Legal Obligations of Public Purchasers

TO THE READER

I have endeavoured to make this material as current as possible but it is impossible to be certain that all of the information provided is up to date. Law is in a continual state of change and growth. Additionally, the laws vary from province to province and specific situations may involve unusual laws or considerations which may not be found in these materials. Therefore the reader must be cautious in relying upon the information contained in this material and should always check with their lawyers before taking any action of consequence.

Neither the author nor the publisher can accept responsibility for exact legal accuracy. We have canvassed the width and breadth of the law to present general legal concepts and information for the contracting professional. We are not rendering legal or other professional advice.

For any specific legal problem, the reader should obtain competent professional legal advice, as soon as possible.

For further information regarding this material and the series of legal education courses available from Worthington and Associates, please contact:

ROBERT C. WORTHINGTON
WORTHINGTON AND ASSOCIATES LTD.
927 WEST 8th AVENUE
VANCOUVER, B.C. CANADA V5Z 1E4
604-488-0114 (p)
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www.purchasinglaw.com
 
© Worthington and Associates Ltd.

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In this material, I have attempted to expose you to a wide variety of laws and legal concepts to help you do your work with excellence and awareness. One of those laws is the law of copyright.

The laws of copyright were created in the 1600's in England (the statute of Queen Anne, actually) to compensate creators for their work by preventing others from using "the work" without paying for it. At the time, no one ever imagined how easy it would become to "make a copy" or even several thousand copies with the push of a button.

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Thank you kindly.

Robert C. Worthington

© Worthington and Associates Ltd., May, 2002

TABLE OF CONTENTS

• CHAPTER I - THE GREATER BURDEN ON PUBLIC PURCHASING
  • A. INTRODUCTION
  • B. MANY MASTERS
  • C. IN THE FISHBOWL
  • D. SHRINKING BUDGETS / SHRINKING PROTECTION
• CHAPTER II - METHODS OF CONTRACTING - SOLE SOURCE v. COMPETITIVE BIDDING
  • A. INTRODUCTION
  • B. SOLE SOURCE CONTRACTING
  • C. COMPETITIVE BID PROCUREMENT
  • D. TERMS OF THE BID CONTRACT A
  • E. OBLIGATIONS OF THE OWNER
  • F. EXCLUDING AND EXEMPTING LIABILITY
  • G. NEGOTIATION AND STRICT COMPLIANCE
  • H. OBLIGATIONS OF BIDDERS
  • I. AVOIDING LEGAL RISK AND COMMON PROBLEMS IN COMPETITIVE BIDDING
• CHAPTER III - CASE SUMMARIES

CHAPTER I - THE GREATER BURDEN ON PUBLIC PURCHASING

A. INTRODUCTION

For a host of reasons, the task of the public purchaser is complex, frustrating and thankless. Unlike your counterparts in private industry, you have many goals which at times conflict with each other, many masters who definitely conflict with each other and many critics, who are too often uninformed and self-interested.

Yet, you can get through it all with a little bit of knowledge, a little bit of care and a lot of patience. This course has been designed to help you do just that - achieve a job well done with a minimum of pain, frustration and grief. It won't be pain-free and it will be hard to balance the many conflicting goals and masters while satisfying the many critics. But it can be done.

The first place to start is to recognize where you are. Your primary goal is the same as the goal of all purchasers ... to obtain the right goods or services from the best supplier or contractor at the right time for the best value.

However, unlike the purchaser in a private company, you have more masters, more rules and more challenges to deal with and overcome in achieving that basic goal.

B. MANY MASTERS

Most private purchasers must serve just two masters - their boss and the end-user. That can be tricky but relatively easy to achieve.

The public purchaser, on the other hand, must serve many masters. Public purchasers have bosses and end-users but also have Treasury Boards looking over their shoulders, purchasing and other policies written by others who have different goals than theirs, Ministers and opposition members serving their constituents and at times seeking their fifteen minutes of sound-bite fame, Trade Tribunals checking their procurement processes against sets of rules and potential suppliers/contractors who feel that the procurement is their entitlement. And, sadly, it has always been thus for public procurement.

It is true that the number of masters to serve has increased in recent years. At one time in the not-so-distant-past, procurement was done on the basis of who you knew, not what you were offering. If newspapers are to be believed, that may still be true for Ministers handing out grants and subsidies, but it is no longer true for professional public purchasing. Today, there are numerous rules and policies as well as laws, all designed to ensure a modicum of fairness, equal access and transparency in government procurement. And, it is important to appreciate that most of these rules, policies and laws were put in place to prevent fraud, favouritism and bias, not to create a frustrating job for the public purchaser (an unfortunate byproduct).

For the most part, all of these policies and rules have achieved their intended purposes. Some may have outlived their usefulness; others have not kept pace with changes in law and society; most remain very good ideas with a strong basis in reality. It's just sometimes hard to remember that when you are inside the fishbowl, being criticized by the cats on the outside.

C. IN THE FISHBOWL

Governmental procurement is also subject to far more scrutiny before and after the fact than private procurement.

For mostly good reasons, governments have chosen to open their processes to the public view. It is after all public money, and taxpayers need to feel their money is being well spent (or they won't voluntarily submit to taxation and the whole system collapses).

Equally, it is a confidence thing. Governments rule by trust and if no one trusts the government, no one will comply with government decisions. That way lies chaos and anarchy, something best avoided in practice (although it does make for good movies and books - providing it remains purely fictional).

So, governments create a host of watchdogs and ways to see inside the fishbowl. Auditor generals look through files to ensure value for money spent. Freedom of Information legislation is created to allow the public access to government documents and decisions. Trade Agreements are created to reduce barriers to free passage of goods, services and investments and enforced (or not) by governments and trade dispute tribunals. And, finally, the Courts are increasingly stepping into procurement initiatives to ensure their legal rules are followed.

Private organizations suffer only the Court's scrutiny in their procurements, and even when that occurs, private companies do not have the same motivation to be seen to be fair. Private companies can cut deals behind the scenes (called "settlement on undisclosed terms) or fight back with every legal tool and tactic at their disposal. Governments feel duty-bound to avoid cutting deals and also duty-bound to play fairly in litigation, both for good and laudable reasons but significantly different in style and delivery from what a private company purchaser would do.

Further, when a bidder sues a private company, that bidder knows he is "biting the hand that feeds him" and that hand, whether the bidder wins or loses, will likely not be overly generous in the future as a result. It is rare and only recently that a few intrepid governments have taken the step of barring bidders from future work (see Case Summary: Sound Contracting v. Nanaimo (City) (2001) BCSC).

Most governments take a potential complainant and treat them no differently than any other bidder, at least publicly. In fact, anecdotal evidence suggests that such complainants may even get more favourable treatment to prevent further complaints from bogging down the procurement process. Regardless, it is a brave government who bars a bidder given the resultant negative publicity.

Finally, our ever-watchful (for controversy) fifth estate, the press, seems to take an inordinate delight in seeking and catching governments doing less than their best. Having moved from "all news that's fit to print" to "all news that fits", the press rarely if ever takes private industry procurement to task. But given a hint of impropriety, its another "Fill in the blank"-gate in the making when government wrong-doing is involved.

In all, that's an awful lot of "eyes watching" from the side-lines as you try to achieve your purchasing goal of the right goods at the right time for the best price.

D. SHRINKING BUDGETS / SHRINKING PROTECTION

Perhaps, at one time, governments could afford the real costs of doing business in the fishbowl with the public's money. However, those days (if they ever existed) are long gone and today, governments are faced with increasing demand and shrinking budgets. Unlike private businesses, who can increase prices to dampen demand, governments simply can't under their current rules.

So instead of "just saying no", governments cut, scrimp and save to meet increasing demand, while at the same time, undertaking new initiatives which increase the demand further still. Despite its logical impossibility, we are asked and expected to "do more with less" by both our political masters and the public at large. Small wonder the most often-run education course in government is "Managing Change". The most often attended is probably "Early Retirement Options"!

Nor has being a government become easier in law in the past years. At one time in Canada, we had something called Crown Immunity, a quaint notion from England that essentially said, the King can do no wrong and since all government servants act for the King, they too can do no wrong.

Crown Immunity was the law and thus, in order to be sued, the government had to first consent to being sued. Surprisingly, the government did consent quite often and over time, did it so frequently that it was decided that the Crown should be "a natural person" and thus capable of being sued any old time another person felt like doing so.

At the time this decision was made, the law under which one could be sued was pretty old and settled and largely favoured the wealthy over everyone else. Then, our society changed and with it, so did the law. Gone were the days when "a man could be as negligent as he wanted to be" (an actual quote of the House of Lords in the late 1880's), to be replaced by "everyone must take reasonable care to avoid foreseeable harm to one's neighbour" (same House of Lords, circa 1980's). And, today, we have negligent words, negligent actions and negligent omissions from the past plaguing governments and their budgets. From Native Residential Schools, to toxic tar ponds, to asbestos and urea formaldehyde claims to faulty inspections of leaky condos, the chickens are roosting on our doorstep and they look a lot like vultures.

Nor do governments have the private corporation option of closing the doors and declaring bankruptcy if too many claims are made. Governments must stand and fight. If they lose, they must find a way to pay ... out of that same public purse whence purchasing gets its budget.

THE COURSE

Now all of this was not intended to depress you (although it can be pretty depressing!). It was all simply to illustrate that you all have a very tough job to do in an increasingly tough environment.

As we said earlier, you can get through it, unscathed and even relatively cheerfully. It takes knowledge, care and patience. The first, we can help with, by showing you where the likely legal risks are and how to safely navigate around them. The other two, care and patience, well, you'll have to supply those for yourselves.

As the old Chinese proverb says:

"That the birds of Worry and Care
fly over your head,
This you cannot change.

But that they build nests in your hair,
This you can prevent."

So, in the next few pages, we will try to give you tools to help you keep those "birds" out of your hair.

Our review of the laws and the risks they create for you must of necessity be brief and we can only hit the highlights in the short time we have today. There is a lot more you should know and we strongly urge you to continue your professional education in these areas.

Laws change, usually slowly but sometimes in a heartbeat. Stay current and remember ... it is always better to hear about a case than to be one.

CHAPTER II - METHODS OF CONTRACTING - SOLE SOURCE v. COMPETITIVE BIDDING

A. INTRODUCTION

In the last twenty years, a legal revolution in how we contract for goods and services has occurred in Canada. For centuries prior to the 1980's, the law did not particularly concern itself with how a contracting party was found, and focused almost exclusively upon the contract the parties made. Then, as a result of a Supreme Court of Canada decision in The Queen (Ontario) v. Ron Engineering, the method by which an Owner found the Contractor or supplier became much more important and much more legally risky.

Today, these laws - called the laws of competitive bidding - are an established part of the Canadian legal landscape. For Owners and Bidders, knowledge of how and when they will be applied is required for anyone who contracts with others.

Canadian law divides methods of procurement into two separate and distinct methods and attaches different rules to the process, depending upon which method is chosen. The two methods are:

1. Sole Source Contracting, and
2. Competitive Bid Contracting.

The legal differences and consequences between the two methods are significant and dramatic. For those who do not know or understand these differences, these laws can also inflict a painful and expensive lesson.

B. SOLE SOURCE CONTRACTING

Under this method of procurement, two parties find each other, negotiate through offer and acceptance and make a deal (or not, as the case may be). No competition for who has the best offer occurs; the Owner (who is the one seeking the goods or services) simply chooses a single supplier or vendor to try to achieve a contract with.

In law, such a relationship is governed by the general laws of contract, agency, etc. The law of offer and acceptance governs whether any contract has been formed, the laws of negligence and misrepresentation control what can be said and no particular legal duties exist - other than the general requirements of honesty and good faith. The parties are bound by what they have agreed to do.

Either of the two contracting parties side can walk away without liability at any time prior to the matching of offer and acceptance but not after agreement has been reached. Thus, the critical feature in sole source contracting is when or whether agreement was achieved (i.e., when did a contract (if any) come into being).

Sole source contracting has its disadvantages and drawbacks, however. When one sole sources, one is only talking to one vendor or supplier. One can negotiate price and any other term in the contract and walk away if you can't achieve a satisfactory agreement but no one knows whether this is the best deal or a good price or whatever. There might be something better or cheaper out there in the marketplace, but when you only talk to one vendor, you can't be sure.

Additionally in many organizations, especially in organizations using public monies, there is a bias against sole source contracting on the grounds that this method can be utilized as an unfair preference, resulting in charges of favouritism or discrimination.

Finally, for some organizations, sole source is difficult to justify publicly and such organizations prefer the defensibility of competitive bid procurement.

Even for those organizations with fish bowl sensitivities, however, sole source contracting does have a place in procurement. It is generally useful where it is a small dollar contract, where it is an urgent problem or a sensitive one where sole source is often the only way one can ensure confidentiality. Finally, sole source contracting may be required where only one vendor or Contractor has the unique skills or products required to do the job.

C. COMPETITIVE BID PROCUREMENT

Competitive bid procurement, as the name implies, involves vendors or suppliers competing in some way for the contract. The traditional method involves the Owner issuing an Invitation or Request to either select vendors (invitational bidding) or even the general contracting community (public bidding) to participate in a process of competition. Bidders who wish to participate submit binding offers to do the work or supply the goods by a fixed rate and time and in accordance with the Owner's requirements. The Owner then reviews and evaluates all on-time bids and (usually but not always) chooses one Bidder to do the work. The Owner and that Bidder then sign a contract to do the work.

Within this basic system, there are many variations but the basic features,

1. Invitation to bid issued
2. Binding bids submitted
3. Owner chooses one for award,

are common to all types. In the Courts, what turns a procurement into a competitive bid are these three features - a competition for award, binding bids and the Owner choosing from the competitors.

The three most common types of competitive bidding in current use in Canada are:

1. The Request for Quotations,
2. The Invitation to Tender, and
3. The Request for Proposals.

Requests for Quotations (RFQ) tend to be issued to select suppliers, tend to be used for small purchases or those where several vendors / suppliers can supply the same or similar products and the real competition occurs over such things as price or delivery date.

Invitations to Tender (Invitations) tend to be used for major construction projects and other large dollar purchases, are most often issued to the general Contractor / vendor / supplier community, tend to have very detailed requirements (specifications) to be met, and can use a host of factors or criteria in evaluation but price is often the most critical competitive factor in award.

Requests for Proposals (RFP) follow the same general format but tend to be used for procurements where the Owner is generally describing its needs and the proponents are expected to offer their method of achieving the objectives described the Owner. RFP's tend to be issued to select vendors / suppliers and tend to have several objective criteria and some subjective criteria for evaluation. Price is not unimportant but the manner and method of achieving the Owner's described result are much more critical in award.

The law does not control which method of competitive procurement is chosen. Most often, an organization's policies will dictate which is used and more importantly how it is used. However, the law does becomes deeply involved in the process once any method of competitive bidding is chosen by the Owner.

As we stated in the beginning of this section of the materials, originally the Courts did not treat competitive bidding procurement any differently than sole source procurement. The parties (Owner and the Bidders) were free to do almost anything they wanted prior to award of a contract, subject to the laws of fraud, misrepresentation and the like. Once an award was made, the law of contract stepped in and applied its rules (eg. offer matched by acceptance, binding deal from award onwards, perform or pay damages, etc.).

For many years, the parties did exactly as they chose (eg. Owners used competitive bidding as a fishing expedition or a screen for choosing their favourite Bidder, Bidders withdrew their bids after closing or extorted a better price at award). Parliament refused to act to remedy these unfair practices, so the Courts finally decided they had to act. By unanimous decision of all nine justices, in a case called the Queen v. Ron Engineering (1981) at the Supreme Court of Canada, the Courts created a new set of rules to govern all forms of competitive bidding.

Law does not move at dot.com speed when it is fashioning new rules and it has taken almost twenty years and literally thousands of cases to set out what rules of law will govern competitive bidding. Today, we have a fairly good idea of what most of the rules are, but the Courts have made it crystal clear that the categories are not closed and new rules are still being formulated.

The principle that the Courts are operating on was first expressed by Mr. Justice Estey of the Supreme Court of Canada in the Ron Engineering decision. As he stated "I share the view ... that the integrity of the bidding system must be protected where under the law of contracts it is possible so to do." And, it is that "integrity of the bidding system" that has been the justification and driving force behind all of the (new) rules of competitive bidding. A comprehension of how to honour the integrity of the bidding system is critical to an understanding of how competitive bidding rules differ from those of ordinary contracting (sole source).

In sole source, there are (usually) only two parties and the law presumes they are equally capable of protecting themselves. Additionally, no one is legally bound until they agree to be bound. Whether they agree to be bound is solely within their control.

In competitive bidding, Bidders put in their best offer, which is binding upon them after close of bidding. They are competing for the award of a contract but they are not in control of the process by which they are chosen. In terms of fairness, something must be created to control that process. Otherwise, chaos reigns supreme.

So, using the laws of contract, the Supreme Court of Canada created a new regime of law to control all types of competitive bidding. How they did this (in non-legalistic terms) is by binding both the Owner and all qualified Bidders to the declared process of competition from the close of bidding until an award is properly made.

In legal terms, the Invitation or Request became an offer by the Owner to all invited Bidders to participate in a declared and binding process which will likely but not necessarily lead to an award of a contract to do the subject matter work. Those who bid properly and as requested accept that offer (the Invitation or Request) by bidding. As a result, something now known as a Bid Contract A comes into existence between the Owner and each compliant Bidder, which contract will govern the process of qualification, evaluation and award (if any is made).

Assuming the Owner does wish to choose a Bidder and make an award, then a second contract, called the Tender Contract B (or Proposal Contract for RFP's), comes into existence, which contract will govern the actual project work. Once a Tender Contract B is formed with the successful Bidder, if the process was conducted properly and in accordance with the declared rules and requirements of the Invitation, all of the other Bid Contract A's with the unsuccessful Bidders automatically expire upon award. Using the Bid Contract A - Tender Contract B system, the Courts created a binding, certain and controlled process to replace a system which was plagued with unfairness, uncertainty and chaos.

The change to a binding and legally enforceable process for all forms of competitive bid procurement has not been without difficulty. Lawyers have severely criticized the legal reasoning used by the Supreme Court of Canada to create this process. Owners have complained that this binding process has made it much more difficult to get what they need or want. And Bidders have complained that it is unfair to hold them to their mistakes in their bids.

While the Supreme Court of Canada and other Courts have been cautious (at least initially) in their rule making, most of these complaints have largely fallen on deaf ears ... for good reason. Basically, the Courts are saying - it is the process which triggers the rules of competitive bidding. If Owners don't like the rules, don't use the process; sole source instead. If Bidders don't like the rules, don't bid. If enough don't, the Owner will by the power of marketplace persuasion, change the process to something more palatable.

D. TERMS OF THE BID CONTRACT A

All contracts have both express and implied terms. The express terms are what the parties in agreement created, while the implied terms are exactly that - implied by the Courts.

In competitive bid contracting (specifically in the Bid Contract A), there are also implied and express terms for the Owner and each of the Bidders. While the express terms are largely clear (as they are the words used in the Invitation package that Bidders accept by bidding), the implied terms (being created by the judges to "protect the integrity of the bidding system") have taken some time to create and discover. In our legal system, judges don't issue pronouncements, but only deal with the issue in dispute before them. But after hundreds of cases, we now have a pretty good idea what the implied rules are.

It is also important to appreciate that the express terms of the Bid Contract A (i.e., the Instructions to Bidders and the other rules governing the Invitation / Request process) are governed by the same rules of contractual interpretation as other contracts are. This means primarily that Freedom of Contract will govern (i.e., aware and knowledgeable persons are free to agree to any terms as long as they are lawful). Translated into real world effects, this means the parties are free to forget things that are important, free to write inappropriate rules and free to make stupid choices without the Court intervening to protect them.

For an Owner writing the Invitation / Request, it means they must set out all the rules and all the power they may want or need. An Owner can correct or add to the Invitation / Request prior to closing by issuing an addendum to the Invitation / Request (if the original Invitation / Request gives them the right to do that). But, after close of bidding, the Owner can not make up new rules, add or subtract from what exists or ignore any particular rule. They are contractually bound - to each and every Bidder - to do exactly what they said - no more, no less.

Even if one Bidder was agreeable to the change, it is not good enough. Since all Bidders who properly bid have the same Bid Contract A, all of the Bidders must consent and the objection of even one Bidder would be enough to prevent the Owner changing the rules of the game. In such a scenario, the Owner, if they truly needed the change, has only one lawful choice - cancel that Invitation / Request and start again with the new rules in place.

As you will see in the cases, this has caused more than one Owner grief and money along the way. The Courts will hold an Owner to the words they used.

On the other side, Bidders too are going to be held to the Rules of the Invitation and to the words the Bidders use in their bids. The first case under the new regime, the Queen (Ontario) v. Ron Engineering, made that crystal clear when the Courts refused to allow the Bidder to withdraw their "irrevocable" bid when the Bidder discovered an honest error in the bid price after close of bidding.

The Court ruled it was neither unfair nor unlawful for the Owner to insist the Bidder either do the work for the price bid or pay the price (in this case, loss of their bid deposit).

In fact since Ron Engineering was decided, the Courts have only rarely allowed any Bidder to escape their binding bid after closing. None have allowed the Bidder to change their prices and none have allowed withdrawal of a valid, compliant bid. Thus far, only a non-compliant Bidder has been allowed to withdraw without penalty and even that case has been subsequently overruled by further changes in competitive bidding law.

From all the cases, one message has consistently been delivered - after closing you will be held to the words you use in competitive bidding.

With respect to the implied terms of the Bid Contract A, there are several, for the Owner and for the Bidders. These have all been created by the Courts and are said to arise from the nature of the competitive bid process. They can be lessened to some degree by appropriate wording in the Invitation / Request but they can not be eliminated. They will be part of every competitive bid procurement.

For the Owner, the implied obligations or terms of the Bid Contract A will be:

1. A duty of full disclosure; and
2. A duty of fairness and good faith.

For the Bidder the implied term of the Bid Contract A will be:

1. Honour the rules of the Invitation / Request.

If any of these implied obligations are broken, then the wronged party has grounds for a lawsuit for breach of contract, in this case the Bid Contract A.

Where it is a Bidder breaching, the Owner has a potential lawsuit. Where it is the Owner who breached these implied terms, then it will be the Bidder(s) who have been harmed who have the potential lawsuit. Often that will only be the successful Bidder (in the case of a failure to disclose) or the most-likely-but-due-to-Owner-breach unsuccessful Bidder (in the case of unfairness or breach of the rules). It could however be all the Bidders commencing separate lawsuits (one for the award and others for cost of preparing their bids). This possibility has not yet occurred but it is certainly possible and overdue in fact!

Do not make the mistake (as many have) of confusing an absence of lawsuits with the absence of rights to sue. Many things come into play when deciding whether to sue, only one of which is whether one has the legal right to sue. The cost of a lawsuit, even if successful, can be huge - in terms of legal fees, lost business and bad publicity. Many Bidders and most Owners will let a lawsuit go unless they see it is absolutely essential or worthwhile. But that does not mean they couldn't sue and win, it simply means they choose not to do so.

E. OBLIGATIONS OF THE OWNER

In this section, we will explore in more detail the implied obligations of the Owner in competitive bidding. In the relatively short time we have available, it will not be possible to examine all the nuances and quirks of these obligations in minute detail but we will show you what these obligations are generally and the cases we have selected (as representative only, for there are hundreds) will further illustrate what the Courts are trying to do.

If this type of procurement is commonly used in your organization, you should take a detailed legal education course in this area of competitive bidding. It will be worth it in dollars saved and peace of mind.

DUTY OF FULL DISCLOSURE

In sole source contracting, there is no duty of disclosure as the parties are presumed equal, not bound until they know the whole contract they are agreeing to and can act to protect themselves. In competitive bidding, there is a positive duty on the Owner to fully disclose the real nature of the Work and the Contract which will govern the performance of the Work because of the irrevocable nature of competitive bidding after close of bidding. Bidders must know in fully disclosed detail what they are bidding upon and how they will be chosen before they bid.

As the leading case on disclosure stated, when an Owner issues an Invitation to Tender package, the Owner impliedly promises:

1. There are no important facts within the Owner's knowledge which have not been disclosed to Bidders in the Invitation;
2. The information provided has been furnished in good faith and in the honest belief that it is complete and accurate; and,
3. If the information is not complete, the Owner will disclose that in the Invitation.

Opron Construction V. Alberta
(1994) Alberta Queen's Bench

The requirements of the Owner fully disclosing the nature of the work and the rules of the competition has several aspects, from requiring disclosure of all preferences and biases that the Owner might or will apply (eg. local preference policies, unionized work force, etc.), disclosure of evaluation criteria, disclosure of the true nature of the work and disclosure of the project contract that will be signed if an award is made, to the very controversial disclosure of site and subsurface soil conditions in construction.

Disclosure by the Owner is a positive legal duty in competitive bidding (meaning the Owner must disclose, not merely answer if asked, as in sole source contracting). And, to date, the Courts have created very few exceptions (eg. Owner's budget, names of Bidders invited, who is on the evaluation committee, among others).

Policies can also have an effect upon disclosure. For example, the law does not require disclosure of the weighting of the evaluation criteria (but it does require the evaluation criteria themselves to be generally disclosed). But, for government in Canada, due to the Internal Trade Agreement between the federal and provincial governments, the criteria must be disclosed and the weighting of that criteria must also be revealed to all potential Bidders. Likewise, those government organizations bound to the NAFTA Accord are bound to reveal more details (and allow for complaints to be dealt with under the NAFTA rules). Private companies and those quasi-government or exempt agencies of government are not bound by or subject to such additional rules.

Most often, if there has been a breach of the disclosure requirement by the Owner, it will only be discovered after award and commencement of work, so it is only the successful Bidder who will have a claim. However, the possibility does exist that more than the successful Bidder could be harmed by a failure to disclose. In that event, all harmed would have claims for failure to disclose.

In terms of awarding damages, in most cases the Courts seem to be prepared to award damages equal to whatever it cost to remedy the non-disclosure (eg. damages equal to the extra costs) but there have been a few cases where the Courts have considered the non-disclosure so serious that they have allowed the Contractor to stop work, rescind the contract and receive full payment for their work and lost profit.

DUTY OF FAIRNESS AND GOOD FAITH

The obligation of the Owner to act fairly and in good faith to all Bidders is the most controversial requirement in competitive bidding and the one which is the hardest to understand. This duty arises from the need to protect the integrity of the bidding system. It is somewhat foreign to law and is almost bound to be controversial, for only rarely does the law concern itself with fairness. More often, especially in contract matters, the Courts prefer to simply require true agreement between the parties and leave issues of fairness to the parties to sort out for themselves. In competitive bidding, however, if integrity of process is paramount then the Courts must, however gingerly, create some rules governing fairness.

It should also be noted that the Courts are definitely not concerned about fairness in any wide sense. As it is fairness of process that is the concern, the Courts merely require fairness to all Bidders (i.e., no one Bidder is secretly treated in any way differently than any other Bidder). It is still acceptable to have unfair rules (such as cancellation without award) providing the rule is disclosed or obvious before Bidders bid and the rule is equally applied to all Bidders. Thus, such things as local preference or other Owner biases are fine, if they are known or disclosed but are unacceptable and unlawful if not disclosed. In effect, you can be unfair if you disclose you are going to do so in advance. Then, if a Bidder, knowing this, chooses to bid, the law will not intervene as the Bidder accepted this rule as part of the game when they bid.

The duty of fairness and good faith applies throughout the competitive bid process from close of bidding to award. At each stage of the process, it will have different applications.

For example, at the close of bidding, this duty requires:

1. No late bids accepted;
2. No non-compliant bids accepted (unless the Invitation allows it);
3. All Bidders received the same information;
4. None of the information provided by the Owner to Bidders is inaccurate or incomplete (unless noted as such); and
5. All criteria for qualification and evaluation have been disclosed.

At the evaluation stage, fairness and good faith require that:

1. All Bidders be evaluated only on disclosed criteria;
2. All evaluations be done by the same people and in the same manner;
3. No undisclosed preferences or biases used in evaluation;
4. No predetermined winners or losers; and,
5. All evaluations will be done in good faith.

At the award stage, fairness and good faith require that:

1. No award be made to a non-compliant Bidder (unless the Invitation allows for it);
2. Any award will be substantially similar to what was originally sought in the Invitation or Request; and,
3. Any award made will be based upon the disclosed criteria, fairly done.

Finally, throughout the competitive bid process, the Owner must generally act honestly and in good faith (eg. no hidden motives or agendas, no political interference, no cheating).

As you will see from the cases we will show you, it is no small feat to achieve a fair, open and honest process - especially if one has an agenda which may be at odds with fairness to all Bidders.

Competitive bidding can also be made much more difficult when policies of the organization work against the law (eg. in Chinook Aggregates v. Abbotsford (1985), BCCA, Abbotsford wanted to have a local preference policy and also wanted to keep it secret so they could apply it or not at their choice - which proved to be impossible under competitive bidding law).

Finally, other persons in your organization (eg. end users or technical advisors) may derail a competitive procurement by having hidden preferences or biases against a Bidder.

All of these factors must be acknowledged and must be managed if a competitive bid procurement is to be conducted well and lawfully. Education (as to what the legal risks are), openness (as to what the real needs are), and finally discipline (of those who break or bend the rules after knowing better or being warned) are your only tools. Despite what you may be told by lawyers, there are very few effective ways to get around or exempt your organization from the basic requirement of fairness and good faith to all Bidders.

F. EXCLUDING AND EXEMPTING LIABILITY

In basic contract law, due to Freedom of Contract, it is theoretically possible for any person to agree to waive their rights. Commonly referred to by a variety of names (exclusion of liability, limitation of liability, exemption of liability, risk avoidance or whatever), all of these contractual clauses seek to do the same thing - shift a legal risk or liability from where the law places it to someone else by agreement.

While the Courts are prepared to accept such clauses in general, they are not particularly keen on them and, as a result, they place several restrictions and requirements on the use of any clause which seeks to limit or exclude liability. These include:

1. Requiring clear agreement to the clause;
2. Requiring the clause to be clear, specific (as to the risk avoided) and precise;
3. Prohibiting the avoidance of fraud, performance or most often negligence; and,
4. Requiring the clause to be reasonable in all the circumstances (eg. limitation of liability to defined events Is more reasonable than wholesale exemption of all liability).

In competitive bidding practice, exemption and exclusion of liability clauses are common as Owners seek to reduce their legal risks. Some are effective - eg. where in construction the Owner requires the Bidders to examine the site of Work and then be bound to pay for additional work themselves which the Bidder's inspection missed - but not always and never where the Owner did not firstly fully disclose what the Owner knew about the site.

Many common exclusion clauses do not work when the Owner has not first done all they could have and should have done. This is also a place where an organization can be fooled by an absence of successful lawsuits into believing they truly are exempt from liability only to discover when they are sued that the clause is ineffective.

As you will see from the cases, such clauses will not protect you or your organization if you have acted unlawfully. By all means, continue to use them, for they can be effective but don't overly rely upon them and don't expect them to be effective if you have acted unlawfully in some way.

For example, many Owners have argued that the common phrase "Lowest or any bid not necessarily accepted" allows the Owner to award to any Bidder it wants even if there has been unfairness or lack of good faith. All have failed. The so called Owner's privilege clause does have meaning and is critically important to always include in all competitive bid procurements but it does not allow the Owner to act unfairly or unlawfully.

By way of an aside, the Privilege Clause does allow an Owner not to award at all ("or any bid not necessarily accepted") and the power not to award to the lowest priced bid ("lowest bid ... not necessarily accepted") IF for good, valid and defensible reasons the Owner wants to award to another Bidder. Establish a business case based upon the disclosed criteria and the evaluations of the bids and you can award to other than the lowest Bidder. But you can't unfairly award to other than the lowest Bidder; the Courts won't let you use the privilege clause for that purpose.

G. NEGOTIATION AND STRICT COMPLIANCE

Two of the thornier problems for an Owner in competitive bidding procurement concern two particular areas where everybody (both Owners and Bidders) have opinions - negotiation with Bidders and waiver of strict compliance with the mandatory requirements of the Invitation / Request package.

Negotiation with the other party to form an agreement is a pillar of contract law. It is not only expected, it is the justification behind the principle of Freedom of Contract and all the attendant consequences which flow from that principle. However, when it comes to competitive bidding, where particularly the Bidders are bound to irrevocable bidding and the Owner is bound to treat all Bidders fairly in selection, evaluation and award, allowing unrestricted negotiation between an Owner and one or more Bidders creates problems. How can the Bidder be bound to their offer irrevocably if the Owner can require the Bidder to change their offer by negotiation? How can it be fair to all Bidders if one (or more) Bidders can improve their chances of award through negotiation with the Owner? These and a host of other questions are at issue whenever negotiation with a Bidder after closing but before award occurs.

As yet, there is no case where the Court has been asked whether negotiation with one Bidder before award is acceptable, so we are left to speculate based upon the cases which are not directly on this issue.

Clearly, the Courts will not allow a Bidder to withdraw their irrevocable bid or change it after closing. Nor will the Courts allow an Owner to substantially change an award from what was originally asked for. Nor will the Courts allow the Owner to correct or change a Bidder's bid after closing ... unless these possibilities were disclosed to the Bidders before the competition started.

The Courts are not prepared to allow an Owner to do something which was not disclosed. Nor will the Courts allow undisclosed favoritism for one Bidder over others. And the Courts are going to uphold and protect the integrity of the bidding system wherever possible under the law of contracts.

By logical extension then, with respect to negotiation during the process (i.e., prior to award), if it is not outright unlawful, it will likely be severely restricted. It is very likely that seeking changes to a bid after closing (which is what the Owner is doing when they seek to negotiate) to extort a lower price, correct an Owner mistake in the Invitation or Scope of Work, or allow that Bidder an unfair advantage over other Bidders will not be allowed. It is possible too that the Courts will restrict negotiation in other ways such as by requiring the possibility of negotiation to be explicitly detailed in the Invitation / Request. Or they may simply prohibit it altogether until after award. After all, if the Owner needs to negotiate that much, they could always sole source (where negotiation is unlimited) or the Owner could explicitly hold a competition to determine who was the Bidder then to be negotiated with. It all depends upon how far the Courts are prepared to go to protect the integrity of the bidding system and we simply don't really know until such a case occurs.

Any organization which wants to or has to negotiate with a Bidder would be well advised to be proactive in this area rather than wait until we know what the Courts decide on the issue of negotiation. By the time we know and this area of law clears, since Bidders can sue for past mistakes (up to two years past), an Owner could still be in trouble for something they did two years ago.

Any Owner who intends to negotiate at all prior to award (and this includes those Owners who want to "clarify" bids after closing), should do several things:

1. Disclose that such negotiation may occur, with whom, and how it will be done, in the Invitation /Request;
2. Choose the Bidder to negotiate with fairly and in accordance with the Invitation evaluation criteria;
3. Negotiate carefully, only if necessary, and then only on declared items with the selected Bidder; and
4. Be ever watchful that any negotiation can not be viewed as unfair to those not invited to negotiate (eg. substantial changes in scope or price should result in a new competition, not resolved by negotiation before award).

Finally, if anything doesn't feel right or fair, don't do it that way. Find another way to achieve it. It is always better to read about a case than to be one.

With respect to the other current "problem" issue, being that of compliance with the mandatory criteria, this too requires very careful and thoughtful consideration.

In the past, some Owners felt it was appropriate to waive a Bidder's non-compliance with the mandatory requirements of the Invitation / Request - especially if the bid was otherwise particularly attractive (eg. a low price or a good Bidder). Since the most recent decision of the Supreme Court of Canada in MJB Enterprises v. Defence Construction (1951) Limited (1999) and the BCCA decision in Vachon Construction v. Cariboo (1997), waiving mandatory requirements is much more of a dubious choice for any Owner unless such a right was clearly and fully disclosed. In both these cases, a non-compliant Bidder was not disqualified but should have been under the Invitation rules, and the Owner paid the price of lost profit to the Bidders who should have won if the rules had been followed.

Waiving any requirement is a multi-faceted issue. To waive a requirement for one Bidder is unfair to the other Bidders who complied. Waiving or accepting something other than what was sought also creates in law acceptance by the Owner of a counter-offer from a Bidder where no counter-offers are contemplated. Finally, waving a mandatory requirement for any reason is hypocritical - either it's mandatory or it isn't.

Owners argue they can't control what Bidders choose to do and they (the Owners) shouldn't be forced to cancel or award to another simply because the Bidder made a mistake in their bid. Bidders will often support this argument as well saying they shouldn't be penalized or denied work simply because they didn't exactly comply with the Owner's unreasonable requirements.

The Courts however take quite a different view of waiving requirements. They look at it purely from a legal viewpoint ... an Invitation (offer) contains all the terms in competitive bidding and to be a valid bid (acceptance of the offer) the bid must match the requirements of the offer. If the offer says this or that is mandatory (eg. shall or must), then it's mandatory. Any bid which does not meet that requirement is not an acceptance and can not be considered further by the Owner without the Owner breaching its binding obligations to the other Bidders. Thus, unless the Owner specifically states a different rule (ie., counter-offer will be accepted and considered), then any variation from the "mandatory" criteria will be non-compliant and can't be considered.

If an Owner were to state they would consider non-compliant bids, they would have to do so expressly in the Invitation. How detailed they would have to be is a matter too speculative to consider. But even then, problems still occur as it is unlikely the Courts would allow waiver of non-compliance if the effect of that would be to prefer that Bidder over another unfairly or to allow a Bidder who was compliant to lose what should have been their award.

The Owner argument about needing to waive compliance without disclosing they may do that is unlikely to be given much credence in the Courts. Most often, the Owner wants to waive compliance because of price, yet by choosing competitive bidding an Owner is saying let them (the Bidders) compete, so I'll get the best price. The Courts may respond with 'Owner, you got the best you could, either cancel or award but don't change the rules of the competition'. As yet we don't know what a Court would do in such a scenario.

Nonetheless, most Owners seem to believe they need to have the right to waive non-compliance. As with the right to negotiate, such a power would have to be explicitly described in the Invitation / Request. And, it is strongly suggested that such a power should be used sparingly and carefully in practice. If the reason one Bidder (non-compliant) is lower is because they were non-compliant, while the others were higher because they were compliant, then waiver of non-compliance would likely be considered unfair.

By the same token, if a Bidder by mistake missed some minor or inconsequential mandatory item, then waiving this non-compliance might be acceptable.

At this point we don't know with any certainty and a wise Owner would firstly disclose such a power and then use it with great care - at least until we know for sure.

H. OBLIGATIONS OF BIDDERS

As with the Owner, the Bidders too are each individually bound to the Bid Contract A and its express and implied terms. The Bidder, once close of bidding occurs, is legally bound to their bid and is no longer free to do as they choose.

Exactly what the Bidder will be bound to will depend upon what the Invitation rules state with respect to the express terms of the Bid Contract A.

With respect to the implied terms, while there are many ways to characterize the Bidder's implied obligations, essentially they amount to "honour the rules of the Invitation".

If bids are described as fixed, firm or irrevocable in some way, either conditionally (i.e., lose the bid bond or deposit if withdrawal is sought after closing) or absolutely (i.e., irrevocable for 60 days and no way to withdraw), then the Bidder is bound and can not withdraw regardless of the kind of mistake they make (honest or otherwise) in calculation or elsewhere in their bid. (It should be noted that if the error is obvious upon opening of the bids, then the Owner can not accept the bid, neither the Bidder nor the Owner can "correct" it and the bid must be disqualified).

Equally, the Bidder can not refuse to sign the Tender Project Contract (Tender Contract B) if they are the one chosen for award, assuming that the Tender Contract B was originally included in the Invitation to Tender package. If the draft Tender Contract was not included, then in law the Bidder has the argument that they did not bid based on these terms and they are not bound to sign a contract with undisclosed terms. In such a scenario (which has not yet been litigated in the Courts), the Owner and Bidder would have to then come up with a contract that does reflect only what was originally in the Invitation. However, very few Bidders make such arguments unless the Owner's contract has something unusually onerous or unexpected in it.

Once the Tender Contract B is signed, then the other Bid Contract A's with the unsuccessful Bidders will expire (if the award and process of competition was run according to the rules and laws) and the rest of the relationship between the Owner and the successful Bidder will be governed by the ordinary laws of contract.

If it is alleged by one of the unsuccessful Bidders that the competitive bid process was unfairly run in some way, the award to the chosen Bidder stands but the Owner may be liable (later) to that unsuccessful Bidder for their lost profit from the contract they should have won (assuming the unsuccessful Bidder does sue and does win).

I. AVOIDING LEGAL RISK AND COMMON PROBLEMS IN COMPETITIVE BIDDING

The vast majority of lawsuits and legal problems in competitive bidding are caused by ignorance and by inattention to detail.

Ignorance of what the rules of competitive bidding are (or that there actually are rules) seems to cause a lot of the lawsuits. Political interference, hidden agendas, over focus on price advantages which could be obtained and a failure to budget properly will all cause a lawsuit sooner or later. If these are common in your organization, then you would be better advised to use sole source contracting than try to twist the competitive bid process to accommodate your agenda.

Inattention to detail ranges from not knowing what the Invitation / Request package actually states to not spending sufficient time in creating a workable (for the Owner) Invitation / Request to govern the particular procurement. For the Owner, the Invitation is the place where the Owner can set up the rules and give themselves what they may need in terms of power and flexibility. Once the competition starts, it is possible to add rules but it is problematic and complicated, not to mention suspicious. Once the competition closes, it is impossible to change the rules and the Owner's only option in the even the playing field has become uneven or the integrity of the process has been compromised is to cancel and start again with better rules.

Template competitive bid documents can be created but they are complex and still need to be adjusted for every type of procurement. One size never fits all and no template can cover everything. Even if it could, human error and practice can still derail even the best documents.

Only by a combination of good documents and good practices can the Owner truly reduce and manage the legal risk created by the laws of competitive bidding.

CHAPTER III - CASE SUMMARIES

• MJB ENTERPRISES LTD. v. DEFENCE CONSTRUCTION (1951) LTD.
  1997 - Alberta Court of Appeal
  1999 - Supreme Court of Canada
• MIDWEST MANAGEMENT V. BC GAS
  1997 - British Columbia Supreme Court (in Chambers)
• MIDWEST MANAGEMENT V. BC GAS
  2000 BCCA
• MARTEL BUILDING LTD. v. CANADA
  (2000) Supreme Court Of Canada
• SOUND CONTRACTING LTD. v. CITY OF NANAIMO
  1999 - British Columbia Court of Appeal

COMPETITIVE BIDDING PRIVILEGE CLAUSE
NON-COMPLIANCE

MJB ENTERPRISES LTD. v. DEFENCE CONSTRUCTION (1951) LTD.
1997 - Alberta Court of Appeal
1999 - Supreme Court of Canada

Defence Construction invited tenders for demolition of a water tank and construction of a pump house and water system. In the original Invitation, Defence instructed bidders to bid unit prices for part of the water system and to specify which of three types of material pipe would be laid in. In a subsequently issued amendment to the Invitation, the choices of fill were eliminated and bidders were asked to bid only unit prices (in effect, shifting the cost of fill choice to the bidders).

MJB bid a specific unit price and were second lowest. Sorochan Enterprises Ltd. (Sorochan) bid a unit price (the lowest) but added a hand written note. "Please note: Unit prices per metre are based on native backfill (Type 3). If Type 2 material is required ... add $6.00 per metre".

Despite complaints by MJB and other bidders that this note constituted a "qualification" by Sorochan thereby invalidating their bid, Defence considered the note to be "merely a clarification" and accepted the bid. Subsequently Defence awarded Sorochan and MJB sued.

AT TRIAL:

The trial judge found that Sorochan's bid contained a "qualification", which made the bid invalid and it should have been rejected. This put Defence in a "technical breach" of their obligations to treat all bidders fairly and as a result all bidders should be reimbursed for their expenses in bidding.

However, MJB was not entitled to their lost profit because Defence had a Privilege Clause "The lowest or any Tender shall not necessarily be accepted", which express term overrode any obligation on Defence to award the contract to MJB. Since MJB could not prove entitlement to the award, they were not entitled to their lost profit from the award to another.

MJB APPEALED

ON APPEAL (UNANIMOUSLY):

The Privilege Clause is not ambiguous. Local practice (The Alberta Guide to Construction states the contract should be awarded to the contractor submitting the lowest proper tender) can not override the Privilege Clause. It says "or any tender". It does not say "qualified tender", "invalid tender" or "rejectable tender".

"It is a clause placed in the bidding process to protect the expenditure of public funds ... (It) has always been a tool prescribed by government. If the privilege provision as here is regarded by the construction industry to be too oppressive, then contractors need not bid those government jobs."

There is "persuasive strong authority that an express Privilege Clause such as this must be given effect even in the face of an industry practice to the contrary." (See Martselos v. Arctic College, Acme Building v. Newcastle, Power Agencies v. Newfoundland Case Summaries)

"It is the view of this panel that the Privilege Clause ... is a complete answer to MJB's action.

APPEAL DISMISSED

EDITOR'S NOTE: The Alberta Court of Appeal was in fact not really even prepared to award "expenses of bidding" to MJB as the trial judge did but decided "in the circumstances ...to affirm the trial judge's recommendation..."

HELD AT SUPREME COURT OF CANADA (unanimously - 7 Justices):

The parties agree that a Bid Contract A arose between the owner and each of the bidders but they disagree upon the terms of that Contract A.

MJB argues that it was a term of the Bid Contract A that Defence had an obligation to award the Tender Contract B to the lowest compliant bid - expressly, by using the Bid Depository System for subcontractor bids (which rules state award shall be made to the lowest qualified subtrade bidder) or impliedly (by industry practice).

The Tender Documents govern the terms (if any) of Contract A. These documents refer to the Bid Depository rules applying to subcontractor's, not to Tenderers. Therefore, there is no express term that lowest qualified bidder will receive the award.

Regarding whether there is any implied term in the Bid Contract that the lowest compliant bid must be accepted,

"in the circumstances of the present case, it is appropriate to find an implied term according to the presumed intention of the parties ... The term must have a certain degree of obviousness to it ... & if there is evidence of a contrary intention on the part of either party, an implied term may not be found ... "

" ... I find no support for the proposition that, in the face of a Privilege Clause such as the one at issue in this case, the lowest compliant tender was to be accepted."

However, "it is reasonable to find an implied obligation to accept only a compliant bid." "The Instructions to Tenderers and the Tender Form are the crucial documents for determining the terms and conditions of Contract A. The salient features ... are twofold: the contractor must submit a compliant bid and the contractor can not negotiate over the terms of the Tender Documents".

"Given this, it is reasonable to infer that [Defence] would only consider valid tenders".

For Defence to accept a non-compliant bid would be contrary to the express provisions of the Tender Documents (in them, there was a process whereby bidders could seek to have Defence allow alternate bids, fourteen days in advance, which was not done in this case) and contrary to the entire tenor of the Tender Documents (eg. no modification of plans and specifications in bids by bidders).

"The rationale for the tendering process...is to replace negotiation with competition." Competition entails risks for bidders and is "heavily weighted in favour of the invitor". " ... Exposing oneself to such risks makes little sense if the [owner] is allowed, in effect, to circumscribe this process and accept a non-compliant bid".

EFFECT OF THE PRIVILEGE CLAUSE

Defence argues the Privilege Clause gave it the discretion to award the contract to anyone, including a non-compliant bid, or to not award the contract at all, subject only to a duty to treat all tenderers fairly. It further argues that because it accepted Sorochan's bid with the good faith belief that it was a compliant bid, it did not breach its duty of fairness.

The words of the Privilege Clause are clear and unambiguous and do prevail over any implied obligation to accept only the lowest compliant bid.

BREACH OF CONTRACT A

Defence was under no obligation (express or implied) to award the contract to the lowest compliant bid but it was under an implied obligation, if it awarded a contract, to award to a compliant bid. Sorochan was non-compliant. "Therefore, in awarding the contract to Sorochan, [Defence] breached its obligation to [MJB] and the other tenderers that it would accept only a compliant bid."

"Acting in good faith or thinking that one has interpreted the contract correctly are not valid defences to an action for breach of contract".

DAMAGES

"There is no uncertainty as to whether Defence would have cancelled instead of awarding, for they did award, albeit improperly to Sorochan. Moreover, the award was made on the basis that Sorochan was the low bid."

Testimony at trial from Defence supports the contention that MJB would have received the award, had Sorochan been disqualified. We agree.

MJB is therefore entitled to damages equal to the amount of profits it would have received had it been awarded the Tender Contract B.

JUDGMENT FOR MJB
Plus Court costs in all three Courts

COMPETITIVE BIDDING
DUTY OF FAIRNESS PRIVILEGE CLAUSE

MIDWEST MANAGEMENT v. BC GAS UTILITY
1997 - British Columbia Supreme Court (in Chambers)

EDITOR'S NOTE: Although, as you will see in a moment, this case has not yet been heard on its merits, we have chosen to report on the skirmishing between gladiators prior to the Main Event as we believe it is one more example of the Courts struggling to define the scope and effect of the Privilege Clause and the duty of fairness in tendering. We will report the full case if it ever gets to Court.

Midwest in a joint venture with Monad contractors bid on a BC Gas Invitation To Tender for construction of 24 km of underground pipeline. The Invitation contained a strongly worded Privilege Clause: "owner reserves the right to reject any or all Tenders, and to award the contract to whomever owner in its sole and absolute discretion deems appropriate, notwithstanding any custom of the trade to the contrary nor anything contained in the contract Documents or herein." All ten contractors who were invited put in bids.

However, Midwest/Monad's bid was received one hour after closing and contained discrepancies. Nonetheless, BC Gas evaluated the bid and decided to include it in a short list of six bids. None of the six bids were compliant with all the requirements of the Invitation.

BC Gas then issued a further addendum to all six bidders due to a change in scope, seeking new prices for the new work. Midwest responded.

Then BC Gas issued a Request for Clarifications to each of the bidders intended to address individual specific concerns. Each RFC was different. All six bidders responded.

Then BC Gas advised Midwest/Monad that the contract would not be awarded to them. [This judge did not list the reasons why or whether another bidder did receive the contract - ED.]

Midwest sued alleging breach of the duty of fairness. BC Gas sought to have the claim dismissed summarily as having no basis in law.

HELD:

BC Gas initially argued that no Bid Contract A had been formed but later conceded it might have been [which in itself is a "triable issue" which ought to have sent the case to full trial - ED].

BC Gas also argued that there is no independent duty of fairness arising as there was no Bid Contract A, Midwest/Monad being non-compliant with the original tender call. Midwest/Monad argues that, while no case has yet to find a duty of fairness outside of the Bid Contract A, there is a trend toward parties acting in good faith and considering the continued negotiations with Midwest/Monad after it was late and non-compliant, the Court could not dismiss the case as "certain to fail" and it ought to have a full hearing at trial.

BC Gas argued in response that the comprehensive Privilege Clause excluded any implied term of fairness. Midwest/Monad disagreed.

At the end of the hearing, the Court decided "the question raised, although novel, appears fit to be tried. While this claim goes beyond the existing law, it is not clear beyond a reasonable doubt that it will fail at trial". Whether the broadly worded Privilege Clause in issue here effectively excludes any duty of fairness without doing so explicitly is a question of law which, in my view, is appropriately determined at trial."

CASE SENT TO FULL TRIAL

MIDWEST MANAGEMENT v. BC GAS
2000 BCCA

HELD (ON APPEAL):

Midwest appeals the decision to dismiss its claim for breach of contract, based upon an alleged breach of the duty of fairness in competitive bidding by BC Gas.

BC Gas issued an Invitation to Tender for construction of a gas pipeline. The Instructions required bidders to complete the Tender Documents "exactly as requested" and to "make no changes to the Tender Documents in format or in text in any manner". Bidders were allowed to submit alternate proposals, but only "separate to and in addition to the Tender Documents."

MidWest did not submit a price for "dewatering" or "well pointing" as required by the Specifications but instead in a separate letter submitted with the bid, proposed such work be paid for on a "cost reimbursable (or cost plus)" basis.

BC Gas considered this to be non-compliance with the Invitation by MidWest.

As none of the bidders were fully compliant, BC Gas sent a request for clarification to MidWest (and others) and then entered into discussions with MidWest and another bidder in an effort to conclude a contract. It ultimately awarded to the other bidder.

MidWest claims a breach of the duty of fairness of the Bid Contract A but the trial judge felt there was no Bid Contract A formed (as MidWest was non-compliant) and therefore no duty of fairness was owed. We agree.

MidWest's bid did not conform to the requirements of the tender documents and BC Gas "was fully justified in disregarding that proposal when it considered [MidWest's] bid."

The clarification process which followed was simply negotiations between the parties, after the tender process had failed to produce a contract. It did not give rise to an estoppel [See Editor's Notes].

With respect to MidWest's argument that there is a "free standing enforceable duty of fairness" independent of any contract that might arise in the tendering process, " ... no such duty exists in law ... ". "Such a duty is quite inconsistent with an adversarial, competitive tendering process. To find such a duty would cause great uncertainty in this area of the law."

Judgment for BC Gas with Costs

Editor's Notes:

Regarding MidWest's estoppel argument, "estoppel" is an equitable legal concept which essentially states that if a person has led you to believe something, they can not later deny that and harm you. MidWest tried (unsuccessfully, on the facts) to argue that having allowed MidWest's bid to be evaluated at all, after they were non-compliant, estops (prevents) BC Gas from later declaring the bid non-compliant.

As the BCCA points out, by entering into clarifications / negotiations with MidWest and others, BC Gas was simply trying to salvage the situation as best it could. No bidder was compliant, no Bid Contracts were formed with any bidders and (in effect), the tender process failed at that point and was (in essence) over. BC Gas negotiating after that (which was allowed, by the way, under the Instructions to Bidders) was not and could not have breached any Bid Contract A's, because there weren't any in existence (as no bidder was compliant).

This decision is also important for its adherence to the MJB Enterprises decision (MJB Enterprises Ltd. v. Defence Construction (1951) Ltd. (1999) SCC) in deciding that first a bidder must be compliant, then they gain rights. If a bidder is non-compliant, then (unless the invitation allows for non-compliant bidding, which this one emphatically did not) the bidder is the author of their own misfortune and has no right to complain.

It should be pointed out that MidWest did raise the argument that BC Gas did allow another non-compliant bid to win but the BCCA disposed of that argument in short order by pointing out such an argument did nothing to assist MidWest as MidWest was non-compliant and had no rights to complain about being infringed.

Had a compliant bidder sued, the decision would likely have been different as they would have had a Bid Contract A (with the attendant right to be treated fairly). Healthcare Developers v. Newfoundland (1996) Nfld. CA., has already decided the Owner in such a case can not skip over a compliant bidder and award to one who is non-compliant.

But where all bidders are non-compliant in a competitive bid procurement, we now know that no bidders gain Bid Contract A rights. And whatever then happens can not be criticized as unfair or in breach of competitive bidding rules, since those rights are only gained if the complaining bidders are first compliant enough to have Bid Contract A's.

COMPETITIVE BIDDING
DUTY OF FAIRNESS
NO BREACH OF DUTY

MARTEL BUILDING LTD. V. CANADA
(2000) Supreme Court of Canada

The Federal Government (Government) was leasing most of a building from Martel Building Ltd. (Martel). Prior to the end of the lease, Martel sought to have the lease renewed. The Government told their representative to seek a proposed rental rate from Martel but this was not done. Martel sought twice to commence negotiations but the Government representative did not respond.

The Government issued a Call for Expressions of Interest for new building space on the same day the Government's representative met with Martel. The Government's representative received the lease rate two days later but then required terms of the lease to be settled that day. Martel could not respond that quickly. The Government rejected the renewal offer the next day and issued a Call for Tenders. Martel bid the lowest cost of four bids received.

The Government then did a financial analysis of all of the bids as per the Invitation's requirements to determine total costs and added $1 million in "fit-up costs" and $60,000 for a "secured card access" system to Martel's bid. This made Martel's bid second lowest. The Government then awarded to the lowest bidder after fit-up and access card costs had been added in to all bids.

Martel sued, alleging:

1. Negligence in negotiations,
2. Negligence in preparing the Call for Tenders, and
3. Breach of the duty of fairness in tendering evaluations.

The Federal Court Trial Division found negligence in negotiations but found no causal link to Martel's loss of the award.

The Federal Court of Appeal found negligence in both the negotiations and the tendering process. It further found that the negligence caused Martel's loss of the award of a new lease. Damages were awarded to Martel but the Government appealed to the Supreme Court of Canada.

HELD (AT THE SCC):

This appeal raises two issues of importance:

1. Does Canadian law recognize a duty of care on parties in negotiations?
2. Was the award of contract fairly made under Canadian law and if it was not, what remedies are available?

In the absence of physical harm or property loss, Canadian law only allows limited rights of recovery for pure economic losses. The reasons for this limited recovery are that economic interests are less compelling of protection than bodily security or property interests, protection of all economic interests raises the specter of indeterminate liability, economic losses can be insured against, and, to allow recovery of pure economic loss in all cases could lead to a multiplicity of inappropriate lawsuits.

Martel's claim does not fit within any of the five exceptions created to date (these being: government liability, negligent misrepresentation, negligent performance of a service, negligent supply of shoddy goods or structures, or economic losses between closely associated organizations). It is therefore a novel claim.

Even though there might be an economic relationship between the Government and Martel based upon the previous lease, there are also compelling policy reasons why one commercial party should not have to be mindful of another commercial party's legitimate interests in an arm's length negotiation.

The object of a commercial negotiation is to achieve the most advantageous financial bargain at the expense of the other party. Negotiation merely transfers wealth between parties but society as an economic whole is no worse off.

To extend a requirement of good faith to pre-contractual commercial negotiations could deter socially and economically useful conduct. To extend a duty of care to the conduct of negotiations would defeat the essence of negotiation and hobble the marketplace.

"We conclude then that no duty of care arises in the conduct of negotiations."

Martel also alleged negligence in the drafting and preparation of the tender documents, which involve events before any Bid Contract A arose. Martel's previous expenditures on leasehold improvement was not counted by the Government. But Martel is essentially asking to be given special treatment based on its previous relationship.

This would give Martel an unfair advantage over the other bidders which would be improper and in breach of the implied obligation of fair and equal treatment of all bidders. The Government acted properly in disregarding any past or planned improvements of the Martel building, as this was not part of the evaluation criteria described in the Invitation.

Finally, Martel argued the Government breached the implied obligation of fair and equal treatment by adding fit-up costs, contiguous space requirements and secure card costs to Martel's bid.

"Implying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process ... Without this implied term, tenderers, whose fate could be predetermined by some undisclosed standards, would either incur significant expenses in preparing futile bids or ultimately avoiding participating in the tender process".

"A privilege clause reserving the right not to accept the lowest or any bids does not exclude the obligation to treat all bidders fairly. Nevertheless, the tender document must be examined closely to determine the full extent of the obligation of fair and equal treatment. In order to respect the parties' intentions and reasonable expectations, such a duty must be defined with due consideration to the express contractual terms of the tender. A tendering authority has the right to include stipulations and restrictions and to reserve privilege to itself in the tender documents ... ".

In this case, the express terms of the tender call gave the Government significant latitude in evaluating tenders. Adding fit-up costs "in such amount as the Government determined" was explicit in the Invitation and was done to all bidders. "A duty to treat all bidders fairly in this context means treating all bids consistently, applying assumptions evenly." This is what the Government did.

Regarding the contiguous space requirements, this too was in the Invitation explicitly and was applied to all bidders. To do otherwise would be breach of the implied contractual duty to treat all bidders fairly and equally.

Regarding applying the requirement of a secured card access system to Martel, this is more problematic as it was not also applied to one of the other bidders. Failing to apply this requirement equally to all bidders is a breach of the duty to treat all bidders fairly and equally.

However, "to be recoverable, a loss must be caused by the contractual breach in question." Martel claims it lost the award of a new lease due to this unfairness but even if this cost add on was not done, Martel's bid would still be significantly higher.

In essence, "at the end of the day, we also believe that Martel lost Contract B because Standard Life (the other bidder) made a better offer".

Judgment for Canada (with costs)

COMPETITIVE BIDDING
HIDDEN TERMS
DAMAGES

SOUND CONTRACTING LTD. v. CITY OF NANAIMO
1999 - British Columbia Court of Appeal

Sound Contracting Ltd. a civil contractor, tendered for a number of construction contracts for the City of Nanaimo. Despite being the lowest bidder on each occasion, the projects were awarded to other bidders. Sound sued Nanaimo (two lawsuits on two Projects) alleging bias and breach of Contract A.

PROJECT 1

Nanaimo issued an Invitation To Tender on a sewer project and required contractors to be responsible for obtaining all licences required for the construction, but did not state whether these were required prior to bidding or merely prior to award. Sound did not have the requisite business licence prior to tendering but submitted the lowest bid. The bid was rejected because Sound did not have the required licence.

Prior to rejection, Nanaimo advised Sound to obtain a licence and gave them reasonable opportunity to do so. Sound failed to comply and consequently the tender was rejected. Sound argued that the City had breached its duty of fairness by incorporating an implied term without providing notice of such a term to all bidders.

HELD:

Claim dismissed.

The requirement to have a business licence prior to the award was not a term stipulated in the tender documents. However, it was not unreasonable for the City to impose this requirement on Sound, particularly as Sound had an on-going dispute re the zoning of its office and its business licence. Furthermore, the Court determined that Sound had been given full and adequate notice of the requirement in a timely fashion and that it could have obtained the licence prior to the contract award. It had therefore failed to act reasonably and its claim was dismissed.

PROJECT 2

On a second Invitation To Tender for a further sewer project, Sound, the lowest bidder, was rejected following a recommendation from a City staff member who stated that if Sound were awarded the contract, a full time resident engineer would be required to monitor the project. The additional cost of $25,520 was then added to Sound's bid price. Additionally Nanaimo felt Sound would likely seek to arbitrate extras during the project and further arbitration should be anticipated. Therefore, Nanaimo added this "cost" to Sound's bid. The costs of the engineer and the anticipated arbitration were not applied to other bidders.

Sound argued that adding additional undisclosed costs, the City had breached the Bid Contract A.

HELD:

Judgment for Sound.

The integrity of the bidding process has to be maintained. The owner cannot prefer certain contractors without first notifying all bidders of such preference (Chinook Aggregates Ltd. v. Abbotsford). The City had no justification for refusing to honour Sound's tender as submitted. "This was certainly an application of an undisclosed criterion and also an inappropriate, uneven treatment of the bidders".

In assessing the appropriate damages, the Court followed the reasoning in Calgary (City) v. Northern Construction Co., namely that the proper measure of damages for a tenderer's refusal to enter Contract B was the actual loss to the bidder. Accordingly, Sound was entitled to the profit it would have received had it been awarded Contract B.

EDITOR'S NOTE: This case illustrates that the Courts will uphold the integrity of the bidding process. A tenderer cannot rely upon an implied term of preference for certain contractors without notifying all bidders of this preference. The appropriate measure of damages for such a breach is the profit it could have received had it been awarded Contract B.

Nanaimo appealled this decision.

ON APPEAL:

The Nanaimo Invitation for Tenders contained several relevant clauses which govern this matter:

"Article 18 Tender Rejection
The Owner reserves the right to reject any or all tenders; the lowest will not necessarily be accepted.

The City of Nanaimo reserves the right to waive informalities in or reject any or all tenders or accept the tender deemed most favourable in the interests of the City of Nanaimo."

"Article 19 Award
Awards shall be made on tenders that will give the greatest value based on quality, service and price. Preference shall be given to local suppliers where quality, service and price are equivalent."

Nanaimo analyzed bids in this case based upon their past experiences on other projects with this bidder and the successful bidder. It determined that an award to Sound Contracting, the low bidder would result in a cost to the City in excess of the second low bidder. Nanaimo argued, on appeal, that this was not the application of an "undisclosed criterion" but rather accepting the tender which it honestly believed would give "the greatest value based on quality, service and price."

The MJB Enterprises Ltd. v. Defence Construction (1951) Ltd. decision of the Supreme Court of Canada really governs this case. There, the Court stated, based only on a privilege clause similar to Article 18, that "The discretion to accept not necessarily the lowest bid, retained by the Owner through the privilege clause, is a discretion to take a more nuanced view of "cost" than the prices quoted in the tender ... ".

Here, the addition of Article 19, which the trial judge gave little or no weight to, expands the area of flexibility created by Article 18. And, based upon the MJB case, "I am constrained to hold that in this case, the privilege clauses in the request for tenders releases Nanaimo from the obligation to award the work to the lowest bidder if there are valid, objective reasons for concluding that better value may be obtained by accepting a higher bid."

"I confess that I find this somewhat worrisome as it creates an opportunity for arbitrariness in the operation of the bidding system. It must be recognized that a compliant tender establishes a legal relationship between the parties conditioned only by the privilege clause. The privative clause gives the Owner a discretion and that discretion must surely be exercised fairly and objectively. The legal relationship just described provides the basis for a Court challenge by unsuccessful compliant bidders of an award to a higher bidder. While I would not attempt to establish a comprehensive enumeration of salient factors that would support a successful action, it may possibly be summarized by reference to the essential requirements of objective fairness and good faith.

In this case, the previous dealings between these parties provided the basis for the additional criteria addressed by Nanaimo. It is not for us to substitute our own analysis for that of the Owner in whom the discretion to award the contract ultimately resides and whose staff, in my view, have not been shown to have acted unfairly or other than in good faith in determining which tender provided the "greatest value based on quality, service and price" to the City. Nor can it be said, in my view, that the consideration of past dealings between these parties constituted an undisclosed criterion. In fact, past dealings are probably the best indicator of how a proposed relationship will come to work out in practice. I would caution, however, that this discretion must not be exercised in such a way as to punish or to get even for past differences. Whenever the low bidder is not the successful tenderer, any additional factors in the analysis will have to be shown to be reasonable and relevant. I conclude that sufficiently good reason has been shown in this case to sustain as appropriate the decision of Nanaimo to award this contract to the second lowest bidder.

I would allow the appeal and dismiss the action."

Editor's Notes:

This decision is the first Court of Appeal decision following the MJB Enterprises Ltd. v. Defence Construction (1951) Ltd. case from the Supreme Court of Canada.

As expected (and required in law), the BCCA follows and applies the precedent of MJB in giving effect to the Owner's use of the privilege clause. In doing so, they are implicitly recognizing that the Owner's words in the Instructions to Bidders do govern over the process of competition.

At the same time that the Court acknowledges the Owner's right to set the parameters and terms of the competition, it is clear that such discretion (i.e., the right to choose the best bid, if any, rather than the lowest bid) will be tempered by the Court requiring "objective fairness and good faith" to be utilized by the Owners in making their choice of best qualified bid. As the Chief Justice of the BCCA states in this case " ... Whenever the low bidder is not the successful tenderer, any additional factors in the analysis will have to be shown to be reasonable and relevant."

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