Canada: Supreme Court Rules Owner Not Obliged To Look Behind Tender

The legal framework that governs tendering processes has been established by previous decisions of the Supreme Court of Canada. Upon the submission of a compliant bid in response to a tender call, a contract, referred to as "Contract A," is formed between the owner and bidder. The terms of Contract "A" are generally defined by the tender documents.

A significant term of Contract A is the obligation of the bidder to enter into "Contract B," which is the contract to perform the work for which tenders were submitted, upon the owner’s acceptance of the bid. Contract A also requires owners to accept compliant bids only and, in assessing the bids, to treat all bidders "fairly and equally".

In Double N Earthmovers Ltd. v. Edmonton (City), the City of Edmonton called for bids for the supply of equipment and operators to move refuse at a landfill site. The tender documents specified that all equipment contained in the bids must have been manufactured in 1980 or later. The tender documents also required the bidders to identify the serial number and City of Edmonton registration licence number for each piece of equipment.

Sureway Construction Ltd., the successful bidder, identified one bulldozer in its bid as having been manufactured in 1980 when, in fact, it was manufactured in 1979. The serial number and licence number listed in the bid for this bulldozer both corresponded to Sureway’s 1979 model. Sureway identified a second bulldozer in its bid as a "1977 or 1980 Rental Unit" and listed the serial number and licence number that corresponded to its 1977 bulldozer.

After receiving Sureway’s bid, the City was advised by Double N Earth Movers Ltd. (Double N), an unsuccessful bidder, that Sureway did not own any equipment that was manufactured in 1980 or later. The City did not investigate this allegation; rather, it accepted the representations in Sureway’s bid that Sureway would provide equipment that complied with the specifications.

The City then entered into separate negotiations with three of the bidders, informing Sureway that it would "probably" get the contract if it supplied one of the pieces of equipment at the lower price offered by one of the other bidders. The City relied on a term of the tender documents which allowed changes to be negotiated with the lowest bidder.

After the award of Contract B to Sureway, Sureway did, in fact, attempt to supply pre-1980 equipment, notwithstanding the representations in its bid to the contrary. Despite the City’s subsequent insistence that Sureway comply with the specifications, Sureway ultimately informed the City that it would not provide post-1980 machines. The City relented and permitted Sureway to supply the older equipment.

Double N, who was the next-lowest compliant bidder, sued the City. Double N alleged that the City had breached its obligations to Double N under Contract A by, among other things:

• failing to investigate Sureway's bid to ensure its compliance with the tender specifications;

• failing to insist on those specifications in the performance of the work;

• accepting a non-compliant bid;

• engaging in illegal "bid shopping;" and

• breaching its duty of fairness to bidders.

While the trial judge had found that Sureway had intended to deceive the City with its bid, the Supreme Court of Canada held that the City did not have a duty to investigate whether the serial and licence numbers provided by Sureway in fact matched a 1980 machine; rather, the City was entitled to rely upon Sureway’s representations on the face of the bid documents that the bulldozers were manufactured in 1980.

The court also ruled that once the City entered into Contract B with Sureway, it did not owe any further obligations to the other bidders; rather, Contract A came to an end when Contract B was formed. Accordingly, the City’s duty of fairness to the other bidders did not compel it to insist on performance of Contract B in accordance with the tender specifications.

It was also the court's view that the City was free to waive the requirement of a 1980 bulldozer when Sureway advised the City that it could not provide one. The court noted that if Contract A obligations survived the tender award, unsuccessful bidders would keep the work under constant surveillance and jump to sue the owner if the work was not being performed in exact compliance with the terms of the original tender call.

In evaluating compliance, the court noted that Sureway did not provide the required licence or serial number for the "1980 Rental Unit"; nonetheless, the court held that the City was entitled to rely upon a provision in the tender documents that permitted it to waive any "informality" in the tenders submitted. The court held that an "informality" was "something that did not materially affect price or performance."

Finally, the court held that because the tender documents expressly permitted the City to negotiate changes to the bid with the lowest bidder, the City had not engaged in illegal "bid shopping," and had done nothing wrong by asking Sureway to lower its price for one piece of equipment to the price quoted by another bidder.

This decision provides owners and successful bidders with the comfort of knowing that they can amend Contract B to account for changes in conditions following the formal tender process without fear of lawsuits from disgruntled bidders. The court’s interpretation of an "informality" under the terms of the tender documents will provide some much-needed guidance to owners in evaluating whether they are able to accept bids with minor irregularities in them.

In addition, the court’s holding that the City had not done anything wrong in asking Sureway to lower its price on one piece of equipment to match that of another bidder expressly permits owner/bidder negotiations on key terms prior to the award decision, so long as the tender documents provide for such negotiations.

It should be noted that, in a strongly-worded dissent, four of the nine Supreme Court judges disagreed with the majority ruling. They concluded that: the City should have taken reasonable internal steps to investigate Sureway’s compliance with the tender documents; the requirement to include serial and licence numbers was not a "mere informality"; and, it was unfair to the other bidders to allow a variation of material terms of the tender call in awarding Contract B. This dissent may cause the Supreme Court to revisit these principles in the future.

Double N Earthmovers Ltd. v. Edmonton (City)

http://scc.lexum.umontreal.ca/en/2007/2007scc3/2007scc3.html

http://scc.lexum.umontreal.ca/fr/2007/2007csc3/2007csc3.html

Rocco Sebastiano is a partner in Osler's Construction & Infrastructure Specialty Group. Roger Gillot is an associate in the Construction and Infrastructure Group. Howard Krupat is an associate in the Construction & Infrastructure Group and a member of the firm’s Litigation Department.

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