Important Principles of Tendering Law for Local Governments
A pair of recent judicial decisions highlight the crucial importance of two key principles of tendering law in Canada: the duty to accept only compliant bids, and the duty to treat all bidders fairly. Whether explicitly included in the terms of a tender or not – and most often they are not – these principles come into play in every tendering situation. As the cases demonstrate, owners neglect these principles at their peril.

Once a tender call is issued and bids are submitted, each compliant bid gives rise to a contract "A" between the owner and the bidder. Contract "A" includes the duty to accept only compliant bids and the duty to treat all bidders fairly. When the successful bidder is chosen then contract "A" crystallizes, to use the legal term of art, and the parties are bound to proceed with the creation of contract "B", which is the actual construction contract. At the same point when contract "A" crystallizes with the successful bidder, contract "A" with each of the unsuccessful bidders comes to an end. However, an owner can still be held liable for breaches that occurred during the currency of contract "A".

Tercon
In Tercon Contractors Ltd. v. British Columbia, 2006 BCSC 499 ("Tercon"), the B.C. Supreme Court held the Ministry of Transportation and Highways ("MOTH") liable for more than $3 million in damages, being the amount that the plaintiff would have earned in profit had it been selected as the successful bidder on a project to construct a highway extension. What went wrong?

A preliminary question dealt with by the court was whether there was a tender process at all. MOTH raised the argument that it was merely a "request for proposals" (the "RFP"). The court found that it was indeed a tender. Since MOTH was clearly under a tight deadline to complete the construction work, and since it was an express term of the request for proposals that the successful bidder negotiate in good faith to enter into the actual construction contract, or contract "B", the court held that MOTH intended to enter into contractual relations with the successful bidder.

This was no mere fishing expedition. There is no implied duty of good faith in commercial contracts, so the good faith requirement set out in the RFP would have been meaningless unless MOTH intended the parties to be contractually bound. This point illustrates that the courts will look at the substance of a transaction, rather than the form or the name attached to it.

The substantial question addressed by the court was whether MOTH accepted a non-compliant bid. The RFP required that only parties who had taken part in a pre-RFP consultation would be eligible to submit a bid. The MOTH official responsible for managing the request for proposals was aware throughout that the bid by Brentwood Enterprises Ltd. ("Brentwood"), while compliant on its face since it listed Brentwood as the only bidder, was in fact non-compliant because Brentwood had entered into a joint venture arrangement with another company to bid for and, if successful, to perform the work. That other company had not taken part in the consultation and was not eligible to submit a bid.

The court found that MOTH breached both the duty to accept only compliant bids and the duty to treat all bidders fairly, by selecting a non-compliant bid from Brentwood. Exacerbating the situation and underlining the breach of the duty of fairness was the fact that the MOTH official actually took steps to facilitate the subterfuge by advising Brentwood to submit its bid in the name of Brentwood only, despite his knowledge to the contrary. Even without that actual knowledge, there were inconsistencies in Brentwood's bid that indicated at least the potential that the bid was non-compliant. Whether the court would have found MOTH in breach in that case is open to question.

Double N
The Supreme Court of Canada may have answered that question in Double N Earthmovers Ltd. v. Edmonton (City), 2007 SCC 3 ("Double N"), a decision released earlier this year. This case arose out of the City of Edmonton's (the "City's") 1986 tender call for equipment and operators to move refuse at a landfill. Bidders were required to list information about the equipment to be used, including the year of manufacture, serial number, and the license registration number issued by the City for all such equipment. The tender further required that all equipment was to be "1980 or newer".

The bid by a company called Sureway Construction of Alberta Ltd. ("Sureway") was successful, while that by Double N Earthmovers ("DNE") was not. Sureway's bid listed a Caterpillar bulldozer as "1977 or 1980 rental unit", and another as "1980" when in fact the machine was a 1979 model. Prior to the selection of Sureway, a representative of DNE informed the City that Sureway did not have 1980 or newer equipment. City officials responded that since Sureway had bid 1980 or newer equipment, the City would hold Sureway to that bid.

After Sureway's bid was selected, Sureway was required by the terms of the tender to register its equipment so the City could set up an account. Sureway attempted to register a 1977 bulldozer and a 1979 bulldozer, and the City responded at first by demanding that Sureway rectify the situation within thirty days. A short time later Sureway replied that it had explored all avenues and was nonetheless supplying a 1979 bulldozer. At that point, City officials made the decision that "this file to be allowed to lie peacefully". It did not.

DNE sued, alleging the City had breached the duty to accept only compliant bids and the duty to treat all bids fairly under contract "A". DNE also argued that the City had a duty to investigate Sureway's bid as a component of its duty to treat all bidders fairly, especially given the fact that DNE had alerted the City as to Sureway's potential non-compliance.

The majority of the Supreme Court of Canada, like the trial judge and the Alberta Court of Appeal, held that the City did not breach contract "A". The majority reasoned that at the time contract "A" was in effect, the City was entitled to rely on the face of the bid documents without further investigation, and was entitled to insist upon compliant, 1980 or newer equipment. The City subsequently waived that condition, but that waiver was held by the court to be permissible under the terms of the contract. Moreover, the waiver occurred after contract "B" had been entered into between the City and Sureway, at which point contract "A" was no longer in effect between the City and DNE. The City no longer owed any duty to DNE.

The majority noted that if the duty to treat all bidders fairly included a duty to investigate an apparently compliant bid, such a duty would "overwhelm and ultimately frustrate the tender process by creating unwelcome uncertainties". Furthermore, the majority pointed out that if the allegations made by DNE to the City during the contract "A" stage gave rise to a duty on the part of the City to investigate, it would encourage "unwarranted and unfair attacks by rival bidders and invite unequal treatment of bidders by owners".

So, the majority ruling in Double N seems to answer the question raised by Tercon, namely whether, in the absence of actual knowledge of non-compliance, an owner is under a duty to investigate a bid beyond what it states on its face. The answer, at least for now, is "no". However, Double N came very close to going the other way at the Supreme Court of Canada. The final result was a 5-4 decision in favour of the City, but that means that slightly less than half of the court would have held the City liable for breach of contract.

The dissenting justices found that because there was an ambiguity ("1977 or 1980") apparent on the face of Sureway's bid, the City could not argue that it was entitled to insist upon an apparently compliant bid. That, coupled with repeated warnings from DNE about Sureway's old equipment, was enough in the eyes of the dissenters to give rise to a duty to investigate – especially since the investigation required little more than a check of the City's own computer records.

To the majority justices' statement that owners must be entitled to rely upon the face of bids in order to protect the integrity of the tendering process, the dissenters responded that to allow the City to ignore an apparent ambiguity and later to waive what the dissenters viewed as an essential term of the tender, was to allow Sureway to profit from its deceit, and to allow the City to "escape entirely from its implied obligations".

What does this mean for future tender calls? It means that for the time being at least, an owner is entitled to accept a bid that is compliant on its face, as long as the owner does not have knowledge to the contrary. It means that for the time being an owner is not under a duty to investigate beyond the face of a bid, again as long as the owner does not have knowledge to the contrary. However, a slightly different set of facts from the ones discussed in Tercon and Double N could give rise to a different result, and the strong dissenting view in Double N could be the majority view the next time around.

How can owners protect themselves? Nothing is certain, but the best practice is to act carefully at all times to ensure that only compliant bids are accepted, and that all bidders are treated fairly. At the very least, this calls for a diligent examination of each bid submitted and a comparison of it with the terms and conditions of the tender call. If doubt arises, owners should seek legal advice before making a decision that could cause significant negative repercussions.

The Tercon and Double N decisions both demonstrate that the "ignore the problem and it will go away" approach is fraught with risk. In Tercon, of course, the Crown was held liable for over $3 million in damages for lost profit. In Double N, the City may have avoided liability for damages, and it may have been awarded costs, but a case that took over twenty years and a trip to the Supreme Court of Canada to win, and by a nose at that, can hardly be called a resounding success.

Michael Hargraves
Spring 2007

This article was published in Spring 2007 and may be superseded by changes in the law at a later date. It is for general information only. Specific legal advice should be obtained from a qualified lawyer.