Tendering Risks
Richard Bell Blake, Cassels & Graydon LLP
Project Management Conference November 23rd, 2015
Overview
• Guiding Principles • The Legal Framework of Tendering • Resulting Obligations for Owners/Contractors
– Managing owner risk – Managing contractor risk
• Identifying and Managing General Tendering Risks – Specify Process – Tips for Drafting and Evaluating Tender Documents
Guiding Principles • To protect and maintain the integrity of the
tendering system • To ensure no unfair advantage and to
uphold the expectations of the parties • To maintain the duty to act fairly and in
good faith
The Legal Framework of Tendering
• Basic Concepts of Tendering – Implied obligation to accept only compliant
bids – Duty to negotiate fairly and in good faith: no
unfair preference of bidders, all bidders to receive similar information, no favouring bidders, no bid shopping
– Formation of Contract A/Contract B
The Legal Framework of Tendering
• Basic Legal Framework
• Contract A (Bidding Contract) – will arise in most cases, but not every case
• Contract B (Construction Contract) – formed when the single successful bid is
accepted
Legal Framework “Contract A and Contract B”
The Queen (Ont.) v. Ron Engineering – Ron discovers mistake after submitting bid, refuses to
sign construction contract – Crown takes Ron’s $150,000 bid security
• SCC found tendering process involves two
contracts – Unilateral Contract (Contract A) - created once bid
submitted – Construction Contract (Contract B) - awarded to
successful bidder – Contract A not formed if bid is substantially/materially
non-compliant
Terms of Contract A and Contract B
• What are the Terms of Contract A? – For the most part, express terms of owner’s tender
documents govern – In return for freedom to set terms, owner is obliged
strictly to follow the terms it has stipulated – Implied Terms: Owner must treat all bidders fairly and
equally, without hidden preferences or undisclosed bid evaluation criteria
Terms of Contract A and Contract B
• “Equally” does not always mean treating all bidders the same – some bids will warrant more attention
• “Fairly” does not necessarily oblige owner to select the lowest bid
• Privilege Clauses (“lowest or any tender not necessarily accepted”) – enforceable, within certain limits
• Duty of procedural good faith is paramount
Impacts of Ron Engineering
• Contractual rights and obligations arise between owner and bidder prior to contract actually being awarded – Chance of liability for breach of contract
• Importance of tender documents – Call for tenders – Bid
• Increased certainty
Resulting Obligations Carry Risk
• Cost Risks – For the contractor: competition risk
• cost of preparing bid, risk of mistake in the bid documents, and risk of underbidding and performing at a loss
– For the owner: risk of undesirable tenders being submitted
• Liability Risks – Failure to comply with obligations (express or implied) of
the tender documents will result in vulnerability to litigation claims
Owners’ Risks
• Obligations – Implied obligation to only accept compliant
bids – Implied obligation to treat all bids consistently
and fairly • Includes duty to conduct tender process in good
faith – To enter into Contract B
Obligation to Only Accept Compliant Bids
MJB Enterprises v Defense Construction – Owner awarded the contract to a non-compliant bid – Owner believed in good faith the bid was compliant
• Rule: there is an implied term in calls for tender that the owner will only accept compliant bids – Acting on a good faith belief that the bid is compliant is not a defense
• Damages: equal to the profit the lowest compliant contractor would have made
Risk: Exposure to legal liability if owner accepts non-compliant bid
Manage Risk: Identify Non-Compliant Bids
• Test: Substantial/Material Compliance • “Merely Irregular” bids can be accepted • Non-compliant when:
– Submitted after close of tenders – Contains alterations to tender form or fails to include required
information – Fails to include bid security – Does not conform to plans in the specifications
• An owner may never accept a non-compliant bid, even if a privilege clause purports to allow it to do so.
Identify Non-Compliant Bids
• Non-compliant tender does not give rise to Contract A – Non-compliant bid constitutes a counter-offer that is
capable of acceptance by owner • Acceptance may breach any other Contract A created
by another party submitting a compliant bid for the same project
• Graham Industrial v. Greater Vancouver Water District
• No compliant bids at all - No Contract A arises – owner is then free to negotiate with any of the non-
compliant bidders • Midwest Management (1987) Ltd. v. BC Gas
NWTSC Case Study: Evaluation & Compliance
Karl Mueller Construction Ltd v Enterprise Settlement Corp, 2007 NWTSC 43 - Tender process for garbage contract - Tender documents also specified type of vehicle to be
used must be a garbage truck or modified dump vehicle - Karl submits using a “pick-up truck” - Bids will be evaluated when they are opened - Bid = substantially non-compliant
• To avoid Contract A, must be shown that bid was submitted in “error” – usually error must be discovered before close of
tenders
– owners should draft detailed tender documents and closely review bid submissions
– bidders should carefully review and follow all tender instructions and requirements
Non-Compliant or “Merely Irregular”
Non-Compliant or “Merely Irregular”
Graham Industrial Services Ltd. v. Greater Vancouver Water District
• Graham advised that its bid contained a $2M error and argued that it could not be accepted because it was materially non-compliant and did not confirm to tender documents
• The Court of Appeal upheld Graham Industrial’s right to walk away from the project
• It held that a discretion clause is effective only once Contract A comes into existence
• Contract A could not arise because Graham Industrial delivered a bid that was “materially” non-compliant
Non-Compliant or “Merely Irregular”
Kinetic Construction Ltd. v. Comox-Strathcona (Regional District)
• Regional District awarded work to Robinson Contracting despite two irregularities in bid
• Trial Judge allowed district to accept bids even though they were defective/irregular based on certain clauses contained in instructions
• The Court of Appeal upheld this decision
Summary: Compliant Bids • Understanding Compliance
– The case law is a mixed bag – There is a natural tension between the “integrity of the
bidding process” and the principle that Contract A is a contract like all others
– Graham Industrial Services (B.C.C.A., 2004) seems to indicate that “compliance” is an objective test
– Kinetic Construction (B.C.C.A., 2004) seems to indicate that “compliance” can be contracted out of
– Only accept compliant bids: Silex Restorations Ltd. v. Strata Plan VR 2096
Manage Risk: Know the Extent of this Obligation
• Obligation: owner cannot accept non-compliant bid, or will be exposed to legal liability
• Obligation: proper evaluation • Limitation: no duty to investigate bids
– Owner need only satisfy themselves that the bid is compliant on its face
• Obligation: duty of fairness
Manage Risk: treat all bids consistently and fairly
Martel Building Ltd v Canada - Consistently
- Criteria and assumptions must be applied to all bids consistently
- Fairly - Fair competition prohibits bidders from gaining an advantage
from a previous relationship with the owner
Risk: – litigation if obligation is breached; – reduced discretion to decide which bid to accept, owner may
have to accept a non-attractive bid
Manage Risk: Privilege Clauses
• Example (MJB Enterprises):
The lowest or any tender shall not necessarily be accepted.
• Provides owner with greater latitude in carrying out the tender process – Permits discretion to consider other qualities like reputation,
timeline, expertise – Allows owners to refuse all bids if none is acceptable – Need for clear and unambiguous language – Does not relieve obligation to treat all bidders fairly
Privilege Clauses
MJB Enterprises v. Defence Construction • Defence Construction sought to rely on privilege clause
in justifying its acceptance of bid • Privilege clause must be read with rest of document • Sorochan’s bid was non-compliant • Was there a breach of Contract A by accepting a non-
compliant bid?
Manage Risk: Exclusion Clauses
• Exclusion clauses limit or exclude a party from liability
• Example: Tercon
2.10 ... Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim
Exclusion Clauses: Tercon and Post-Tercon
Tercon Contractors Ltd. v. British Columbia • Facts
– Request for proposal for highway construction – One pre-qualified proponent entered into a
joint venture with an unqualified party – Bid was accepted – Tercon contractors sued, claiming Province
accepted non-compliant bid
Exclusion Clauses: Tercon and Post-Tercon
– Court looked at whether Ministry had breached terms of the contract by accepting a joint venture and whether exclusion clause could protect them
• SCC decision (5-4) – Restored trial judge decision – Acceptance of non-compliant bid was a breach – Exclusion clause provided no protection
• Rule: Exclusion clause may shield owner from liability under certain circumstances
Exclusion Clauses: Post-Tercon
• New test for whether an exclusion clause should be enforced – Is the clause applicable to the issue in contention? – Was the clause unconscionable when the contract
was made? – Is there any overriding public policy considerations
that warrant not enforcing an otherwise valid exclusion clause?
• Effect?
Exclusion Clauses: Tercon and Post-Tercon
• Exclusion clauses upheld by courts will require more detailed acknowledgements and clarity to be enforced
• Reiterated implied duty of fairness • Emphasized fairness and transparency
are key, particularly in public procurement context
Contractors’ Obligations
• Obligations – To be bound by terms of submitted bid if
accepted by owner – Restricted ability to revoke bid
• Risks – Submitting non-compliant bids – Submitting bids with mistakes
Manage risk: approach tender documents diligently
Owners and Contractors: Right to Enter into Contract B
• Both the owner and contractor will get corresponding rights to protect their positions in the tendering process
• Risk: Contract A is not properly formed – Resulting rights and obligations do not arise
Manage Risk: Specify the Process
Select the appropriate process • Tender vs. RFEI, RFQ and RFP
– Tender
– RFEI – “Requests for Expressions of Interest”
– RFQ – “Requests for Quotations”
– RFP – “Requests for Proposals”
Tender vs. RFEI, RFQ and RFP
• Tender process imposes strict obligations but provides contractual protections and certainty
• RFEI, RFQ and RFP have greater flexibility but lack certainty
• Consider which method is preferable to the situation
• Consider multi-stage process
Beware! Unless tender documents state what process
has been initiated in a manner that is unequivocally clear there will always be risk that tendering law will or
will not apply
Manage Risk: Choosing the Process
• Intention of Parties – indicia of tendering – Irrevocability of bid
– Clause; or, – Deposit/Security
– Specificity of Project • Not excessive, but more than basic details
– No room for material negotiation
Manage Risk: Drafting Tender Documents
Owner may set the rules, but must play by the rules
• Clear language – An implied term cannot be found if there is evidence
of a contrary intention • Intention of the parties
– Owner should be explicit in drafting tender documents to give effect to its intentions
• Freedom of Contract – Parties will be bound by their agreement
Manage Risk: Drafting Tender Documents
Owner • Draft tender documents in plain, clear and
concise language • Avoid leaving too many blanks or requesting too
much information • Put key submission information in one place only
(times, dates, etc.) • Define a clear process for clarification of tender
requirements and response
Manage Risk: Drafting Tender Documents
Contractor • Review call for tender carefully
– Identify the process – Be cognizant of material terms
• Review submission carefully – Compliance with instructions in tender documents – Missing or incorrect information
• Remember – Bid is irrevocable (or subject to penalty if revoked) – If the bid has been submitted and is compliant, it cannot be
revoked, even if it contains errors
Manage Risks: Evaluating Contract Bids
• Proper evaluation • No duty to investigate • Only compliant bids may be accepted
Evaluating Contract Bids: Proper Evaluation
• Evaluate in accordance with evaluation criteria in tendering documents
• Use weighting indicated or, if criteria listed in order of importance, apply in that order
• Satisfactory audit at all stages of process – Reference to a clear, written policy on
evaluating tenders and awarding contracts – Make available to the public and all tenderers
Evaluating Contract Bids: Duty to Investigate?
Double N Earthmovers Ltd. v. Edmonton (City) • City of Edmonton, as owner, accepted bid later
determined to be non-compliant • SCC ruled no irregularity on face of document • No duty to investigate that a bidder will be able
to perform • No duty to investigate beyond the tender
documents • However, must take reasonable steps to ensure
the bid is compliant
Evaluating Contract Bids: No Duty to Investigate
• Force Construction Ltd. v. Nova Scotia (Attorney General) – Owner asked for an additional written confirmation from a bidder – Owner rejected bid when bidder could not obtain the written
confirmation – Court held owner breached Contract A, because the bid was
compliant without the additional written confirmation • Example of where conducting additional investigations
after the fact can lead to owner liability • All concerns should be raised at the time of bid
submissions and all bidders must be subject to the same requirements and requests
Conclusion
• Be mindful of the guiding principles of tendering law
• Prepare clear rules regarding how procurement process will be administered and follow those rules
• As a bidder, make sure your bid documentation is compliant
• As an owner, do not award to party who is not in material compliance with the rules
Questions?
Richard Bell, Partner
Blake, Cassels & Graydon LLP 855 - 2nd Street S.W.
Suite 3500, Bankers Hall East Tower Calgary AB T2P 4J8 Tel: 403-260-9656
E-mail: [email protected]
Top Related