A recent overseas decision relevant to Australia suggests that it may be time for tenderers to pay more attention to the conditions of tendering and consider the exclusions and discretions surrounding the tender process.
In giving an all clear to an abandonment of the tender process, the Canadian Court of Appeal in Amber Contracting Ltd v Halifax (Regional Municipality) 2009 NSCA 103 has provided some timely clarification to principals. It confirms that broad discretions in the conditions tender, and the exclusion of implied terms, will significantly dilute the ability of tenderers to enforce the process contract against the principal, particularly when the principal's actions are expressly provided for in the conditions of tender.
In the earlier Canadian case of Amber Contracting Limited v Halifax (Regional Municipality)1, Amber Contracting Limited (Amber) was successful in its claim that the Halifax Regional Municipality (HRM) had breached its duty of fairness to Amber Contracting and had engaged in bid shopping. HRM subsequently appealed the first instance judgment and, in October 2009, the Nova Scotia Court of Appeal overturned the first instance judgment.
HRM called for tenders for the upgrade of the Plymouth Road sanitary pumping station located in Dartmouth, Nova Scotia. HRM engaged consulting engineers to design and estimate the costs of the pumping station. Their estimate for construction was CAD$158,240. The HRM budget for the project was CAD$249,000, which included the cost of consultants.
Three contractors bid on the project, all of whom tendered a price which far exceeded the estimate and the project budget. In accordance with the conditions of tender, the tendered prices were published on the HRM website and also by the Construction Association of Nova Scotia following the opening of tenders.
As a result of the tendered prices, HRM cancelled the tender and informed each tenderer of this decision by letter. Despite cancelling the tender, HRM entered into negotiations with the lowest priced tenderer, Amber, in an attempt to negotiate a price which was acceptable to HRM. Amber's original tendered price was CAD$621,000. No significant acceptable cost savings could be negotiated and, as a result, negotiations ceased.
Almost 12 months following the original call for tenders HRM issued another tender for the construction of the pumping station. The plans and specifications were substantially the same as those issued in the original tender.
Four tenders were received, three of which had participated in the original tender process and one which had not. All tendered prices again exceeded the budget and the estimate. The lowest priced tenderer, Eisener Contracting, which was not one of the original tenderers, was awarded the Contract at a tendered price of CAD$579,282.83. At first instance Amber claimed that:
- HRM had breached the contractual duty of fairness and good faith owed to Amber through the process contract by engaging in the process of 'bid shopping'.
- HRM, having breached its duty of fairness and good faith, could not rely on the clause in the tender document which provided that HRM reserved the right to reject all tenders not considered to be satisfactory or to abandon the tender process at any time without recourse by the contractor (the privilege clauses).
- It should be awarded damages equal to the amount of its lost profit on this contract, especially in light of the fact it did not take on an additional project after the publication of its position as lowest bidder.
HRM argued that there was no implied contractual obligation to award the contract to the lowest bidder in the first tender process. It further contended that, by running a second tender process after publicly opening and disclosing prices, as it was required to do, and then cancelling the first tender, no unfairness or compromise to the initial bidders resulted.
HRM relied on the privilege clauses of the tender documents which provided that:
- HRM reserved the right to reject all tenders, abandon tenders and call for additional tenders.
- No term or condition could be implied, based upon any industry or trade practice or custom, any practice or policy of HRM or otherwise, which is inconsistent or conflicts with the provisions contained in these conditions.
- HRM had the right to cancel the request for tender at any time and without recourse under the contract and that HRM had the right not to award the contract.
First instance decision
At first instance the Court found that the central implied term of any process contract is the duty to treat all bidders fairly, similar to the approach taken by the Australian Courts.
The Court noted that the established practices of HRM when it received bids which exceeded the project budget were to negotiate with the lowest bidder or make major changes to the scope. Considerable weight was given to evidence which, in the Court's opinion, demonstrated those responsible for the tender process believed that in calling the tenders the following year, they would receive lower priced bids. This was based on the assumption that the high prices were due to the high volume of work currently available to construction contractors during the first tender period. The Court found that HRM personnel had engaged in bid shopping and whether or not they had intended to was not relevant. The written policy and established practice of HRM's tendering protocol provided that the municipality worked with low bidders in situations where bids exceeded the original estimate.
As a result at first instance the Court found that the ostensible reliance on budget constraints belied the true conduct of HRM, which in its view, was bid shopping. Such conduct amounts to a breach of the implied term of fairness which, the Court found, precluded HRM from relying on the Privilege Clauses.
What is a duty of fairness?
On appeal the primary focus of the Court was the privilege clauses and the extent to which those clauses affected the implied duty of fairness that HRM owed Amber.
The Court observed that 'the integrity of the bidding system must be protected where under the law of contracts it is possible to do so'2 and that central to the integrity of the tendering process is the duty of fairness which 'requires owners to treat all bidders equally, and not to place any bidder at a disadvantage in relation to its competitors during the tendering process'. However the Court noted that the duty of fairness 'does not exist in a vacuum and must be interpreted in the context of the contractual terms'.
As a result of this approach to interpreting the duty of fairness, on appeal the Court framed the key issues in this case as follows:
- Do the privilege clauses, giving HRM the right to select any tender, invite other tenders or not to proceed at all, affect the implied term of fairness which the trial judge found HRM owed Amber?
- Did HRM breach the implied duty of fairness?
- If it did, should the trial judge's award of damages to Amber be altered?
At first instance the Court had decided that HRM could not rely on the privilege clauses to suggest that Amber, in accepting the conditions of tender, had waived its right to make a claim.
However, the Court of Appeal found that the earlier Court had not considered the conduct of HRM in the context of the privilege clauses, and that the trial judge had not used the proper approach in ascertaining the scope of the duty of fairness which should be analysed in the context of the entirety of the invitation to tender. The Court of Appeal decided that the specific words of the privilege clauses must be examined closely to determine the full extent of the obligation of fair and reasonable treatment3 in each case.
The Appeal Court found that the trial judge had determined that HRM had breached its duty of fairness to Amber and, as a result, could not rely on the privilege clauses, but that the first decision had failed to address the relationship between the privilege clauses, the invitation to tender and the duty of fairness. Accordingly, the Court of Appeal found that the trial judge had made an error at law.
The Appeal Court observed that the conditions of tender specifically permitted HRM to:
- Reject all tenders if none were satisfactory and re-tender.
- Cancel a tender without recourse to any tenderer
- Not award the work for any reason.
- Call for additional tenders.
The privilege clauses also provided that no term should be implied into the process contract based on previous custom or practice. As a result the fact that it was not normal custom to call additional tenders did not give rise to a breach of the duty of fairness.
In the context of the broad discretion conferred by the privilege clauses, the Appeal Court found that the fact that HRM wanted to obtain a lower price did not breach the duty of fairness.
The Court noted that the rejection of all tenders in the original tender process because the bids exceeded the project budget, and the call for a second tender process, did not amount to 'bid manipulation' or the use of bids as a negotiating tool, ie bid shopping. The trial judge found that HRM should have negotiated with Amber. However in the Court of Appeal's opinion, bid shopping would have occurred if, during negotiations, HRM threatened to reject Amber's low bid for the next highest bid unless Amber reduced its price – a situation that did not occur.
The Appeal Court also observed that the conditions of tender expressly provided for a public opening of tenders. As a result, the conditions of tender specifically permitted HRM to follow a public tender opening with a rejection of all tenders and a call for new ones. This alone could not amount to a breach of the implied duty of fairness.
The Court therefore allowed the appeal and ordered Amber to return the damages awarded at trial, plus HRM's trial and appeal costs.
1. 2008 NSSC 208
2. Ontario v Ron Engineering & Construction (Eastern) Ltd  1 S.C.R. 111
3. Martel Building v Canada 2000 SCC 60
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