There is a fundamental rule in tendering: say what you are going to do, then do it. But what does this really mean? What happens if you get a fantastic bid that meets your requirements but is non-compliant? What happens if you try to qualify the requirements of a tender in your bid?
In this bulletin, we unpack this rule by explaining how it developed in Canadian law and what happens to that non-compliant bid.
Readers should note that this Bulletin does not consider how the trade agreements impact the tender process for public entity procurements. Those subject to trade agreements will need to be aware that stricter rules apply to bid compliance issues specifically, and procurements generally.
Understanding the Basics of Tender Law
At the heart of the tendering process is the following rule: the procuring entity writes the rules of the tender and the procuring entity and the bidder follow the rules of the tender - to a 'T'.
The origins of this legal framework in Canada can be traced back to the 1981 Supreme Court of Canada (SCC) decision in Ron Engineering.1 This case concerned a tender for a construction contract for the Government of Ontario's Water Resources Commission in the City of North Bay. The tender documents required a bid deposit at the time of bid filing. While the tender permitted for the return of the bid deposit, if a bid was withdrawn within sixty days of the opening of the bids, the deposit could be retained.
After the opening of bids, one of the bidders, Ron Engineering, identified a pricing error in its submitted bid, rendering its bid price considerably lower than the rest of the bidders. Ron Engineering sent a notice of its error and asked to withdraw its bid without penalty. The Commission refused, accepted the bid and submitted the contract for Ron Engineering's signature. Ron Engineering refused to sign, maintaining that since it had notified the Commission of its error prior to acceptance of the bid, the offer was not capable of being accepted. The Commission, relying on the bid deposit terms, retained the deposit and accepted another bid.
The arguments made by Ron Engineering were fairly complex but in essence, Ron Engineering argued that because it had identified its error prior to acceptance, it had not withdrawn its bid and thus the right to retain the deposit was not triggered. Ron Engineering sued for recovery of the bid deposit, and the Commission counter-claimed with respect to Ron Engineering's refusal to carry out the terms of the tender.
Ultimately, the SCC determined that the Commission was entitled to keep the bid deposit because that is what the tender documents said. The Court held that when a mistake was proven by the production of reasonable evidence after the bids were opened, the person receiving the bid was not prevented from accepting the bid or seeking to forfeit the bid because the test is applied at the time the bid is submitted and the rights of the parties have crystallized.
While the outcome may not be surprising, the paramount importance of Ron Engineering was the Court's determination that the tender process itself creates a contract between the procuring entity and each bidder who submits a compliant bid in response to an invitation to tender. This contract is known in Canadian tender law as "Contract A."2 The SCC gave full weight to the terms of the tender document (e.g. the rules for the tender process) − the bid deposit, which was designed to ensure the performance of the obligations of the bidder under Contract A, was exposed to the risk of forfeiture upon Ron Engineering's breach of obligations by withdrawing its bid.
Cases at the SCC have further evolved the Canadian tendering framework since then, but the essential elements of Ron Engineering have not changed.
This rule on its face looks pretty simple and the logic behind it makes sense – but the application is not always as straightforward as it appears.
Privilege and Waiver Clauses - Can They Save a Non-Compliant Bid?
Recall that in Ron Engineering, the Court said that Contract A forms on submission of a compliant bid. This framework protects the credibility and integrity of the tendering process and ensures that the "dual duties" – fairness and good faith on the part of the procuring entity – are met.3
The court will look at the tender requirements and apply a 'strict compliance' test – did the bid strictly comply with the tender requirements?
Procuring entities frequently seek to balance the risk of the loss of an otherwise great bid by including a clause – referred to as a "privilege clause" – in the tender documents, reserving their right to accept bids that may not respond one hundred percent to the tender (e.g. the right to waive non-compliance in a bid).
While this might seem to be a workaround, privilege clauses are not a carte blanche for procuring entities or bidders. A tendering process that allowed a bid to be rejected for frivolous reasons, or that allowed a procuring entity to accept an entirely non-compliant bid, would be harmful to the public tendering system, create commercial uncertainty, and undermine the credibility and integrity of the tendering process.
While a privilege clause may reduce the "strict" compliance test to a "material non-compliance" test, it will not eliminate the requirement that a bid be compliant.
A materially non-compliant bid is, in essence, a counter-offer that is incapable of giving rise to Contract A unless the procuring entity exercises the discretion reserved by tender documents and considers the non-compliant bid.4 However, the bid may still not pass the "material non-compliance" test if the non-compliance results in a failure of the bid to address an important or essential requirement of the tender documents and a "substantial likelihood" that the bid defect would have been significant in the owner's decision-making process. Even in the face of a broad privilege clause, a court is highly unlikely to excuse the failure to comply with mandatory requirements.
Procuring entities may also use "waiver of informality" clauses, allowing them to waive minor omissions or defects.
For example, in Double N Earthmovers v. Edmonton (City),5 the call for tenders required that serial and license numbers be provided for all equipment to be used by the bidder. The successful bidder failed to provide this information for certain pieces of equipment, but was awarded the contract when the City exercised its rights under the waiver of informality clause in the tender documents. An unsuccessful bidder sued the City of Edmonton and the matter made its way through the courts, eventually landing at the SCC.
In a split decision, the SCC, applying the material non-compliance test, held that the failure to include serial numbers was not something that could materially affect the price or the performance of the procurement. The court found that the City was not aware of the successful bidder's deceit until after it had accepted the bid and it had not colluded with the successful bidder during the bidding process to treat other bidders unfairly. Once the City accepted the bid, it was permitted under Contract A to waive this informality and award the bid to the successful bidder. The court identified that a procuring entity has no duty to investigate whether a bidder will comply with tender requirements, and can rely on the terms of the tender because each bidder is legally obliged to comply in the event that a bid is accepted.
Bidder Beware - Qualifying Statements
Mere irregularities in bids should not result in the disqualification of a bid that otherwise complies with all material conditions of a tender.
However, bid qualifications are not "mere irregularities". Responses that, for example, differ in quantity and quality from the tender requirements and that attempt to qualify or modify the terms of the tender are typically considered to be counter-offers (and incapable of acceptance). Even if the qualifying statements may not render the bid a counter-offer, attempts to qualify a bid can create two significant problems:
- For bidders: qualifying statements in bids can render a bid non-compliant and incapable of acceptance.
- For procuring entities: accepting bids that modify or qualify tender requirements breaches the implied duty of fairness.
Acceptance of bid qualifications or modifications could give the bidder a technical advantage over other bidders who, given the opportunity, may have wished to also modify or qualify their bids or submit counter-offers.
Even if a tender document contains a privilege clause, bidders should take note that the exercise of the rights provided to a procuring entity in a privilege or waiver clause are optional – the procuring entity is not required to exercise this right even if all bidders are non-compliant6.
Bidders and procuring entities should keep in mind the following guiding principles:
- The number one rule – always follow the rules set out in the RFP.
- The tendering process can create contractual obligations and trigger a duty of fairness on the part of the procuring entity towards all compliant bidders.
- The key implied terms of Contract A
- to accept only a compliant bid; and
- to be fair and consistent in assessment of bids.
- There is a difference between a bid that contains an informality and a bid that is materially non-compliant.
- If a bid is non-compliant or so qualified that it constitutes a counter-offer, no contract A exists and no duty of fairness is owed to that bidder.
- A broad privilege clause will not excuse the failure to comply with mandatory requirements.
- Over-application of the rights found in a privilege clause may run up against the duty of fairness which is owed when a Contract A is formed.
- Privilege clauses or waiver clauses are not the solution to a poorly structured RFP or bid response.
1 The Queen in Right of Ontario v. Ron Engineering,  1 SCR 111 (Ron Engineering).
2 The final written contract between the successful bidder and procuring entity is referred to as "Contract B".
3 The duty of good faith, in the sense of fair dealing, requires the issuing authority to act in good faith towards all bidders and is generally implied throughout the tendering process. The duty of fairness arises once Contract A comes in to effect and is extinguished once Contract B comes in to existence. There is no freestanding or "independent" duty of fairness absent the existence of a Contract A.
4 Kinetic Construction Ltd. v. Regional District of Comox-Strathcona, 2003 BCSC 1673 at para 30.
5 2007 SCC 3.
6 Recall our Bulletin on vague tender requirements [ As Clear as Mud - Why Taking a 'Wait and See' Approach to Vague Solicitation Requirements is Never a Good Strategy]where we explained that the obligation to clarify vague tender requirements in advance of bid submission rests with bidders. Trying to address a vague requirement by qualifying your bid can be fatal to success.
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.