $22,102,223. [ 109 ] In order to calculate the contribution margin on the final quantities utilized in performance of the contract, PWC added back to the estimated profit an amount determined to be Rankin’s fixed costs or overheads, for the reasons stated above.

These costs included allocations of salaried supervisors, fixed costs of operating equipment, and fixed costs related to the operation of Rankin’s asphalt plant. Included in the fixed costs was the cost of a contracted supervisor, Walter Liszek, retained specifically for the project at a cost of $130,500, who Rankin felt morally bound to retain, notwithstanding that it was not awarded the contract. [ 110 ] In the final result, PWC calculated the contribution margin on the contract to be 17.2%, which when applied to the actual quantities, resulted in a lost base contribution margin of $3,807,637.

To this figure PWC added a profit of 15% on the actual change orders incorporated into the project, as well as material bonuses awarded to Hard Rock, for a total loss initially calculated at $4,009,410. [ 111 ] KPMG did not provide its own alternate loss quantification, as it indicated that it was not privy to the necessary data to do so, but rather, in its Responding Report, challenged a number of the assumptions utilized by PWC in calculating its loss quantification. [ 112 ] KPMG noted that, in examining Rankin’s previous MTO projects, the relative profitability of the projects generally decrease as the size of the project increases.

Since the Highway 406 project was significantly larger than any previous MTO project undertaken by Rankin, KPMG maintained that the use of previous MTO projects looked at by PWC as measures of the reasonableness of the expected profitability on the Highway 406 project was not appropriate and the projected profit margin should be considerably lower due to the relative size of the project.

It further argued that the use by PWC of certain of the MTO projects as comparators was not appropriate, as they were different in character, complexity, duration and number of tender items. [ 113 ] KPMG also questioned the use of Rankin’s financial performance on its audited financial statements as a useful test of the reasonableness of the projected profit, as PWC failed to conduct a review of whether the make-up of the costs included in the bid for the project is comparable to the overall costs derived from the financial statements. [ 114 ] KPMG also took issue with the thoroughness of the review conducted by PWC in calculating the amount of the adjustment for fixed costs in calculating the contribution margin, including supervisory costs, equipment fixed costs, impact on equipment rentals, amortization costs, the costs of small tools and fixed costs associated with Rankin’s asphalt plant.

In the end it suggested that the fixed costs added back by PWC to arrive at its contribution margin may have been overstated. In particular, it challenged the inclusion of the

cost for the contracted supervisor, Mr. Liszek, arguing that his services were able to be utilized by Rankin on other MTO projects duringthe period. [115] Although KPMG did not take issue with the application of a profit margin of 15% on change orders, it did challenge theinclusion of material bonuses based on those awarded to Hard Rock because material penalties assessed to Hard Rock were notconsidered.

In addition, KPMG argued that the effect of the use of higher or lower quality of materials on the cost of materials, andtherefore on the overall profit margin, was not sufficiently addressed by PWC. [116] Finally, KPMG took issue with PWC’s assertion that Rankin would have been able to handle all of the actual work obtained in2006 and 2007 in addition to the Highway 406 contract, and therefore no deduction from the damages should be applied to reflectmitigating income.

In this respect it pointed out that Rankin’s total gross profit for the affected years, being 2006 and 2007, after beingadjusted for the loss as calculated by PWC, greatly exceeded the actual gross profit either before or after those years, by approximately$2,000,000 in each of those years.

On this basis the inclusion of the calculated loss in income for 2006 and 2007 would have resulted innet revenue well out of the ordinary for Rankin’s business, suggesting that Rankin was able to mitigate the loss by gaining other workwhich fully utilized its resources and earning capacity. [117] KPMG concluded by stating that adjustments to PWC’s loss calculation would be dependent upon findings of fact andinformation that was not available to it and therefore presented four alternate scenarios to be considered by the court, depending uponfour different sets of assumptions.

The four alternate scenarios effectively adjusted downwards the budgeted profit margin from 7.3% to5% or 6%, reduced the add-back for fixed costs by 50% or 25%, and discounted any inclusion of material bonus or penalty. KPMG’scalculation of the loss in the four scenarios ranged from a low of $2,321,000 to a high of $3,903,000. None of the scenarios, as presented,made any adjustment for potential mitigating income. [118] In its Reply Report, PWC adjusted its calculation of fixed costs downward by $108,350 ($43,100 for supervisory equipmentfixed costs and $65,250 for the supervisory subcontractor Mr.

Liszek at 50% of the cost attributed to him) and asserted that the estimatedmaterial bonus should be based upon Rankin’s history of earning material bonuses on previous MTO jobs, rather than on the actualmaterial bonuses awarded to Hard Rock.

Based upon these adjustments PWC provided a revised loss calculation totalling $4,104,348. [119] In my view, there is little to suggest that the projected profit margin in Rankin’s bid of 7.3% was unreasonable or unattainable.Although KPMG asserted that, based on historical results, as the amount of the revenue on a project increases, the profit margindecreases, in this case the evidence suggested that the relatively higher revenue on the project related to the length of the road to beconstructed, rather than to any increased complexity of the work.

Logic would suggest that, on a project of this nature, consisting largelyof laying asphalt roadway, the profitability per kilometre of roadway would increase as the project grew longer, since the mobilizationcosts would be spread over a greater number of kilometres. [120] I am not satisfied that any adjustments are required to PWC’s revised loss calculation other than for elimination of the add-backof the balance of the cost associated with the retention of Mr. Liszek in the sum of $65,250.

In my view, even if Rankin was committedto his retention, which may be questionable since there was no actual contractual commitment but only a “moral” one as indicated byPWC’s Reply Report at para. 36, such commitment was premature, given that it occurred prior to the contract award. [121] I would not include any amount for a projected material bonus or penalty, as this head of the claim was, in my view, notsufficiently developed to make an informed determination of whether Rankin would have earned material bonuses on the project.

It issuggested in KPMG’s Responding Report that the provision of higher quality materials, which would generate a material bonus, wouldhave an impact on the material costs, however, it is not clear how this was accounted for by PWC in its loss calculation.

In short, in myview, whether material bonuses would have been generated by Rankin, and if so, to what extent, is dependent on contingencies which arenot possible to discern, based upon the evidence. [122] On the basis of the foregoing, before consideration of the question of whether there was mitigating income which should bededucted from the damage calculation, I would reduce the revised loss calculation in PWC’s Reply Report as follows: Revised Claim as per Reply Report $4,104,348 Less balance of supervisory subcontractor cost ($65,250) Less material bonus claim ($286,184) Balance $3,752,914 [123] On the question of mitigation, it is a well-established principle that a plaintiff cannot recover for avoided loss.

As stated inMcGregor on Damages (London: Sweet & Maxwell Limited, 14th ed., 1980), c. 7., at para. 209, quoted in Neilson v.

Vancouver HockeyClub Ltd. (BC CA), [1988] 4 W.W.R. 410, 25 B.C.L.R. (2d) 235 (B.C.C.A.) at paras. 10 and 11 “where the plaintiffdoes take steps to mitigate the loss to him consequent upon the defendant's wrong and these steps are successful, the defendant is entitledto the benefit accruing from the plaintiff's action and is liable only for the loss as lessened.” [124] In this case, had Rankin been awarded the contract, the work would have been performed during the course of its 2006 and2007 fiscal years.

In those two years it had actual revenues of $85,003,134 and $87,153,917 respectively, substantially more than anyprevious year, with the exception of 2005, and on par with 2008 at $86,825,188 and substantially more than 2009 at $77,129,004. [125] It was acknowledged by PWC in its Reply Report that the revenues of $94,171,525 for 2005 were anomalous as being reflectiveof extraordinarily high subcontractor expenses on one particular contract. In effect, much of the additional revenue was simple flow-though revenue to a subcontractor for which Rankin earned no profit.

The total subcontractor expense for 2005 was $37,913,029,compared to $15,924,943 in 2004 and $13,728,775 in 2006. Rankin’s net earnings in 2006 and 2007 were higher, at $4,453,519 and$4,224,968 respectively, than any previous year, and were exceeded only in 2009 at $4,722,509.

[ 126 ] In its Loss Calculation Report PWC stated at para. 54 “in the context [of mitigation], Rankin may have, at least, in part, mitigated its losses if it had been able to obtain jobs during the duration of the Contract which it could not have taken on if it had been awarded the Contract.” At para. 55 it stated “management [of Rankin] has advised us that Rankin would have been able to handle all actual work obtained plus the Contract in [2006 and 2007]” and at para. 57 “it does not appear unreasonable that Rankin could have handled an additional $11 or $12 million annually in revenues in 2006 and 2007.” [ 127 ] Although the onus of proof of actual mitigation, or of an unreasonable failure to mitigate, rests on the Defendant, in my view that onus was discharged, on a balance of probabilities, by the demonstration of Rankin’s heightened revenues and profits in 2006 and 2007, being the years that the contract would have been performed, thereby suggesting that the lost contract was replaced by other work sufficient to largely utilize Rankin’s resources.

This had the effect of casting the onus back on Rankin to show that it could have absorbed the Contract in addition to the other work that it did perform in those years. In my view, the conclusion stated at para. 57 of the PWC Loss Calculation Report referred to above, based only upon the advice of Rankin management and without further support or analysis, is not sufficient to discharge that onus. [ 128 ] Rankin’s financial results confirm that it was able to largely mitigate its damages that may have resulted from it not being awarded the Highway 406 contract.

Although it may be argued that the loss was fully mitigated, I would give Rankin the benefit of the doubt on the extent of the mitigation and reduce its damages for mitigation by 75%, resulting in net damages, had it been successful in the action, of $938,228. This is in keeping with the principle laid down in the case of Wood v. Grand Valley Railway Company [1915] 51.S.C.R. 283 that where the court is unable to calculate damages with mathematical precision or accuracy, it should do the best that it can based upon the evidence before it.

Disposition [ 129 ] On the basis of the foregoing, the Plaintiff’s action is dismissed. [ 130 ] The parties may make written submissions with respect to costs. The Defendant’s submissions shall be delivered to the office of the Judges’ Secretaries at St. Catharines within 30 days, and the Plaintiff’s within 45 days, of the of release of these Reasons. The Defendant may deliver Reply submissions within a further 10 days, if so advised. [ 131 ] I wish to commend and thank counsel on both sides for their thorough preparation and helpful submissions. D.A. Broad J.

Released: January 7 , 2013 CITATION : RANKIN CONSTRUCTION INC. v. HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO, 2013 ONSC 139 COURT FILE NO.: 47754/06 DATE: 2013-01-07

ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: RANKIN CONSTRUCTION INC. Plaintiff - and – HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO Defendant _________________________________________ REASONS FOR JUDGMENT _________________________________________ D.A. Broad J. Released: January 7, 2013