R. (Ont.) v Ron Engineering & Construction (Eastern) Ltd., [1979] 24 OR (2d) 332 (ONCA), revd [1981] 1 SCR 111, online: LexUM http://scc.lexum.umontreal.ca/en/1981/1981scr1-111/1981scr1-111.html

This case is understood to be the leading case on the law of bidding and tendering in Canada.

Facts

The province of Ontario (the “owner”) retained an engineering consulting firm to prepare an estimated budget for the construction of a new water and sewage treatment plant. The consultants returned a budget estimate of $2,744,700. The owner then issued a call for tenders for the construction of the plant. The tender documents required a tender deposit to be submitted with the bids, and included the following statement:

. . . the tenderer guarantees that if his tender is withdrawn before the Commission shall have considered the tenders or before or after he has been notified that his tender has been recommended to the Commission for acceptance . . . the Commission may retain the tender deposit for the use of the Commission and may accept any tender, advertise for new tenders, negotiate a contract or not accept any tender as the Commission may deem advisable.

Ron Engineering (the “contractor”), submitted a bid on time and with the required $150,000 deposit in the form of a certified cheque. An employee of the contractor was present for the opening of all the bids. At $2,748,000, the contractor came in over $600,000 lower than the next bidder. The employee immediately called the president of the contractor company about the possibility of a mistake in the bid. Before she could tell him about the tender opening, he told her that he found he had made a mistake in the bid. It was held as a fact at trial that there was nothing on the face of the bid which would indicate any error. At 4:12 pm, an hour after the submission deadline of 3:00 pm, the contractor sent a telex to the owner saying they had made a mistake of $750,058 in their submission, and that their total bid price should have been $3,498,058. The message went on to offer a submission of other documents to show the error and requested to withdraw from the bid process without being “penalized”.

After receiving this message from the contractor the owner went on to seek the contractor’s signature on the contract documents as provided for in the tender documents. The contractor refused to sign the contract document for the reason that it had mistakenly sent a tender bid at a price far lower than it actually intended. The owner then took the position that, per the tender documents, it was entitled to keep the tender deposit and awarded the contract to the second-lowest bidder.

The contractor sued for recovery of the deposit, and the owner counter-claimed for damages resulting from the contractor’s refusal to carry out the tender and at having to accept the next-lowest bidder.

Procedural history

The trial judge held that the owner was entitled to keep the deposit and dismissed the counter-claim. The Ontario Court of Appeal reversed the trial judgment and directed the owner to return the deposit. The Ontario Commission appealed to the Supreme Court.

Issues to be determined

Can a bidder rely on the contract doctrine of mistake to revoke a tender, notwithstanding any provisions in the tender documents to the contrary, as long as the bidder gives notice of the mistake to the owner prior to formal acceptance of the bid?

Holding

No.

Rule of law

A call for tenders is not an invitation to treat and a bid is not an offer. Rather, a call for tenders is an offer, and a properly submitted bid constitutes an acceptance of that offer resulting in a unilateral contract. The tendering process involves two contracts, not one. The second is the actual contract being competed for. The first is the bidding contract. Consideration for the bidder is the chance to compete for the second contract and the consideration for the owner is the promise that, if selected, the bidder will enter that contract on the terms provided in the documents. The terms of the bidding contract are also contained in the tender documents. If the terms stipulate it then the bidder’s acceptance of the owner’s offer is irrevocable. If no error is apparent “on the face of the tender” then the bidding contract forms when the bid is submitted.

Reasoning

Justice Estey delivered the unanimous judgment of the court (Justices Martland, Dickson, Estey, McIntyre and Lamer sat for the appeal).

Estey J. noted at the beginning of his reasons that the facts before the court did not concern either “a case where the mistake committed by the tendering contractor is apparent on the face of the tender” or a case of “impropriety” where a contractor was attempting to recall a “legitimate bid” after discovering that they were the low bidder by a wide margin. Instead, Estey J. said that “the mistake here is one which requires an explanation outside of the tender documents themselves” ([1981] 1 SCR 111, p 117).

The Ontario Court of Appeal had relied on its decision in Belle River Community Arena Inc. v W.J.C. Kaufmann Co. Ltd. (1978), 20 OR (2d) 447 in finding that the contractor could recover the bid deposit. In Belle River, a contractor had similarly wanted to withdraw its bid after finding a mistake in its pricing and argued that it could do so as long as there had been no formal acceptance of the bid by the owner. The tenderer was identified as the offeror, the owner as the offeree, and the Court of Appeal held that where the offeree was informed of the mistake – i.e. that the original offer was not the one intended by the offeror – then the offeree could not accept it. The Belle River facts were very close to the facts in Ron Engineering.

Estey J. disagreed with the Court of Appeal’s ‘mistake’ analysis. In his analysis, the respondent contractor’s tender did not constitute an offer. Instead, he found that the terms and conditions contained in the tender documents governing the submission of tenders caused a unilateral contract to be formed between owner and bidder on submission of a tender. This contract – the tender contact – is distinct from the actual construction contract for which the owner is soliciting bids. For convenience Estey J. labelled these contracts contract A and contract B (p 119).

Under this model, Estey J. stated: “[T]he principal term of contract A is the irrevocability of the bid, and the corollary term is the obligation of both parties to enter into a contract (contract B) upon the acceptance of the tender. Other terms include the qualified obligations of the owner to accept the lowest tender, and the degree of this obligation is controlled by the terms and conditions established in the call for tenders” (p 122-123). In the case at hand Estey J. found that there was no controversy about the form and procedure followed and that all the terms and conditions required by the call for tenders had been complied with, and thus that contract A had crystallized between the parties (p 122).

Once Estey J. made the core finding that a tender contract – contract A – existed between the parties, all that remained was to determine the terms and conditions of the contract and whether they had been properly observed. The terms and conditions in the tender at issue did in fact provide for recovery of the deposit under certain conditions, none of which were met by the respondent contractor, and so Estey J. found simply that, per the terms of the agreement, the owner was entitled to keep the deposit. Estey J. noted in passing that the purpose of the deposit “was clear and simple . . . . [It] was required in order to ensure the performance by the contractor-tenderer of its obligations under contract A.”

On the vexing issue of the doctrine of mistake as it might apply in the circumstances, Estey J. dispensed with it simply by saying that it did not affect the contract A analysis because the issue of mistake was not raised by the parties until after contract A had validly formed. He wrote that the mistake in question would certainly be pertinent to a consideration of whether “a shared animus contrahendi” existed for the purposes of the formation of a contract B. But, whether contract B could have formed was never actually at issue. Instead, “the rights of the parties [for the purposes of the matter at hand] fall to be decided [solely] by the tender arrangements” (p. 123).

This is not to say that the doctrine of mistake might not operate to prevent the formation of contract A in the right circumstances. On this Estey J. referred to the case of McMaster University v Wilchar Construction Ltd., [1971] 3 OR 801, where a tender was missing a page. The trial judge in Wilchar described the case as one where “the offeree, for its own advantage, snapped at the offeror’s offer well knowing that the offer was made by mistake.” On this, however, Estey J. wrote, again, that the issue was not so much one of mistake as of the failure to comply with the terms and conditions of the tender call (by submitting a proper set of documents) (p 124).

One issue that Estey J. declined to address at length was where, for example, a tender offer came in at a price so low as to be obviously made in error: “. . . as where the offeror intended to say $200 . . . but wrote $20 dollars by mistake.” He hinted, though, that “it may well be that such a form of tender could not be ‘snapped up’ by the owner” (p 125).

All said, a call for tenders like the one in Ron Engineering – sometimes called a “classic” tender call today because of continually evolving procurement models – involves two contracts, the first being a tender contract, or contract A. This contract according to its terms entails rights and obligations on the part of the parties under the same fundamental rules as any other contract. These terms will generally include irrevocability and the right to the formation of the contemplated construction contract on acceptance of the tender.

A final point of note is an often quoted statement made by Estey J. in his reasons for decision which sheds some light on the rationale for his insistence on strict enforcement of the terms of a call for tenders: “[The] integrity of the bidding system must be protected where under the law of contracts it is possible to do so” (p 121).

Nota Bene

It is critical to understand that Estey J.’s creation of the two-contract analysis in Ron Engineering does not represent an attempt to turn the law of contracts on its head. Instead, Estey J. simply applied the principles of contract law to the documents that passed between the parties to arrive at the conclusion that the parties had agreed to be bound by the terms of a process contract in anticipation of a construction contract. As a result, Estey J.’s two-contract model of bidding and tendering only applies to situations where the underlying documents and surrounding circumstances support the creation of a process contract.

Some contemporary procurement models, such as some Request-for-Proposal models, are not understood in law to be a call for tenders and thus are not subject to the application of the rule in Ron Engineering.

I recently commented on Russell (Township) v. Dalcon Enterprises Inc., [2009] O.J. No. 2560 (Ont. S.C.J.) (“Dalcon“), and I indicated that the owner township had every right to exercise a contractual provision giving it “discretion” to award the contract to a bidder other than the lowest bidder. And it did. But I should mention that although they’ve been around for awhile, those types of provisions are controversial. And understandably so. After spending time and money preparing and submitting tender documents, a bidder is generally disappointed to lose the bidding competition. And if the low bidder is snubbed in favour of one of their higher-priced competitors, you’ve got great potential for a great big row.

That’s what happened in Dalcon, except the contract was not actually awarded prior to the submission of an application to court. Again, see my post if you’re interested.

Can They Do That?

The question always asked when an owner passes over a low bidder by relying on a provision purporting to give them the power to do so is: Can they do that? The answer is: Maybe.

These clauses are called “privilege clauses.” Some pratitioners are of the opinion that privilege clauses are as enforceable as any other contract term. And while they are generally enforceable, I personally would be a little more cautious before relying on one.

In M.J.B. Enterprises v. Defence Construction (1951), [1999] 1 S.C.R. 619 (“M.J.B.“), which is a leading case in Canadian law on privilege clauses, the tender documents at issue stated: “The lowest or any tender shall not necessarily be accepted.” This type of wording is fairly standard, although privilege clauses have gotten a little more sophisticated in response to developing case law.

But the catch is that the case law, arguably, is not entirely consistent. For example, Iacobucci J’s discussion in M.J.B. indicates that in deciding which bidder to award a contract to, an owner should not make the decision based on “undisclosed” criteria. But some subsequent decisions of lower courts have upheld owners’ decisions made rejecting low bidders based on such critertia.

What is generally agreed on is that inclusion of a privilege clause does not eliminate owners’ duty to deal with all bidders fairly and in good faith. For example, see Martel Building Ltd. v. Canada, 2000 SCC 60.

In any event, privilege clauses are not an overly complex subject, but an in-depth discussion is probably better saved for a subsequent post. What I did want to correct was any impression I might have left that the owner township in Dalcon would be absolutely immune from any liability should they choose to exercise their “discretion” not to accept a bid. In Dalcon, the owner township’s tender documents contained what were essentially privilege clauses. And they did have the right to exercise their discretion under those clauses without seeking a court order stating so. What they couldn’t do was exercise that discretion improperly, for example, in bad faith. That is, a privilege clause may not be available for use if there are no circumstances which could justify its fair use.

Nota Bene

Public Tenders in Newfoundland and Labrador are governed by the Public Tender Act, R.S.N.L. 1990, c. P-45, section 8(1) of which is effectively a statutory privilege clause.
See also the Public Tender Regulations, N.L.Reg. 103/98.

Public sector owners like federal and provincial departments and large municpalities often have no qualms about throwing their weight around in the event of a contractual dispute. For that matter even smaller municipalities often have no reservations about getting into a racket with a contractor depending on the collective personality of their public officials. But, sometimes, smaller public owners with less commercial expertise and fewer resources at their disposal might approach contracting companies with more trepidation.

Not to say that this was exactly the case with the Township of Russell, ON. But, this past spring, the Township issued an invitation to tender for an expansion to its Lagoon. The tender closed on May, 21, 2009, and of six bids received the two lowest were by Dalcon and Robert. An engineering consultant hired by the Township reviewed the bids and recommended that Dalcon’s be rejected because of some issues with the bid documents, and that the contract be awarded to Robert. In early June, both low bidders having gotten wind of the potential to gain or lose the project, Dalcon and Robert each threatned to sue the Township for damages if they were not found to be the successful bidder.

Rather than make the call and deal with one or the other threatened actions, the Township decided to head both actions off at the pass and brought an application to court to seeking a judicial order confirming the Township’s contractual ability to select a bidder without incurring liability to the unsucessful bidders.

But, the tender documents themselves provided at three points for the owner to exercise discretion in the final selection of a successful bidder. Justice Ray dismissed the application, saying that where the Township’s own contract documents gave it discretionary power, there was no room for the court to “make the decision for Russell Township.” That is, make your decision, and if there’s a legal dispute subsequently, that’s when you come to court.

See Russell (Township) v. Dalcon Enterprises Inc., [2009] O.J. No. 2560 (Ont. S.C.J.).

This is an interesting little case, although it doesn’t really set out any ground-breaking ratio. The moral of the story is that it doesn’t matter who’s threatening what in the way of a legal action, or how bad and mad they are, a contractual right pursuant to an agreed-to provision – assuming that the provision is enforceable – is what it is: a contractual right.

So, for smaller public owners everwhere, the general rules of engagement for tender contracts equally apply, including: (i) Make sure your tender contract documents are well-drafted, (ii) make sure you know what you can and can’t do under the contract, and (iii) if you can do it, and you need to do it, don’t be afraid put a provision into action.