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PurchasingB2B

Sub-contractors shut out

Sub-contractors can sue contractors, but have had little success suing owners—(from the Jan/Feb 2012 print edition)


February 29, 2012
by Robert Worthington
FROM THE PURCHASINGB2B JANUARY/FEBRUARY 2012 PRINT EDITION:

It’s not uncommon for contractors to hire sub-contractors to help perform a contract for an owner. The owner hires the contractor, and the contractor hires the sub-contractor. In the owner-contractor contract, the contractor promises to perform the work for the owner. In the contractor-sub-contractor contract, the sub-contractor promises to perform their portion of the work for the contractor to deliver to the owner.

In this two-separate-contracts scenario, if the sub-contractor fails to perform as promised, the contractor has suffered a breach of contract and may claim compensation from the sub-contractor. But the contractor is still liable to deliver their promise of completed work to the owner and can’t blame the sub-contractor. The contractor is still responsible regardless of what the sub-contractor did or didn’t do. In contract law, there’s no connection between the owner and the subcontractor. Due to a rule of contract law called privity of contract, whereby one can only sue the party one has a contract with, owners are protected from being sued by sub-contractors, and vice versa.

Ready for change?
In Canadian law, this rule has protected many owners and sub-contractors. Recently, sub-contractors have sought to change these rules as they’ve discovered they’re denied compensation. The rule regarding privity of contract is ancient and unlikely to change, so where the owner’s actions have harmed them, sub-contractors have tried to sue using the law of torts (specifically the laws of negligence).

For example, in Arrow Construction Products v. Nova Scotia (1996) NSCA, a materials supplier in a competition for goods procurement tried to sue an owner for refusing to allow their products to be considered acceptable. While the supplier convinced the trial court to give them a remedy, the court of appeal overturned the decision, holding it was the owner’s choice what materials were acceptable and, in any event, the supplier had no direct contract with the owner. Privity of contract prevented the owner being liable to the sub-contractor.

In a more recent case, Design Services Ltd. v. Canada (FCTD (2005), FCA (2006), SCC (2008) several designers and sub-contractors who felt they were harmed by an owner’s decision not to award to the contractor for whom they were going to do work, sued—not in contract but in negligence. They argued the owner was negligent in awarding the contract and that negligence harmed them and they should therefore be compensated. Again, the designers and sub-contractors convinced the trial court to compensate them, but the court of appeal and the Supreme Court of Canada unanimously disagreed. To them, there was no way for the designers and sub-contractors (in contract or negligence law) to claim against the owner. There was no privity of contract between the sub-contractors and the owner (they weren’t bidders and had no contract with the owner). To both appellate courts, the laws of negligence shouldn’t be expanded to create a legal duty owed by owners to sub-contractors, although the owner in this case admitted liability in wrongly awarding the contract.

In Air-Tite Sheet Metal v. Dobbin and Defence Construction (1951) Ltd. (2011) NLCA, sub-contractors again appeared successful but on appeal lost their case. In this case, the contractor wrongfully fired the sub-contractor from a project. The subcontractor sued the contractor for breach of contract and also sued the owner for negligently allowing the contractor to wrongfully fire them.

The court allowed the claim of breach of contract against the contractor and the claim against the owner. To the court, the owner owed the sub-contractors a duty of care (the foundation for a claim for negligence) the owner allegedly breached when it allowed the contractor to fire the sub-contractor. The trial court felt the fact that the owner had a right to approve any substitution of sub-contractors was enough to create this duty of reasonable care.

On appeal, the Newfoundland and Labrador Court of Appeal (NLCA) unanimously disagreed owners had a legal duty to control what their contractor did to its sub-contractors. The right to approve subcontractors was in the owner-contractor contract and couldn’t create rights for noncontracting parties. Negligence law shouldn’t be extended to create a new legal duty. The sub-contractor’s only remedy was to sue the party they had a contract with: the contractor.

That’s where the law is and likely where it will remain for some time. For harm caused by contractors, sub-contractors have all the remedies available to them—but only against their contractors, not against the deeper-pocketed owner. As owners, contractors, and now sub-contractors, have learned through painful experience to be ever mindful of whom they’re dealing with. If it looks
too good to be true, it likely is.

Robert C Worthington, LLB, teaches purchasers contract, competitive bidding and procurement law, and consults with lawyers on competitive bidding law.