By H. David Edinger, Mollie Deyong and Sharla Johnson
Owners owe a procedural duty of fairness to all compliant bidders during the tendering process, but what happens when all the bids are non-compliant?
Overview of the tendering process
Tendering is the process by which a party that wishes to enter into a contract for goods or services on a project, typically the owner of the project, solicits binding offers with a view to obtaining the best price and most favourable terms.1 A “bid” and a “tender” are interchangeable terms for offers to enter into a contract on the terms set out by the owner.2 The owner sets the terms by issuing a call for tenders, which contains instructions that define the terms under which bids or tenders will be accepted.3 Development of the bid or tender requirements and evaluation criteria requires owners to carefully consider the requirements of a successful bid before issuing a call for tenders.
Prior to the deadline for submitting a bid, interested parties review the owner’s tendering documents and attempt to determine the cost of completing the work and the price at which they are willing to fulfil the contract requirements. Upon submitting a bid, a “Bid Contract” (or “Contract A”) is formed. This Bid Contract renders the bid irrevocable and, subject to the terms of the tender, obliges the owner to accept the lowest bid that complies with the specifications in the tendering documents.4 Once the owner has selected the lowest bid, the parties enter into a “Construction Contract”5 (or “Contract B”) which governs the completion of the project.6
A general constraint imposed on owners by the common law when reviewing bids or tenders for compliance or when evaluating them is a duty of fairness owed to all bidders under the Bid Contract.7 This duty of fairness is an implied contractual term, the content and scope of which depends on the terms of the tender documents.8 Regardless of the terms of the tender documents, the duty of fairness is an obligation to treat all bidders equally, and not arbitrarily or capriciously, and in accordance with the stated selection procedure.9
Mistakenly deficient bids
To select a successful bid, the owner must evaluate the bids using the criteria set out in the tendering documents. However, important factors sometimes fail to be identified in the tendering documents for a variety of reasons. Bidders can also forget to include certain key information when submitting their bid.
While the lack of some information may be inconsequential, if certain fundamental information is missing the bid may be considered non-compliant and must be eliminated from the competition in order to uphold the owner’s duty of fairness to the other compliant bids.
It is also possible that one small error or omission in the tendering documents may cause every bid to be non-compliant. Although such a situation may also coincidentally arise due to independent mistakes by each bidder, it is more likely to arise when the owner has made a mistake in the tender documents. Regardless of who is responsible, the same legal principles apply. However, the reason for the non-compliances will inform the appropriate response.
To stay within the rules of the duty of fairness and avoid compromising the integrity of the tendering process, careful consideration of the common law of contract is required.
Are the bids materially compliant?
The owner must first determine whether the deficiency in each bid is so fundamental that it renders the bid non-compliant. When courts decide this, they first analyze whether the bid was strictly compliant and then whether the bid was substantially compliant in light of the overall nature of the bidding process employed by the owner, including the owner’s discretion clause and the nature of the non-compliance.10
A discretion clause generally allows the owner to waive minor or immaterial defects in substantially compliant bids. However, even where there is a broad discretion clause, courts will not allow the owner to proceed by whim. The owner will be permitted to ignore immaterial non-compliance but cannot ignore material non-compliance.11 In the case of immaterial non-compliance, the owner can proceed to consider the non-compliant bids, although the owner should carefully and transparently document its process and rationale for determining that the bids are materially compliant. If the bids contain material non-compliances, the owner cannot ignore the non-compliances and must consider other options. However, the line between immaterial and material can be difficult to determine and factually specific, often requiring legal advice.
A material non-compliance also arises when there is uncertainty preventing a determination that a Contract A has been formed between the parties.12 The test is whether the term or terms in question relate to essential aspects of the prospective contract.13 For example, mistakes and uncertainty as to price and the identity of a party are material defects that will render bids invalid.14
Obligation to comply with the duty of fairness
Once all compliant bids are identified, the owner must treat all bidders fairly throughout the remainder of the tendering process, in strict compliance with the tendering documents.15
In situations where none of the bids are compliant, and the non-compliances are sufficiently material that the duty of fairness precludes the owner from simply waiving them, the owner has at least three options:
- Start over In a perfect world where time, cost, and risk are not at issue, all non-compliant bids should be rejected. The owner’s logically cleanest solution is to cancel the invitation to tender and re-start the tendering process. However, this obviously poses significant practical disadvantages. Re-tendering often, if not always, causes significant costs and delays. If the owner’s tendering documents are perceived to be responsible for bid deficiencies, cancelling the invitation to tender could also harm the owner’s reputation and disincentivize future bidders from participating in the tendering process. If mistaken bid documents did not cause the non-compliances, then there may be market reasons for the absence of compliant bids, and the owner should consider engaging in market sounding exercises prior to commencing a new tender process for the same scope. However, if all of the bids are non-compliant for different reasons, re-tendering may be the only option consistent with the duty of fairness that is available to the owner. Otherwise, the owner will be at risk of facing allegations of actual or perceived preferential treatment.
- Waive specific criteria If all bids are defective in respect of one criterion (or the same criteria), the owner may wish to waive that criterion (or criteria). This option may be appealing where the bids are otherwise compliant. To be clear, waiving a criterion for all bidders is different from waiving a non-compliance in a particular bid. Criteria can be waived by issuing addenda to the tender documents, and/or by obtaining the written consent of all bidders to waive the specific criterion. Waiving criterion after bids are received can be risky due to the possibility, whether actual or perceived, that the waiver of the criterion favours a certain bidder. However, where all bidders failed to comply with the waived criterion, this is of lesser concern. This option may be appealing for owners because it minimizes delay and allows otherwise compliant bids to remain competitive. However, the owner must be careful that the defects contained within waived criteria are not material.
- Request bid correction Depending on the terms of the owner’s bid documents, it will generally be less risky for the owner to request further information or clarification on a particular point from all bidders than to waive criteria. Whether this option is attractive to an owner will depend on the nature of the non-compliances. Bid documents will often permit the owner to request clarification or rectification in respect of immaterial non-compliances that can be simply rectified through further clarification. However, these clauses typically do not permit rectification of material non-compliances. If the owner asks bidders to correct a material non-compliance, the owner must ensure that all bidders receive an equal opportunity to do so, and that the opportunity for bid correction does not disproportionately favour any particular bidders.16 The owner should request information in a consistent format and provide a timeline for bid corrections that is reasonable and fair to all.
What to avoid
When there are no compliant bids, owners must be careful not to engage in bid shopping—the practice of obtaining a bid from one bidder and then taking it to another bidder to see if they will match or beat it.
This not only exposes owners to liability, but it can have damaging reputational repercussions. In Stanco Projects Ltd v British Columbia (Ministry of Water, Land and Air Protection), none of the bids received in the tendering process for upgrading the water system in Cypress Provincial Park provided a separate price for an epoxy-coated tank, as requested by the owner.17 The owner’s Appendix C to the tender package did not specifically set the requirement for a separate price in the Schedule of Prices. The owner told the lowest bidder that it would be awarded the Construction Contract and requested a price for the epoxy-coated tank. However, the owner also elicited prices from the other bidders and then urged the lowest bidder to reconsider its price. This conduct was considered bid shopping and the owner was found to have breached the duty of fairness.
Practice tips for owners
Some careful thinking and strategy before a call for tenders can go a long way in minimizing risks. Owners should always obtain legal advice and, in the absence of an experienced internal procurement team, the assistance of procurement specialists.
One way in which owners can simplify evaluation is by preparing the tendering documents in a way that makes bids easier to evaluate. For example, bids could be requested in a format that mirrors the evaluation criteria, so as to make bids easier to evaluate and compare in accordance with the criteria. This will also make it much easier to identify any missing information or other non-compliances.
Owners should also establish and clearly articulate processes in the tendering documents for how bidders can clarify their bids, and how the owner can seek more information or clarification from bidders. Not only does this provide guidance for when mistakes are made, it allows the owner an opportunity to think through its duty of fairness obligations and vet its procedures when tensions are low.
What if the owner gets it wrong?
Damages are a monetary award for parties that have been legally wronged to compensate for losses suffered as a result of that legal wrong. The intention is to put these parties into the position they would have been in had the wrong not occurred.
If an owner breaches its duty of fairness in selecting a successful bidder (i.e. by selecting a bid with a material non-compliance), it is liable for damages equal to the profit that would have been made on the next lowest compliant bidder’s bid. This is because the next lowest compliant bidder can argue that its bid would have been selected and that it would have been awarded the contract at that price had the owner not breached the duty of fairness.
Case law is inconclusive as to the damages awarded to an unsuccessful party whose bid was deficient in the same respects as the successful party. Logically, if the next lowest bidder’s bid is equally deficient, it would not have been awarded the Contract B in any event. Therefore, the next lowest bidder has not actually suffered any losses, even if the owner breached the duty of fairness. If there are no compliant bidders, arguably no one has suffered any damages as a result of the owner accepting a non-compliant bid.
Nonetheless, this is not a reason for owners to proceed recklessly. Public owners in particular are often subject to additional transparency and fairness requirements and must assess the risk of appearing careless more conservatively.
If an owner breaches the duty of fairness, there can also be significant reputational consequences. Most industries, and particularly the construction industry, are quite close knit. The market is competitive and owners regularly running tendering processes (as, for example, public bodies are often required or best advised to do) cannot afford to develop a reputation for running unfair processes. This is particularly true in market environments where qualified bidders have no shortage of opportunities. Potential bidders will not want to waste money and time participating in a competition in which the ‘rules of the game’ may not be properly followed.
Possible Protection – Privilege Clause
The seminal case Tercon Contractors Ltd v British Columbia (Transportation and Highways) left open the possibility that a broadly worded privilege clause in the invitation to tender could be sufficient to limit the owner’s liability, including liability for breach of the duty of fairness.18 A privilege clause permits the owner to not accept the lowest, or any bid, and to choose between bids on an unspecified basis. In Tercon, the Supreme Court of Canada said that clear language is necessary to exclude liability for breach of the duty of fairness because it is such a basic requirement of the tendering processes.
However, cases since Tercon, whether in B.C. or other Canadian jurisdictions, have not yet directly addressed the issue of whether a privilege clause that excludes liability for a breach of the duty of fairness is enforceable.19
Best practice for an owner is to avoid situations where they must rely on a privilege clause. Privilege clauses should always be included in the bid documents but relied on only as a last resort.
The above discussion is limited to common law considerations only. It does not consider specific policies, laws, or agreements which may be incorporated into tendering documents or otherwise apply to public owners.
This article also only focuses on a classic tendering process. However, another common way to procure goods and services is by issuing a request for proposals (“RFP”). A true RFP permits more flexibility after the receipt of proposals than does a tender. RFPs solicit interest in negotiating the final contract, whereas a tender results in a binding commitment that the owner will award a contract to the lowest compliant bidder and the bidder will enter the contract as presented in the tender documents.
To minimize risk in any circumstance, owners should obtain expert advice and carefully draft and prepare tendering documents, so mistakes are less likely to occur. Owners should also always proceed as though the common law of tendering applies and they do not have protective language in their bid documents, even if they have issued an RFP and the documents contain exculpatory clauses.
For footnote information visit renewcanada.net/mj23resources
[This article originally appeared in the May/June 2023 edition of ReNew Canada]
David Edinger is a Partner in the Construction and Infrastructure Practice Group at Singleton Urquhart Reynolds Vogel LLP.
Mollie Deyong and Sharla Johnson are Associates in the Construction
and Infrastructure Practice Group at Singleton Urquhart Reynolds Vogel LLP.
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