Tendering: What are the Rules?

Few issues are as critical to the business of construction as tendering.  After all, unless you land the work how long can you stay in business?  When it’s all or nothing – win the job or sit out the season – experience is a tough teacher.  Most survive by learning how to play the game, but in order to do that you have to understand the rules.

Tendering is a process to connect owners and contractors in a competitive context.  In basic terms, the contractor bids or offers to do the identified task for a specified cost and the owner gets to choose the most favourable offer.  While some key legislation directs how the process applies to specific parties, such as the Public Tender Act for “government funded bodies”, tendering rules have generally been set by the courts in ruling on legal disputes.  In terms of process, a request for proposals or RFP is often distinguished from a tender, but usually the “does-it-quack-like-a-duck-and-swim-like-a-duck” test applies and, if it is an RFP in name only, it will be treated by the courts as a tender.

The “granddaddy” of tendering cases is the 1981 ruling by the Supreme Court of Canada in The Queen in right of Ontario v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111, which describes the process in terms of two contracts: Contract A is formed when a bid is submitted in response to an invitation to tender and Contract B is the agreement between the owner and the successful bidder for the work set forth in the tender.  From Ron Engineering, and the various cases building on its reasoning in the 30 years since, some key principles have been recognized that sometimes appear to be at odds:

• Obligations lie with both owners and bidders. Owners are bound by the terms and conditions of their tender documents and, no matter how attractive, cannot accept non-compliant bids.  All compliant bidders must be treated equally and in good faith, particularly during tender evaluations, and decisions to award or reject tenders cannot be based on criteria outside the terms and conditions of their tenders.  Except to the extent permitted by the tender documents, bidders are bound by their tenders and cannot revoke them once opened.
• The owners set the rules as they see fit when drafting the terms and conditions of the tender documents; the owners create the terms and conditions of Contract A.  For example, if properly drafted, privilege clauses are fully enforceable and reserve the rights to owners to award other than to lowest compliant bidder, or not at all.  While bound by the rules that they set, owners have a broad discretion as to what those rules will be and can exclude bidders based on location, similar work experience, prior legal actions, existing equipment holdings, identified sub-trades, and so on.
• To ensure fair competition, the rules set in the tender documents are binding but, when faced with public policy concerns, the court’s interpretation of those rules can change the game.  This is where the underlying facts come in.  For example, the 2010 decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 SCR 69 opens with: “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.”  In Tercon, the Supreme Court of Canada refused to apply a clause in the tender whereby bidders waived any claim against the owner “for compensation of any kind whatsoever as a result of participating in the RFP” because the court decided that the clause only applied to losses from participating in the process and did not apply to the owner’s award to a non-compliant bidder.  The court noted that the clause had to be “…considered in harmony with the rest of the contract and in light of its purposes and commercial context.”  In other words, the clause was too drastic a departure from the contemplated relationship for anyone to have intended it to mean what it seems to say.   That does not mean that owners are prohibited from excluding liability in drafting tenders, only that the line is not yet drawn as to how far they can go.

Where does this leave industry?  Above all parties must understand what they are offering and what they are accepting: both the owner and bidder must comply with the terms and conditions of the tender documents.  Owners must act in good faith in applying those terms and conditions, and tender evaluations especially must be based on the criteria in the tender.  While there is a generally implied duty to accept only compliant bids, it is possible that owners could limit the consequences of breaching their own obligations, but we have not seen such a case in Canada so far.  One thing is certain: the stakes are too high for anyone in the process to be other than fully informed.