New Zealand: The commercial property tender process - getting it right.

Last Updated: 14 August 2018
Article by Jeroen Vink

Property

The tender process is widely used in commercial property where an owner is engaging building contractors or is selling a property. Requests for tenders can create a separate process contract and this process contract has implied duties and obligations. It is important to understand these duties and obligations and also what you can do to mitigate them. The consequences for getting it wrong can be costly should unsuccessful parties seek compensation.

Implied terms

For many years the tender process itself did not create any legal obligations on the parties. However, it is now well established that when a party makes a formal request for tenders (the offer) and that request is met with a complying tender bid (the acceptance) then a process contract is formed completely separate from the principal agreement for the sale of property or for construction services. When a separate process contract arises there are several obligations or duties that are implied in the tender process unless they are specifically excluded by the tender document. These obligations and duties are:

  • The duty to consider a tender: you must consider all compliant bids;
  • The duty to act fairly and in good faith: you must treat all bidders fairly and equally;
  • The duty to reject non-compliant bids: you cannot accept a non-compliant bid (although minor irregularities are acceptable);
  • The obligation to consider only disclosed criteria in evaluating bids: When making a decision you must use the correct criteria when evaluating bids.
  • No bid shopping: You cannot use the tender process to negotiate better prices/ terms with bidders.

Getting it right

It is normal practice to include some limitations on the implied obligations when setting out the terms for tender. It is important to consider the most appropriate terms to include for a particular tender situation. The following clauses and conditions often included in the terms of a request for tenders:

Privilege and discretion clauses

A 'privilege clause' reserves the right to not accept the lowest bid or any bids. Similarly a 'discretion clause' may allow the acceptance of a non-compliant bid. These clauses allow a broader discretion when an owner is assessing tenders. It is important to note that privilege and discretion clauses do not displace the duty to act fairly and in good faith when accessing bids.

Flexible evaluation criteria

If detailed bid evaluation criteria are included with the tender then it pays to include terms which reserve the right of the owner to deviate from the stated evaluation criteria or to amend the criteria for making its evaluations on giving notice to the parties.

Warranties and disclaimers

It's a good idea to include conditions placing an obligation on the tenderer to warrant the information in their bid is accurate and meets the tender criteria. An owner should also include a disclaimer stating that it has no responsibility for checking the accuracy of the information provided in the bids.

Risk management and confidentiality

It is also recommended that an owner includes limitation and exclusions of liability as a risk management exercise. It may also be appropriate to include privacy and confidentiality clauses restricting the disclosure of commercial information accessed as part of the tender.

Onyx clauses

An Onyx clause disclaims that any legal relations are intended to come into effect as part of the tender process, therefore excluding a tender contract for coming into existence. It is used to avoid the implied warranties as it makes it very difficult for unsuccessful tenderers to challenge the tender process. Care must be taken when including an Onyx clause as it limits the ability for the owner to rely on the conditions of its request for tenders, such as warranties and confidentiality clauses. It is common to include modified or limited Onyx clauses to avoid this issue. An owner should also be aware that Onyx clauses are often commercially inappropriate and can discourage parties from making a bid due to a lack of certainty in the tender process. Proper consideration is therefore needed in each circumstance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jeroen Vink
 
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