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

This case, similar the earlier case of M.J.B., considered the effect of an exclusion clause in the context of an acceptance of a non-compliant bid. The exclusion clause in this case was more broadly worded than the privilege clause in M.J.B.

Facts

In 2000, the British Columbia Ministry of Transportation and Highways (the “Ministry”) issued a request for expression of interest (“RFEI”) for a major highway design-build project. Six teams of interested contractors made submissions, including Tercon Contractors (“Tercon”) and Brentwood Enterprises (“Brentwood”). After receiving the submissions the Ministry changed its mind and decided to perform the design function itself and issued a request for proposals (“RFP”) for the construction contract only.

The RFP was issued in January 2001 and included among its terms a provision that only participants in the original RFEI process were pre-qualified to bid. The RFP also included a broadly worded exclusion clause excluding liability on the part of the Province for any damage claims arising “as a result of participating in this RFP”. It was specifically worded as follows:

Except as expressly and specifically permited in these Instructions to Proponents, no Proponent shall have and claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim (para 60).

Brentwood found itself unable to submit a competitive bid on its own in part as a result of a lack of experience in drilling and blasting and engaged Emil Anderson Construction (“EAC”) to work with it on the bid. Brentwood sent a preliminary submission to the Ministry’s project manager to advise them that it had changed its team structure and wished to form a joint venture with EAC. The Ministry never responded to this preliminary submission, although it fact it should have pursuant to the provincial Ministry of Transportation and Highways Act then in force. Unlike Brentwood, EAC was not a participant in the original RFEI process and was not on its own an eligible bidder. Brentwood and EAC submitted a bid in Brentwood’s name. Although it understood that the Brentwood/EAC joint venture submission did not constitute an eligible bid, the Ministry nonetheless accepted it and took steps to obscure the reality of the situation. Brentwood and Tercon’s bids were shortlisted and of the two Brentwood was selected for the project.

Tercon sued the Ministry for damages on the basis that acceptance of an ineligible bid constituted a breach of contract, and that the breach had cost it an award of the project.

Procedural history

The trial judge accepted Tercon’s arguments and awarded expectation damages. On the issue of the application of the exclusion clause, she found that it was ambiguously worded and applied the contra proerentem rule to resolve the ambiguity in favour of Tercon, and she also held that the Ministry’s breach was fundamental and thus that it was not fair or reasonable to enforce the clause in light of such a breach. The Court of Appeal reversed the trial decision on the basis that the exclusion clause did cover the Ministry’s default.

Issues to be determined

1. Did the province breach the tender contract by accepting a bid from an ineligible bidder?
2. Does the exclusion clause bar a claim for damages for breach of the tendering contract?

Holding

1. Yes
2. No, on an interpretation of the clause that found that it did not apply to the circumstances of the breach.

Rule of law

On the issue of the enforceability of exclusion clauses, courts must undertake a three-part inquiry for enforceability:

1. As a matter of interpretation, does the clause apply to the circumstances established in evidence?
2. If it applies, was it unconscionable at the time the contract was made?
3. If it applies and is valid, should the court nonetheless refuse enforcement based on an overriding issue of public policy?

Minority reasons

In a five to four split, the majority reasons for decision were delivered by Justice Cromwell (Justices LeBel, Deschamps, Fish and Charron concurring), while dissenting reasons were written by Justice Binne (Chief Justice McLachlin and Justices Abella and Rothstein concurring in dissent).

In his majority reasons for decision Cromwell J adopted a test put forward by Binnie J in the minority reasons, and so it makes sense to discuss the dissenting reasons first.

Before launching into his dissent, Binne J prefaced them with a statement that sets the tone for the minority reasons:

The important legal issue raised by this appeal is whether, and in what circumstances, a court will deny a defendant contract breaker the benefit of an exclusion of liability clause to which the innocent party, not being under any sort of disability, has agreed. (para 81)

Binnie J did not spend much time on the question of whether the Ministry had breached their obligations to Tercon under the RFP, being satisfied with the finding at trial that they had, and his dissent focuses on the issue of the enforceability of exclusion clauses such as the one contained in the RFP. He noted that:

The appeal thus brings into conflict the public policy that favours a fair, open and transparent bid process, and the freedom of contract of sophisticated and experienced parties in a commercial environment to craft their own contractual relations. I agree with Tercon that the public interest favours an orderly and fair scheme for tendering in the construction industry, but there is also a public interest in leaving knowledgeable parties free to order their own commercial affairs. In my view, on the facts of this case, the Court should not rewrite – nor should the Court refuse to give effect to – the terms agreed to by the parties.” (para 85)

Reviewing Supreme Court jurisprudence on bidding and tendering since its decision in Ron Engineering, Binne J emphasized the contractual nature of the Contract A/Contract B construct, concluding that “contract A continues to be based not on some abstract externally imposed rule of law but based on the presumed (and occasionally implied) intent of the parties. Only in rare circumstances will the Court relieve a party from the bargain it has made.” (para 93).

Turning to the exclusion clause Binnie J stated that there were two separate questions to answer in addressing the clause’s applicability, (i) whether there were a statutory or other legal reason why the parties would not have been free to negotiate the exclusion clause, and (ii) if there were any other reasons why the clause should not be enforced in the circumstances (such as fundamental breach).

On the first question, Tercon had argued that the statute under which the RFP had been undertaken communicated a policy that the Ministry should be accountable for its actions and thus that an exclusion clause was incompatible with the statute. Binnie J gave short shrift to this argument stating that the statute “no where prohibits the parties from negotiating a ‘no claims’ clause” (para 101).

Turning to the second question Binnie J reviewed what was then the leading Canadian case on fundamental breach: Hunter Engineering Co. v Syncrude Canada Ltd. [1989] 1 SCR 426. In that case the Supreme Court had unanimously upheld a contested exclusion clause, but diverged in their assessments of when a court could properly refuse to enforce an exclusion clause. In Hunter, Dickson CJ favoured a pre-breach analysis of whether the clause was unconscionable at the time the contract was made. Wilson J favoured a post-breach analysis considering whether, in the event of a fundamental breach, it were still fair in the circumstances to allow enforcement of an exclusion clause:

Wilson J. considered it more desirable to develop through the common law a post-breach analysis seeking a “balance between the obvious desirability of allowing the parties to make their own bargains . . . and the obvious undesirability of having the courts used to enforce bargains in favour of parties who are totally repudiating such bargains themselves” (p. 510) (para 109)

Binnie J then turned to other more recent cases on the issue of fundamental breach, focusing on considerations of public policy. He was generally of the view that no rule of law needed to be explicitly stated that that a court could resort to public policy to reuse to enforce a contract, but that such discretion on the part of the court went without saying. “Freedom of contract, like any freedom, may be abused” he stated, giving examples of such abuses which would clearly justify refusal to uphold an exclusion clause on grounds of public policy.

Based on his survey of the jurisprudence on the enforcement of exclusion clauses, Binnie J thus stated a three part inquiry for assessing enforceability:

1. As a matter of interpretation, does the clause apply to the circumstances established in evidence?
2. If it applies, was it unconscionable at the time the contract was made?
3. If it applies and is valid, should the court nonetheless refuse enforcement based on an overriding issue of public policy?

The onus of proof of this last inquiry lies on the party seeking to avoid enforcement. (paras 122-123)

Applying this three-part inquiry to the case, Binnie J found that the exclusion clause did apply, holding that Tercon did “participate” in the RFP process, whether or not the process was compromised. (para 128)

On the question of whether the clause was unconscionable, Binnie J held that that while “Tercon is not on the same level of power and authority as the Ministry”, is was nonetheless a major contractor and well able to look after itself, so there was no “relevant” imbalance of bargaining power. (para 131)
On the question of an overriding concern of public policy, Binnie J stated that while “there is a public interest in a fair and transparent bidding process, it cannot be ratcheted up to defeat the enforcement of Contract A in this case.” (para 135) He acknowledged the clear validity of Tercon’s complaints about the Ministry’s handling of the RFP, having no real issue with the trial judge’s “condemnation” of the Ministry’s lack of fairness and transparency, but held simply that that the “Ministry’s misconduct did not rise to the level” required for a court to refuse enforcement on grounds of public policy. (para 140).

Binnie J would have dismissed the appeal.

Majority reasons

Like Binne J, before rehearsing the facts and formally framing the issues Cromwell J prefaced his reasons with a summary paragraph whose wording set the tone for the majority reasons:

The Province accepted a bid from a bidder who was not eligible to participate in the tender and then took steps to ensure that this fact was not disclosed. The main question on appeal, as I see it, is whether the Province succeeded in excluding its liability for damages flowing from this conduct through an exclusion clause inserted into the contract. I share the view of the trial judge that it did not (para 1).

1. Did Brentwood submit an eligible bid?

Cromwell J began by reviewing the authorities for the formation of Contract A in the bidding process and on the nature of implied terms. While the Ministry did not contest the existence of Contract A on Appeal as they had at trial, Cromwell J thought it prudent to review the reasons for the trial finding that Contract A had formed.

The Ministry had not in fact issued a call for tenders, but, as mentioned, a “request for proposals”.

Note: RFP processes are typically used where a project has a significant design element or where for some other reason it makes sense to entertain feedback from prospective bidders with competing solutions prior to negotiating a final contract with one of them. In a definitional sense, they are distinct from a classic call for tenders; but in practice it is sometimes hard to tell the difference.

The terms of the RFP included among other things a period of irrevocability, a requirement of bid security, significant formalities surround the submission of documents, and a set of detailed evaluation criteria. As a result, despite the fact that some details of the main contract were left to be negotiated with the successful bidder, the trial found that the parties had actually agreed to enter a contractual agreement governing the bidding process; i.e. that Contract A had formed.

Cromwell J noted that this model is a little more complicated than the simpler Ron Engineering-style Contract A/Contract B model, where the terms of Contract B are fully articulated from the outset. But, he noted that this did not impact the analysis of the case at hand, and further, it was not necessary to explore in full detail all the terms and conditions of Contract A. The question was merely whether it was a term of Contract A that the Ministry accept bids only from eligible bidders (para 21).

Cromwell J agreed with the trial finding of fact that the bid was ineligible and that the Ministry well knew it:

[The Ministry] had a bid which it knew to be on behalf of a joint venture. Permitting the bid to proceed in this way gave the joint venture a competitive advantage in the bidding process, and the record could not be clearer that the joint venture nature of the bid was one of its attractions during the selection process. The Province nonetheless submits that so long as only the name of Brentwood appears on the bid and ultimate Contract B, all is well. If ever a submission advocated placing form over substance, this is it” (para 49).

Cromwell J further found that the Ministry’s conduct “not only breached the eligibility provision of the tender documents, but also the implied duty to act fairly towards all bidders.” (para 59).

2. Does the exclusion clause successfully exclude the Ministry’s liability for the breach?

Cromwell J first turned briefly to the question of fundamental breach in relation to exclusion clauses, saying that he felt it was time to “lay this doctrine to rest”, although he subsequently said little else about it (para 62).

Cromwell J did state that he agreed with Binne J’s analytical approach to the applicability of an exclusion clause, but disagreed with Binnie J on the interpretation of the clause. As a consequence he did move beyond the first part of the three-part inquiry. Rehearsing some of the legal principles applicable to interpretation of contractual terms, Cromwell J emphasized the principle that terms be read in the context of the entire agreement and highlighted the decision taken by the Court in past cases to carefully “consider the special commercial context of tendering”, and reiterated the view that “[e]ffective tendering ultimately depends on the integrity and business efficacy of the tendering process” (para 67). He went on:

The closed list of bidders was the foundation of this RFP and there were important competitive advantages to a bidder who could side-step that limitation. Thus, it seems to me that both the integrity and the business efficacy of the tendering process support an interpretation that would allow the exclusion clause to operate compatibly with the eligibility limitations that were at the very root of the RFP.

The same may be said with respect to the implied duty of fairness. As Iacobucci and Major JJ, who wrote for the Court in Martel at para. 88, “[i]mplying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process.” It seems to me that clear language is necessary to exclude liability for breach of such a basic requirement of the tendering process, particularly in the case of public procurement. (paras 70-71)

Cromwell J asserted that interpreting the exclusion clause this way did not rob it of meaning, but merely that it could not have been intended to operate when the Ministry’s failure to adhere to the RFP process was such as to be completely outside the process altogether. (para 76)

Cromwell J finally stated that in any event if his interpretation of the clause was incorrect, he agreed also with the trial judge’s reasons on the ambiguity of the clause and that it should be read in favour of Tercon. (para 79) Cromwell J restored the trial judgment.

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

This case is addresses the issue of compliance with the terms of a call for tenders. It was a five-four split at the level of the Supreme Court of Canada.

Facts

In 1986 the City of Edmonton (the ‘City’) issued a call for tenders for a 30-month contract to supply heavy equipment and operators (in particular some bulldozers and a motor scraper) at the city’s landfill.

Not surprisingly for a contract concerned entirely with the supply of equipment, the tender documents included three pages of equipment requirements in addition to the main tender form. The tender form itself included a number of requirements including a requirement that each item of equipment had to be 1980 or newer. The tender also required that bidders be local to the City of Edmonton and that they supply a bid bond.

The equipment spec sheets required provision of detailed information about the particular pieces that a bidder was proposing to supply, including make, model, serial number, date of manufacture, and hourly billing rate.
Other tender conditions of note were Condition 17, which stated that tender conditions “must be strictly complied with and failure to do so either in whole or in part may invalidate the bid in question” (para 38), as well as Condition 7, a privilege clause:

The City reserves the right to reject any and all Tenders, and to waive any informality therein, to award by item or class. The lowest or any Tender may not necessarily be accepted (para 39) (emphasis added).

Tender Condition 25 also proved important to the outcome: “Changes in Tenders will not be permitted after the Tenders have been opened, unless negotiated with the lowest evaluated Tenderer” (para 58).

Six bids were submitted and subsequently opened on 25 June 1986. The City assessed the value of each bid by multiplying the per hour rate of each piece of equipment by the estimated number of hours a particular piece was expected to be used in the 30-month period. Under this formula Sureway Construction (“Sureway”) was the third lowest bidder and Double N Earthmovers (“Double N”) was the fourth lowest bidder. The lowest bidder was disqualified because it was not a local contractor.

Around 7 July, the City entered into separate negotiations with the second lowest bidder, Sureway, and Double N, but the second lowest bidder was also then disqualified because it had not submitted a bid bond. With only Sureway and Double N remaining, the City told Sureway that if it could reduce its rate for one of the pieces of equipment it “would probably” get the contract (para 18). Double N also revised its bid but still came in higher than Sureway’s prices. At this meeting Double N complained to the City that Sureway’s equipment was not actually 1980 or better, but the City took no action on this.

In fact, although Sureway had listed one of its dozers as 1980 it was actually a 1979. Further, the second dozer was listed as a “1977 or 1980 rental unit”, presumably meaning that if the 1977 described was not accepted then Sureway would rent a 1980 unit to meet their obligations (para 13).

Sureway was awarded the contract on 18 August with work to commence on 1 September. Before they could start work Sureway had to “register” their equipment with the City for billing purposes, and at that point it became clear that the equipment was older than the tender requirements specified. The City called a meeting on 29 August and insisted that Sureway comply with the 1980 requirement and Sureway agreed to upgrade within 30 days. A week later, Sureway sent a letter saying that it could not comply and would continue to supply the 1979 dozer. The City decided not to push the matter any further.

Double N sued the City for breach of contract and the City brought in Sureway as a third party.

Procedural history

Double N’s claim was dismissed at trial. The trial judge found that Sureway’s bid was compliant, and that the City had no duty to investigate it. He was also of the view that all of the tender contracts came to an end once the City entered Contract B with one bidder, and that the City could not be liable to unsuccessful bidders for post-Contract B dealings.

The Alberta Court of Appeal unanimously dismissed the appeal, agreeing that Sureway’s bid was compliant on its face and that the City had no obligation to investigate suspicions of non-compliance.

Issues to be determined

1. Did the City accept a non-compliant bid?
2. Does an owner have a duty to investigate suspicions of non-compliance?
3. Did the City engage in bid shopping?
4. Did the City award based on terms different from those in the tender?
5. Do Contract A obligations survive the formation of Contract B?

Holding

1. No, since the terms of the tender included discretion to waive informalities.
2. No.
3. No, since the tender documents reserved a right to negotiate with the low bidder after opening.
4. No.
5. No.

Reasoning

In a five to four split, the majority decision was delivered by Justices Abella and Rothstein (Justices LeBel, Deschamps and Fish concurring), while dissenting reasons were written by Justice Charron (Chief Justice McLachlin and Justices Bastarache and Binnie concurring in dissent).

Before discussing the particular issues the majority restated the authorities for the formation and terms of Contract A, and noted the implied obligation to accept only compliant bids found in M.J.B., and the implied obligation to treat bidders “fairly and equally” found in Martel (para 32).

Issue 1: Did the City accept a non-compliant bid?

Concerning the first dozer, the majority said that since it was listed as a 1980 on the face of the bid then Sureway could be taken to have promised to supply a 1980 machine and so was compliant on this point. Concerning the second dozer, where Sureway has promised to supply a “1977 or 1980 rental unit”, Double N conceded that the tender did not prohibit bidders from offering alternative pieces of equipment, but that the 1977 piece was non-compliant because it was older than 1980 and the “1980 rental unit” was non-compliant because no other information was included for it. The majority stated that it was apparent that the make, model and hourly rate were to apply to the proposed rental unit and that only the serial number requirement and a City of Edmonton license number requirement would be unmet.

The majority held that the serial and license numbers were “informalities” of the sort contemplated by the privilege clause, stating that “an informality would generally be something that did not materially affect the price or performance of Contract B” (para 41).

Issue 2: Does an owner have a duty to investigate suspicions of non-compliance?

In the absence of any provision in the tender documents expressly creating an obligation to do so, the majority considered whether such an obligation should be implied.

The majority stated simply that “[t]here is no reason why the parties would expect an owner would investigate whether a bidder will comply, when each bidder is legally obliged to comply in the event its bid is accepted” (para 51).

Issue 3: Did the City engage in bid shopping?

Double N never raised this issue in the lower court proceedings.

The majority first cited some judicial definitions of bid shopping. But, in response to Double N’s argument that the post-tender negotiations violated the tender process as defined by Iaocobucci J in M.J.B., the majority stated that Condition 25 of this particular tender clearly contemplates the possibility of “some measure of negotiation” (para 58). Exercising their right to negotiate with Sureway under Condition 25 could not constitute a breach on the part of the City.

Issue 4: Did the City award the contract on terms different from those of the original tender?

This issue is raised as a consequence of Sureway’s bid of a 1980 dozer which in reality was a 1979 dozer. The majority held that since the City did not know that the dozer was not in fact a 1980 until after they had accepted the tender then they had not awarded the contract on different terms (para 66).

Issue 5: Do Contract A obligations survive the formation of Contract B?

The majority held that when “an owner undertakes a fair evaluation and enters in Contract B on the terms set out in the tender documents, Contract A is fully performed” (para 71). An unsuccessful bidder would not be privy to Contract B and cannot require the cancellation of that contract based on rights which existed under a tender contract which had been completed.

For a bidder to sue on Contract A, an owner would have had to engage in conduct that amounted to breach while Contract A was still in effect.

Minority reasons

In her minority reasons for decision Charron J took a position significantly at odds with that of the majority, contending that the City had in fact breached its implied obligations of accepting only compliant bids and of treating all bidders equally and fairly. In particular, the minority were especially offended by the fact that Sureway had in the end managed to profit from essentially deceitful conduct in the course of the tender process.

In their own review of the facts, the minority paid particular attention to the repeated attempts of Double N to bring to the City’s attention Sureway’s likely non-compliance, which the City could have easily checked simply by checking the license numbers Sureway provided against their own municipal database. The majority addressed this issue and dismissed it saying that allegations by rival bidders cannot be taken to compel owners to investigate those allegations, since encouraging “unwarranted and unfair attacks” would work to the detriment of the bidding process (para 52).

Charron J disagreed with the majority that the specifications not included by Sureway were mere informalities said that “given the circumstances of the case, it was not open to the City ignore these specifications.” She went on:

The City’s casual approach to Sureway’s bid, particularly in light of the warning it received about the bid’s likely non-compliance, was unfair to other bidders who provided accurate information in accordance with the tender specifications. The obligation to accept only a compliant bid would be meaningless if it did not include the duty to take reasonable steps to ensure that the bid is compliant (para 116) (emphasis added).

So, Charron J would have actually extended the obligation of owners beyond merely ensuring that bids are compliant “on their face” but to take “reasonable steps” to ensure compliance – in this case by checking information in the bids against their own records.

In addition to the issues of informalities and a duty to take reasonable steps to investigate bids for compliance, Charron J also addressed the issue of ambiguity in bidding. She characterized the “1977 or 1980 rental unit” component of Sureway’s bid as “ambiguous at best”, and that since the ambiguity “related to an essential term of the contract” it could not be said to be a “mere irregularity” (para 120). The City argued that, although the ambiguity made it unclear whether Sureway was promising to comply or not, it had a right to insist on ultimate compliance. Charron J took issue with this position, stating:

The right to insist on compliance cannot turn what it on its face a non-compliant bid into a compliant one. Furthermore, I fail to see how the integrity of the bidding process is protected by allowing a bidder to get rid of the competition unfairly and then hash it out with the owner after it has been awarded the contract. Approaching the tendering process in this manner encourages precisely the sort of duplicity seen in the present appeal. . . . This approach is not consistent with a fair and open process (para 123).

Charron J also, in assessing the liabilities, would have found Sureway liable for a significant portion of the costs as a consequence of their deliberate inducement of the City to accept a non-compliant tender (para 129).

Note Bene

On bid shopping: While the majority concluded that the City had not breached any Contract A obligations by negotiating with Sureway after the opening of tenders, it did note that its port-tender negotiations with Double N probably did constitute a breach on the part of the City in respect of its Contract A obligations to the other bidders (para 61).

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).

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.