NEWFOUNDLAND HEALTH CARE CORP.

FOUND LIABLE FOR LOST

PROFITS

Poorly Handled Transition Nets Damages for Low

Bidder
What are your obligations when you move from a strong incumbent to a new service provider?
Would your organization be liable if you failed to provide any work under a contract for services
on an as-needed basis?

These issues, as well as the question of damages, were dealt with in the recent case of Gulf
Physiotherapy v. Western Health Care Corporation, 2009 N.L.T.D. 49 .

The Facts
The facts of the case are quite straightforward. In March 1998, Gulf had awarded a contract to
Western Health Care Corp. for outside physiotherapy services, on an as-needed basis, for the
remainder of that year. Western had been the low bidder, at $45 per hour. The intent was for the
winning bidder to be called in, as needed, to provide in-patient physiotherapy services when the
existing staff was unable to meet the need, because of staff shortages. The second-lowest bidder
(at $50 per hour) was Linnick Physiotherapy, the incumbent provider.

Despite the contract with Western, Gulf continued to use the services of Linnick exclusively, for
the period from March 30 to October 23, 1998. After Western contacted Gulf in October 1998 to
protest, Gulf then used Western to deliver the outside physiotherapy services for October and
November. Western sued for loss of profits for the work from March to October.

At trial, the two Gulf employees who handled the contracting of outside physiotherapy work
testified that they had contracted with Linnick between March and October “to ensure continuity
and consistency of service.” They further testified that they were not aware of a final contract
with Western, and that they felt they could use the services of any of the bidders. They admitted
that this was the first time either of them had been involved with a tendering process.

The Findings
Based on the evidence presented, Gulf had to concede that failure to use Western to provide
services from March to October was a breach of the contract with Western. The big issue at trial,
therefore, was the extent and nature of damages owing to Western for that breach of contract.

In addition to loss of profits for the work that Gulf had awarded to Linnick between March and
October, Western claimed damages for loss of business reputation. It asserted that members of
the public knew it had been the successful bidder and that its competitor, Linnick, was doing the
work. Therefore, Western argued, its reputation was damaged, which resulted in a decrease in
business. Western claimed that the decrease for the applicable 12-month period was 1,197 fewer
visits, an average income to them of $27 per visit, for a loss of $32,319. Western also claimed
punitive or aggravated damages.

Damages
In reaching its conclusion, the Supreme Court of Newfoundland and Labrador Trial Division
referred to the test for damages applied by the Supreme Court of Canada in the case of Naylor
Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, 2001 S.C.C. 58: “The well-
accepted principle 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.”

Loss of Profits: The normal measure of damages is the contract price less costs (i.e., the loss of
profits). Therefore, under the facts of this case, Western was clearly entitled to recover the profits
it would have made, had Gulf honoured its contract and used Western for outside physiotherapy
services from March to October. The amount of the loss was easy to assess, based on the hours
given to Linnick during that period: 217.5 hours times the price bid by Western ($45 per hour)
for a total of $9,787.50. The Court allowed recovery of the full amount, finding nothing more
than nominal overhead costs for Western.

Loss of Reputation: When examining the claim for the indirect financial loss due to ‘loss of
reputation’, the Court was not convinced that the loss had been established, on the evidence
presented. Western could not prove, on the balance of probabilities, that the community knew
about the contract and subsequent work given to Linnick, nor that there was any demonstrable
drop in business for Western as a result of alleged community knowledge. While a drop in
business was established, the Court concluded that there could have been many reasons for the
decrease in patient visits. It therefore dismissed that portion of Western’s claim.

Punitive or Aggravated Damages: The legal test for establishing punitive or aggravated
damages is quite stringent. The claimant must establish that the conduct was “malicious, high
handed, arbitrary or highly reprehensible and that it departs to a marked degree from ordinary
standards of decent behaviour.” Western failed to establish that Gulf’s conduct met this test, so
the Court also dismissed this portion of the claim.

Lessons for Contracting Organizations

The lessons from this case are clear:

1. Plan carefully for transition issues when you are setting up your contracts, taking into
account any special need to ensure consistency and continuity.

2. Consider some requirement for shadowing or other defined transition obligations for
the incumbent, when setting up that original contract. It is too late and/or too costly to impose
such obligations on the incumbent(s) when you are ready to move on.
3. If you decide to solicit competitive bids for a new contract, be aware of the real
possibility that the incumbent will not be successful. What will this mean for your clients or
users? Will there be an impact on your staff?
4. Once you have entered into a contract with a new provider, ensure that you are
meeting your obligations when you are transitioning from past incumbents.

5. Finally, and perhaps most importantly, make sure that your key people handling
contracts are properly trained and involved from the beginning, wherever possible. At the
very least, they should be completely familiar with your contractual obligations to the new
provider(s).

Reprinted from The Legal Edge Issue 89, January - March 2010