This article is an excerpt from Government Procurement, which is available for purchase.
In its April 2014 decision in Olympic Construction Ltd. v. Eastern Regional Integrated Health Authority, the Newfoundland and Labrador Court of Appeal reduced the amount of interest awarded by a trial judge in a case involving an improperly rejected bidder. While the defendant, Eastern Regional Integrated Health Authority, did not dispute the trial court’s finding of liability for the improper rejection of Olympic Construction’s bid, it appealed the trial judge’s ruling with respect to the amount awarded for lost profit damages and related interest.
As the Court of Appeal explained, Eastern took issue with Olympic’s claim that it would have enjoyed a thirteen percent profit margin had it been awarded the tendered contract, arguing that, based on past projects, six percent was a more reasonable percentage to base the lost-profit award on:
39 Olympic sought damages for the cost of bid preparation and loss of profits. The trial judge awarded Olympic its loss of profits on the tender, putting Olympic in the position it would have been in had it been awarded the contract. He did not award damages for bid preparation because such costs would have been borne by Olympic as the cost of doing business if Olympic had been awarded the tender contract.
40 The trial judge decided that Olympic would have been awarded the tender contract because it was the lowest compliant bidder. Eastern does not challenge the trial judge’s decision in this respect, indeed it could not, for that was the evidence of its own representatives. Rather, Eastern challenges the amount of damages the trial judge awarded, arguing that he erred in awarding damages based on Olympic’s anticipated 13 percent profit margin for the project. Eastern submits that the 13 percent was based on the significant risk associated with the project, and because Olympic did not actually assume that risk (because it was not awarded Contract B), the 13 percent should be discounted for negative contingencies. Eastern cites the six percent profit margin on the Caribou Pavilion Project (a project the subject of trial but not of appeal) as indicative of a more reasonable award.
However, Olympic countered that its thirteen percent lost-profit claim was reasonable in the circumstances:
41 The president of Olympic, Carl Mallam, testified that Olympic anticipated a profit margin of 13 percent on the bid. He explained that it was based on four factors: (1) he had a supervisor readily available for the job; (2) there were only two bidders on the project and he did not anticipate that Redwood, the other bidder, would be aggressive in bidding because Redwood did not know much about it; (3) he knew the building inside and out because Olympic had built the main Janeway building to which the Janeway Project was to be attached; and (4) there are particular risks associated with building hospitals due to their nature and complexity. Mr. Mallam acknowledged that the risk associated with the Janeway Project was higher than the risk associated with the Caribou Pavillion Project. He explained this was because (1) the Janeway Project was a renovation and renovations take longer than new builds, (2) the Janeway Project was a hospital job and hospital jobs require more administrative resources than other jobs, and (3) the Janeway Project was a difficult job that had to be completed in a short period of time (one year). He explained that the Caribou Pavilion Project was a much easier project because it was essentially a new build residential facility as opposed to a hospital. Mr. Mallam said that the Caribou Pavillion Project was not as risky a project and pointed out that its demolition costs were estimated at $16,000 whereas those for the Janeway Project were estimated at $172,000.
The Court of Appeal ultimately agreed with Olympic and rejected Eastern’s arguments, reasoning that the profit margin from one project cannot be mechanically applied to a different project:
46 Eastern’s contention that a six percent anticipated profit margin like that which Olympic included in the bid for the Caribou Pavillion Project has no merit. It is clear from the evidence that the two projects were very different from each other, and in any event, anticipated profit on one project is not automatically applicable to another project. As Mr. Mallam testified, it’s not like adding a set mark-up to the wholesale cost of a candy bar.
The Court of Appeal explained the legal reasoning behind the calculation of lost-profit damages and why it would be unreasonable to reduce the thirteen percent profit margin calculation in the particular case:
48 The well-accepted principle of damages is that the respondent should be put in as good a position, financially speaking, as it would have been in had the appellant performed its obligations under the tender contract. The same principle applies to damages awards in cases of wrongful refusal to contract. The normal measure of damages in this context is the contract price less the cost of executing or completing the work, i.e. the loss of profit (Naylor, paragraph 73). In this case, Olympic was wrongly denied Contract B for the Janeway Project. Olympic therefore lost the opportunity to make its anticipated profit on the project and its damages would be the contract price less the cost of completing the work, i.e. its loss of profit.
49 It was not shown at trial that the 13 percent profit margin on the Janeway Project ought to be discounted for any negative contingencies, which led the trial judge to conclude that it would be “arbitrary and without reason” for him to discount it. As well, Eastern has not pointed to any evidence respecting negative contingencies on which this Court could rely to discount the damages award based on 13 percent anticipated profit margin. Therefore, the trial judge did not err in holding that “it would be arbitrary and without reason” to discount Olympic’s damages award reflecting the 13 percent loss of profit.
However, while it upheld the trail judgment award of $684,712.71 (plus HST) in lost profit damages, the Court of Appeal reduced the amount of interest owing to Olympic Construction. The issue of interest turned on the question of when Olympic Construction would have enjoyed its profits had it been awarded the project. While the trial court awarded interest as of the date that the contract should have been awarded, Eastern’s position was that the interest should have been calculated as of a later date when the profits would have actually been earned on the project:
54 Eastern submits that interest on Olympic’s damages award should not run from the date of the breach of contract, saying that Olympic would not have sustained any profits as of this date if it had been awarded the tender contract. Eastern argues that a damages award for loss of profits is akin to one for loss of income, and therefore interest on Olympic’s damages for lost profits should be calculated in accordance with subsection 4(2) of the Act. Eastern bases its argument on the fact that Olympic’s lost profits would have accrued in increments as the project progressed, which is how income losses accrue. Further, Eastern maintains that it was incumbent on Olympic to prove its entitlement to interest by proving how much profit it would have received from Eastern at three-month intervals as the project progressed, and because this was not done, Olympic is due no interest on its damages for loss of profits.
The Court of Appeal agreed that pre-judgment interest should not run from the date of the breach of the tendering process. It also rejected the option of calculating the interest based on the date that the project would have been completed, preferring instead to allocate the realization of profit in a proportionate basis across the term of the project, which for practical purposes made the project midway point the date at which interest on lost profits should be calculated:
66 I favor the second option. The damages award has already determined that there has been a loss of profits. To say that Olympic would not have sustained any lost profit until its books would have been closed on the Janeway Project ignores the commercial realities of construction projects. Few contractors can take on long construction projects without any prospect of receiving some portion of anticipated profit until the final accounting is done. Prejudgment interest is awarded to compensate the successful claimant for its loss of use and the declining value of the money. Although a contractor may not know for sure whether or how much actual profit the project will generate in the final analysis, he or she does not have to wait for the final accounting to enjoy the use of the money.
67 In Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2622, a large and complicated wrongful-refusal-to-contract case, I note that the Court determined the award of prejudgment interest as though the profits arose over the life of the contract. Envoy Relocation shows that lost profits in tendering cases can accrue over time.
68 In my view, it is reasonable to assume that some degree of profit accrues regularly and linearly during the lifetime of a construction contract. I see this assumption as fair and simple and free from artificial and costly speculation. It also avoids a windfall to a successful claimant which would occur if prejudgment interest were awarded from the date of the breach. As well, it enables litigation to be dealt with in a timely and efficient manner in cases where there has been a wrongful refusal to contract respecting a lengthy project that would still be ongoing at the time of judgment.
69 Accordingly, prejudgment interest on a damages award for a pecuniary loss of this nature where there has been a wrongful refusal to contract in a building case can be calculated on the basis that the loss accrues regularly and linearly over the course of a contract pursuant to subsection 3(b) of the Act. As long as the award involves a fixed rate of interest and does not involve compound interest (which is the case under the Act), the interest on linearly accruing profits over the life of a contract will be equal to the interest that would accrue on the whole sum if it is awarded from the date representing the halfway point in the life of the contract. This simple and practical methodology, which obviates the need for expert evidence, applies in this case and would apply in many cases, but I leave open the opportunity for parties to seek to bring forward evidence which might substantially affect the accrual of interest in particular cases.
By establishing a midway point rule for the calculation of pre-judgment interest on lost-profit damages, the Newfoundland Court of Appeal established a useful principle for the calculation of damages arising out of future tendering disputes. This case also serves as a helpful review of the underlying principles that inform the calculation of lost profits, illustrating why lost-profit margins cannot be mechanically applied by formula since profit margins will vary from one contract to the next.
