Legal basics of competitive bidding and procurement in Canada

procurement handshake

The following represents a quick review of certain legal principles and case law associated with competitive bidding and procurement in Canada.

Firstly, any tendering process will create two contracts that bind the bidder and the owner. In an invitation to tender, it is generally expected that the owner will award the contract based on the completed tender documentation alone and will not negotiate with the bidders. The evaluation criteria must be set out in detail in the tender documents and must be strictly adhered to. With this in mind, the tendering process is governed in Canada by the Contract “A” and Contract “B” analysis established by The Queen (Ont.) v. Ron Engineering & Construction (Eastern) Ltd. (“Ron Engineering”).

Contract “A” is the name given to the contract that comes into existence between a bidder and an owner upon the submission of a compliant bid in a tender call. Contract “B” is the goods and service contract itself, which comes into existence upon the acceptance by an owner of the lowest compliant bid made by the contractor (if price is the key factor in the detailed evaluation criteria). Contract “A” governs how the tendering process will occur including but not limited to how a bidder can expect their tender response to be evaluated. In the event the owner fails to comply with the terms and conditions set out in the original invitation to tender (i.e., Owner deviates from originally described evaluation criteria), the bidder can argue that Contract “A” was breached.

The second principle to appreciate is that bids must be compliant to take effect. In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. the court established that Contract “A” only comes into effect the moment a compliant tender is submitted. The court went on further to observe that Ron Engineering does not stand for the idea that Contract “A” will always be formed. Whether the tendering process creates a preliminary contract is dependent upon the terms and conditions of the tender call. Moreover, only compliant bidders have any legal remedy for a breach of the process by an owner.

The third principle to remember is the duty of fairness. In Martel Building Ltd. v. Canada it was affirmed that all bidders in a call for tender must be treated fairly and equally unless otherwise expressly agreed upon in the terms of the call for tenders or in a privilege clause. The courts held that implying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process, and benefits all participants involved. Without this implied term, tenderers, whose fate could be predetermined by some undisclosed standards, would either incur significant expenses in preparing futile bids or ultimately avoid participating in the tender process.

The above principles and case law form the legal framework of procurement in Canada and were examined again in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways).

The facts of this case were that Tercon Contractors Ltd. (“Tercon”) was one of two shortlisted bidders for a Request for Proposal (“RFP”) to build a highway through Nisga’a Land. The other shortlisted bidder, Brentwood Enterprises Ltd. (“Brentwood”), recognizing that it lacked the depth of expertise to complete the project on its own, entered into a joint venture with another contractor named Emil Anderson Construction Co. (“EAC”). This arrangement would have been compliant had EAC been a sub-contractor and not a joint-bidder. However, since the arrangement (EAC and Brentwood) was a joint venture, it did not comply with terms and conditions of the RFP. When Brentwood/EAC was awarded the contract, Tercon filed a suit for breach of contract and damages caused by the Ministry of Transportation and Highways awarding the contract to a non-compliant bid. They argued that it was contrary to the RFP and the implied obligation of equality and fairness to all tenderers. Tercon won in the British Columbia Supreme Court, and were awarded damages in the amount of $3,293,998.

The British Columbia Supreme Court found that the Ministry of Transportation and Highways had breached its contractual duty of fairness and equity by awarding to a non-compliant bidder. In quantifying the damages, the court established that when a bidder under a tendering agreement sues for breach of Contract “A”, the appropriate measure of damages is the “expectation principle” (i.e., what would the bidder’s financial position have been had they performed the contract).

In its defence, the Ministry of Transportation and Highways sought to rely on its exclusion of liability clause in the tender materials:

“Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for any 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.”

The trial court found that exclusion clauses in a request for proposal did not apply to fundamental breaches of the terms of the request for proposal itself (i.e., where the owner knowingly accepts a non-compliant bid).

This point was appealed and the Court of Appeal reversed the trial court’s decision. Their rationale was that broadly construed exclusion clauses are broad enough and clear enough to cover even a fundamental breach. Most importantly, sophisticated parties should be aware.

Justice Cromwell of the Supreme Court of Canada, in speaking for the majority overruled the Court of Appeal, and held that the trial judge had correctly assessed the relevant legal issues by finding: (a) the Ministry of Transportation and Highways breached its contractual duty under the terms of the RFP; and (b) the Ministry of Transportation and Highways could not rely upon the exclusion clause as a defence to the breach and the resulting damages.

In summary, exclusion clauses, no matter how broadly construed or clear, cannot exclude an owner from liability in the event the owner alters the very nature of the RFP or tendering process in such a way as to unfairly or unequally prejudice one bidder over another. In addition, Justice Cromwell emphasized that paramount to the tendering and RFP process is integrity and business efficacy. Allowing such exclusion clauses to operate in the way suggested by the Ministry would completely undermine the process and rob it of its integrity. Finally, privilege clauses or exclusion clauses must not be read in isolation, and rather, should be read in harmony with the rest of the tender or RFP documents.

This case reveals the subtle struggle between two major policies: (1) allowing sophisticated parties to contract; and (2) upholding the integrity and business efficacy of the procurement system in Canada. Accordingly, as sophisticated as a party to the tendering process may be, no owner should be allowed to completely ignore the terms and stipulations of its own tendering system at the cost of a compliant bidder.

If you require further assistance, please contact Patrick Cleary.

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