M.J.B. Enterprises Ltd. v Defence Construction (1951) Ltd., [1994] 164 AR 399 (ABQB), affd [1997] 196 AR 124 (ABCA), revd [1999] 1 SCR 619, online: LexUM http://scc.lexum.umontreal.ca/en/1999/1999scr1-619/1999scr1-619.html
Facts
The respondent, Defence Construction (‘Defence’), invited tenders for construction of a water pumping and distribution system on a Canadian Forces Base in Alberta. It received four bids, including one from the appellant, M.J.B. Enterprises (‘M.J.B.’), who was the second lowest bidder, and one from Sorochan Enterprises (‘Sorochan’), who submitted the lowest bid.
The tender documents contained a privilege clause worded as follows: “The lowest or any tender shall not necessarily be accepted”.
The original tender package instructed bidders to provide split pricing. A typical lump sum price was required for one portion of the project (the pump house and a few other items). Apart from these facilities a major portion of the project involved digging a trench system for the piping to be laid in and backfilling the trenches with different types of material (stone, natural backfill, or concrete slurry) contingent on the site conditions of a particular trench section. So, for the piping portion of the job the tender required provision of separate lineal meter unit prices for the three different types of fill where the final quantities of each type were to be determined in the field by a supervising engineer. The total amount of pipe and trenching required was known at the time of tendering, but not the individual amounts of each type of fill which would finally be required. An amendment to the tender package changed this pricing scheme to require – instead of the separate unit prices – only a single unit price for all types of fill material regardless of the relative amounts of each type that might finally be required onsite.
On submission and opening of the bids Sorochan’s was the lowest. But they had included a note with their bid documents essentially stating that their pricing was based on a certain amount of backfill type fill but if more stone fill was in fact required then their unit price was to be adjusted.
M.J.B. and the other bidders complained that the note was a conditional qualification of Sorochan’s bid and rendered their bid invalid. Defence took the position that the note was merely a “clarification” and accepted Sorochan’s bid. M.J.B., the second-lowest bidder, sued for breach of contract arguing that Sorochan’s bid should have been disqualified and that they should have been awarded the job instead since they had submitted the lowest valid bid.
Procedural history
The trial judge agreed with M.J.B. that Sorochan’s note qualified their bid, but held that the privilege clause eliminated any obligation on Defence to award the contract to M.J.B. as the second lowest bidder. The Alberta Court of Appeal dismissed the appeal, holding that the privilege clause was “a complete answer” to the action (para. 12).
Issue to be determined
In a call for tenders, does the inclusion of a privilege clause in the tender documents allow the owner to disregard the lowest bid in favour of any other tender, including a non-compliant one?
Holding
No.
Rule of law
Tender contracts can arise as a result of call for tenders and the terms and conditions of a tender contract are determined by the provisions of the tender documents and by the intentions of the parties.
Although a privilege clause reserving the right not to accept to the lowest or any bids successfully gives the owner a qualified discretion not to award to the lowest bidder, it does not operate to override an implied promise to accept only compliant bids.
Reasoning
Justice Iacobucci delivered the unanimous judgment of the Court (Chief Justice Lamer and Justices Cory, McLachlin, Major, Bastarache and Binnie also sat for the appeal).
He began by discussing the holding in Ron Engineering that a contract can arise on the submission of a bid in response to a tender call and that the terms of that contract would be governed by the terms and conditions of the tender call. Iacobucci J. noted that the decision of Estey J. in Ron Engineering was primarily concerned with the duties and obligations of the bidder under such a contract. By contrast, the facts in M.J.B. raised the issue of the duties of the owner under a contract arising from a tender call.
Rehearsing some of Estey J’s reasons in Ron Engineering, Iacobucci J expressed some misgivings about characterizing Contract A as a unilateral contract, but agreed with the Court’s reasons in Ron Engineering that, depending on the terms and conditions and context of tender call, a call for tenders could indeed give rise to a separate contract intended by the parties to govern the tender process. That is, it is cannot be true that a contract arises in every situation or that such a contract will have particular terms, such as irrevocability. But such contracts certainly can be created, again, depending on the terms and conditions of the call (paras 17-19).
Iacobucci J found that a tender contract had been arisen between the parties, saying that:
At a minimum, the respondent offered, in inviting tenders through a formal tendering process involving complex documentation and terms, to consider bids for Contract B. In submitting its tender, the appellant accepted this offer. The submission of the tender is good consideration for the respondent’s promise, as the tender was a benefit to the respondent, prepared at a not insignificant cost to the appellant, and accompanied by Bid Security (para 23).
Turning to the issues of the terms of that contract, the argument raised by the appellant was that it was a term of the tender contract that Contract B be awarded to the lowest compliant tender. Iacobucci J rejected an argument that it was an explicit term of Contract A finding no clear support for such a term in the tender documents themselves.
Reviewing the law on implied terms, Iacobucci J found that it was an implied term of the tender contract that the owner was under an obligation to accept only a “compliant” tender, based in part on the reasoning that he found it “difficult to accept” that prospective bidders, including the appellant, “would have submitted a tender unless it was understood by all involved that only a compliant tender would be accepted” (para 30).
Finding that a tender contract had arisen and that it included an implied term to accept only compliant bids, Iacobucci J then turned to a consideration of the effect of the privilege clause and found that it did not operate to override the obligation to accept only compliant bids (para 45). Instead, he found that the clause could be used to allow owners to (i) take a more “nuanced” view of costs in assessing bids or (ii) to cancel a tender in the event of unforeseen circumstances, such as inadequacies discovered in the project design specifications after the fact. This said, Iacobucci J also indicated that “the rejection of the lowest bid would not imply that a tender could be accepted on the basis of some undisclosed criterion” (paras 46-47).
So, although Iacobucci J found an obligation to accept and award only to a compliant bidder, he found no obligation to award to the lowest compliant bidder (i.e. M.J.B.). This said, he held that although M.J.B. had no contractual right to be awarded the construction contract, its rights under the tender contract were still breached. Iacobucci J found that on the balance of probabilities the evidence suggested that, had the tender contract not been breached, M.J.B. would have been awarded the construction contract and, after concluding that they were not too remote, awarded expectation damages in respect of the lost contract (paras 55-60).
Nota Bene
Note 1: In obiter dicta Iacobucci J observed that the tender documents being considered in the case themselves illustrated the “rationale for the tendering process . . . to replace negotiation with competition” (para 41).
Note 2: The appellant argued that even if it had awarded Contract B to a non-compliant bidder, it had acted in a good faith belief that the bid was in fact compliant and so was not in breach of its duty to the other bidders. Iacobucci dismissed this out of hand, saying: “Acting in good faith or thinking that one has interpreted the contract correctly are not valid defences to an action for breach of contract” (para 54).
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