This article is an excerpt from Government Procurement, which is available for purchase.
In its October 2011 decision in Air-Tite Metal Ltd. v. N.D. Dobbin Ltd., the Newfoundland and Labrador Court of Appeal reversed a trial decision that found the owner, Defence Construction Canada, partially liable to a subcontractor for negligently approving the prime contractor’s substitution of that subcontractor. The trial court had found that the prime contractor, N.D. Dobbin, had terminated the subcontractor over alleged performance issues after the subcontractor had refused to lower its price. The trial court found Defence Construction negligent for approving the subcontractor substitution without first inquiring into the reasons behind the substitution. In coming to this conclusion, the trial court had determined that Defence Construction, as the owner, owed the subcontractor a duty of care in these circumstances. However, the Newfoundland and Labrador Court of Appeal reversed this legal finding since it flew in the face of Supreme Court of Canada precedent that clearly established no legal duty owed by the owner to subcontractors:
In this appeal Defence Construction submitted that the trial judge erred by relying on Naylor Group because that decision concerned contractual obligations between a prime contractor and a subcontractor rather than a duty of care in negligence. Binnie J., for the 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 seemed grounded in tort, including negligent misrepresentation. However, tort was neither pleaded nor argued in the courts below and tort law will play no role in the disposition of this appeal.In relying on the decision in Naylor Group to establish that Defence Construction owed a duty of care to Air-Tite, the trial judge erred by failing to apply the appropriate line of judicial authority. Air-Tite’s claim for loss of profit, being solely financial in nature, is, for purposes of an action in negligence, characterized as a pure economic loss. The applicable authority is summarized in Design Services Ltd. v. Canada, 2008 SCC 22, [2008] 1 S.C.R. 737, which incorporates earlier decisions of the Supreme Court of Canada discussing principles underpinning the availability of an action in tort for pure economic loss. While the decision in Design Services was released after the hearing in the trial division, it pre-dated release of the trial judge’s decision. Unfortunately, it appears counsel did not bring the decision to the attention of the trial judge. (paras. 12-13)
As the Court of Appeal explained, in applying the governing Anns test, the courts have historically been reluctant to recognize new tort-based duties for “pure economic loss” (meaning monetary loss where there is no physical harm or injury associated with the loss as is otherwise typical in tort claims):
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. (para. 37)
The Newfoundland and Labrador Court of Appeal’s decision therefore applied the precedent established by the Supreme Court of Canada in its 2008 Design Services Ltd. v. Canada decision. In that case, the trial court had found that the government owed a duty of care to a subcontractor who was part of an unsuccessful bidding consortium. The contract had been awarded to a non-compliant competing consortia and the subcontractor sought damages directly against the government after the government settled out of court with the prime bidder. While the trial court had recognized a duty of care owed by the government to the subcontractor in that case, the Supreme Court of Canada ultimately found that no duty of care was owed to subcontractors by owners and reversed that trial judgment. While the trial decision in the Air-Tite case was at odds with the Supreme Court’s precedent in Design Services, the Newfoundland and Labrador Court of Appeal’s reversal of that trial decision served to align this case with the binding Supreme Court precedent that found no duty of care owed by owners to subcontractors.
