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).

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.

The legal rules of bidding and tendering in Canada consist primarily of judge-made law. In particular, the basic framework of bidding and tendering law in Canada was set out in a landmark Supreme Court decision in 1981 which fundamentally altered the common law of contracts as it had previously applied to analysis of tendered contracts.

That decision, R. v Ron Engineering, created the Contract A / Contract B framework which is at the core of Canadian bidding and tendering law. Following that decision owner/developers and bidders found themselves subject to a new set of rights and obligations when engaged with each other in formal bidding processes.

Because the decision represented a radical reformulation of the law, it predictably led to questions about its particular implications, the scope of the rights and obligations created under the scheme, and the extent to which it was actually binding on parties to a bidding process (that is, if you didn’t want to be bound by the new rules for some reason, was it possible to get around them?). To a significant extent this discussion is still ongoing, and the law of bidding and tendering in Canada continues to evolve as the courts are faced with novel situations, particular contractual provisions, and new arguments about why the rules should or should not apply in a particular way to a particular set of facts.

Since Ron Engineering, the Supreme Court of Canada has revisited the law of bidding and tendering five times in the past three decades, most recently in a decision issued this past February. In chronological order, these six decisions are:

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

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://csc.lexum.umontreal.ca/en/1999/1999scr1-619/1999scr1-619.html

Martel Building Ltd. v Canada, [1997] 129 FTR 249 (FCTD), revd [1998] 163 DLR (4th) 504 (FCA), leave to appeal refused, 2000 SCC 60, [2000] 2 SCR 860, online: LexUM http://scc.lexum.umontreal.ca/en/2000/2000scc60/2000scc60.html

Naylor Group Inc. v Ellis-Don Construction Ltd., [1996] OJ No 3247, 31 CLR (2d) 195 (ON Gen Div), revd [1999] 119 OAC 182 (ONCA), vard 2001 SCC 58, [2001] 2 SCR 943, online: LexUM http://scc.lexum.umontreal.ca/en/2001/2001scc58/2001scc58.html

Double N Earthmovers Ltd. v Edmonton (City), 213 AR 81 (ABQB), affd [2005] AJ No 221 (ABCA), affd 2007 SCC 3, [2007] 1 SCR 116, online: LexUM http://scc.lexum.umontreal.ca/en/2007/2007scc3/2007scc3.html

Tercon Contractors Ltd. v British Columbia (Transportation and Highways), 2006 BCSC 499, revd 2007 BCCA 592, revd 2010 SCC 4, [2010] 1 SCR 69, online: LexUM http://scc.lexum.umontreal.ca/en/2010/2010scc4/2010scc4.html

The recent Tercon decision has sparked renewed debate in the legal community about the present state and the future of bidding and tendering law and bidding and tendering practices in Canada. The possible impact of the Tercon decision on procurement processes was a feature topic at the Canadian Bar Association’s National Construction Law Section annual conference. As well, provincial branches of the CBA have also been addressing the topic (the CBA New Brunswick Branch is including a session on developments in construction law in their upcoming Fall Conference).

Given that the rules of bidding and tendering are a current topic, I’ve decided that it might be useful (not least for myself) to prepare and publish briefs of the foregoing Supreme Court decisions. I’ll update this post with links to the briefs as I put them up.

Update:

• Ron Engineering
• M.J.B. Enterprises
• Martel
• Naylor
• Double N
• Tercon

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.