Tendering and the Test for Material Compliance

In the July 11, 2011 decision of Maple Reinders Inc. v. Cerco Developments Ltd., Madam Justice Fitzpatrick provides an informative discussion about the nature of “material compliance” in the tendering context.

Maple Reinders was an unsuccessful bidder following a tender associated with the construction of an apartment building in Kelowna.  Cerco was the tendering authority for the project.  Maple Reinders alleged that it submitted the lowest compliant bid, and that the contract was improperly awarded to another tenderer whose bid was non-compliant.

Fitzpatrick J. summarizes the “Contract A – Contract B” analysis of tendering law that is currently accepted in Canada.  Under this analysis, “Contract A” is formed when a bidder submits a compliant bid to an “owner” (such as a local government that is engaged in procuring works or services) in response to a tender, and “Contract B” is formed when the owner accepts a bid and enters into the contract for the works or services to be provided.  The terms of Contract A are set out in the tender documents, but there may also be implied terms that flow from custom or the implied intentions of the parties.

One generally accepted implied term is that the owner must only accept a compliant bid.  This term is implied in order to ensure that the bidding process is fair and equal for bidders.  Where there is a discretion or “privilege” clause in the tender documents (a clause stating for example that the owner will not necessarily accept the lowest bid, may waive irregularities, may reject any non-conforming bids, etc.), then the implied term is that the owner must reject a bid if it is not materially compliant.  If a bid is not materially non-compliant, then its submission does not result in Contract A, but rather amounts to a counter offer that the owner generally cannot accept.

As Cerco’s tendering documents included a discretion clause, Maple Reinders said that it submitted a materially compliant bid, which resulted in Contract A, and that Cerco was obligated to award Contract B to Maple Reinders.   Cerco denied that Maple Reinders’ bid was materially compliant and argued that no Contract A was formed, and therefore Maple Reinders could not claim any damages.

The question in this case came down to whether Maple Reinders’ bid was materially compliant.  This legal issue has been explored in past cases, where it has been decided that a bid that has only minor or immaterial defects may still be materially compliant, and may form Contract A.

Although there has been much consideration of whether compliance is material, it can be difficult in any particular case to determine whether a defect in a tender is in fact a minor one. Maple Reinders’ failed to provide alternate pricing numbers for a metal fence and for the omission of floor drains in the building’s utility rooms, the requirement for which had been imposed on bidders only four days before the deadline for the receipt of bids.

Fitzpatrick J. considered the following factors and questions in her determination of whether Maple Reinders’ omissions were material:

  • The test is an objective one, based on what a reasonable party would expect in the circumstances.
  • What were the terms of the tender documents?  Were the directions clear?  What was the scope of discretion of the owner to waive defects in the bid or to reject bids for being incomplete?
  • Was the omission an important or essential requirement of the tender documents, or was it a “mere irregularity”?  Was it an important factor in the decision making process of the owner?
  • What was the conduct of the parties?  Was there an indication by the owner that the omitted information was important, and/or was there an understanding or acknowledgment by the bidder that the information was required?
  • Does the defect undermine the fairness of the process?

In this case, Fitzpatrick J. found that the discretion clause clearly stated that the owner could reject any a bid for reason of omissions in the Appendices or omission of alternate prices.  The people preparing the bid for Maple Reinders were clearly aware of the requirement for the alternate pricing numbers, and Cerco had emphasized the importance of receiving that information.  As a result of the omission, Cerco was unable to complete a comparison spreadsheet to compare bids.

Although at first glance the omitted information in this case does not appear to be particularly important to the overall project, an analysis of all of the relevant factors led Fitzpatrick J. to conclude that no Contract A was formed between the parties, and that Cerco was free to award Contract B to a different bidder.   This case is also a good reminder that the inclusion of a discretion clause does not automatically allow an owner to award a contract to whomever it pleases; the discretion clause was one – but not the only – factor considered by the judge in determining whether Maple Reinders’ bid was materially compliant.