Tendering Trials

The recent decision of the Supreme Court of Canada in the case of MJB Enterprises Ltd. v. Defence Construction (1951) Ltd. is a significant development in Canadian tendering law. It has substantially refined the principles relating to construction bidding that were established in the Court’s previous watershed decision of 1981 in R. in Right of Ontario v. Ron Engineering & Construction (Eastern) Ltd.

MJB Enterprises’ tender for a construction project on a Canadian Armed Forces base was the lowest of several others that properly conformed to the requirements of the tender documents. However, the owner awarded the construction contract to a tenderer with a lower price whose bid was non-compliant because it included a qualification in the form of a handwritten note. The note outlined a “schedule of final costs.” The tender document required that tenderers submit only one price.

In the earlier case involving Ron Engineering the court had decided that the bidding process involves two levels of contract. “Contract A” arises when a bidder submits a tender; the contract exists between the owner and each bidder, and its terms are the provisions of the tender documents. “Contract B” is the construction contract between the owner and the successful bidder. The significance of the Contract A/Contract B analysis in the earlier decision was that it established that contractual rights and responsibilities arise in the tendering process before the award of the tendered contract. Subsequently other courts took this approach further to mean that the owner had an implied duty to be fair to all the bidders in the tendering process.

In allowing MJB’s appeal against the owner in the new case, the Supreme Court of Canada reached the following conclusions.

1. It decided that a tendering Contract A does arise if it is the clear intention of the parties to initiate contractual relations by submitting a tender in response to the invitation to do so. Thus, although a Contract A will usually arise, it will not always do so simply upon the submission of a tender. On the other hand (and contrary to the previous theory), a tender does not have to be irrevocable in order for Contract A to exist.

The confirmation that Contract A can still exist even when a tender is revocable potentially expands the situations to which the Contract A/Contract B analysis can be applied. It now can apply to a wider range of tenders, requests for proposals and expression of interest situations between owners and contractors, and between contractors and subcontractors.

2. The “privilege clause” of the tender documents (which provided that the lowest or any tender would not necessarily be accepted) did not operate to preserve the owner’s right to consider accepting an invalid tender, i.e. one that did not comply with the requirements of the tender documents. In this specific case, the owner’s Contract A with MJB included an implied term that the owner would accept only a compliant tender. The owner could accept a tender other than the lowest price tender if it saw fit, but such a tender had to comply with the tender “rules.”

The decision indicates that owners must disallow any non-compliant tender, not just one that contains fundamental problems such as uncertainty as to bid price. It appears that the combination of the privilege clause and related provisions stating that errors, qualifications, etc. in the tender may (but not must) be the cause of rejection of the tender may no longer suffice to allow the owner to waive irregularities in considering a bid.

If so, the MJB Enterprises case will significantly restrict the owner’s flexibility. It will also complicate the tendering process, since on many projects some or all of the tenders contain errors. The results of this decision may be delays in the tendering phase of construction projects due to a need for retendering, and budgetary problems arising from owners’ inability to award contracts to tenderers who might otherwise be acceptable.

Even though the owner did not have a positive obligation to award Contract B (the construction contract) to the lowest compliant tender (MJB), according to the judgement the owner’s conduct in awarding the job to a non-compliant tenderer was a breach of the owner’s Contract A with MJB.

As for damages awarded to MJB, the Court decided they should be measured by the company’s “expectation” of projected loss of profit on Contract B, rather than based on the lesser amount of the expenses they had wasted on preparing the tender. This decision further emphasized that owners risk incurring high costs if they do not enforce their own tender form requirements.

J. MARC MACEWING

SHAPIRO HANKINSON & KNUTSON

BARRISTERS AND SOLICITORS, VANCOUVER