Mea Culpa

The discovery of a mistake in a construction bid can wreak havoc in the tendering process. For a contractor, the financial consequences of making a material error can be a nightmare. For an owner, a myriad of complications ensue if a mistake does not come to light until after the tenders are opened. It is obviously in the financial interests of the owner to accept the lowest tender, but it may not be in the financial interests of a bidder to proceed if a mistake has rendered its bid the lowest. What if there is an issue concerning whether the bid is compliant with the tender documents? Owners may look to a consultant for advice.

A consultant in this situation will know that the 1981 Supreme Court of Canada case of Ontario v. Ron Engineering & Construction (Eastern) falls short of providing an easy solution. It is clear that in the normal course, the submission of a bid by the contractor forms a “Contract A” between the contractor and the owner. One of the usual implied terms of Contract A is that the bid must be irrevocable. The courts have made it equally clear in cases since Ron Engineering that a further implied term of Contract A is that when an owner is considering tenders received, the owner must act fairly and in a manner that preserves the integrity of the bidding system.

Does that judicial interpretation mean that an owner can choose to accept the mistaken tender and force the bidder to proceed into “Contract B” to perform the work at the mistaken tender price? Does it mean that a contractor who subsequently discovers a mistake in its bid cannot withdraw from the tendering process and must be bound by the mistake? Can an owner use a discretion clause to render a defective bid into a compliant one and thus take advantage of the mistaken tender?

Two recent decisions of the B.C. Court of Appeal shed light on how to handle these issues. In Graham Industrial Services v. Greater Vancouver Water District, Graham’s bid on the Capilano Pump Station project was lowest by $5 million. However, immediately after tenders were opened, Graham advised the owner that its bid contained a $2 million mathematical error. Graham sought to revoke its bid, pointed to a number of defects in the bid and argued that it did not conform to the tender requirements and, therefore, could not be accepted by the owner.

In proceeding to attempt to hold Graham to its low bid and have Graham proceed with the work, the owner argued that the tender documents required the bid to be irrevocable; the owner further relied upon its discretion clause that stated: “If a Tender contains a defect or fails in some way to comply with the requirements of the Tender Documents, which in the sole discretion of the Corporation is not material, the Corporation may waive the defect and accept the Tender.”

The owner argued that it could subjectively interpret the discretion clause to determine whether a defect in a bid was material. It reasoned that in this case the defects in the bid relied upon by Graham were not material.

In dealing with the case, the court returned to the first principles set out in Ron Engineering. The court held that “if a bid is not filed ‘in conformity with the terms and conditions under which the call for tenders was made,’ the rights of the owner under Contract A, such as the irrevocability clause, do not arise.” The court further held that the discretion clause that the owner sought to rely upon did not come into effect until a valid Contract A had been formed. In this instance, the tender had not materially complied with the terms of the tender call, and therefore the owner could not subjectively use the discretion clause to accept an otherwise objectively non-compliant bid.

The court in Graham distinguished its case from two recent Supreme Court of Canada cases: M.J.B. Enterprises v. Defence Construction (1951), and R. v. Martel Building, pointing out that these two cases were dealing with the exercise of discretion after a Contract A arose; they did not deal with the issue of whether an owner can dictate whether Contract A arises by using a discretion clause in the tender documents.

Meanwhile, on June 10, 2004, the Supreme Court of Canada refused to hear the appeal of the decision by the owner in Graham.

The decision in Graham appears to conflict with a recent lower court decision in B.C., Kinetic Construction Ltd. v. Comox Strathcona (Regional District). In that case an unsuccessful bidder failed in its court action to sue the owner, alleging that the owner breached Contract A by awarding Contract B to a non-compliant bidder. The Appeal court in Graham distinguished its case from the Kinetic decision on the basis that in Kinetic the non-compliant bidder did not withdraw its bid before it was accepted. By contrast, in Graham, the non-compliant bid was withdrawn by Graham immediately after bids were opened and before Graham’s bid was accepted.

On the face of it, the results in Kinetic and Graham appear to be in conflict. If, as in the Graham analysis, in order to preserve the integrity of the tendering process, a bid is rendered non-compliant due to a defect and therefore cannot be accepted, how can the owner in Kinetic be allowed to accept a non-compliant tender just because the bidder who submitted the non-compliant tender did not object?

The Kinetic decision is currently under appeal. At press time, the B.C. Court of Appeal had not provided a ruling to give clarification.

On July 2, 2004, in a separate case, Silex Restorations v.Strata Plan VR 2096, the B.C. Court of Appeal questioned the approach in the Kinetic case and followed the reasoning in the Graham case; it found that a contractor who provided a bid bond of 60 days duration, rather than the 90 days required by the tender documents, had failed to submit a compliant bid with the result that no Contract “A” was created.

It remains to be seen whether the approach taken by the B.C. Court of Appeal in Graham, and subsequently in Silex, will be implemented by courts across the country. It is clear that the court in Graham chose to prevent an owner from seizing upon and taking advantage of a bidder’s mistake in the name of preserving the integrity of the bidding process. The court justified its decision by stating that permitting an owner to use a discretion clause to render an otherwise non-compliant bid compliant, “would return the construction industry to the pre-Ron Engineering days where negotiation on undisclosed terms, rather than competition on specified terms, governed the tendering process.”

This situation leaves the question of what is the usefulness of a discretion clause in tender documents? The court in Graham answered this question by stating that the clause gives leeway to an owner to accept tenders with “minor irregularities or non-material defects.” The clause renders the test as one of “substantial compliance rather than strict compliance.”

In the end, although the court in Graham and Silex based its decisions on the principles set down in Ron Engineering, and while the cases provide some guidance to owners and consultants in determining whether to accept a defective tender, they give no clear measure of when a defective tender crosses the line from having a “minor irregularity or non-material defect” to having a “material defect” that is so significant the tender should not be accepted.

Fortunately, we now have two court decisions that examine the principles in this type of situation, but unfortunately the application of the principles will still be open to interpretation. At this point, the court in Graham and Silex has told us that the interpretation must be supportable on an objective standard. We will see if the B.C. Court of Appeal provides any more guidance when it gives its decision in the Kinetic case.

E. Sigurd Ruud, B.Sc. Mech. Eng., LL.B., is a construction lawyer with Miller Thomson LLP in Calgary. He is a member of the Bars of Alberta and British Columbia.