Canada: Reflections on the Evolution of Fairness in Public Procurement

Reflections on the Evolution of Fairness in Public Procurement

Glenn W. Ackerley¹ - WeirFoulds LLP

Editor's Note

It would be hard to imagine a more active area of interest in construction law than that of the law of public tendering. Within that body of law, the question of fairness predominates. On one hand one sees recognition in certain case law of the principle of party autonomy, while in other cases one sees courts reining back the parties from unfair conduct. We are proud to present our readers with the following contribution, which treats these issues in some detail. It is a tribute to the author's facility with this area of the law that he is able to seamlessly incorporate a quote from Oscar Wilde into an article on tendering.

The unfairness that concerns the author is not the obvious unfairness of a party not playing by the rules it has set. Unfairness has another aspect, where the rules themselves are the source of the perceived unfairness. Here we see a kind of tectonic collision between the principles of party autonomy and the rule of law and this is the area that interests the author. The article begins with three examples of uncertainty in the law: (1) a technical noncompliance not affecting price; (2) a re-tender on identical terms resulting in allegations of bid shopping; and (3) uncertainty arising from the bargainedfor "adjustment" or "correction" of bid prices. In each case the point is made that in the real world the need for certainty and predictability is not being met. The reader might at this stage flip to the interesting and creative solution proposed by Christopher Wu in his guest article at the end of this volume.

This article traces the evolution of concepts of fairness from the seminal decision in Ron Engineering to the controversial 2007 decision of the Supreme Court of Canada in Double N. The concept of fairness is explored and discussed as a contractual term alongside standard privilege clauses; as a judicial device to deal with non-compliance; as an implied term of contract; and most interestingly, perhaps, as a tort duty. The law as it applies to public tenders is also contrasted with the law applying to public requests for proposals (RFPs).

In the final section the author brings these concepts together in the context of what is now a much litigated and active area of construction law: the application of judicial review to public tendering decisions. The author's comments on this area represent some of the first published ideas on this aspect of this subject in Canada.

This article was submitted while Tercon was still under reserve in the Supreme Court of Canada. We were able to obtain a brief note updating this article just as it went to press. Please see the Author's Note at the end of this article.

Duncan Glaholt

December 2009

One should always play fairly when one has the winning cards.—Oscar Wilde

1. INTRODUCTION

Over a quarter of a century has passed since the Supreme Court of Canada decided Ron Engineering.² In the years since, a staggering number of related cases³ has filled the law reports. Few months pass without another notable tendering case being released. The decisions come from across the country, from the lowest level of provincial court to the Supreme Court of Canada and nothing suggests that the growth in this area of the law will cease any time soon. On the contrary, for the reasons this article will explore, the pace of development may only quicken.

Those on the front lines of public procurement are most immediately affected by this dynamic area of law. On a daily basis, bidding contractors must grapple with complex and onerous tender documents, often requiring multiple detailed forms to be submitted over two-part bid closings, with the process governed by complicated rules and procedures. Owners, even with the assistance of trained experienced procurement staff, often face stressful and difficult decisions. They struggle to find their way through flawed bid submissions, budget overruns, changing circumstances, and political pressure to reach a decision about the "right" award to make — with the best answer likely being the one that will avoid a successful multi-million dollar lawsuit from an unhappy losing bidder. In this era of massive infrastructure stimulus spending and the large size of the projects going out to tender, the risks on both sides are very high, and even the slightest slip could be disastrous.

Far from representing a stable, clear set of rules that can be relied upon with confidence, which from the perspective of business efficacy⁴ should be a paramount objective, we see that the present condition of the law of tender leaves anyone facing a difficult tender issue having to seek guidance and to discern meaning from confusing statements and seemingly conflicting principles spread throughout the relevant authorities. Simply put, this area of law is a minefield.

How did things evolve to this point? Why do the "rules of the game" seem to be so uncertain? Why, when confronted with these issues, are they so hard to solve? How did we end up in this quagmire?

2. THE NATURE OF THE PROBLEM

Applying the Oscar Wilde quote at the outset of this paper, it is the owner⁵ in the tender process who, at least in the first instance, sets the rules by which the hand is to be played out and in that unique sense has the winning cards. As a result, it is the owner who must play fairly.

Consider the obligations imposed on the house at a blackjack table in a casino. While the gamblers are each trying to maximize their own winnings (and doing so comes at a cost the others at the table, depending on the available cards), it is the dealer who must be seen to be scrupulously fair as the overall odds favour the casino.⁶ The house rules chosen for the game may strongly affect the outcome. For example, whether the dealer must stand on "17" or has the option of "taking" will affect the odds, as will the number of decks used.

The primary source of confusion in the current state of the law of tender is the result of a fundamental tension between the competing notions of "freedom of contract" (the owner is free to make up whatever rules of the game the owner may choose) and "fairness" (the players involved in the game, i.e., the bidders, are treated equally and the outcome appears to be just).

To be clear, the heart of the problem is not where the rules are applied unequally to all bidders in a particular case. In fact, the cases involving unequal treatment tend to be the easy ones to understand and follow. When an owner has given one bidder a hidden advantage not enjoyed by others, it is easy to conclude that the owner was being unfair and should answer for such improper behaviour.

The real source of the current uncertainty in the law is when the court's view of what is a fair set of rules is not the set of rules that the owner, having exercised freedom of contract, has actually adopted and applied. We run into serious problems when the owner's own rules are thought not to be fair, in the sense of not being the right rules (in a normative sense) for the game at hand.

The cases suggest that whether or not the rules are considered fair seems to depend on whether they accord with some independent sense of what is considered fair play. For exampe, consider rule that says "red-haired gamblers will always win at this blackjack table". That the casino owner might be free to create such a rule, which is duly posted for all to see and is applied evenly and consistently, does not displace the feeling that there is just something wrong about the rule itself.

It is submitted that the tension between fairness and freedom of contract in this sense underlies many of the significant court decisions in this area of the law. Finding the balance between the two concepts is an exercise that courts must undertake on a regular basis; the resulting decisions are often inconsistent and in some instances irreconcilable. As we will see, some courts are quite prepared to uphold thestrict letter of the rules,⁷ telling bidders "you knew full well what you were getting into, and nobody forced you to play." Others go to great lengths to avoid application of these rules, in order to prevent what would be an unfair (in the sense of undesirable) outcome.

On occasion, the presence of tensions in the tender process have been explicitly recognized by the courts. A refreshingly open and frank discussion of the competing interests in the process is found in the following passage from the case of Fred Welsh Ltd. v. B.G.M. Construction Ltd.,⁸ which was dealing with a subcontractor's allegation of bid-shopping⁹ by a general contractor:

Though there has been some apparently conflicting authority regarding the Ron Engineering analysis, the courts agree on the need to create and monitor a legal framework which attempts to preserve the reasonable expectations of those involved in the bidding process. The court must attempt to protect the integrity of the bidding system in the context of the tension between the parties involved in the process. Owners and general contractors who invite bids generally desire to retain some flexibility in their final decision, striving to maintain control and discretion over their choice of contractor. General contractors, or subcontractors in this instance, are concerned that favouritism not be shown other tenderers and that arbitrary or capricious decisions not be made. Those submitting tenders are willing to accept some risk and bear the cost of preparing an unsuccessful bid, provided the "rules of the game" are clearly spelled out and define what actually happens. Those accepting tenders are willing to forsake ultimate discretion to attract quality, competitive bids.¹⁰

What this passage does not address, however, is what happens if the rules of the game are clearly spelled out, but the rules themselves are unacceptable, at least in the context of well-established tender process values like the "preservation the integrity of the bidding system." What if, for example, the rules of the game expressly provide for the right of the owner to be arbitrary or capricious?

3. EXAMPLES OF UNCERTAINTY

Before examining the development of this tension, and the reasons for the confusion and uncertainty in the legal landscape, it is perhaps useful to give a flavour of the kinds of challenges parties face with some concrete examples of the kinds of decisions routinely emerging from our courts in the area.

(a) The "Eye of the Beholder"

Imagine you are undertaking a renovation project to a health care facility. You decide to go to tender using the local bid depository system. Several bids are received in response to the tender call, with the lowest bid being significantly lower than the others. A review of the bids is undertaken and it is discovered that the lowest bidder had technically violated the rules of the bid depository, although taking into account the effect of the breach on price, the bid remained the lowest. A second violation by the low bidder was then identified, and the adjustment to the price that followed rendered the bid no longer the lowest. The bidder then explains that there is a misunderstanding about the second instance relating to misnaming of subtrades and that in fact everything is in order. Further investigation reveals other shortcomings with the bid, but the financial impact of each individually is quite minor. What do you do? In light of these flaws, do you award to the low bidder anyway, or reject that bid and award to the next lowest? What's the fairest thing to do?

That was the dilemma faced by the owner in Chandos Construction Ltd. v. Alberta (Alberta Infrastructure).¹¹ In the end, the owner (the Minister of Infrastructure) decided to treat all of the issues with the low bid as "minor" and awarded the contract to the lowest bidder. The Minister was no doubt comforted by the language contained in the bid documents, which said:

The second lowest bidder, Chandos, sued the Minister, claiming that the low bid was non-compliant and should not have been accepted. Doing so, it was argued, was a breach of the owner's duty of fairness owed to Chandos.

The action proceeded as follows:

This sad tale illustrates two of the key principles governing tender cases. This first, whether the circumstances were fair tends to be in the eye of the beholder; what one court may consider the fair treatment of bidders may be considered by another to be wholly unfair. Any language in the tender documents that appears to either stand in the way of that conclusion or that may call for a different result will be treated and disposed of accordingly.

The second, the parties should be prepared for the long haul in a disputed tender situation. Tender cases are often hard fought and the litigation may last for years,¹⁷ with the project in question having been long completed by the time the case reaches its conclusion. Nevertheless, who would ever expect to be in litigation for five years — all the way to the Supreme Court of Canada and back — over questions surrounding the naming of a woodwork subcontractor in a bid?

(b) The "Chicken or the Egg"

The competing opinions over whether a particular set of facts and circumstances should be considered as being fair to a bidder are not, of course, arbitrarily subjective; they are arrived at depending on the opinion the court hearing the matterholds on the broader question of whether fairness enjoys primacy over freedom of contract, or vice versa. The recent case of Amber Contracting Ltd. v. Halifax (Regional Municipality)¹⁸ illustrates this point.

In Amber Contracting, the Region of Halifax had called for tenders for a sanitary pumping station. The three bid prices received all exceeded the approved budget for the project by a significant amount. The Region therefore elected to shelve the project for six months and then came back out to tender with exactly the same project. On the second tender, a fourth bidder submitted a price along with the original three, which beat out the others. The fourth bidder was awarded the contract.

The tender documents contained the words:

In the ensuing litigation, Amber Contracting, the second lowest bidder, complained that the Region effectively engaged in bid-shopping¹⁹ by accepting the lower bid of the fourth bidder in the second tender. The trial judge agreed and considered the conduct of the Region in seeking to get a better price through a retender to have been unfair to Amber Contracting. Having concluded that the behaviour of the Region was a breach of its implied obligations to Amber Contracting, the Court would not let the Region hide behind the privilege language of the tender documents.

On appeal,²⁰ the majority of the Nova Scotia Court of Appeal overturned the trial decision. The majority viewed the trial judge's approach as backwards. Rather than looking at the privilege clause and then determining what was fair, the trial judge had determined what was fair (or unfair in this case) and then considered the privilege clause. Here, the privilege clause gave the Region the right to act as it did, so no breach of duty had occurred.

In dissent, Hamilton J. sided with the trial judge, taking the approach that what the Region did was indeed unfair (being correctly viewed as "bid-shopping"), and that the words of the privilege clause could not have meant to permit such conduct.

Looking at the straight tally of judges who considered the question in Amber Contracting,²¹ two judges voted on the side of fairness and two judges voted on the side of freedom of contract. If you are a municipality trying to decide whether you can reshelve a project that came in over budget on the tender, and reissue the same project six months from now, would you be confident in proceeding with that plan with this case in your back pocket?

(c) "Do as I Say, Not as I Do"

Interpreting what these tender cases mean can be a risky exercise. For one municipality faced with a tender dilemma, relying on an earlier appellate court decision (or at least its interpretation of an appellate court decision) to figure out the proper course of action in seemingly identical factual circumstances proved to be disastrous.²²

In 2005, the Town of Newmarket went to tender on a recreation facility. Bids were received from a number of general contractors, including Maystar General Contractors Inc. and Bondfield Construction Company. When the bid prices were read out, it seemed Maystar was low, and Bondfield was third lowest. Further review of the Bondfield bid showed that there was an apparent discrepancy in its bid price: the base bid quoted one price (in both words and figures) but the GST calculation and the total bid price did not accord with that base bid price. In fact, working backwards, the two latter numbers suggested that the base bid price before GST was intended to be approximately $500,000 higher than what was actually written.

Which was the correct price? The stated base bid price or an "adjusted" base bid price extrapolated from the total bid price and the GST? Given the uncertainty surrounding Bondfield's bid price, and based on the decision in Vachon Construction Ltd. v. Cariboo (Regional District),²³ the Town was initially inclined to reject the Bondfield in favour of the Maystar bid, despite receiving correspondence from Bondfield after bid closing in which Bondfield insisted that the lower price was the correct one.

However, before the final decision on the award was made, the Ontario Court of Appeal case of Bradscot (MCL) Ltd. v. Hamilton-Wentworth Catholic District School Board²⁴ was brought to the Town's attention. In Bradscot, the lowest bidder (Bondfield again!) had submitted a tender where the bid form contained price discrepancies relating to the calculation of the GST and the total price. Despite thenevertheless capable of acceptance.²⁵

Despite any residual misgivings it may have had, the Town felt it was bound to follow Bradscot and awarded the contract to Bondfield at the stated base bid price. In the inevitable litigation brought by Maystar following the award, and to the Town's dismay, both the lower court judge and the Court of Appeal chose to follow Vachon and distinguish Bradscot. While finding the Town guilty of breaching its legal obligation to be fair to Maystar, the Court recognized the dilemma faced by the Town, and expressed some sympathy for its predicament:

The Town was in a difficult situation. It wanted to accept the lowest bid for this project in the best interests of its citizens. The Bondfield bid on one reading could have been the lowest bid. The Bradscot case appeared to be a very similar situation where the court allowed the owner to accept a bid that had a price discrepancy on its face. It no doubt believed it was acting in good faith. However, the Supreme Court has made it clear in the cases it has decided that the integrity of the tender process is essential in order to foster a fair and orderly bidding process where contractors will expend the time, effort and expense to bid, knowing they will be treated fairly and equally. A public owner cannot undermine that process by purporting to accept a bid with an uncertain price, or to encourage contractors to believe that they can communicate with owners after the fact to clarify or explain inconsistencies in their bids.²⁶ [Emphasis added.]

Unfortunately, these words would presumably be little consolation for the Town (and its taxpayers), who then had to contend with Maystar's claim of over $3 million in damages on account of the "lost profits" Maystar suffered for not having been awarded the contract. Considering Maystar did not have to pick up a shovel to earn any of those profits, one might be excused for thinking Maystar's success in the action is equivalent to having won the jackpot.²⁷

These are, of course, but a small sampling of the kinds of decisions those involved in procurement must turn to for guidance when confronted with a bidding question. And can it be said that they provide any guidance at all?

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Footnotes

1. The author wishes to thank his colleagues Michael Swartz and Bruce Engell for their

invaluable insights during the preparation of this article

2. R. v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111.

3. A simple legal database search turns up almost 350 cases that refer to Ron Engineering.

4. An important value espoused by the minority of the Supreme Court of Canada in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, discussed more fully in section 4(d) below.

5. "Owner" is used throughout as any public tender calling authority.

6. A survey of a number of sources suggests a range of a 5–10% advantage for the dealer.

7. The term rules is meant here to refer to such provisions as "privilege clauses", "discretion clauses", "exclusion of liability clauses", and the like, which expressly reserve to owners the right to do things and behave in certain ways that may seem to be at odds with independent notions of fair play.

8. (1996), 27 C.L.R. (2d) 269 (B.C. S.C.).

9. See note 19, infra.

10. Supra note 4, at p. 284.

11. 2004 ABQB 836; reversed (2006), 50 C.L.R. (3d) 1 (Alta. C.A.); reversed (2007), 66

C.L.R. (3d) 166 (Alta. C.A.).

12 .See the discussion of such so-called "discretion clauses" below, at note 41 and following. Someone unfamiliar with the law of tender might be forgiven for believing, based on these express words, that it is in fact the Minister at the end of the day who gets to determine whether a problem with a bid amounts to a "minor and inconsequential irregularity", after all, that is what the words actually say. That is not however the way the law has developed.

13 .(2006), 380 A.R. 152 (C.A.).

14. (2007), 412 A.R. 397 (note) (S.C.C.).

15. Double N, supra note 4, and discussed further in section 4(d) below.

16. 2008 ABCA 14. The author is advised that the case was resolved before the second trial.

17. The events of Double N, supra note 4, took place more than 20 years before the S.C.C. rendered its decision.

18. (2008), 267 N.S.R. (2d) 44 (S.C.); reversed (2009), 84 C.L.R. (3d) 7 (N.S. C.A.).

19. In Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, at para. 9, the Court quoted a definition of bid shopping that described the practice as follows:

20. Amber Contracting Ltd. v. Halifax (Regional Municipality), 2009 NSCA 103.

21. But not in the result, since the decision of majority in the appellate court, of course, becomes "the law".

22. Maystar General Contractors Inc. v. Newmarket (Town), 2009 ONCA 675.

23. (1996), [1996] B.C.J. No. 1409, 1996 CarswellBC 1466 (C.A.), that a bid price that is vague should be disqualified, since an offer that is uncertain as to price is not capable of acceptance—a very contractual analysis. To make matters more complicated, the very thing the owner usually cannot do is ask for clarification of what was intended by the bidder.

24. (1999), 42 O.R. (3d) 723 (C.A.).

25. One salient difference between the two situations may be that the result of each of the possible ways of calculating what Bondfield intended as its bid price in Bradscot was still lower than the next lowest bid price—the resolution of the uncertainty did affect who had submitted the lower bid. In the Maystar situation, the interpretation of Bondfield's bid price made all the difference, because Maystar's bid price fell in between the two possible Bondfield bid prices. On the one hand, this fact should not make any difference to the analysis, since price is either objectively uncertain or it is not. On the other hand, how the uncertainty was resolved in Maystar determined the winning bid and so the stakes in Maystar were much higher. For this reason, the uncertainty could not so easily be overlooked.

26. Maystar, supra note 22, at para. 38.

27. A discussion of the fascinating topic of damages in tender cases is outside the scope of this article. It suffices to say here that the uncertainty surrounding the obligations in the process as discussed in this article applies equally to the damages flowing from their breach. See, for example, the following statement recently made by the Nova Scotia Court of Appeal in Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town), 2008 NSCA 17, 262 N.S.R. (2d) 163, at paras. 60 and 61:

28. Fairness in the context of this article generally refers to the process of the tender, i.e., how bidders are treated. Although fairness is often tied with good faith, it is possible, of course, for an owner to behave unfairly but do so in good faith. Conversely, an owner may arrive at a result that is fair in terms of process but one which is motivated by bad faith. For a fuller discussion of the distinction, see the thorough and very insightful article by Peter Devonshire, "Contractual Obligations in the Pre-Award Phase of Public Tendering" (1998) 36 Osgoode Hall L.J. 203–244, written prior to the important Supreme Court of Canada cases discussed in this article.

29. Ron Engineering, supra note 2, at pp.122-123.

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.