The Law of Tendering

THE LAW OF TENDERING
FMC LLP Construction Group
March 4, 2010

1

TENDERING
presented by:
Phil Scheibel

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LAW OF TENDER
A. Overview

1. R. v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111.

• Case introduced the Contract A/Contract B analysis.

• Contract A is formed immediately upon a bidder submitting a bid in
response to an invitation to tender.

• Contract B is formed between the owner and the winning bidder and is the
actual construction contract.

3

Law of Tender (cont.)
2. M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619.

• Central issue was whether the inclusion of a privilege clause in the tender
documents allows the person calling for tenders to disregard the lowest bid in
favour of any other tender including a non‐complaint one.
• Court clarified that Contract A can only be formed between an owner and
compliant bids, meaning an owner can only accept compliant bids:

• The rationale for the tendering process…is to replace negotiation with competition.
This competition entails certain risks for the [contractor].  The [contractor] must
expend effort and incur expense in preparing its tender in accordance with strict
specifications and may nonetheless not be awarded Contract B…it appears obvious to
me that exposing oneself to such risks makes little sense if the [owner] is allowed, in
effect to circumscribe this process and accept a non‐compliant bid.  Therefore I find it
reasonable, on the basis of the presumed intentions of the parties, to find an implied
term that only a compliant bid would be accepted.

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• The tender call is the owner's offer to receive and consider tenders according
to the terms and conditions of the tender call.

• The submission of a compliant tender is the act of acceptance of the owner's
offer.

• The court will apply a test of "substantial" compliance so that technical
deficiencies which would not operate to undermine the integrity of the
tendering process have been held not to invalidate a tender.

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• It is not the law that the owner can only accept the lowest compliant bid —
there is no incompatibility between the privilege clause and the prohibition
on accepting non‐compliant tenders.

• An owner is entitled to take a "nuanced" view of price. Examples of
economic factors an owner is entitled to take into account in rejecting the
lowest tender include:

• Additional contract administration costs anticipated as a result of the tenderer's
previous performance on other projects.
• Tenderer's lack of actual direct experience in performance of the work.
• Potential for cost increases or claims.
• Application of alternative unit pricing.
• Anticipated cost overruns due to past incidents of inadequate site supervision and
construction errors.

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3. Martel Building Ltd. v. R., [2000] 2 S.C.R. 860.
• There is a duty to treat all compliant bidders fairly and
equally in accordance with the terms and conditions of the
tender call:
• In light of the costs and effort associated with preparing and
submitting a bid, we find it difficult to believe that the
[contractor] would have submitted a bid unless it was
understood by those involved that all bidders would be treated
fairly and equally … Without this implied term, tenderers whose
fate could be predetermined by some undisclosed standards,
would either incur significant expenses in preparing futile bids
or ultimately avoid participating in the tender process.

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• Prohibited activities include:
• Application of undisclosed preferences.
• Application of undisclosed bid evaluation criteria.
• Bid shopping.
• Giving one bidder an unfair competitive advantage over others.

• At the same time, the Court reinforced that owners have the right
to reserve privileges to themselves:
• …the tender documents must be examined closely to determine the full
extent of the obligation of fair and equal treatment. In order to respect the
parties' intentions and reasonable expectations, such a duty must be defined
with due consideration to the express contractual terms of the tender.

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4. Double N Earthmovers Ltd. v Edmonton (City), [2007] 1 S.C.R.
116

• Court clarified the obligations on an owner in assessing
whether a bid is compliant.
• The duty of fairness requires an owner to evaluate tenders
"on the basis of what is actually in the bid, not to weigh them
on the basis of subsequently discovered information".
• Imposing a post‐tender investigative duty on the owner
"would encourage un warranted and unfair attacks by rival
bidders and invite unequal treatment of bidders by owners.
This would frustrate, rather than enhance, the integrity of the
bidding process."

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• In other words, an owners obligations under Contract A to
unsuccessful bidders, including the obligation to treat bidders fairly,
do not survive the creation of Contract B.

• The significance of the decision is two fold.

• Owners and successful bidders can amend Contract B to account for
changed circumstances following the tender call without fear of lawsuits
from disgruntled bidders.
• So long as the tender documents provide, the owner can negotiate with
the lowest bidder prior to contract award.

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B. Summary of the Law of Tender

• Both owners and bidders have obligations.
• An owner must follow the terms and conditions of the tender
documents, can only accept compliant bids and must act fairly
and equally towards all bidders.
• A bidder cannot revoke its bid once tenders close (unless
permitted by the tender terms and conditions).
• An owner can draft criteria for contract award and insert privilege
clauses and reserve to itself the right to accept other than the
lowest bid, or to not make any award at all — but there is a limit
and clauses which purport to eliminate the duty of fairness and
render the tender selection process arbitrary will be qualified by
the duty to treat all bidders fairly.

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• Two Percolating Issues

• Tender v. RFP
• Exclusion Clauses

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THE TERCON DECISION
presented by:
Peter Vetsch

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Facts
• RFEI issued by Province of British Columbia re: design and construction of  highway
– Six respondents provided EOIs, including Tercon and Brentwood – concern with
Brentwood’s lack of drilling/blasting experience
– Province then decided to design the highway itself and to bid out construction work only
to RFEI respondents

• RFP therefore issued, expressly limited to the six initial RFEI respondents only:  “Proposals
received from any other party will not be considered”.
– Exclusion Clause in RFP:  “Except as expressly and specifically permitted in these
Instructions to Proponents, no Proponent shall have any claim for any compensation of
any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal
each Proponent shall be deemed to have agreed that it has no claim.”

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Facts (cont.)
– Brentwood entered into pre‐bidding joint venture agreement with larger construction
company, EAC (not an eligible Proponent)
– Brentwood formally informed the Province of existence of joint venture prior to
submitting its bid. Both agreed that the joint venture was likely an ineligible bidder. The
Province therefore told Brentwood to submit the RFP in its name only, which
Brentwood did, listing EAC as a major subcontractor.

• Brentwood and Tercon were the two short‐listed RFP Proponents and Brentwood
was ultimately chosen for the highway construction project

• Tercon sued, alleging that (1) in breach of Contract A, the Province had accepted an
ineligible bidder (i.e. the Brentwood/EAC joint venture), and that (2) the Exclusion
Clause did not save the Province from this kind of fundamental breach.

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Lower Courts
• BC Supreme Court: found in favour of Tercon and awarded $3.5M in damages for Tercon’s
loss of the construction contract

• Held that:
– (1) The RFP was sufficiently formal and imposed a sufficient level of obligation
on bidders to create Contract A.
– (2)  The Province had breached both the express provisions of Contact A and its
implied obligations of good faith, fairness and equal treatment of all bidders by
awarding the project to an ineligible bidder.
– (3)  This constituted a fundamental breach of Contract A – neither fair nor
reasonable to uphold Exclusion in such circumstances.

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Lower Courts (cont.)
• BC Court of Appeal: reversed the trial decision and found in favour of the Province

• Held that:

– (1) The plain wording of the exclusion clause was clear and unambiguous, broad
enough to cover the Province’s breach – no recovery to Tercon

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Supreme Court of Canada
• Whole Court:
– The time has come to “lay to rest” the doctrine of fundamental breach
– Courts will no longer refuse to enforce an exclusion clause simply
because the defendant’s breach “went to the very root of the
contract” or “denied the plaintiff of substantially the whole of the
benefit of the contract”

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Supreme Court of Canada (cont.)
• Majority (5 judges): agreed with the BC Supreme Court; overturned Court
of Appeal

• Held that:
– (1) Brentwood’s accepted bid was made on behalf of ineligible joint
venture, (2) the joint venture materially improved Brentwood’s bid,
and (3) the Province knew this and so intentionally attempted to
conceal the winning proponent’s true identity – Clear breach of
express and implied terms of Contract A

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Supreme Court of Canada ( Majority
cont.)
– The exclusion clause barring Proponent claims resulting from “participating in this RFP”
did not bar Tercon’s claim:

• RFP process premised on closed list of six bidders
• Contest involving ineligible bidder therefore fell outside of that process
• A process involving other bidders…is not the process called for by ‘this RFP’ and
being part of that other process is not in any meaningful sense ‘participating in this
RFP’.” (para. 74)
• “Tercon’s claim is not barred by the exclusion clause because the clause only applies
to claims arising ‘as a result of participating in [the] RFP’, not to claims resulting from
the participation of other, ineligible parties.” (para. 63)

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Supreme Court of Canada (Majority cont.)
• “Clear language” necessary to exclude liability for a breach of Contract A’s implied
duty of fairness and obligation to treat all bidders fairly and equally, especially in
public procurement context

– Still possible to exclude such liability by using the right wording in Contract A?

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Supreme Court of Canada (Majority cont.)
• An early return of the doctrine of fundamental breach?  Majority’s
rationale for not upholding the exclusion clause:

– Restricted eligibility of bidders was “the foundation of this RFP” – Court
should interpret the exclusion clause compatibly with eligibility limitations
which were “at the very root of the RFP”.  (para. 70)
– Parties would not have intended exclusion to “effectively gut” a key aspect of
approved RFP process (para. 72) or waive compensation for conduct that
“strikes at the heart of the integrity and business efficacy of the tendering
process”.  (para. 78)
– Limiting bidders to the six RFEI respondents “was the foundation of the whole
RFP”, and acceptance of an ineligible bid “attacks the underlying premise of
the process”, such that “[l]iability for such an attack is not excluded by a clause
limiting compensation resulting from participation in this RFP.” (para. 76)

• CONCLUSION:  Exclusion clause held not to cover the breach; Tercon’s claim for
damages successful

22

Supreme Court of Canada (Dissent)
• Dissent (4 judges): would have upheld the exclusion clause and denied claim

• Held that:
– Contract A not based on “some abstract externally imposed rule of law” but on the
presumed intent of the actual parties to the contract

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Supreme Court of Canada (Dissent cont.)
– 3‐step inquiry when party seeks to escape a contractual exclusion clause:

• 1.  As a matter of interpretation, does the exclusion clause even apply to the
circumstances of the case?
• 2.  If yes, was the exclusion clause unconscionable at the time the contract was
made?  (relates to contract formation, not breach)
• 3.  If the clause was valid when it was made, should the Court nevertheless refuse to
enforce it because of some overriding public policy that outweighs the very strong
public interest in the enforcement of contracts?
– Burden of proof on the party seeking to avoid exclusion
– Examples of public policy exceptions:  fraud, conduct approaching criminality

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• 3‐step approach applied by dissent:

• 1.  Does the exclusion apply?  Yes.
– Exclusion clear and unambiguous
– “Participating in this RFP” = more than Province’s final selection of an ineligible
bid; begins with submitting a Proposal and having it considered
– Tercon clearly “participated in this RFP” and fell within plain wording of the
exclusion.
– The Province “was at fault in its performance of the RFP, but the conclusion that
the process thereby ceased to be the RFP process appears to me…to be a
strained and artificial interpretation [of the exclusion] in order, indirectly and
obliquely, to avoid the impact of what seems…ex post facto to have been an
unfair and unreasonable clause.” (para. 128)

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• 2. Was the exclusion unconscionable when made? No.

– No unequal bargaining power
– Tercon a major contractor with experience entering into tender contracts “and
is well able to look after itself”.

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• 3. Are there public policy reasons not to enforce the exclusion? No.
– Tercon failed to prove that Province’s actions were “so aberrant as to forfeit the
protection of the contractual exclusion clause on the basis of some overriding
public policy.” (para. 135)
– No reason to deprive Province of “the protection of the clear exclusion clause
freely agreed to by Tercon.” (para. 140)
– If Tercon did not think it was in its business interest to bid on project based on
RFP exclusion, it was free to decline to participate. “So long as contractors are
willing to bid on such terms, I do not think it is the court’s job to rescue them
from the consequences of their decision to do so.” (para. 141)

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RFPs vs. TENDERS
Presented by:
E. Jane Sidnell

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Pros and Cons of Tenders and RFPs
• Pros of Tenders • Pros of RFPs
– Drives to lowest cost delivery – Scope does not need to be set
method – Flexibility to receive suggestions
– Irrevocable price from proponents
– If selected bidder refuses to enter – No duty of fairness on part of
into Contract B, owner can sue Owner
for damages (i.e. differential to
next selected or lowest bidder)
• Cons of RFPs
• Cons of Tenders – Proponent can pull out at any
– Most practical where scope if time ~ price is revocable
defined – Does not focus the selection on
– Owner has a duty of fairness the lowest cost delivery method
– Owner must comply with the – Owner still may have duties
rules of engagement and can face
significant exposure for failing to
do so

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Considerations for Decision Making
Tender Consideration RFP
Typically Is the work or are the services clearly specified? Does not
matter
Yes Are the final results and deliverables clearly defined? Does not
matter
Yes Is more weight placed on price than other values? No

Yes Is price irrevocability important to the owner? No

No Does owner want input on design ,execution, alternative methods or Yes
innovations?
Yes Is there mandatory detailed evaluation criteria? Not
typically
Yes Does owner want a specific form of contract? No

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What makes an RFP a Tender?
• Indicia of tenders:
– Irrevocability of submission
– Security required with submission
– Revisions required to be in writing, executed and received before the
closing
– Detailed evaluation criteria specified and the limited criteria being the
only criteria used to evaluate the bids
– Detailed pricing provisions that are fixed and non‐negotiable
– Contract B to be substantially in the form attached to the package

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Effect of an Exclusion Clause
• Justice Cromwell also determines that:
– the existence of an exclusion clause is in itself an indicia of a tender
because an exclusion clause would not be necessary for an RFP
– it is not fatal that the “classic” approach was not followed:
• Classic: Contract A – Contract B framework in which bidder submits an
irrevocable bid and undertakes to enter into Contract B on those terms if
its bid is accepted
• Tercon variation: Contract B to follow good faith negotiations based on the
form set out in the tender documents

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Avoiding the Tender Conundrum
• Steps to take to keep your RFP out of the world of tender:
– State that the process is not a tender process
– Scope of work may allow for input by proponents – specifications need
not necessarily followed by proponent – alternate methods welcomed
– Use subjective evaluation criteria without significant detail or process
~ do not evaluate on price
– Allow for proposals to be revoked
• There will be no need for:
– bid security
– an exclusion clause
– Consider whether attaching contractual terms is necessary

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EXCLUSION CLAUSES
presented by:
Robert Simpson Q.C.

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The Exclusion Clause
• "The Exclusion Clause reads:

– 2.10 …Except as expressly and specifically permitted in these
instructions to Proponents, no Proponent shall have any claim for
compensation of any kind whatsoever, as a result of participating in
this RFP, and by submitting a Proposal each Proponent shall be
deemed to have agreed that it has no claim."

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The Basic Principles Applying to
Exclusion Clauses
• Exclusion clauses that are drafted to address the claim being advanced will be
respected and applied if they are clear and comprehensive such that the wording of
the clause is found to apply to the circumstances established in the evidence.

• An exclusion clause, however, will be construed strictly to determine whether it
applies to the circumstances of the claim.

• Clear language which addresses the precise circumstances of the claim is necessary
to exclude liability.

• To determine if an exclusion clause is applicable, the exclusion clauses must not be
read in isolation but should be considered in harmony with the rest of the contract
and in light of its purposes and commercial context.

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The Majority's Analysis on the
Application of the Exclusion Clause
• The majority found that the exclusion clause did not apply to the
circumstances of the Tercon's claim. It did so because:

– In looking at the other provisions of the RFP, the Court found that the Province
reserved its right to unilaterally cancel the RFP and propose a new RFP to
additional bidders and did not reserve to itself the right to accept a bid from
an ineligible bidder or to unilaterally change the rules of eligibility;

– The Court found that the integrity and business efficacy of the tendering
process supported an interpretation that would allow the exclusion clause to
operate compatibly with the eligibility limitations that were at the very root of
the RFP;

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The Majority's Analysis on the
Application of the Exclusion Clause (cont.)
– The implied duty of fairness which is a basic requirement of the tendering
process, particularly in the case of public procurement was not explicitly
excluded by the wording of the clause;

– The Court found that even though the application of the exclusion clause was
restricted, it still had application and could be given effect in the proper
circumstances. The Court pointed out that the exclusion clause would apply if
the remedy claimed was not for compensation, although the Court noted that
practically speaking it could not envision a practical claim arising from a breach
of contract "A" other than a claim for compensation; and

– The exclusion clause would have application in respect of a claim that arose as
between the invited Proponents to the RFP.

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The Majority's Conclusion
• The Court found that it was central to the RFP process issued by the Province that it
was a contest among those eligible to participate which did not include Proponents
who did not initially submit a response to the RFEI and specifically indicated that
Proposals received from any other party would not be considered.

• The Court found that the Proposal submitted by Brentwood was a joint venture
with the result that it was submitted by another party that had not submitted an
RFEI.

• As the Province was now considering an ineligible party's bid, the bidding process
was no longer the "RFE Process" referred to in the exclusion clause but a different
process.

• The result found was that the exclusion clause did not apply to this different RFE
Process.

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The Minorities' View
• There is nothing inherently unreasonable about exclusion clauses and they should
be applied unless there is some compelling reason not to give effect to the words
selected by the parties.

• It is a matter of interpretation whether the exclusion clause applies to the
circumstances established in the evidence which will depend on the Court's
assessment of the intention of the parties expressed in the contract.

• Participation in the RFP began with submitting a Proposal. As Tercon had
submitted a Proposal, the exclusion clause applied with the result that Tercon "shall
be deemed to have agreed that it has no claim".

• The minority found that the exclusion clause applied to exclude Tercon's claim.

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What do we take from this?
• The application of an exclusion clause in any given circumstance depends
upon the view of the beholder.

• That view is tainted by whether or not the beholder thinks in the
circumstances of the case it is fair or not to deny the claimant
compensation.

• It is extremely difficult, if not impossible, to draft an exclusion clause that is
guaranteed to be effective in responding to all possible claims that could
arise as it is impossible to predict the manner and nature of all possible
claims that may arise in advance.

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How could the Province's Exclusion
Clause be worded to avoid the Tercon
Claim?
• 2.10…Except as expressly and specifically permitted in these
instructions to Proponents, no Proponent shall have the right
to bring any claim for any remedy of any kind whatsoever as a
result of anything of any nature whatsoever done or not done
by the Province in connection with the Province's request for a
submission of a bid and the final award of a contract to build
this highway.

42

Is the revised Exclusion Clause
bullet proof?
• As Bennie J. states in the Tercon decision, it will depend on whether a
Court is prepared to take a "strained and artificial interpretation in order,
indirectly and obliquely, to avoid the impact of what seems to it ex post
facto to have been an unfair and unreasonable clause";

• The facts and circumstances giving rise to the claim; and

• There is an absence of fraud or equally evil wrongdoing on the part of the
party relying on the exclusion clause.

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Thank You!
Contact Us:
Phil Scheibel – phil.scheibel@fmc‐law.com | +1 403 268 6810
E. Jane Sidnell – jane.sidnell@fmc‐law.com | +1 403 268 3119
Robert Simpson, Q.C. – robert.simpson@fmc‐law.com | +1 403 268 7021

The preceding presentation contains examples of the kinds of
issues companies dealing with tendering issues could face.
If you are faced with one of these issues, please retain professional
assistance as each situation is unique.

The Law of Tendering

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