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: richard.bell@blakes.com