Evaluation Breached Tender Conditions: Alberta Queen’s Bench Court

You would think that the owner would get one thing right before issuing an invitation for tenders: its standard for evaluating the tenders.

Yet, in Elan Construction Limited v South Fish Creek Recreational Association, the Alberta Court of Queen’s Bench recently found that the owner’s tender evaluation criteria were unfair and did not reflect the terms of the tender, and awarded nominal damages to the unsuccessful bidder. The decision is a good checklist for owners in establishing tender evaluation standards.

Background

In July 2010, the South Fish Creek Recreational Association (“SFCRA”), issued an invitation for tenders for the construction, as additions to its existing recreational facilities, of two ice surfaces and multi-purpose rooms and other spaces. Elan was a pre-qualified bidder and filed a bid.

The published evaluation matrix provided for a maximum of 100 points and contained the following elements: Price, 35 points; Date of completion, 35 points; Previous community and arena experience, 20 points; References, 10 points.

Elan was not awarded the contract and sued for damages. The trial judge found the following with respect to the bid criteria:

Price: Elan’s bid was the lowest by $400,000.

Completion Date:  The Invitation to Bid stated that SFCRA wanted the Project to be substantially completed by August 1, 2011, with that date highlighted in bold. The Instructions to Bidders contained a liquidated damages clause providing for liquidated damages in the event of late completion in the amount of $15,000 per day, later reduced to $3,000 per day.

Elan’s bid provided for substantial completion by August 1, 2011 and completion of deficiencies by August 15, 2011. The successful bidder’s completion date was August 31, 2011.

The adjudicator did not use August 1, 2011 as the relevant date. Instead, he took the average of the completion dates of certain, but not all, of the bidding contractors considered most relevant, arriving at a completion date of September 5, 2011; and then awarded bidders points out of 30 based on their proximity to that notional date. As a result, Elan received 25 points for its on–time date of August 1, 2011 for substantial completion, while the successful bidder received 34 points for its later substantial completion date of August 31, 2011.

The evaluator used the same approach to deal with the estimated time to complete deficiencies, arriving at an average figure of 45 days after his notional completion date of September 5, 2011. As a result, Elan received zero points for its 14 day estimate while the successful bidder received four points for its longer 30 day projection.

LEED: Leadership in Energy and Environmental Design (“LEED”) experience was used as a factor in the evaluation criteria factor, but there was no indication in the Bid Documents to this effect.

Court’s Decision

The Court of Queen’s Bench found that on various accounts the evaluation factors used by the owner had not been disclosed in the bid documentation, and therefore the owner breached the implied duty of fairness inherent in the tender process. Here are the reasons of the court on some of the factors:

Substantial Completion Date

“Mr. Quinn’s methodology, as described above, created an arbitrary standard that could not have been within the contemplation of the bidders. His testimony as to his method and rationale served only to underscore the arbitrary nature of his evaluation. Moreover, his approach created, in my view, the kind of undisclosed evaluation criterion that the Supreme Court of Canada has said constitutes a breach of Contract A.”

Experience

“….SFCRA’s approach to evaluating the relative experience of the bidders cumulatively amounted to breach of the Bid Contract….While I agree that it would not be unreasonable for SFCRA to put greater emphasis on arena experience given the nature of the Project, in my view, that emphasis should have been disclosed in the Bid Documents…..an explicit preference for such experience could and should have been indicated in the Bid Documents….”

Other undisclosed criteria

“I find that other undisclosed criteria influenced SFCRA’s assessment of the bidders’ experience. ….any consideration of LEED in the assessment of experience…..should have been brought to the attention of bidders….Similarly, while interviewing candidates may be useful and may fall within SFCRA’s right to seek further information, bidders should have been made aware that interviews were a possibility. Further, Elan should not have been forced into the position of attending an important interview without key employees who were designated to work on the Project. In my view, both the use of interviews and the process by which they are conducted must be fair to all bidders.

In its analysis the court referred to the recent decision of the Supreme Court of Canada in Bhasin v Hrynew. In that decision, the Supreme Court held that there is a duty to perform contracts honestly. Applying that principle, the Court of Queen’s Bench said:

“I hasten to add that there is no suggestion that SFCRA acted dishonestly or with malice. Nevertheless, as the Supreme Court of Canada held in Bhasin, a duty of good faith may require more than honesty. Where a bid evaluation has been conducted in an arbitrary manner or on the basis of undisclosed criteria, that is sufficient to constitute breach.

The court concluded that, absent the owner’s breaches of contract, Elan would have been the successful bidder.

In assessing damages, the court held that either the cost of preparing the bid, or the lost profit on the construction contract that would have been awarded to Elan, is the proper measure of damages, but not both. In assessing damages under the second approach the court reduced Elan’s claim:

  1. because Elan had, in the court’s view and based on the next lowest tender, underestimated the subcontracts. On this account Elan’s claim should be reduced by $185,000, from $704,908 to $519,908
  2. because the contractor who was actually awarded the contract was anticipating a $300,000 profit and made a loss of $600,000, and Elan would likely have encountered a similar experience. Accordingly, Elan’s claim should be reduced from $519,908 to nominal damages of $1,000.

Having awarded damages based upon loss of profit, the court said that no damages could be awarded for the cost of preparing the bid, and in any event no proof of that cost had been provided.

Discussion

This decision is a good illustration of two perils relating to claims for breach of an invitation to tender, and the “smell tests” which the court will likely apply in the course of litigation over a tender.

First, a court will be very unsympathetic to an owner that has not prepared and applied tender evaluation criteria that fairly reflects the bid conditions. There is really no excuse for an owner applying criteria that do not accurately reflect the bid conditions which it has itself prepared and published. Interestingly, the court used the concept of “honest performance” of a contract, enunciated in the Bhasin case, to judge the owner’s performance of its obligations under the invitation to tender.

Second, the court will carefully scrutinize the bidder’s claim for damages. The court may well think: “Well, this contractor was fortunate not to have won that contract!”

Elan Construction Limited v South Fish Creek Recreational Association, 2015 ABQB 330

Construction law – tenders- Contract A/Contract B – honest performance – damages

Thomas G. Heintzman O.C., Q.C.,  FCIArb                                                      December 20, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Eight Rules of Tender Law Pronounced By The Ontario Court Of Appeal

In Rankin Construction Inc. v. Ontario, the Ontario Court of Appeal recently made a number of significant rulings in a tender case. While the rulings were based upon the specific wording of the tender in that case, they were made in the context of a major Ontario highway tender and appear to have wider application.

Factual Background

The Ministry of Transportation of Ontario (MTO) issued an invitation to tender for the widening of Highway 406. The invitation to tender required a bidder to declare the value of imported steel in its bid. The invitation stated that a 10 percent preferential allowance would be granted for domestic steel but that allowance did not apply H-Piles. Rankin did not declare the value of H-Piles as imported steel, believing that its steel qualified as domestic steel even though manufactured outside Canada. A competitor complained that Rankin’s bid was non-compliant and Rankin’s bid was disqualified and the contract was awarded to the second lowest binder.

The trial dismissed Rankin’s claim against Ontario and that dismissal was upheld by the Ontario Court of Appeal but for different reasons.

Rulings of the Ontario Court of Appeal

The Court of Appeal made the following rulings:

  1. Under the formula set forth in Ron Engineering, Contract A governing the tender process arose when bidders submitted their tenders.

This point may seem obvious but other decisions have raised doubts as to when Contract A is formed: Is it the moment before a bid is submitted; or when the bid is submitted, or when the bids are opened or when the bids are published? In this decision the Court of Appeal has said that “Contract A arose when the appellant submitted its tender.”

  1. Contract A was formed with any bidder who submits a bid, not just with a compliant bidder

This is an important point since some decisions, including that of the trial judge in this case, have held that Contract A is only formed between the person issuing the invitation and a compliant bidder. That approach does not make sense since if it is only Contract A that requires the issuer to deal fairly with the bidder in determining compliance. So there must be a Contract A in order for the treatment of compliance to be a binding factor between the issuer of the tender and the bidder. The Court of Appeal was clear that Contract A is formed with any bidder who submits a bid:

“The significance of the appellant’s non-compliance with the tender documents is that, pursuant to the express or implied terms of that Contract A, it may not be awarded Contract B, even if it is the lowest bidder — not that no Contract A is formed. I come to this conclusion based on the language of the Instructions to Bidders, which form part of the tender documents. In this case, the tender offer contemplated that tenders submitted might not be compliant….Paragraph 7.3 of the Instructions to Bidders specifically requires that a bidder include a tender deposit with its tender. This requirement is clearly material. However, para. 11.2 of the Instructions to Bidders also provides that “Tenders not accompanied by a Tender Deposit in the required amount may be rejected.” The fact that the MTO specifically addresses the consequences of the submission of a materially non-compliant tender — when viewed in conjunction with the other provisions in the Instructions to Bidders discussed below — is evidence that it intended that a Contract A come into effect, even if the tender submitted is non-compliant.

Respectfully, the trial judge erred in concluding that the necessary consequence of Ron Engineering… referred to in Tercon, is that no Contract A can come into existence where a bid is not materially compliant with the tender documents, without considering the effect of the tender documents. In other words, the terms of the offer to consider bids made by the request for tenders, as reflected in the tender documents, must be scrutinized to determine whether the parties intended contractual relations to arise on the submission of a tender: see M.J.B. Enterprises…. In my view, subject to the governing documentation, contractual relations would usually come into existence on the submission of a bid. This is a desirable result: it provides greater certainty as to the rights and obligations of the bidders and the owner, and may reduce the frequency of litigation arising out of the award of tenders.”

  1. The person issuing the invitation to tender has a right, but not an obligation, to investigate the bids

The trial judge had held that in the decision in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, the Supreme Court had found that the owner issuing an invitation to tender does not have an implied duty to investigate allegations of non-compliance by a rival bidder, but that the owner has a right to do so. The Court of Appeal agreed:

“…the tender documents do not preclude the MTO from conducting an investigation. They do not expressly provide that the MTO will not investigate any complaints, and I see no basis for implying such a term….Like the trial judge, I reject the appellant’s argument that an owner cannot investigate allegations of non-compliance unless the bid documents specifically give the owner the right to do so or the owner has a written policy that it will do so.

  1. The effect of non-compliance clause and the privilege and discretion clause was that the owner might, but was not obliged to, waive the non-compliance and accept the bid

The privilege clause said that “the Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted.”

As the Court of Appeal noted, this paragraph “constitutes both what are often referred to in cases involving the law of tender as a “privilege clause” (the right not to accept the lowest or any tender) and a “discretion clause” (the right to waive formalities as the interests of the MTO may require).”

The Court held that this paragraph allowed, but did not require, the MTO to waive a “formalities”:

“In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder.”

In arriving at this conclusion, the Court of Appeal apparently considered that “formalities” are what might be called “informalities”, that is, something that is a mere formality and not significant.

Accordingly, the Court of Appeal held that the MTO had the right not to waive the non-compliance in Rankin’s bid.

  1. A formality which could be waived was one which arose honestly and which does not substantially affect cost or the resulting comparative bids and maintains the integrity of the bidding process.

The Court of Appeal gave two reasons for its decision that the non-compliance was in respect of a formality which could have been waived by the MTO.

First, it applied what it called the ‘generous view of “informality”’ of the Supreme Court of Canada in Double N Earthmovers and then held that the non-compliance could have been waived:

“because of the appellant’s honest intention to use Canadian steel and the fact that the outcome, and the cost to the MTO, would have been the same had it declared that the H-Piles are imported steel. The price preference for Canadian steel was a mechanism for evaluating the competing bids. It did not affect the actual price to be paid by MTO to the successful bidder. And the MTO expected that American H-Piles would be used in the project. The appellant’s non-compliance “did not materially affect the price or performance of Contract B” [quoting from Double N Earthmovers], and therefore amounts to an informality….”

The Court of Appeal then gave a second reason: waiving the non-compliance maintained        the integrity of the bidding process. It said:

“I would add the following. Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process. And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible. Here, the tender process was essentially fair and the appellant’s bid was materially less costly to the public purse. Given this, in my view, a balancing of the public interest in promoting the integrity of the public bidding process so that the government can generally obtain the best prices, against the public interest in the MTO obtaining the best price possible in this particular case for widening Highway 406, also weighs in favour of the conclusion that the appellant’s non-compliance was a formality”.

  1. The owner could not waive a material non-compliance

On its interpretation of the invitation to tender, the Court of Appeal held that the MTO could not waive a non-compliance that was not a mere formality:

“In my view, a requirement that the MTO would not accept bids that were non-compliant, if the non-compliance amounted to more than a “formality”, can in this case be implied in Contract A on the basis of the presumed intention of the parties.”

The Court of Appeal held that, by not waiving the non-compliance in Rankin’s bid, the MTO had adopted the more cautious route in a sensible effort to avoid litigation.

  1. The owner was not obliged to notify bidders of non-compliant bids within 10 days

The tender documents contained two stipulations, as follows:

6.3         Bidders whose Tender has been rejected by the Ministry will be notified of the reasons within 10 days of Tender Opening.

12.1       The Ministry will notify the successful bidder that the Tender has been accepted within 30 days of the Tender Opening.

Paragraph 6.3 appeared in Part 6 of the tender documents headed Unbalanced Bids and Discrepancies. Paragraph 12.1 appeared in Part 12 of the tender documents headed Contract Award Procedures. MTO did not advise Rankin that its bid was non-compliant within the 10 days. Accordingly, Rankin argued that the rejection of its bid was invalid and MTO was obliged to award the contract to it as the lowest bidder.

The Court of Appeal rejected Rankin’s arguments for a number of reasons.

First, it held that paragraph 6.3 only applied to unbalanced bids, not non-compliance:

“….given that para. 12.1 gives the MTO 30 days to determine the successful bidder, I agree with the trial judge that interpreting para. 6.3 to require the MTO to determine whether it will waive “formalities” and, if not, notify non-compliant bidders, within 10 days of tender opening, makes no sense. To require the MTO to notify all unsuccessful bidders of the reasons why it will not accept their bids within 10 days of Tender Opening, would effectively require the MTO to determine the successful bidder within 10 days, rather than 30 days as expressly provided for under para. 12.1.”

Second, paragraph 6.3 did not convert an invalid and non-compliant bid into a valid and compliant bid. As the court said, the clause “does not provide that a “rejection” is invalid if the bidder is not notified of the reasons for the rejection within 10 days of Tender Opening.”

  1. The Exculpatory clause excluded all liability

Paragraph 11.3 of the tender documents said:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents”.

The Court of Appeal applied the tests in the Supreme Court of Canada’s decision in Tercon to determine the proper interpretation and enforceability of this exclusion clause. It found that the paragraph was a complete defence to any claim in the present circumstance. Rankin did not argue that the clause was unconscionable or unenforceable due to public policy. Rather it argued that the paragraph did not apply if MTO breached the conditions of tender. The court rejected that argument:

“The language is in my view clear — both in the paragraph itself and in the context of the Instructions to Bidders as a whole. A bidder presumably would not sue unless it alleged that the MTO had breached a term — express or implied — of the tender documents by accepting another’s bid, or not accepting its bid. To interpret para. 11.3 as not applying where a breach by the MTO of the tender documents is alleged would effectively render it meaningless. Paragraph 11.3 is a commercial response to the increased litigation faced by owners arising out of the acceptance, and corresponding non-acceptance, of bids.”

The court did say that in some circumstances the “the conduct of the owner in the bid process is so aberrant that it would justify a court’s refusal to enforce an exculpatory provision in the tender documents on public policy grounds. This is not such a case.”

Comments

The first three principles adopted by the Court of Appeal are helpful clarifications of the tender law relating to Contract A.

Principles 4 to 6 are more contentious since they involve three possible layers of discretion. The first layer involves the determination of the boundary between the two categories. Clearly, the court is hesitant to interfere with the owner’s determination that the non-compliance is a mere formality or is a substantial non-compliance. The second layer of discretion is introduced by the court’s finding that the tender documents allow the owner to waive something which is a mere formality. But the third level of possible discretion goes the other way. The court interpreted these tender documents as not giving the owner the discretion to waive material non-compliances. Differently worded tender documents might change either of these latter two discretions, requiring the owner to waive a mere formality or allowing the owner to waive a material non-compliance, but it seems that tender documents would have to be clearly written to achieve the latter result.

Principle 7 involves principles of contract interpretation that were used to rescue MTO from what were less than well-drafted tender documents. Besides arising from an analysis of the different parts of those documents, the principle appears to be based on a distinction between the substantive and procedural provisions of tender documents. The owner’s failure to follow the procedures – giving the bidders notice of non-compliance – cannot convert what is a non-compliant bid into a compliant bid.

Principle 8 is probably the most important and contentious. The Court of Appeal appears to have held that the exclusion clause drafted by MTO is the elusive “magic bullet” that removes all the owner’s liability arising from breach of any term of a tender. The court was at pains to say that egregious conduct by the owner might, in another case, not be protected by this exclusion clause. But absent such conduct, the court appears to have held that this clause gives the owner complete protection in respect of the tender.

If that is so, then many questions arise. Is there a Contract A at all? What is the consideration for the contractor’s bid if the contractor has no effective remedies? If the owner inserts such a sweeping exclusion clause into the tender documents, should the contractor be able to say that there is no Contract A and withdraw its bid? Or is such an exclusion clause so sweeping that it is contrary to public policy or unconscionable from the standpoint of the law of contract formation – something not argued by Rankin. Further cases may have to explore the answers to those questions.

Rankin Construction Inc. v. Ontario, 2014 CarswellOnt 12595, 244 A.C.W.S. (3d) 79

Construction Law – Tenders – Waiver – Non-Compliance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 26, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

Ontario Court Of Appeal Holds That The Doctrine Of Mistake Does Not Apply To A Tender

In Asco Construction Ltd. v. Epoxy Solutions Inc., the Ontario Court of Appeal recently held that the doctrine of mistake did not apply to an invitation to tender. In doing so, the court provided a useful reminder of the limited circumstances in which the law of mistake can apply to building contracts.

Background

Asco was hired by the City of Kingston to renovate a theatre. Epoxy was the successful bidder for the subcontract work to install flooring. Epoxy’s bid was based on a sketch provided by Asco during the tender process. The sketch depicted the elevations of the theatre. After the bid was accepted, but before commencing its work, Epoxy’s surveyor found that the elevations in the survey were inaccurate. Epoxy asked for an increase in the contract price which Asco refused, insisting that the work be done in accordance with the contract and that any adjustment to the price could be made later. Epoxy refused to do the work without an assurance that the contract price would be adjusted. Asco sued for breach of contract and damages and Epoxy counter-claimed for loss of profits.

The trial judge found that the error in elevation was the contractor’s fault and awarded damages in favour of Epoxy. On appeal, the Divisional Court found that the contract between the parties was void for mistake. Epoxy appealed to the Court of Appeal.

Decision of the Ontario Court of Appeal

For three reasons, the Ontario Court of Appeal held that the doctrine of mistake could not apply.

First, the trial judge had held the mistake was the fault of Asco. The Court of Appeal held that a “party at fault cannot rely on its own mistake to avoid a contract.” Accordingly, the doctrine of mistake could not apply.

Second, Asco’s tender documents represented “an implied representation to compliant bidders that the work described in the tender documents could be built as described. Those bidders are entitled to rely upon the accuracy of design information prepared by the owner or its engineers. A bidder does not have to duplicate design and analysis prior to submitting a bid.” In arriving at this conclusion, the court relied upon the decision of the Supreme Court of Canada in Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206.

Third, Asco could not rely on the doctrine of mistake because, “by asserting its claim for damages against [Epoxy], [Asco] elected to affirm the contract and thereby disentitle itself from relying on the doctrine of common mistake.”

Comments

This decision re-affirms the narrow application – or perhaps inapplicability – of the doctrine of mistake to the tender process. When a contract is made through an invitation to tender, it is only in very unusual circumstances that one party can assert to the other that it was mistaken about the contract. The parties have explicitly stated the basis of the contract, in either the invitation to tender or the response (being the bid) to that invitation. In those circumstances, the existence of a mistake seems very improbable. Either the tender and the bid have made the resultant contract clear. Or one of the parties is responsible for any mistake. In either event, the contractual doctrine of mistake cannot apply. Any difficulties in interpreting the invitation and the bid do not mean that the doctrine of mistake applies.

However, the Court of Appeal’s second proposition – that the invitation to tender contains an implied statement that the work can be built in accordance with the tender documents – seems more problematic. The Supreme Court of Canada stated that proposition in Edgeworth Construction, but where does that principle come from, and what is its ambit? The traditional rule is that an owner does not represent that a work can be built in accordance with its proposal and that a contractor takes on the “buildability” risk and must itself determine that the work can be built in accordance with its bid. Does the use of the tender process eliminate that traditional rule?

The decision in Asco v. Epoxy may reflect a general proposition that tendered contracts contain a representation that the project can be built as described in the invitation to tender. If it does, then it represents a wake-up call for owners and contractors issuing those invitations, and the consultants preparing the plans and specifications used in those invitations. They may wish to insert a specific warning into the invitation to tender that there is no representation that the building can be built as shown in the attached plans and specifications, and that it is up to the tendering contractor or subcontractor to determine that issue. If there is no such warning then the result in Asco v. Epoxy may well apply.

Asco Construction Ltd. v. Epoxy Solutions Inc., 2014 CarswellOnt 9200, 2014 ONCA 535, 242 A.C.W.S. (3d) 76

Building Contracts – Tenders – Subcontracts – Implied Representations and Conditions

Thomas G. Heintzman O.C., Q.C., FCIArb                                           September 14, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

 

When Should A Contract Arising From A Tender Be Declared Void For Mistake?

We don’t usually think of the law of mistake as having any relevance in the 21st century. Mistake seems to be an 18th century problem which couldn’t possibly apply to today’s building contracts, especially those arising out of the modern law of tender.

But the recent decision in Asco Construction Ltd. v. Epoxy Solutions Inc. shows that this assumption isn’t correct. The Ontario Divisional Court held that a contract arising from a tender was void for mistake. The decision is a wake-up call about the need for reasonable certainty in tender information.  Otherwise the whole tender process may be for naught.

Facts

The City of Kingston hired Asco as the general contractor to renovate the Grand Theatre.  Asco invited tenders for the concrete and epoxy subcontract and gave bidders a sketch containing slab elevations. A revised sketch was also provided before tenders closed.

Epoxy Solutions submitted a bid for the subcontract work.  Asco confirmed that Epoxy was awarded the subcontract and the parties signed a letter of intent.  After Asco provided Epoxy with a draft contract to sign, Epoxy’s surveyor advised that the sketch forming part of the tender documents contained insufficient information, and that it was necessary to conduct an as built survey to calculate accurately the quantities of concrete necessary to perform the work.

Later, Epoxy told Asco that the elevations listed in the tender documents were inaccurate and that further work and material were needed for an additional cost of about $32,000. Epoxy refused to start the work without confirmation that it would be paid the additional amount. After accusatory correspondence between the parties which resolved nothing, Asco re-tendered the subcontract and hired another contractor at an additional cost of $17,800.00 plus taxes. Asco and Epoxy counter-sued each other for breach of contract.

The Decision

The trial judge dismissed Asco’s claim and awarded damages to Epoxy. The trial judge held that the sketch provided by Asco to Epoxy was misleading.  The parties appealed. The Divisional Court dismissed Epoxy’s appeal but allowed Asco’s appeal and dismissed Epoxy’s action. It did so on the basis that there was no contract between the parties arising from the tender process due to mistake.

The Divisional Court agreed with the trial judge regarding the misleading nature of Asco’s tender documents.  Epoxy was not aware of those errors and could not reasonably be expected to have discovered them prior to making its bid. The court found that Epoxy was under no obligation to investigate the accuracy of the tender invitation documents. The tender documents, it said, “constitute an implied representation to compliant bidders that the work described in the tender documents can be built as described. Contractors and subcontractors bidding on projects are entitled to rely on the accuracy of design information prepared by the owner or its engineers, rather than being compelled to duplicate design analysis prior to submitting bids.”

However, the Divisional Court dismissed Epoxy’s case because there was no contract between the parties due to mistake.  The Divisional Court arrived at this conclusion through the following reasoning:

“Both parties refused to budge from their positions. By their conduct, they walked away from any contractual obligations they had with each other. The positions they adopted arose from a common mistake. The sketch the appellant provided with the tender documents was not a detailed survey and failed to provide adequate information necessary to calculate accurately the costs of labour and materials required to do the work. The respondent did not become aware of the mistake until informed by its surveyor, almost ten months after submitting its bid, of the inadequacy of the sketch. We find that the mistake was so fundamental that it renders the contract between the parties void. No damages can flow from a contract that does not exist.”

Discussion

This decision raises a fundamental issue under the Ron Engineering line of cases in relation to tenders. If there is misinformation in the tender documents, or if those documents are indefinite or confusing, what is the impact on the Contract A arising from the tender under Ron Engineering analysis?

It does seem strange that Asco, the party whose tender information was found to be misleading, should be entitled to have the contract set aside for mistake. Usually, mistake will only lead to a remedy – rescission – if the party seeking relief is innocent of any wrongdoing leading to the mistake.  In this case, Asco was not innocent of wrongdoing and, perhaps recognizing this fact, had not even asked for rescission or asserted a mistake.

Without Ron Engineeering, there would be no real issue here. The letter of intent created no contract, and without Ron Engineering there would be no contract between the parties. Ron Engineering created Contract A which governed the tender process itself.  That contract obliged Asco to act in good faith toward Epoxy in considering its bid as the lowest tender, and obliged Epoxy to keep its bid open and to enter into a Contract B consistent with the invitation to tender.  If the information provided by Asco was either misleading or indefinite, then Epoxy would have been entitled to rescind Contract A, or the subject matter of the contract or the dealings would have been too uncertain to create a contract.

If rescission was to be granted for mistake or misrepresentation at Epoxy’s request – a request that was never made – then Epoxy might have been disentitled to damages due to its own fault in not detecting the errors in the sketch at the time of bidding.  This approach would have led to the same result.

All in all, this decision raises puzzling issues about how to properly apply the law of mistake to misleading information in an invitation to tender and a bidder’s failure to detect the errors on a timely basis.  What the decision does do is provide a warning to owners and contractors about the perils of inaccurate tender information.

Asco Construction Ltd. v. Epoxy Solutions Inc., 2013 CarswellOnt 7940, 2013 ONSC 4001 (Ont. Div. Ct.)

Tenders – Misrepresentations – Contract A – Contract B analysis – Rescission – Mistake

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                September 16, 2013

 www.heintzmanadr.com

www.constructionlawcanada.com

 

 

The Mother Of All Tender Cases – The Fifth Issue: Determining Damages In An Unfair Tender Case

The last two articles have dealt with the recent decision of the Ontario Superior Court of Justice in Envoy Relocation Services Inc. v. Canada (Attorney General). That decision concerned a tender by the federal government.  The trial judge awarded $29 million to an unsuccessful bidder due to the court’s findings that the tender had been conducted unfairly.  The prior two articles dealt with four questions:

  • When must a sponsor’s conduct occur for it to be considered unfair?
  • What is the standard of review to be applied to a sponsor’s decision to select one bid over the others?
  • Can the court’s authority to try an action arising from a government tender be ousted by the authority of an administrative tribunal?
  • And when do earlier decisions about a tender amount to res judicata and bar the court from considering the claim?

This article concerns a fifth question arising from the Envoy Relocation Services decision.

How should the bidder’s damages be calculated when the sponsor of a tender wrongly fails to award the contract to the bidder?  And in particular, how does the decision of the Supreme Court of Canada in Hamilton v. Open Window Bakery Ltd., [2004] 1 SCR 303 apply to tenders and procurements?

The Background

Let’s review the facts in this case. They were set out in the last two articles and will be repeated here.

The dispute arose from a 2004 RFP by the Canadian government.  The RFP was for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid on the 2002 RFP showing zero as the ceiling cost for PMS, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider again knew that few individuals used PMS.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified level of projected users of PMS, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS, as the incumbent had done.

These facts about the 2002 and 2004 procurements were subsequently discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The trial judge found that, because of the unfairness with which the Crown had conducted the RFP, the Crown had breached the contract that applied to the bidding process (Contract A in the Ron Engineering analysis) and Envoy Relocation Services was entitled to about $29 million in damages.

Calculation of the Plaintiff’s damages

In arriving at his assessment of Envoy’s damages, the trial judge considered conflicting submissions made by the Crown and Envoy.  Envoy said that, once the trial judge found that if the bid had been properly conducted Envoy would have been awarded the contract for the relocation services, then Envoy’s loss of profit on that contract was the proper measure of damages. Furthermore, Envoy said that, in order for the Crown to carry out the contract most favourably to itself, the Crown would have granted Envoy a two year extension of the contract and therefore, under the Open Window Bakery case, Envoy was entitled to its loss of profit based on those two extra years.

The Crown said that Envoy did not win the tender, that another bidder did, and therefore Envoy was only entitled to nominal damages. In the alternative the Crown said that it was not clear what would have happened if the other bidder had not won the contract.  Accordingly, Envoy had at most a 50 percent chance of winning, so its damages should be calculated at 50 percent of its loss of profits.

The trial judge rejected the Crown’s approach.  He held that “in the tendering context, the measure of damages is loss of profits” of the plaintiff whose bid ought to have been accepted.  He cited the Supreme Court of Canada’s decision in Naylor Group Inc. v. Ellis-Don Construction and M.J.B. Enterprises v. Defence Construction in which loss of profit damages were indeed awarded to the plaintiffs in “unfair tender” cases.  However, those cases were decided before the Open Window Bakery decision of the Supreme Court in 2004.  The Supreme Court has not yet decided how that case might impact the award of damages in an “unfair tender” case.

The trial judge certainly seems to be correct in rejecting the application of the “chance of success” theory of damages.  After all, he had found that the winning bidder was wrongly selected by the Crown, and he had found that Envoy’s bid ought to have been accepted.  With those findings, there was no question of probabilities or chances. On the trial judge’s findings, if a contract was to be awarded, it could only have been awarded to Envoy. And the prior decisions in Naylor and MJB certainly seem to rule out any application of the “chance of success” theory of damages in “unfair tender” cases.

However, the trial judge’s application of the Open Window Bakery decision appears problematic. He held that the most beneficial way for the Crown to perform the relocation contract, assuming it was awarded to Envoy, was for the Crown to extend that contract for two years.  He therefore awarded damages to Envoy for the period of extension but discounted them by 50 percent to take contingencies into account.

It is arguable that this use of Open Window Bakery is contrary to what the Supreme Court actually decided. In that decision, the Supreme Court said that “the non‑breaching party is entitled to be restored to the position they would have been in had the contract been performed….The assessment of damages required only a determination of the minimum performance the plaintiff was entitled to under the contract, i.e., the performance which was least burdensome for the defendant.”

In Open Windows Bakery, the Supreme Court did go on to say (and these words were quoted by the trial judge in Envoy Relocation Services decision)

“This is not to say that the general principle will never require a factual inquiry.  The method of performance that is most advantageous or least costly for the defendant may not always be clear at the outset from the contract’s terms.  A court may have to consider evidence to determine an estimated cost of the various means of performance.  In some cases it will only be after this factual investigation that a court can confidently conclude that a certain mode of performance would have been the least burdensome for the defendant.  That this factual investigation might need to be conducted in some instances does not undermine the general principle.”

But the Supreme Court said these words after holding that a tort-like determination of what the defendant would probably have done was not relevant to contract damages. In making the assessment of damages for breach of contract, the Supreme Court has effectively said that it is not a question of considering how the defendant would have actually conducted its business, and determining what method of actually carrying on its business would have been most profitable.  Rather, it is a question of awarding the plaintiff the least amount that it could expect to receive from the defendant if the defendant had performed the contract, and performed the contract in the manner least onerous to it.  It would seem that not extending the contract was a less onerous way of the Crown performing the contract so far as the calculation of damages was concerned.

The bigger question, which was not addressed in the Envoy Relocation Services decision, is whether the Open Window Bakery decision disentitles the plaintiff to any damages in an “unfair tender” case, if the invitation to tender contains a “privilege clause”. That clause usually says that the sponsor is not obliged to accept the lowest or any tender.  In light of that clause, is the plaintiff entitled to any damages, since the sponsor was entitled to award no contract?

This possibility arises from the peculiar nature of the contract in issue in an “unfair tender” case.  That contract arises from the invitation to tender and the bidder’s tender, and it governs the tender process itself.  The contract is called Contract A in the analysis conducted under the Ron Engineering decision of the Supreme Court of Canada and the decisions which have applied that analysis including MJB, Naylor, Martel, Double N  Earthmovers and Tercon.  Those cases establish that Contract A governing the bidding process contains a duty of good faith.

But if there is a privilege clause in the tender documents, Contract A doesn’t necessarily result in a final contract for services or a building contract, called Contract B in the Ron Engineering analysis. It results in the sponsor deciding whether to award Contract B, or to cancel the tender.  Can the sponsor say to the plaintiff in an “unfair tender” case that one optional method of performing Contract A was to not award Contract B, and therefore the plaintiff has no claim to damages?

Compare Open Window Bakery.  That case concerned an employment contract.  The employer wrongfully terminated the employee but had the right to terminate the employee on giving a certain period of notice. The Supreme Court held that the employer had the option of performing the contract by giving a proper notice of termination.  Therefore the employee was entitled to no more damages than arose under that period of notice.  Could the sponsor under an invitation to tender say that it had the option of performing Contract A by not awarding Contract B?

That result seems unfair to the bidder and would effectively let the sponsor off the hook for unfair tendering practices.  It also is contrary to the actual results in MJB, Naylor , Tercon and many lower court decisions in which substantial damages have been awarded in “unfair tender” cases. The unwillingness of the Supreme Court of Canada to allow such a result is evidenced in its decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 SCR 69.  In that case, the majority held that the sponsor, the Department of Transportation and Highways of British Columbia, could not rely on an exclusion clause to avoid liability for an unfair tender, and substantial damages were awarded against that Department.

This article concludes the analysis of the decision in Envoy Relocation Services, truly the Mother of All Tender cases.  The decision can be filed away for future reference on a wide variety of issues relating to tenders and procurements. And it can be pulled out to be read any time we need to be reminded about the importance of the courts to the impartial resolution of disputes between the government and the private sector.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders and Procurements  –  Damages

 T.G.Heintzman O.C., Q.C., FCIArb                                                                                                                               May 23, 2013

 www.heintzmanadr.com

www.constructionlawcanada.com

The Mother Of All Tender Cases Revisited: Three More Issues

The last article about the decision of the Superior Court of Ontario  in Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034 considered the impact of that case upon the Contract A  –  Contract B principles of tender law.  There are many more interesting issues which emerge from that case.  This article considers three more issues.

The first issue is:  What Standard of review should be applied by the Court to the procurement authority’s decision? Should that decision be over-ruled if the court considers it to be incorrect; or only if it is unreasonable; or only if it was made in bad faith or fraudulently?

The second and third issue concerns the Court’s entitlement to review the procurement decision in the first place.  Was the Court’s authority excluded by federal legislation?  And was a prior decision in this case on this point res judicata and binding on the court?

The fourth issue related to how the plaintiff’s damages should be awarded.  The Open Windows Bakery decision of the Supreme Court of Canada directs that damages for breach of contract are to be calculated according to the least burdensome way for the defendant to perform the contract. But what does this mean in the context of a tender or procurment? That issue will be addressed in my next article about this very interesting case.

The background

The facts were set out in my last article on this case.  Mr. Justice Annis took 1194 paragraphs to set forth the facts, so this article provides just a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified number of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services.

These facts about the 2002 and 2004 procurements were discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The Trial Judge’s decision

As discussed in the prior article, the trial judge found that the Crown breached the express terms of the contract applicable to the invitation to tender, and also breached the implied term that it would conduct the tender fairly.  In addition, the trial judge addressed the following three issues which are of importance to construction and procurement law.

Standard of Review

One of the important issues in tender cases is:  what standard of review should the court apply when considering the sponsor’s evaluation of the tender proposals? Should the sponsor’s decision to accept one tender and reject the others be overturned: if the court believes that the sponsor was incorrect in its assessment; or must the court apply a higher standard and find that the sponsor acted unreasonably before it interferes; or must the court apply an even higher standard and only interfere if the sponsor acted fraudulently, in bad faith, by mistake or unconscionably?

The trial judge appears to have applied a two part test. For those parts of the sponsor’s assessment which were based on its expertise, he concluded that a standard of reasonableness should be applied; for those parts of the assessment where the sponsor’s employees had no expertise or had acted improperly (due to clear error, conflict of interest, or obvious preference for one bidder), a standard of correctness should be applied.  The trial judge rejected the Crown’s submission that he must find fraud, mistake, bad faith or unconscionability before he could review the tender assessments made by the Crown, finding that such a standard was “overly deferential” to the sponsor and not supported by the case law.

These distinctions between the various standards of review are useful.  Often the standard of review may be the decisive factor in whether the court will interfere with the sponsor’s assessment of the bids.  The trial judge’s reasons for using the correctness standard when the conduct of the sponsor’s decision-makers does not deserve respect, but otherwise the standard of reasonableness, provide a nuanced approach to the standard of review.

The Court’s Jurisdiction

The Crown asserted that the court had no jurisdiction to deal with the plaintiff’s claim because the  Canadian International Trade Tribunal Act and the Canadian International Trade Tribunal Procurement Inquiry Regulations  had established a statutory code for procurement disputes falling within the jurisdiction of the Canadian International Trade Tribunal, and that the present dispute fell within the Tribunal’s jurisdiction. The Crown submitted that the statutory code operated to oust the jurisdiction of the Superior Court, such that the action must be dismissed.

The trial judge rejected this submission.  He noted that this submission had been made to the court by way of a motion to dismiss earlier in the action, and that motion had been dismissed.  Accordingly, the trial judge held that the issue was res judicata.  But the trial judge went on to agree with the motion judge’s decision.  He held that there would have to be very clear language in the statute before the court’s jurisdiction was ousted, and there was nothing in the legislation that expressly did so.

The trial judge also expressed some horror that the court’s jurisdiction could be usurped in this kind of case. He said

“The fundamental difference between a court like the Superior Court of justice and the CITT involves the capacity to determine facts. It would frankly be unthinkable for any judicial body, but a trial court to hear a matter such as this one.

 If I may resort to a Proustian sentence to make the point: this matter involves facts extending over several years [and the trial judge continued in one sentence for seventeen lines concluding] …and everything else that goes with a trial in which factual findings are fundamentalto the ultimate decision that teams of lawyers have spent thousands of hours working on.

I cannot imagine more inappropriate circumstances in which to advance an argument that the jurisdiction of the Superior Court should be ousted because Parliament intended that cases of this nature should be resolved before the CITT.

This is not intended to be disrespectful towards the CITT, but it is clearly not a fact-finding quasi-judicial institution. Matters of contract, tort and remedies resulting therefrom are generally fact driven. One cannot replace a trial court with an administrative tribunal, unless the tribunal takes on the general characteristics of the trial court, such as has happened in many respects in labour law. But there is nothing in the constitution and procedures before the CITT that suggests it has either the capacity or the experience to make factual determinations, unless of a fairly rudimentary nature…..

 In matters of procurement, there is an obvious need in some cases for recourse to a judicial institution whose primary responsibility is the finding of facts in the pursuit of justice. I consider this to be a strong policy argument supporting the conclusion that Parliament could not have intended to exclude the Superior Court’s jurisdiction in this area without the clearest words to that effect.”

The private sector may well share the judge’s concern that the review of government procurements exclusively by government appointed tribunals is no way to ensure independent justice. The private sector may well wish to be vigilant to ensure that Parliament and the provincial legislatures do not try to shut off recourse to the courts arising from government procurements.

Res Judicata 

 Res judicata was considered by the trial judge twice in his reasons.

First, he held that the earlier decision of the motions judge, that the role of the Canadian International Trade Tribunal (CITT) did not oust the jurisdiction of the court, was res judicata on that issue. Nevertheless, he agreed with that decision and arrived at the same conclusion.

Second, the trial judge concluded that the unsuccessful proceedings by Envoy before the CITT were not determinative of Envoy’s rights.  Again, that issue had been raised by the Crown before the motion judge on its earlier motion, and had been dismissed.  That made the earlier judge’s decision res judicata on the issue.

In addition, the trial judge considered this issue on its merits and concluded that the earlier proceedings before the CITT were not definitive for two reasons.

First, the “intervening circumstances” showed that the proceedings before the CITT “bear no relationship to those argued before and ultimately determined by the Court.” Moreover, the trial judge said that he would exercise his discretion to not apply the doctrine of res judicata having regard to the refusal by the CITT to allow any inquiry into the allegations raised by Envoy and the subsequent discovery by the Auditor General of the facts relating to PMS.

The reasoning of the trial judge can be a useful starting point for any litigant facing the issue of res judicata arising from a tender.  The decision could be that of a government tribunal, but it could also be that of the engineer or architect on the project.  If the issue is whether that decision is binding on the parties by reason of res judicata, or whether the court should exercise its discretion to relieve against the application of that doctrine, then reference to the Envoy Relocation Services decision may be useful.

Quantifying Damages: The Open Window Bakery Decision

Time and space do not permit this article to review the trial judge’s consideration of the Open Window Bakery decision of the Supreme Court of Canada to the calculation of the plaintiff’s damages.  The issue may be crucial in tender and procurement law. It will be addressed in the next article.  In all, it will take three articles to fully digest the issues raised in this Mother of All Tender Cases.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –   Res Judicata  –  Standard of Review  –  Jurisdiction of the Court

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                       May 16, 2013

The Mother Of All Tender Cases!

The recent decision in Envoy Relocation Services Inc. v. Canada (Attorney General) certainly deserves the title of Mother of All Tender Cases.  It is a judgment of over 1800 paragraphs in which Mr. Justice Annis of the Superior Court of Ontario analyzed and found in great depth how an invitation to tender by the federal government went wrong due to unfairness.  Not only is the factual analysis extremely detailed. The legal issues are of the greatest importance to the building industry and the procurement process, particularly relating to allegations of favoring an incumbent or preferred bidder.

The basic issue in this case was whether unfairness by a sponsor of a procurement which occurs prior to the time when the tenders are submitted by the bidder, or after the award of the substantive contract to the successful bidder, can be a breach of the bidding contract (known as Contract A under the Ron Engineering analysis).  The Crown said that the prior conduct could not be a breach of contract, since before the submission of tenders there was no Contract A.  As well, the Crown said that the subsequent conduct could not be a breach of conduct since, upon the award of the final contract (known as Contract B under the Ron Engineering analysis), the tender process was terminated.  The Crown said that it was only conduct by the sponsor between the time that the tenders were received and the time of the award of the contract to the successful bidder that could be considered for unfairness under the Ron Engineering line of tender cases.

Mr. Justice Annis held that the unfairness principle applied to conduct by the sponsor before the tenders were submitted because that conduct was embedded in the tender documents and in the sponsor’s consideration of the bid.  Mr. Justice Annis also held that this unfairness principle  applied to the sponsor’s conduct after the award of the contract if the sponsor colluded in the improper award of the contract.

Background

Mr. Justice Annis took 1194 paragraphs to set forth the facts, so the following is a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider again knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified level of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services, as the incumbent had done.

These facts about the 2002 and 2004 procurements were subsequently discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

Reasons of the Trial Judge

The trial judge concluded that the Crown had breached the express terms of the 2004 RFP, for instance by accepting the incumbent’s zero cost for PMS services. The trial judge also concluded that the Crown had breached the implied term that the invitation to tender would be fairly conducted. His reasons included the following:

  1.  By inserting a zero price for the PMS, the incumbent had failed to bid the ceiling price in accordance with the requirements of the 2004 RFP, and its bid was non-compliant and ought to have been disqualified.
  2. By inserting a zero price for the PMS, the incumbent was in an “obvious actual conflict of interest.”  By quoting a zero price for PMS, the incumbent would wish to discourage any transferee form using the PMS services, because it would have to pay for those services if the transferee requested them.
  3. the weighting in the selection formula used by the Crown was “intentionally amended to favour” the incumbent bidder, and the government’s “conduct on the issue of amending the selection formula [constituted] bad faith.”
  4. The Crown “fail[ed] to follow its own published evaluation process, which was also set out in the RFP.”
  5. The Crown was in a “conflict of interest as the result of being implicated in litigation with the incumbent bidder arising out of the 2002 RFP.”  The Crown “knowingly drafted…the provisions of the [2004] RFP intended to favour the incumbent.”
  6. The “Crown intentionally turn[ed] a blind eye to [the incumbent bidder’s] intention to breach the contract, if awarded it” since the incumbent intended to charge for PMS services even though it had bid a ceiling of zero for this service.

Some of the other comments of the trial judge about the conduct of the Crown are best left to be read in the actual judgment.

Based upon these findings, the trial judge found that Envoy Relocation Services would have been the winning bidder if the RFP had been properly conducted and he awarded about $29 million in damages for breach of contract.

The Legal Issues

The Crown maintained that any alleged misconduct by it fell outside its contractual duty of good faith under the decisions of the Supreme Court of Canada in MJB, Martel and Double M Earthmovers, which followed and applied the decision in Ron Engineering. The Crown’s position was that:

  1.  Any misconduct before the tenders by Envoy and the other bidders were filed could not fall within any contractual duty of good faith. Until those tenders were filed, there was no Contract A applicable to the bidding process, under the Ron Engineering analysis. The trial judge put the Crown’s position this way:
  2.  “The defendant argues that the duty of fair and equal treatment is limited to the assessment of bids and does not apply to all aspects of the bidding process. Therefore, the plaintiffs cannot make any claim in respect of property management services because it relates to the drafting of the tender documents, not the evaluation of tenders…. [The] duty of fairness does not extend beyond a duty to treat all bidders fairly and consistently in the process of assessing bids. The duty of fairness therefore, does not apply to other aspects of the bidding process. In particular, it does not apply to the preparation of tender documents.”
  3.  Any misconduct occurring after the 2004 contract was awarded to the incumbent could not be attacked because, under the Double M Earthmovers decision, once that award was made the contract applicable to the bidding  process (that is, Contract A) came to an end.

There were many other important legal issues discussed in this judgment but for procurement and construction law purposes, those are two of the most interesting.

The Trial Judge’s Decision

The trial judge found several elements of unfairness in the way the RFP was run, particularly in relation to the incumbent bidder.  The incumbent “had access to information that it could bid the PMS item based on actual volumes, which Envoy was not aware of because the answers to questions had directed Envoy to use estimated volumes found in the BOP formula.”  The trial judge concluded that “had accurate PMS volumes been provided to non-incumbent bidders, it would have become immediately apparent that the PMS tendering provisions were a scam by their use of egregiously inflated PMS volumes that in no way could be described as “estimates”.  In addition, “the repetition of the 2002 PMS provisions in the 2004 RFP constituted a hidden preference to [the incumbent] that was concealed from Envoy and the other bidders”.

The trial judge rejected the Crown’s defence that the Crown’s conduct could only be legally unfair if it fell within the time period between the submission of the tenders and the award of the final contract. As to the Crown’s conduct before the tenders were delivered, the trial judge essentially found that that conduct was embedded in the tender documents and the sponsor’s selection decision.  The tender documents themselves were unfair by reason of the Crown’s conduct in preparing and administering them in the tender process. As the trial judge said:

“Firstly, the simplest answer is that the definition of what constitutes an unfair evaluation would include an evaluation carried out on an RFP that includes concealed advantages or disadvantages to any bidder. Any aspect of the tendering process upon which an evaluation is based is part of the evaluation process. Accordingly, if the tender terms are inherently unfair because of undisclosed preferences, the evaluation based on those tender terms is equally unfair. The jurisprudence upholds this result.  (emphasis added)

Second, the trial judge relied upon several decisions that establish that undisclosed standards or criteria are classic examples of unfair tenders. The present situation was, in his view, no different:

“I find no distinction between a “concealed preference” and an “undisclosed standard” referred to in the decisions above with respect to preferring local contractors or providing insufficient details. In either case, tender documents concealing preferences or undisclosed standards undermine the integrity of the bidding process and with that, the implied obligation to treat all bidders fairly and equally.”

So far as evidence about the Crown’s conduct after the award of the 2004 RFP to the incumbent, the trial judge distinguished the Double N Earthmovers decision of the Supreme Court of Canada:

“[T]he Crown Collusion is also relevant to the blameworthiness of the owner. One of the factors in the Double N decision was that the City of Edmonton was an innocent party because it had no forewarning or knowledge of the contractor’s deceitful behaviour. In contradistinction to those facts, blameworthiness and culpability on the part of the Crown is evident throughout this tendering process.”

In addition, the trial judge held that the court could look to any relevant evidence, including conduct before or after the moment when the tenders were filed, in determining whether the conduct of the Crown in accepting the incumbent’s bid and rejecting another competing bid, was fair.

Comment

There are two useful aspects of the Envoy Relocation Services decision.

First, the factual circumstances contain a wide variety of circumstances in which an invitation to tender may be found to be unfair, particularly if there is an incumbent bidder:

  • permitting the incumbent access to information not available to other bidders;
  • requiring other bidders to use criteria not used by the incumbent in its bid;
  • failing to address the conflict which may arise if the incumbent has a claim against the sponsor rising from the prior contract, etc.

In fact, the Envoy Relocation Services decision provides a virtual check-off list of problems to be considered anytime an invitation to tender involves an incumbent bidder or potential favouritism to any bidder.

Second, the decision provides a good explanation of why a sponsor’s conduct may be contractually unfair even if it occurs before the bidders’ tenders are submitted. It may be unfair if it affects the fairness of the tender documents or the selection made by the sponsor. In either case, while the conduct may occur before the bidders submit their tenders, that conduct affects the sponsor’s conduct after the tenders are submitted.  That prior conduct affects the fairness of the crucial decision made as part of the bidding contract, namely, the selection of the winning bidder.

That conduct prior to the submission of the tenders may not give rise to liability in tort (as found in Martel). And it may seem illogical that conduct prior to the making of the Contract A bidding contract could be the basis of a claim for breach of that contract. However, the trial judge found that it is entirely logical because that conduct is part of the tender documents and part of the sponsor’s selection decision.

So far as the conduct of the sponsor after the selection of the winning bidder is concerned, the Envoy Relocation Services decision confirms that such conduct may be the basis of unfairness if the owner knows (or is reckless) as to the winning bidder’s subsequent conduct.  If the sponsor knows before awarding the bid that the winning bid is really non-compliant based upon that bidder’s tender or clear intentions (as found in Envoy Relocation Services and MJB,) then the sponsor can be held to have acted unfairly in awarding the contract to that bidder.  If the sponsor does not know these facts (as found by the majority in Double N Earthmovers), the subsequent conduct of the sponsor or winning bidder will not be the basis of allegations of unfairness against the sponsor.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –  Non-Compliant Bids  –   Incumbent bidder  –  Fairness

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                         May 8, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Is There An Intermediate Position Between An Invitation To Tender And A Request For Proposal?

Not all requests for bids issued by an owner are the same. A request for bids that will be binding on the chosen bidder is usually referred to as an Invitation to Tender.  On the other hand, a request for bids which is not binding on the chosen bidder is usually referred to as a Request for Proposals (or RFP). The RFP results in proposals which can be considered by the owner but are not binding on the bidder.

But how do you really tell an Invitation to Tender from a Request for Proposals? What sort of clause in the owner’s request results in a RFP rather than an Invitation to Tender?

And is there in intermediate position in which the owner and bidders do not have an obligation to enter into a contract but only an obligation to negotiate exclusively with each other for a period of time?

This was the issue faced by the Ontario Superior Court in Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre.

Facts

In 2006, the Campus issued an RFP for food services and the lease of a kitchen at a community centre which the Campus was building in north Toronto.  When fully developed the community centre was to include a private high school owned and run by a separate organization (the Academy). When the 2006 RFP was issued, the construction of the community centre had not begun, and the 2006 RFP stated that it was subject to design change.

The 2006 RFP stated that the Campus might reject any proposal or might negotiate with more than one party responding to it. The RFP contained a provision which stated as follows:

…The submission and acceptance of any proposal does not obligate [the Campus] to enter into a binding legal contract with the successful proponent, nor does acceptance of the proposal imply that a contract has been entered into with [the Campus]. The implementation of the project by the successful proponent is dependent upon entering into a separate legal contract with [the Campus], to be negotiated and signed prior to implementation of the project.

The Plaintiff made a proposal which was favoured by the Campus. The parties entered into an exclusive 90 negotiation period.  A final agreement was never reached, but the parties continued to negotiate until October 2007.

The Plaintiff began providing food services to the Academy which commenced operations in the campus premises in the fall of 2007. The high school submitted a Memorandum of Understanding to the Plaintiff but that MOU was never signed.

By 2011, the Campus’ plans had changed and it issued a new RFP for the provision of food services to the community centre. The Plaintiff protested that it already had a contract for those services. However, it did participate in the 2011 RFP, but was not successful.  After the issuance of the 2011 RFP, the Plaintiff continued to provide food services to the Academy but those arrangements were terminated in 2012. The Plaintiff then sued the Campus to assert that it held a contract to provide for food services to the community centre.

Decision of the Trial Judge

The trial judge held that the 2006 RFP did not lead to a contract between the parties for the provision of food services. The trial judge said that the 2006 RFP:

“made it clear that it was not an offer that would lead to a firm acceptance. Rather, as the courts have said elsewhere, the 2006 RFP was “a request for proposals and nothing more. The prize at the end of the exercise was…the opportunity to negotiate for a contract”…. While the 2006 RFP created an obligation to negotiate terms over a 90 day period, it presented to the Plaintiff nothing more than an opportunity to attempt to conclude an agreement. It was not itself a binding document.

The trial judge also concluded that the negotiations after the 2006 RFP did not lead to a written agreement for the provision of food services which was a specific requirement of that RFP before any contract could arise. The final draft agreement which was exchanged in October 2007 was not signed because there were still terms and issues to be concluded.

Discussion

The challenge of this case is to fit it into the Contract A – Contract B analysis under the Ron Engineering decision of the Supreme Court of Canada. Did the trial judge find that a contract arose for the tender process (Contract A in Canadian tender law under the Ron Engineering), but that no Contract B arose from the bidding process?  Or did the trial judge find that there was no Contract A because the Contract B that was being offered by the owner was too indefinite for Contract A to arise?

The first sentence of the provision in the request issued by the owner referred to above into bid documents appears to be very similar to a standard privilege clause. A privilege clause is usually inserted by owners to state that the owner has no obligation to accept the lowest or any tender. Such a privilege clause would not normally preclude a Contract A arising in a true tender situation, namely a contract for the purpose of the tender. That contract would normally carry with it the implied terms discussed in many decided cases, including an obligation on the owner to act fairly and not accept non-compliant bids.  A privilege clause may allow an owner to accept a bid other than the lowest bid and not to accept any bid if the privilege clause specifically allows that to happen.

Interpreted as a privilege clause, the provision referred to above should have been sufficient for the court to decide the case. Based upon the owner’s original request, the owner had no obligation to accept any bid, including the Plaintiff’s bid

But the plaintiff had a second agreement. It said that the conduct after the initial request by the owner resulted in, or evidenced, a contract.  By selecting the Plaintiff’s bid as the preferred bid and by negotiating with the Plaintiff, the owner had moved beyond the privilege clause. It was no longer a question of the owner’s right to not enter into any contract. The owner had effectively waived the privilege clause and entered into a contract with the Plaintiff by its conduct.

To address this point, the court seems to have adopted a hybrid conclusion.  The trial judge seems to have concluded that, yes, there was an obligation between the parties.  But that obligation was to negotiate with each other exclusively for a period of 90 days, not a final contract for food services. That “exclusive negotiation” obligation explained the subsequent conduct of the parties.  And when no final contract resulted for those negotiations, then there were no continuing contractual relations between the parties.

There is no question that a contract to negotiate exclusively with one party is a binding contract. The contract is not too indefinite to be enforced because it requires negative conduct, that is, no negotiation with another party, and it sets a specific period for that negative conduct to occur. But what an “exclusive negotiation” contract cannot compel is a specific result, a specific substantive contract at the end of the negotiation period.

In this sense, the trial judge may have been incorrect, and contradictory, to say that “while the 2006 RFP created an obligation to negotiate terms over a 90 day period, it presented to the Plaintiff nothing more than an opportunity to attempt to conclude an agreement. It was not itself a binding document.”  The obligation to exclusively negotiate with a party can be a binding contract. But it is only a contract not to negotiate with other parties. It is not a binding contract to conclude an agreement on the substance of the negotiations. In the present case, it was not a binding contract for the food services contract.

The present case creates, therefore, a potential intermediate or hybrid position between the normal Invitation to Tender and RFP, or between Contract A and Contract B. Under this hybrid position, a Contract A does arise for the bidding process.  That Contract may well contain the usual implied terms that apply to Contract A.  But the Contract B that the owner is offering is not a substantive building or supply contract on specific terms.  Rather the owner is offering an “exclusive negotiation” contract for a specific period of time.  That sort of Contract B is specific enough to allow Contract A to come into existence. But it does not compel the owner to agree to any specific terms for the final supply or building contract, except to the extent that those terms are stated in the original request.

The advantage to a bidder of this sort of arrangement is that it means that the Contract A-Contract B analysis applies to the original request by the owner. That analysis requires the owner to comply with the implied terms of Contract A, including the obligation to treat the bidders fairly. The disadvantage to a bidder is that, if the bidder is successful, the bidder will only obtain an exclusive right to negotiate with the owner for a specific period of time. But this disadvantage may not be a severe one since that sort of negotiation may be the reality in a tender process involving a privilege clause.

The advantage to the owner of this arrangement is that the result of the process is only an obligation to negotiate with one or a number of preferred bidders for a specific period of time, but not to agree to any specific terms other than those mandated in the original request.  This arrangement gives the owner the flexibility to deal with one or a few bidders and arrive at the best arrangement. The disadvantage may be that, during the initial request, the owner will have to abide by the Contract A obligations, including the obligation of fairness and the obligation not to deal with a non-compliant or higher priced bidder unless a privilege clause expressly permits it to do so.

This case demonstrates that the Contract A – Contract B analysis of Ron Engineering is not just a strait jacket as is often assumed. The analysis permits various types of Contract A and Contract B to emerge. And it permits variants between a strict Invitation to Tender and a strict RFP.

The genius behind Ron Engineering is that it separates the bidding contract – Contract A – from the contract emerging from the bidding contract.   It enables the court to imply into the bidding contract the necessary elements to allow the bidding process to proceed fairly. But it allows the contract emerging from the bidding process to be whatever contract the bidding process may contemplate.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 1, part 1(f).

Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre, 2013 ONSC 2057

Building Contract  –  Tenders

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                          April 29, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can An Owner Look Behind A Bid And Find It Non-Compliant?

Is an owner entitled to look behind a bid submitted in response to an invitation to tender and determine whether it is compliant with the terms of the invitation to tender, even though on its face the bid is compliant? And if the owner does so, and determines that the bid is non-compliant, can the owner then disqualify the bid?  According to the recent decision of the Ontario Superior Court in Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139, the answer to both questions is yes.

This decision raises important issues about the discretion of an owner once it decides to look behind a bid. In Double N Earthmovers v. Edmonton (City), 2007 SCC 3, the Supreme Court of Canada held that the owner is not obliged to go behind a bid which is compliant on its face, to determine whether the bid really complies with the tender documents. The Rankin decision deals with the implications for the owner and the bidders if the owner decides to do so.

The Background

In 2005, Rankin was a pre-qualified bidder in an invitation to tender issued by the Ministry of Transportation of Ontario (MTO) for the widening of Highway 406 near Niagara Falls, Ontario.  The tender package provided an advantage for using Canadian domestic steel.  It did so by allowing a 10 per cent discount to the tender price to arrive at the Adjusted Total Tender. That adjustment did not apply, however, to imported steel and each bidder was required to declare the amount of imported steel in its bid.

The MTO specifications called for the supply of H-Piles made of rolled steel.  The H-Piles were to be driven into the ground to provide support for bridge structures. Rankin did not declare the H-Piles to be made with imported steel. In fact, they were manufactured in the United States. The value of the H-Piles in Rankin’s bid was about $500,000 out of a total adjusted bid of about $18.6 million or about 2.7 per cent.  All the other bidders declared the H-Piles to be made of imported steel.

The tenders were opened and Rankin’s bid was the lowest, both as to the total tender and the adjusted tender.  The MTO then received complaints that Rankin’s bid was non-compliant due to its failure to declare that its H-Piles were made of foreign steel.

MTO’s practice was not to ask for supporting documents or other proof of bidder’s declarations. Apart from one previous occasion, the MTO had never reviewed a bidder’s declaration of imported steel. Nevertheless, a local MTO investigator undertook an investigation and reported that the contract should be awarded to Rankin. That report was not accepted by the local MTO manager who recommended that Rankin’s bid be rejected and the contract be awarded to the next highest bidder. That recommendation was accepted and after consultation with the MTO’s legal department, the contract was awarded to the next highest bidder. No reasons for rejecting its bid were given to Rankin.

The MTO witnesses testified that Rankin’s bid was rejected to maintain the integrity of the bidding process. While the MTO had, under its Instructions to Bidders, the right to reject any or all tenders and to waive irregularities “in the Ministry’s interest”, the MTO witnesses said that a waiver of the non-compliance would compromise the bidding process.

The MTO argued that Rankin’s bid was non-compliant and accordingly, no Contract A came into being under Ron Engineering formulation. Therefore, MTO asserted that it owed Rankin no contractual duties.  Rankin argued that its bid was compliant on its face and that MTO was not entitled to investigate Rankin’s tender and then, based on that investigation, rule that tender to be non-compliant.

Reasons of the Trial Judge

The trial judge noted that the situation in the present case was the opposite of that presented in Double N.  There, the Supreme Court held that the owner was not obliged to go behind an apparently compliant bid. Here, the MTO had gone behind Rankin’s bid and investigated its compliancy and the issues were “whether an owner is disentitled to carry out such an investigation, and whether, if it does so at the instance of a rival bidder, [the owner] thereby breaches an obligation to the low bidder whose bid is found to be non-compliant as a result of the investigation.”

The trial judge held that the contract formed in the tender process, Contract A in the Ron Engineering analysis, should not be found to contain a term prohibiting the owner from “investigating whether a bidder is capable of fulfilling the material terms of its bid, in the face of information that it may not be.” In his view, such a term would not

“promote the integrity of the bidding process. Public sector owners, such as the MTO in this case, have a long-term interest in protecting of the integrity of the bidding process. Their concern is not necessarily restricted to the individual project under consideration, but with the maintenance of a vigorous and competitive tendering process on future projects.  Anything which would dissuade potential bidders from participating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest.”

The trial judge found that there was nothing in the MTO’s procurement policies which precluded the MTO from investigating Rankin’s bid, even if it was not MTO’s practice to do so. In addition, the trial judge said that, even if those policies had that effect, Rankin could not rely on them because the terms of the tender were governed by the tender documents, not MTO’s policies. Unless the MTO’s procurement policies were incorporated into the tender package, a deviation from those policies did not give rise to any breach of duty to a bidder.  Those policies were not expressly incorporated into the tender package, and an implied incorporation would “give rise to unnecessary uncertainty and potential confusion and would therefore be unjustified.” Accordingly such incorporation would satisfy neither the business efficacy nor officious bystander tests for implying a term into the tender contract.

The trial judge found that Rankin’s declaration of imported steel was “crucial” to the determination of the lowest bidder. The process for declaring imported steel was “integral and fundamental” to the tender scheme. Even though the resulting price difference was only $50,000 (10 per cent of the $500,000 value of imported steel H-Piles) and even though Rankin would still have had the lowest adjusted bid and total bid if H-Piles had been properly declared, that was not sufficient, for the following reasons:

“[The] materiality [of the non-compliance} is to be determined objectively having regard to the impact of the defect on the tendering process and the principles and policy goals underlying the process. The focus is not on the impact of the defect on the outcome of the particular tender process, but on the impact on the process itself, including the reasonable expectations of the parties involved in the process, including rival bidders….three elements [are] to be considered on an assessment of materiality of the non-compliance, namely, whether it undermines fairness of the competition or the process of tendering, impacts the cost of the bid or performance of Contract B, or creates a risk of action by other (compliant) bidders. This list is stated disjunctively, and accordingly, not all of them need to be present in order for there to be a finding of material non-compliance..…To require the MTO, at the stage of determining compliance with the tender documents, to undertake a consideration of whether an inaccuracy in the Declared Value of Imported Steel will in fact alter the ultimate outcome of the tender process, as a pre-condition to a finding of material non-compliance, would, in my view, be inappropriate and could introduce an element of uncertainty to the process and the imposition of an unjustified risk on the MTO.”

The trial judge then found that the owner, MTO, was “incapable of accepting a bid containing a material non-compliance” and that, therefore, “once the material non-compliance in the Rankin bid was discovered, the MTO was bound to rule it to be non-compliant and therefore not capable of acceptance.”

The trial judge also dealt with a paragraph of the tender documents which required the MTO to notify bidders whose tenders had been rejected within 10 days of the opening of bids.  He found that this paragraph did not apply because, by its heading it only applied to unbalanced tenders and discrepancies and not to non-compliant bids, and because the Rankin tender was not “rejected” but simply non-complaint.

The trial judge found that, in any event, the MTO was protected by an exclusion clause which read as follows:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in the acceptance of a Tender, except as provided in the tender documents.”

The trial judge applied the reasoning of the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69 and held that, unlike in that case, the exclusion clause covered MTO’s alleged misconduct and was a complete defence. Applying the unconscionability and public policy test in Tercon, the trial judge found that the exclusion clause was not invalid. In his view, even if the MTO erred in investigating whether Rankin’s bid was compliant, it did so, “not to subvert the integrity of the tender process in order to gain some unfair advantage, but rather to promote the integrity of the process.” Accordingly, its conduct was protected by the exclusion clause.

Comments

The background and the reason of the trial judge have been dealt with at some length because they address many of the “hot button” issues relating to tenders. Here are a few issues which arise by comparing the Rankin decision to the decision of the Ontario Court of Appeal in Bot Construction Limited v. Ontario (Transportation), 2009 ONCA 879:

  1. The trial judge found that the owner was prohibited from accepting Rankin’s tender once it found it to be non-compliant.  In Bot, the Court of Appeal was, again, dealing with a MTO tender and foreign steel components.  The successful contractor, Cavanaugh, specified welded steel components in its bid when the tender package called for rolled steel.  The Divisional Court held that this change made Cavanagh’s bid non-compliant, in the same fashion as the trial judge did in the Rankin case. The Court of Appeal in Bot reversed the Divisional Court and held that a standard of reasonableness should be applied to the MTO’s decision and that the decision that Cavanagh was compliant with the tender process fell within “a range of possible, acceptable outcomes that are defensible in respect of the facts and law.”
  2. The decision in Rankin may be at odds with the decision in Bot on another point, namely the degree to which the non-compliancy mattered.

Here is what the Court of Appeal said in Bot:

“The amount of steel required for the bridge beams was small (1.14 per cent of the total steel required for bridges by the Contract) and minor (0.26 per cent of the value of the Contract). …  Even if the use of Canadian steel required a change in the project specifications, this change would be a minor one and would be readily approved.  Finally, even if Cavanagh had declared imported steel for use on the bridge beams, it would not have affected the order of bidders because of the large gap ($2,259,000 in the total bids, $2,230,000 in the adjusted bids) between Cavanagh, the lowest bidder, and Bot, the second lowest bidder”.

These are the sort of factors that Rankin pointed to, unsuccessfully, so far as its bid was concerned.

3.  But where Bot and Rankin may come together is the different effect of a stated or unstated non-compliance.  In Bot, the successful bidder expressly and openly bid Canadian welded steel and asked for it to be accepted within the bid or that any non-compliancy be waived by the owner. In Rankin, Rankin’s tender contained a non-compliancy which was not apparent on the face of its bid. That non-compliance might have slipped through a DoubleN type of bidding process, namely one in which the owner does not examine into the bids which on their face meet the requirements of the bid.

So a bidder faces a choice if its tender contains a potential non-compliancy:

 If the bidder openly states the compliancy issue, then the bidder faces the possibility of being disqualified. But if the issue is accepted by the owner as not involving a non-compliancy, or if the non-compliance is waived by the owner, then the owner’s decision to accept the tender may be upheld as reasonable, according to Bot.

 If the bidder does not openly state the non-compliance issue, then the bid may be accepted as being apparently compliant, under Double N.  But if the owner does investigate and decides that the bid is non-complaint, then its decision may be upheld, according to Rankin.

See Heintzman and Goldsmith on Canadian Building Contract, 4th ed. chapter 1, part 1(f). 

Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139

Building Contracts   –   Tenders   –   Non-Compliant Tender   –   Waiver

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                           April 6, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Supreme Court Denies Leave In Tender Case – Refuses To Re-Write History

The Supreme Court of Canada has recently refused leave to appeal in Trevor Nicholas Construction Co. Ltd. v. Canada. In doing so, it has upheld the decisions of the Federal Court Trial Division and Federal Court of Appeal which declined to permit a bidder to rely on after-the-fact information to overturn an invitation to tender.  These decisions, and the Supreme Court’s decision not to allow an appeal, may signal a growing unwillingness of courts to disturb the tender process based upon facts or events occurring after the tender is completed.

Background Facts

This is a long story, starting 23 years ago in 1989. The summary judgment motion judge summarized the facts as follows.

In 1989 and 1990, Trevor Nicholas submitted the lowest bid on two invitations to tender for dredging contracts issued by Public Works Canada.  In each case, Public Works Canada advised Trevor Nicholas that it was “by-passed” in favour of the second lowest bidder based upon its previous work and apparent incapacity.  Trevor Nicholas submitted bids on three further projects between 1990 and 1993. It was the lowest bidder but was by-passed for the same reasons.

In 1995, Trevor Nicholas sued the federal Crown and alleged that the defendant had treated the plaintiff unfairly during the first four tenders.  Trevor Nicholas also claimed that the Crown had breached an implied term of the contracts which were created when the plaintiff delivered four fully qualified low tenders.

In May, 2001, the Federal Court granted summary judgment dismissing the plaintiff’s claim under the implied term theory.

In January 2011, the balance of the plaintiff’s claim was dismissed on summary judgment, on the ground that there was no genuine issue for trial with respect to the plaintiff’s claim that the defendant breached its obligation to treat the plaintiff fairly. The Federal Court of Appeal upheld that decision and the Supreme Court of Canada has now denied leave to appeal from that decision.

The Federal Court of Appeal’s decision

The Federal Court of Appeal quoted, and agreed with, the following portion of the trial judge’s reasons which stated the ingredients of the duty of fairness in an invitation to tender.  The Federal Court of Appeal underlined the concluding portion of the quote:

“The defendant’s implied obligation to treat the plaintiff fairly flows from its “obligation to treat all bidders fairly in the sense of not giving any of them an unfair advantage over the others” and not unfairly preferring one bidder over another… In assessing whether this obligation was breached, it must therefore be determined whether the plaintiff was treated unfairly, relative to other bidders. This assessment should include a determination as to whether the By-Pass Decisions were made on the basis of considerations that were extraneous to those set forth or implied in the tender documentation…. In my view, the assessment should also include a determination as to whether the defendant was biased against the plaintiff or made one or more of the By-Pass Decisions in bad faith, for example, by basing any of the By-Pass Decisions on facts that the defendant knew or ought to have known were untrue at the time those decisions were made. [underlining added]”

The central argument of Trevor Nicholas was that the Crown knew or should have known at the time of the tender that the information which the Crown relied upon to by-pass Trevor Nicholas was false.  Trevor Nicholas attempted to show the falsity of that information, and the Crown’s contemporary knowledge of it, through cross examination of witnesses on the summary judgment motion. Its difficulty was that all the facts that it relied upon were dated long after the invitation to tender.  Trevor Nicholas was attempting to show that, by virtue of those facts long after the tender, the Crown knew or should have known of the falsity at the time of the tender. But it had no information that the Crown did know that falsity at the time of the tender.

The trial judge and the Federal Court of Appeal were not prepared to allow Trevor Nicholas to proceed to trial on the issue of fairness when Trevor Nicholas based its case on facts occurring long after the tender, and sought to extrapolate backwards from those facts to show unfair conduct by the Crown at the date of the tender.  As the Federal Court of Appeal said:

“[T]he plaintiff had no direct evidence to show that when making his decision not to accept the plaintiff’s tenders, the decision-maker knew that the information before him was incorrect or based upon irrelevant factors. At best, the plaintiff’s evidence took issue with the accuracy of various opinions placed before the decision-maker…[T]he Judge wrote that there was nothing in the plaintiff’s motion record:

[…] that would indicate or suggest in any way that the defendant knew, at the time when it made the By-Pass Decisions, that any of the facts upon which it relied in making those decisions were false, erroneous or misleading. Despite my repeated requests during the oral hearing, the plaintiff was not able to identify any basis for this claim, other than its mere belief that the defendant knew that some of those facts were false.”

The Crown led evidence to show that, at the time of the tenders, it retained and relied upon independent experts to evaluate the bids.  The tender documents explicitly stated the past performance of bidders, and the similarity of work previously undertaken by bidders to the proposed work, would be considered.  The summary motion judge concluded that, in all the circumstances, Trevor Nicholas had not shown that there was any genuine issue for trial on the issue of fairness. The Federal Court of Appeal agreed.

Discussion

The decision brings to an end 23 years of disputes and litigation over tenders. There have been 20 reported decisions in the two actions brought by Trevor Nicholas over these tenders. This is a remarkable amount of unsuccessful litigation.

One can well understand the frustration of a contractor repeatedly losing out on invitations to tender on which it was the low bidder.  This frustration is then fed by discovering later facts which demonstrate, in its view, that the decisions to by-pass it were unjustified.  In invitations to tender, bidders are outsiders to the decision-making process.  When they are excluded for subjective reasons, such as unsuitability or incapacity, there is a natural tendency to blame the process and to jump to the conclusion that the process was unfair.

But the invitation to tender process cannot be run by “monday morning quarterbacking.”  Business is business, and courts are not going to paralyze the tender process by raising the spectre of penalizing owners if facts are later discovered which call into question the wisdom of the tendering decision.  Fairness will be judged by the fairness of the process, and the later discovery of new facts does not render a prior process unfair.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 1, section 1§1(f)    

Trevor Nicholas Construction Co. Ltd. v. Canada, 2012 FA 110

Building Contracts  –  Tenders  –  Fairness  –  Duty of Care  –  Remedies

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                          December 9, 2012

www.constructionlawcanada.com

www.heintzmanadr.com