Canada: Two Recent Appellate Decisions Discuss Discretion And Privilege Clauses In A Competitive Bidding Process

The courts of appeal of British Columbia and Alberta have recently released decisions dealing with the effect of discretion and privilege clauses often used by owners in calls for competitive bids.¹ Though privilege clauses and discretion clauses are different, they are related both in their purpose and in the way courts have sought to limit their effect in order to preserve the integrity of the tendering process. The way courts have done this has been to require that winning bidders must, notwithstanding any discretion or privilege clauses, be selected based on evaluation criteria that can be reasonably inferred from the tender documents themselves, as understood within the context of the needs and the reasonably ascertainable realities of the project.

Discretion Clauses

Discretion clauses permit bid evaluators to waive defects in any bid or tender document and accept such bids despite their non-compliance. In the absence of such a clause, those calling for bids must reject all bids that are non-compliant in any way, which can mean that good bids are rejected for trivial errors. When discretion clauses are used, work providers can waive defects, but only insofar as they are not material defects based on an objective reading of the tender documents at the time the bid is made.²

In Maglio, the discretion clause at issue read as follows:

The call for bids in that case required bidders to complete a preliminary construction schedule ("PCS") and included several indicators that timing was important to the project. What complicated matters, however, was that at the time the bids were submitted, the City did not have confirmed milestone dates because an archaeological assessment required by the Water Act and water level forecasts from BC Hydro were unavailable. As such, whatever PCS was submitted would have to be amended once the milestone dates were confirmed. The Plaintiff's (Maglio Installations Ltd.) bid complied with all requirements of the invitation to tender, including the requirement to submit a PCS. The winning bidder, however, failed to include a PCS. Instead, its bid stated it would submit a PCS after the City confirmed the milestone dates.

Maglio sued the City and sought summary judgment for breach of contract, alleging that the City breached its duty of fairness arising from Contract A by awarding the project to a bid containing a material defect.³ The question was whether and to what extent external uncertainties can affect what otherwise appeared to be an important element of a bid. The City took the position that the lack of confirmed dates made the PCS requirement immaterial. The summary judgment judge disagreed and granted summary judgment in favor of Maglio.

On appeal, the court referred to the two-step test found from Graham to determine whether a defect in a bid is material:

1. the defect has to do with an important or essential requirement of the tender documents; and
2. there is a substantial likelihood that the omission would have been significant in the deliberations of a reasonable owner in deciding which bid to select

In regards to the first element of the test, the court found that the materiality of a defect must be assessed objectively, based on an objective reading of the tender documents at the time they are submitted. The court noted that nearly an entire page of the call for bids was devoted to this requirement and the tendering documents as a whole "made it clear that timing would be an essential aspect of Contract B." The court endorsed an earlier statement on the law by Justice Harris in True Construction Ltd. v. Kamloops (City), 2016 BCCA 173:

In regards to the second element, the court resisted the invitation of the City to change the test to whether the entity calling for bids had a good business reason for not placing much importance on that element. This kind of hindsight approach would have substantially increased the discretion of those calling for bids to accept non-compliant bids. The court declined to place any importance on the subjective reasoning of the bid evaluator, choosing rather to look at whether the requirement in question would likely be objectively useful to a reasonable bid evaluator. The court construed this requirement quite broadly, finding that it will be satisfied so long as the defect relates to a requirement that is "neither redundant or useless."

To summarize, the court of appeal applied the two-part test in Graham in such a way that the question was not whether the City was unreasonable in not making the PCS material in its deliberations, but rather, whether Maglio was reasonable in believing that the City would consider the PCS material in its deliberations. Maglio first had to base its belief on what the tender documents said and then turn its mind to whether the PCS would likely, in fact, be useful to a bid evaluator. The court of appeal agreed with Maglio on both these points.

Privilege Clauses

Privilege clauses permit the bid evaluator to award the project to someone other than the lowest bidder. In the absence of a privilege clause, or any express evaluation criteria in the tender documents, the law has traditionally been that the lowest compliant bidder must be awarded Contract B.

In Everest, the privilege clause in question was characteristically short, stating simply that "the lowest or any bid will not necessarily be accepted." The City of Strathmore ended up selecting the second lowest bidder based mostly on the fact that this bidder had an overall completion date which was 4.5 months earlier than the lowest bidder, Everest Construction Management Ltd. There was good evidence that the cost to the City of Everest's later completion date was greater than the difference between Everest's bid and the winning bid.

Everest sued the City and then appealed the decision of the trial judge dismissing its action. In regards to the privilege clause, Everest took the position that the City could only have selected the second lowest bidder for the reason it did if it had expressly stated in its tender documents that the cost of construction would be considered alongside the cost to the City arising from a later completion, or if it stated that the schedule criterion was the most important or only criterion.

The court of appeal dismissed this ground of appeal, relying in part on an passage from paragraph 46 of the Supreme Court of Canada decision in MJB Enterprises. In that case, the court stated, in obiter, that a privilege clause gives owners discretion "to accept not necessarily the lowest bid," including the discretion to "take a more nuanced view of 'cost' than the prices quoted in the tenders." Taking a "more nuanced view of cost" included adjusting a quoted price upwards to reflect the expected costs of a later completion.

In Elan Construction,⁴ the same court had stated that privilege clauses "cannot be interpreted to include the ability to alter the bidding process in a manner which cannot reasonably be anticipated from a reasonable reading of the Instructions to Bidders." The tender documents in Elan Construction contained a chart of criteria with applicable ratings points that the bid evaluator, South Fish Creek Recreational Association, was found not to have followed. In Everest, however, the listed criteria were not rated. The key takeaway, therefore, is that even with privilege clauses, bid evaluators cannot deviate from the express bid evaluation process in the tender documents. However, where the tender documents are silent as to relative weight, evaluators will have much more discretion in how to weigh these criteria against one-another, so long as there are sensible business reasons for the weighting and there are no other secret criteria being used. In essence, tender documents can bind bid evaluators by their level of detail, whereas less detailed evaluation criteria, combined with a privilege clause, will result in more discretion for the bid evaluator; and more uncertainty for bidders.

Conclusion

Discretion and privilege clauses have been used for some time in tender documents to give bid evaluators maximum discretion in selecting the winning bid. Omnibus clauses, which combine the two into one, are also commonly used. The courts, however, in an effort to maintain the integrity of the tendering process, have sought to confine their effect so that they cannot contradict what is expressly stated in the tender documents or make compliant a materially non-compliant bid. The tendering documents must always be read objectively and in view of the realities of the underlying project.

Those drafting calls for bids should be aware of the benefits and disadvantages of using such clauses alongside stated criteria and the uncertainty they may cause as to what exactly is most important to the work provider. In some cases, a wider variety of proposals may be desired; but in other cases, particularly where the provider of work knows exactly what it wants, more clear and precise evaluation criteria may result in lower bids. On the other hand, these criteria also come with heightened obligations and potential liability.

Those submitting bids in response to tender documents containing a privilege clause should not assume that the lowest bid will automatically be selected, but rather look carefully at the evaluation criteria and consider them holistically in the context of the project and how a reasonable bid evaluator may weigh them. Those who see their lowest bid being rejected should look carefully at the tender documents and the reasons given for the selection of the winning bid.

Finally, those planning to issue calls for bids and those planning to respond to such calls are encouraged to seek legal advice from counsel having experience in the kind of project at issue. Experienced counsel will be able to provide advice on both the legal and practical ramifications of the use of discretion, privilege, or omnibus clauses.

Footnotes

1 Everest Construction Management Ltd v Strathmore (Town), 2018 ABCA 74, released February 28, 2018 [Everest]; Maglio Installations Ltd. v Castlegar (City), 2018 BCCA 80, released March 8, 2018 [Maglio].

2 MJB Enterprises Ltd. v Defence Construction (1951) Ltd., [1999] 1 SCR 619 at 633 [MJB Enterprises]; Graham Industrial Services Ltd. v Greater Vancouver Water District, 2004 BCCA 5 at para. 30 [Graham].

3 For an overview of the law of competitive bidding and the types of calls for bids that create Contract A, see Jonathan Martin, Recent Trial Decision Discusses Calls for Bids vs RFPs, November 14, 2017.

4 Elan Construction Limited v South Fish Creek Recreational Association, 2016 ABCA 215.

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