Canada: Alberta Court Of Appeal Speaks To Owner's Discretion In The Bid Process

The Alberta Court of Appeal1 has recently considered the limits on a company's discretion to award the general contract in the tendering process. The teaser is that a company does not have sole and unfettered discretion to award the general contract to any bidder. Rather, the assessment of the bids must be based on the bid criteria provided to the bidders.

Background

In the summer of 2010 the South Fish Creek Recreation Association (Fish Creek) solicited tenders for a planned expansion to the South Fish Creek Recreation Complex, including the addition of two ice surfaces and multi-purpose rooms (the Project). Fish Creek received 11 tenders, 10 of which it deemed compliant with the bid criteria.

The Instruction to Bidders outlined an evaluation matrix that would be the basis for assessing the 10 compliant bids. Up to 100 points were to be allocated under 4 categories: (a) price (35 points); (b) completion date (35 points); (c) experience with arena projects (20 points); and (d) references for arena experience (10 points).

The Instruction to Bidders indicated that August 11, 2011 was the desired completion date, so that the ice surfaces would be ready for the upcoming hockey season. The tender process came down to 2 bids — one from Elan Construction Limited (Elan) and the other from Chandos Construction Ltd. (Chandos). Fish Creek awarded the contract to Chandos.

Elan sued Fish Creek for approximately $700,000 in damages, alleging that Fish Creek wrongfully awarded the general contract to Chandos. Elan specifically challenged Fish Creek's method of awarding points under both the completion date and experience headings.

In the completion date category, Fish Creek awarded 25 points to Elan and 34 points to Chandos. This allocation was made by Fish Creek in spite of Elan proposing an earlier substantial completion date (August 1 vs. August 31) and less time to correct deficiencies (14 days vs. 30 days).

In the experience category, Fish Creek awarded 12 points to Elan and 20 points to Chandos. Elan took issue with Chandos introducing a new site supervisor for its bid after the bid submission deadline had passed. Fish Creek wanted the new site supervisor involved in the Project, and Elan argued that this desire influenced the points allotted under the experience heading, and ultimately improperly motivated Fish Creek to award the contract to Chandos.

The Trial Decision — Elan Wins a Nominal Moral Victory

At trial, the Court found that Fish Creek wrongfully awarded the contract to Chandos. However, the trial judge awarded only the nominal sum of $1,000 to Elan in damages. This was because Chandos had suffered significant losses, approximately $600,000, during the course of the Project. Chandos completed the Project 158 days after its scheduled completion date due in part to poor weather, issues with subcontractors and design flaws in the Project. The trial judge determined that Elan could not have avoided the same losses experienced by Chandos.

The Appeal — Elan is Vindicated and Awarded Significant Damages

Elan appealed the damages award. Fish Creek cross-appealed the trial judge's finding that it wrongfully awarded the general contract to Chandos.

Court of Appeal agreed with trial judge on liability

The Alberta Court of Appeal considered Fish Creek's claim that the privilege or exclusion clause in the Instruction to Bidders allowed it to award the general contract to any bidder without consequence. It found that even a robust privilege or exclusion clause did not give Fish Creek unfettered discretion to award the general contract to any bidder.

The Court of Appeal noted that the privilege clause was strongly worded, providing Fish Creek with "considerable room to manoeuvre" when assessing bids:

5.1 The Owner reserves the right to reject any or all Bids received and also reserves the right, if it is in its interest to do so, to waive informalities in the Bid or failure to comply with all bidding requirements. The lowest Bid will not necessarily be accepted.

5.2 By submitting a Bid, the bidder acknowledges and agrees that the Owner has, and is hereby entitled to exercise, the sole and unfettered discretion to award the points for the evaluation of the criteria noted below.

5.3 By submitting a Bid, each bidder acknowledges and agrees that it waives any right to contest any legal proceedings regarding the decision of the Owner to award points under the criteria noted below. (emphasis added)

However, even with a robust privilege clause, the Court of Appeal would not interpret the "sole and unfettered" discretion to mean that Fish Creek could assess bids based on criteria which were not disclosed in the Instruction to Bidders. The Court of Appeal reasoned that this would be contrary to bidders' reasonable expectations and would undermine the legitimacy of the tendering process.

Applying this reasoning, the Court of Appeal agreed with the trial judge that assigning points for Completion Date based on proximity to a date other than the desired completion date was contrary to bidders' expectations and a breach of contract. Rather than rewarding Elan for submitting a completion date which was earlier than Fish Creek's desired completion date, it actually penalized Elan for doing so.

When allotting the Completion Date points, Fish Creek removed 4 bids with the same or earlier completion dates than Elan, and then averaged the remaining 6 proposed completion dates. This created a notional date of September 5, 2011. Fish Creek then allotted points based on proximity to the notional date rather than the desired completion date. Further, Fish Creek had no explanation for why it removed 4 bids when it calculated the notional date.

Because Fish Creek had so arbitrarily awarded points for the completion date category, both the trial judge and the Court of Appeal concluded that Elan should have received the general contract.

The Court of Appeal awarded substantial damages

The Court of Appeal overturned the trial judge's $1,000 damage award.

Driving this decision was the Court of Appeal's view that Fish Creek was required to prove that Elan would have experienced the same losses that Chandos did in performing the general contract, rather than Elan having to prove that it would not have experienced the same difficulties as Chandos.

The Court of Appeal found that trial judge's approach to damages was problematic for 3 reasons:

  • Fish Creek did not plead in its Statement of Defence that Elan should be denied damages because it would have lost money just like Chandos. This was unfair because Elan reasonably did not submit evidence to rebut a claim that had not been pled.
  • There was no factual basis to conclude that Elan would have experienced the same losses as Chandos on the Project. Elan's burden was to prove its expected profit on the Project, a burden that was met. The onus then turned to Fish Creek to prove that Elan would have experienced the same problems as Chandos, an onus Fish Creek did not meet.
  • No expert evidence was submitted by Fish Creek to address the likely fate of Elan which was necessary based on the lackluster factual comparison.

The Court of Appeal likened the factual deficiency in fish Creek's arguments to comparing apples to "invisible oranges" since the arguments about Elan's likelihood of losing money were almost all speculative and lacking in factual basis.

In the end, the Court of Appeal did find sufficient factual foundation to allow for 2 small reductions to Elan's $700,000 claim. It lowered the amount by $70,000 to reflect the cost of replacing an insolvent subcontractor that both Elan and Chandos planned to use. Further, it reduced the claim by an additional $62,000 because a subcontractor had underestimated its quote to Elan. The reduction reflected the gap between the underpriced quote and the next lowest quote.

With those reductions, the Court of Appeal awarded $577,000 to Elan.

Takeaways

  • Privilege clauses are not a license to ignore the bidding criteria.
    • The Court of Appeal was very clear that there are limits to a "sole and unfettered" discretion to award the general contract. Assessment of bids should be carried out in accordance with the bid criteria. If certain factors are important to a project owner, they should be included in the bid documents.
  • Owners facing legal action stemming from its award of the general contract need to specifically plead as a defence that the aggrieved bidder is not entitled to damages because the project was not profitable for any bidder.
  • Project owners need evidence to prove the defence that an aggrieved bidder would not have profited from being awarded the general contract. Keeping detailed records of issues that caused the general contractor to incur greater expense than expected will assist with forming the proper foundation to establish this defence.

Footnotes

1 Elan Construction Ltd. v South Fish Creek Recreation Assn, 2016 ABCA 215.

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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