Owner Discretion in the Tendering Process

February 12, 2019 | Alice M.L. Wong

Lawsuits are often brought by the unsuccessful bidder on the basis that its tender bid should have been chosen but was not due to unfairness on the part of the party calling for bids (for simplicity, this latter party will be referred to as the “owner” in this article).

The general expectation on the part of bidders is that the lowest bid will be accepted.  However, tender law has evolved in Canada to grant greater discretion and control over the tender decision-making process to the owner.

The degree of discretion granted to owners in the tendering process has been recently reinforced and clarified by the Alberta Court of Appeal in Everest Construction Management Ltd. v. Town of Strathmore, 2018 ABCA 74 (“Everest Construction”).

As background, the basic tenants of tender law are as set out by the Supreme Court of Canada in the seminal case of Ontario v. Ron Engineering & Construction, [1981] 1 SCR 111:

  • “Contract A” is created between the owner and every bidder who submits a compliant bid in response to a call for tenders.  As there may be multiple bidders, there may be multiple Contract A’s.  The express terms of Contract A will be the terms in the call for tenders.  The implied terms of Contract A include the duty to enter into a formal construction contract if the bid is chosen, and a duty of fairness on the owner to treat all bids fairly and equally.[1] This article will focus on Contract A.
  • “Contract B” is created between the owner and the successful bidder.  Contract B generally refers to the formal construction contract.

In Everest Construction, the Town of Strathmore (the “Town”) issued a call for tender for work on a reservoir.  The project was ultimately awarded to Graham Construction JV (“Graham JV”), despite the fact that Graham JV’s bid was $300,000 more than the bid of the plaintiff, Everest Construction Management Ltd. (“Everest”).  Everest sued for breach of Contract A, alleging that the Town evaluated the bids based on criteria that had not been fairly disclosed to the bidders and failed to investigate Graham JV’s past construction experience despite having investigated Everest’s.

Everest lost at trial and on appeal on the basis that the call for tender issued by the Town contained certain privilege and discretion clauses entitling the Town to award the project based on factors other than the bid price:

  • Privilege clauses give owners the right to choose between bids on some basis other than the lowest price. They also give owners the right not to accept the lowest, or any, bid.  In order to be valid, the criteria relied on by an owner must be “fairly disclosed to bidders”.  Privilege clauses do not exclude an owner’s obligation to treat all bidders fairly.[2]
  • Discretion clauses give owners the right to accept substantially compliant bids that contain non-material defects.[3]

Everest Construction serves as a good example of sufficiently narrowly-worded privilege and discretion clauses that have been upheld by the Courts:

  • Privilege clause: “lowest or any bid will not necessarily be accepted” and the Town could “accept other than the low bid”.
  • Discretion clause: the Town “reserves the right to accept any offer, waive defects in any offer, or reject any and all offers”.
  • Bid instructions required that bidders provide the following information and acknowledge that said information was being provided “in order that the owner may judge our ability to fulfil the contract requirements” and “assess our ability to plan the work and respond to critical deadlines”:
    • a list of qualifications and experience; and
    • a construction schedule with inserted completion dates for all project steps, as well as an overall completion date.  The Town specifically noted that it preferred a project completion date of December 31, 2012.

Everest’s bid only referenced one past project and projected an overall completion date of May 15, 2013.  In comparison, Graham JV’s bid referenced six past projects and projected an overall completion date of December 31, 2012.  Everest argued that it was unfair for the Town to have investigated Everest’s single past construction project but not to have investigated any of Graham JV’s six past projects when such projects had actually been completed by companies related to Graham JV through common shareholders rather than by Graham JV itself.

The findings of the Court of Appeal are summarized below:

  • Owners are entitled to rely on privilege clauses to not accept the lowest or any bid and to choose between bids based on something other than the lowest price.  This discretion, however, is not unfettered: owners cannot depart from the fundamental content of the instructions provided to bidders when making their selections.
  • Unless stated in the call for tenders, owners are not restricted in their ability to use information requested from bidders that has been specified as a bid evaluation criteria.
  • Owners are not required to use the specific words “bid analysis” or “analyzing” in disclosing what the bid evaluation criteria will be. In this case, the required acknowledgements contained in the bid instructions, whereby the bidders certified that they understood that the information they were providing was necessary in order for the Town to evaluate the bid, were held to be sufficiently clear.
  • Privilege clauses give owners the discretion to take a more nuanced view of costs than simply the bid price.  If the call for tenders contains a privilege clause and fairly discloses that project completion date will be a factor in evaluating bids, then owners have the right to adjust bid prices upwards to reflect the expected costs of later completion where different bids contemplate different project completion dates.
  • The experience, personnel and resources of related companies can be taken into account if there is evidence they will be available to the bidder for the execution of the project.
  • In situations where the project schedule is disclosed as an evaluation criteria, owners are not required to make late completion costs the primary evaluation criterion.  Costs can be one of many different bid evaluation criteria.
  • Owners do not have a freestanding duty to investigate whether a bidder will be able to comply with its bid.  If it does exercise this discretion, an owner must do so fairly. However, owners are entitled to rely on information they have acquired through past experience with a bidder.

The takeaway from this case can be summarized as follows:

  • Owners who wish to be able to assess bids based on factors other than bid price should consider inserting privilege and/or discretion clauses into their call for tenders.
  • Privilege and discretion clauses should be clear and specifically worded.
  • Owners who wish to be able to assess bids based on specific factors must clearly set out what the factors are and state that such factors will be used by the owner to assess, judge or analyze the bid.
  • If the call for tender contains a privilege clause and fairly discloses that completion dates will be a factor in evaluating bids, owners are entitled to adjust bid prices for anticipated costs of late completion.
  • Owners are not required to investigate a bidder’s ability to fulfil the terms of the bid but if such investigation is carried out, it must be done fairly.
  • Owners are entitled to rely on past experience with a particular bidder in their evaluation of that bidder’s ability to fulfil the terms of the bid.

[1] Martel Building Ltd. v. Canada, 2000 SCC 60 at paras. 84-85.

[2] Martel Building Ltd. v. Canada, 2000 SCC 60 at para. 89.

[3] Graham Industrial Services Ltd. v. Greater Vancouver Water District, 2004 BCCA 5 at para. 30.

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