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The Law of Tendering: Mistake, Disclosed Criteria, Non-Compliant Bids and The Duty of Fairness

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Business Advice

The law of bidding and tendering in Canada has been evolving in recent years.  Significantly, these developments have both clarified and expanded the rights and obligations of those who participate in the tender process. These developments should accordingly be of interest to most who work in the construction industry.

In 1981 the Supreme Court of Canada, in R. v. Ron Engineering and Construction (Eastern) Ltd, introduced the concepts of “Contract A” and “Contract B”.  The Court found that a contract (“Contract A”) had arisen upon the tenderer’s submission of a valid bid. Pursuant to Contract A, the owner had agreed to accept bids in accordance with the terms of the tender call. In exchange, bidders agreed that the bids were irrevocable and that they would enter into the construction contract (“Contract B”), if it was awarded by the owner. The tender documents further provided that where the bidder withdrew its bid or refused to enter the construction contract on award, it would forfeit its bid deposit.

In Ron Engineering the low bidder refused to enter into the construction contract upon award, citing a mistake in its bid. The owner, knowing of the mistake, refused to return the bidder’s deposit upon the refusal. The Supreme Court held that while the owner could not accept a mistake that was obvious on the face of the bid itself, the mistake was not so obvious in the case before it. Accordingly, the owner was entitled to enforce the provisions of Contract A and retain the deposit.

In 1999, the Supreme Court of Canada revisited the law of tendering in MJB Enterprises Ltd. v. Defence Construction (1951) Ltd.  At issue was the form of ‘privilege clause’ found in many tender documents: ‘the lowest or any tender not necessarily accepted’. The Court confirmed that Contract A does not automatically arise upon a tender call, but may arise depending on the terms of the tender documents. After finding that Contract A arose in the case before it, the Court in M.J.B. went on to deal with the owner’s obligations thereunder. While the owner had argued that it could select a non-compliant bid so long as it had treated bidders fairly, the Court found an implied term that only compliant bids could be accepted. The Court found no support for the proposition that, in the face of the privilege clause, the owner was required to accept the lowest compliant bid. The Court did, however, hold that the owner was required to base its award on criteria disclosed in the tender documents.

In a later case, Martel Building Ltd. v Canada, the Supreme Court of Canada found an implied term obliging the owner to be fair and consistent in its assessment of bids. In the circumstances, it held that the obligation required the owner to treat all bids consistently, to apply assumptions evenly and to avoid ‘colourable’ attempts to achieve desired results.

The Supreme Court of Canada’s decisions in Ron Engineering, MJB and Martel suggest at least four ways in which owners may have obligations to bidders in the tender process. Depending on the terms of the tender call, the owner’s obligations will include some or all of the following:

(1)        the obligation to reject a bid that contains an error on its face;

(2)        the obligation to accept only compliant bids;

(3)        the obligation to consider only disclosed criteria in evaluating bids; and

(4)        the obligation to act fairly in evaluating the tenders. 

Whether or not these obligations arise in any particular circumstance will depend on an analysis of the bids themselves, in conjunction with the bid documents. The possible fact situations are, of course, almost infinite. This is particularly so given that the terms of any particular tender call will rarely be the same. 

It is in the application of the above referenced cases to particular facts that the law of tendering in Canada will either become further clarified or more confused. Indeed, this process is already well underway, with mixed results:  

 – the B.C. Supreme Court dealt with what constitutes a ‘compliant bid’ in J. Oviatt Contracting Ltd. v. Kitimat General Hospital Society. There, the Court held that ‘substantial compliance’ was sufficient, and upheld the award to a successful bidder who had omitted four of eight pages of the tender form. In Johnson’s Construction Ltd. v. Newfoundland, on the other hand, the absence of one unit rate was enough to render a bid non-compliant;

 – with respect to ‘disclosed criteria’, owners in Ontario who rejected a low-bid were found liable for breaching their obligations of fairness in Direct Underground Inc. v. Pickering (City)  and Tarmac Canada Inc. v. Hamilton-Wentworth (Regional Municipality). (These decisions are consistent with M.J.B., where the Court had stated that allowing the owner to accept a non-compliant bid amounted “to saying that because it thought it had interpreted the contract properly it cannot be in breach”);

 – the B.C. Court of Appeal, on the other hand, has taken a somewhat different approach.  In Sound Contracting Ltd. v. Nanaimo (City)  the owner had rejected the low bidder because it had previously claimed an extra for deleted work. Although the tender call did not disclose that claims history would be a consideration, it did state that quality, service and price would be relevant. The Court focused on the owner’s obligations of fairness, and found no evidence that the owner’s representatives had acted unfairly towards the low-bidder;

 – similar arguments prevailed in J. Oviatt Contracting Ltd. and in West Central Air Ltd. v. Government of Saskatchewan, where it was held that the owner had rejected the low bidder in good faith and fairly, given the information available at the time. 

 – in Kinetic Construction v. Comox-Stathcona (Regional District), the British Columbia Court of Appeal dealt with a privilege clause which expressly allowed for non-compliant bids. It held that the acceptance of non-compliant bids was contemplated by the tender call such that ‘Contract A’ could, in fact, come into existence;

– in Naylor Group Inc. v. Ellis-Don Construction Ltd., the Supreme Court of Canada held that there is no reason why, in principal, the ‘Contract A’ /‘Contract B’ analysis cannot be applied to the contractor/subcontractor relationship. In that case the Court found that the bid depository rules gave rise to Contract A and required the contractor to award to the subcontractor it had carried in its bid. The Court confirmed, however, that whether or not the Contract A arises will depend on the circumstances of the tender call, noting that outside “the framework of a bid depository or comparable scheme, such provisions might operate solely between the owner and the prime contractor, and be of no assistance to a stranger to their contract”.

– in Buttcon Ltd. v. Toronto Electric Commissioners, the Ontario Superior Court discussed how the law of tendering might apply to a Request for Proposals. The Court held that the owner had a duty of fairness to consider proposals fairly and suggested that had a contract been awarded to a non-compliant proponent, that proponent might have had “a legitimate complaint”;

– in Graham Industrial Services Ltd. v. Greater  Vancouver Water District, the tender documents suggested the owner could only accept “materially compliant” bids. Graham’s bid to the Water District was accepted, however Graham argued the bid contained an error and could not be accepted.  The British Columbia Court of Appeal held, in keeping with the principle that the terms of Contract A derive from the terms of the particular tender call, the dispute turned on whether or not the mistake made the bid “materially” non-compliant (and not whether or not the mistake was clear on the face of the record);

– in another case dealing with a mistaken bid, Toronto Transit Commission vs. Gottardo Construction Limited et al, the Ontario Superior Court originally held that it would be inequitable for an owner to accept a bid he knows contains an honest and inadvertent mistake which is fundamental to the Contract and where the bidder would suffer financial hardship as a result. The Ontario Court of Appeal, however, overturned that decision. The Court found that Contract A was enforceable and that the principles of equity could not assist the bidder where “the enforcement of the contract freely entered into is not so grossly disproportionate so as to make enforcement of it by the courts unconscionable”;

– in Coco Paving (1990) Inc. v. The Ontario Ministry of Transportation, Coco Paving successfully brought an application for a declaration that its bid, submitted electronically but late, should in fairness be nonetheless considered compliant as the late submission was due to circumstances beyond its control. The Court of Appeal, however, disagreed. In doing so, it held that a tender authority only owed a duty of fairness to compliant bidders, unless the tender documents expressly provided otherwise. The Court actually found that, in the circumstances of the tender call, the duty of fairness to compliant bidders necessitated that late bids not be accepted;

– in Turcon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), the tender documents included an exclusion which provided that no bidder would have a claim against the Ministry for damages suffered as a consequence of its participation in the tender process.  While the trial judge refused to give effect to the clause, the B.C. Court of Appeal upheld it, essentially holding that as sophisticated parties, the bidders knew and understood the terms of Contract A in submitting the bids, and accepted those terms.  In the circumstances, the Court saw no reason to interfere with the contractual agreement entered into between the parties. The case has been appealed to the Supreme Court of Canada.

As a review of these decisions indicates, the law of bidding and tendering in Canada continues to evolve. Further, the decided cases provide only limited guidance, as each new case will necessarily be decided on its own facts. That having been said, there are steps which participants in the construction industry can take to better protect their interests in the process.

Bidders should take care to read the bid documents carefully and fully comply with the tender requirements, to minimize the risk of being declared non-compliant. Bidders should not qualify their bids, or make ‘counter-offers’, as this will often result in a rejected bid. Bidders should also understand what criteria has been disclosed as relevant for the purposes of bid evaluation and consider requesting an explanation of an award in circumstances where they are low, but unsuccessful.

Owners (and contractors who request bids in a potential ‘Contract A/Contract B’ scenario) should take care to treat all bidders fairly and equally in the tender process. This includes providing all information equally to all bidders, including answers provided to requests for clarification made during the tender period. Owners should also take care to only evaluate compliant bids, on the basis of disclosed criteria. The safest approach is often to accept the lowest compliant bid unless there is a good, disclosed reason for not doing so. Where complications arise, the advice of counsel knowledgeable in the area should be sought.  Such complications include concerns over the extent to which a bid is either compliant or too low, concerns that all bids are too high and concerns that the owner would like to make post-tender changes to the scope of work, pre-award. Owners should also understand that they are ultimately responsible for the conduct of consultants who administer a tender process on their behalf. Owners should accordingly take care to ensure that the consultants they utilize understand the owner’s obligations and will conduct themselves accordingly.

Robert J. Kennaley  –  McLauchlin & Associates

Rob Kennaley practices construction law in Toronto. He speaks and writes regularly on construction law issues and can be reached for comment at (416) 368-2522 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.

Rob Kennaley practices construction law with McLauchlin & Associates in Toronto and Simcoe, Ontario. He speaks and writes regularly on construction law issues and can be reached for comment at (416) 368-2522 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice.  Also, changes in the law and its application may have occurred since the original drafting of this article and neither Rob Kennaley, McLauchlin & Associates or Landscape Management Network warrant that the information contained herein is up-to-date. Those who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.

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