Implications of the process contract rules on health sector procurement.
Those involved in health sector procurement activity, whether it concerns the provision of medical equipment or the construction of major health infrastructure, need to be aware of the risks that may arise.
Public sector health service providers invest considerable resources into the tendering process. Accordingly, when tenderers engage in the tender process they have a legitimate expectation that they will be treated fairly, equitably and with due process. In response to this legitimate expectation, a body of case law in Australia has developed, which deals with the protection of that legitimate expectation. Specifically, a discrete contract has evolved, known in Australia as the process contract.
The Process Contract
The process contract is a contract between each tenderer who submits a bid and the principal calling the tenders. Whilst historically it was considered that there was no contractual relationship between the principal and any tenderer until such time as the principal nominated a preferred tenderer and a contract for the provision of works, goods or service was executed, the development of the process contract creates a contractual relationship between tenderers and principals.
Relevant Case Law
This concept was first established in the United Kingdom in 1990 in the case of Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council  1 WLR 1195 (Blackpool). In this case the Court found that when submitting a tender, a tenderer who submits a conforming tender before the deadline, is entitled, as a matter of contract, to expect its tender will be opened and considered with other conforming tenders.
Blackpool Borough Council owned and managed Blackpool airport. The Council granted a concession to an air-operator to operate pleasure flights from the airport.
When the concession was due to expire, the Council issued an invitation to tender for a three year concession to operate joy flights. The invitation to tender was issued to Blackpool and Fylde Aero Club (the incumbent provider) and six other parties.
The invitation to tender provided that tenders must be received in the Council's tender box not later than 12 noon on 17 March 1983. The tender conditions also provided that no tender received after the prescribed closing date and time would be considered for evaluation.
Blackpool and Fylde Aero Club submitted its tender in the required format at 11am on 17 March 1983, one hour prior to the closing time set out in the invitation to tender.
The Council emptied the tender box at 12 noon each day. On 17 March 1983, the Council failed to do so. Accordingly, the Club's tender remained in the tender box until the following day when the tender box was next opened. The word "Late" was written on the Club's tender as it was mistakenly thought that it had not been lodged on time. In accordance with the tender condition dealing with late tenders, the tender was not considered for evaluation.
Two tenders were received by the Council, in addition to the Club's tender. The tender submitted from Red Rose Helicopters was the preferred tenderer. The Council subsequently indicated to Red Rose Helicopters that it was the preferred tenderer.
The Council also wrote to the Club informing it that its tender was not received until 18 March and was therefore received too late for consideration. The Club wrote to the Council informing it that the tender had been lodged before the closing date and time. The Council made its own enquiries and having established that the Club's tender had been received on time, it determined to cancel the current tender process and re-issue the tender again.
As a result of the second invitation to tender, further tenders were submitted. At this stage Red Rose Helicopters contended that its earlier tender had been accepted and that the Council was contractually bound to proceed on that basis. Red Rose Helicopters threatened to commence legal action.
In response to the threat of legal actions, the Council decided to disregard the responses to the second invitation to tender and to honour its contractual obligations to Red Rose Helicopters.
The Club commenced legal action stating that the Council warranted that if a tender was returned to the Council before noon on 17 March 1983, then that tender would be considered along with other tenders also returned on that date and time. This, the Club argued, was a breach of this warranty and the Club claimed contractual damages.
The Court noted that:
The Court therefore found that the Council's invitation to tender was an offer and the Club's submission of a timely and conforming tender an acceptance. Therefore, the invitation to tender gave rise to contractual obligations. In this case the contractual obligation was a warranty given by the Council that all tenders received on or before the closing date and time would be considered by the Council.
The Council had not complied with this obligation and as a consequence was found to have breached the warranty contained in the invitation to tender.
Process Contract Terms
The terms of the process contract will normally be constituted by the conditions of tender. These are no different to conditions of contract, in terms of their binding nature. The conditions of tender normally set out the way in which the tender process will be run. They will include procedural issues such as the key contact for the tender process, the closing date and time and the location for the submission of tenders. They usually also include the key evaluation criteria and other conditions of participation in the tender process.
The case of Blackpool is an example of a tender process in which the procedural aspects of the process were not followed, leading to a breach of the process contract.
Whether or not an invitation to tender constitutes a process contract, which creates legal obligations, will ultimately depend on the tender conditions and other surrounding factors. There is now, however, a sufficient body of case law which demonstrates that an invitation to tender will normally create a process contract.
Australian Process Contracts
In Australia, the process contract was confirmed as part of Australian law in the case of Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151. In this case, Hughes Aircraft submitted a tender for the Australian Advanced Air Traffic System Acquisition contract. Hughes Aircraft was the unsuccessful tenderer and brought a claim for a breach of the process contract. In summary, Hughes Aircraft argued that the Principal was required to conduct the tender process fairly and in accordance with the procedures and evaluation methodology set out in the conditions of tender. Hughes Aircraft sought damages for a breach of the process contract.
Hughes Aircraft was successful in its claim and, as a result, the process contract was established in Australian law.
Implications for Tenderers
When conducting a tender process it is important to consider that the tender process may give rise to contractual rights and obligations. The invitation to tender document is a contract in itself and a breach of this process contract can give rise to a right to claim contractual damages.
As the health sector continues to meet the challenges of demands on the Australian heath system through its procurement activities, it should ensure that it does not expose itself to risk through the procurement process by carefully planning its tender process and ensuring that it complies with any terms of a process contract that may be created.
© DLA Phillips Fox
DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.