Procurement 101: How Not To Turn Your Next Procurement In To New Case Law – Government, Public Sector

Overview

There is a fundamental rule in tendering: say what you are going
to do, then do it. But what does this really mean? What happens if
you get a fantastic bid that meets your requirements but is
non-compliant? What happens if you try to qualify the requirements
of a tender in your bid?

In this bulletin, we unpack this rule by explaining how it
developed in Canadian law and what happens to that non-compliant
bid.

Readers should note that this Bulletin does not consider how
the trade agreements impact the tender process for public entity
procurements. Those subject to trade agreements will need to be
aware that stricter rules apply to bid compliance issues
specifically, and procurements generally.

Understanding the Basics of Tender Law

At the heart of the tendering process is the following rule: the
procuring entity writes the rules of the tender and the procuring
entity and the bidder follow the rules of the tender -
to a ‘T’.

The origins of this legal framework in Canada can be traced back
to the 1981 Supreme Court of Canada (SCC) decision in Ron
Engineering.¹ This case concerned a tender for a
construction contract for the Government of Ontario’s Water
Resources Commission in the City of North Bay. The tender documents
required a bid deposit at the time of bid filing. While the tender
permitted for the return of the bid deposit, if a bid was withdrawn
within sixty days of the opening of the bids, the deposit could be
retained.

After the opening of bids, one of the bidders, Ron Engineering,
identified a pricing error in its submitted bid, rendering its bid
price considerably lower than the rest of the bidders. Ron
Engineering sent a notice of its error and asked to withdraw its
bid without penalty. The Commission refused, accepted the bid and
submitted the contract for Ron Engineering’s signature. Ron
Engineering refused to sign, maintaining that since it had notified
the Commission of its error prior to acceptance of the
bid, the offer was not capable of being accepted. The Commission,
relying on the bid deposit terms, retained the deposit and accepted
another bid.

The arguments made by Ron Engineering were fairly complex but in
essence, Ron Engineering argued that because it had identified its
error prior to acceptance, it had not withdrawn its bid and thus
the right to retain the deposit was not triggered. Ron Engineering
sued for recovery of the bid deposit, and the Commission
counter-claimed with respect to Ron Engineering’s refusal to
carry out the terms of the tender.

Ultimately, the SCC determined that the Commission was entitled
to keep the bid deposit because that is what the tender documents
said. The Court held that when a mistake was proven by the
production of reasonable evidence after the bids were opened, the
person receiving the bid was not prevented from accepting the bid
or seeking to forfeit the bid because the test is applied at the
time the bid is submitted and the rights of the parties have
crystallized.

While the outcome may not be surprising, the paramount
importance of Ron Engineering was the Court’s
determination that the tender process itself creates a
contract between the procuring entity and each bidder who
submits a compliant bid in response to an invitation to tender.
This contract is known in Canadian tender law as “Contract
A.”² The SCC gave full weight to the terms of the
tender document (e.g. the rules for the tender process) − the
bid deposit, which was designed to ensure the performance of the
obligations of the bidder under Contract A, was exposed to the risk
of forfeiture upon Ron Engineering’s breach of obligations by
withdrawing its bid.

Cases at the SCC have further evolved the Canadian tendering
framework since then, but the essential elements of Ron
Engineering have not changed.

This rule on its face looks pretty simple and the logic behind
it makes sense – but the application is not always as
straightforward as it appears.

Privilege and Waiver Clauses – Can They Save a Non-Compliant
Bid?

Recall that in Ron Engineering, the Court said that
Contract A forms on submission of a compliant bid. This
framework protects the credibility and integrity of the tendering
process and ensures that the “dual duties” –
fairness and good faith on the part of the procuring entity –
are met.³

The court will look at the tender requirements and apply a
‘strict compliance’ test – did the bid strictly
comply with the tender requirements?

Procuring entities frequently seek to balance the risk of the
loss of an otherwise great bid by including a clause –
referred to as a “privilege clause” – in the tender
documents, reserving their right to accept bids that may not
respond one hundred percent to the tender (e.g. the right to waive
non-compliance in a bid).

While this might seem to be a workaround, privilege clauses are
not a carte blanche for procuring entities or bidders. A
tendering process that allowed a bid to be rejected for frivolous
reasons, or that allowed a procuring entity to accept an entirely
non-compliant bid, would be harmful to the public tendering system,
create commercial uncertainty, and undermine the credibility and
integrity of the tendering process.

While a privilege clause may reduce the “strict”
compliance test to a “material non-compliance” test, it
will not eliminate the requirement that a bid be compliant.

A materially non-compliant bid is, in essence, a counter-offer
that is incapable of giving rise to Contract A unless the procuring
entity exercises the discretion reserved by tender documents and
considers the non-compliant bid.⁴ However, the bid may
still not pass the “material non-compliance” test if the
non-compliance results in a failure of the bid to address an
important or essential requirement of the tender documents and a
“substantial likelihood” that the bid defect would have
been significant in the owner’s decision-making process. Even
in the face of a broad privilege clause, a court is highly unlikely
to excuse the failure to comply with mandatory requirements.

Procuring entities may also use “waiver of
informality” clauses, allowing them to waive minor omissions
or defects.

For example, in Double N Earthmovers v. Edmonton
(City),⁵ the call for tenders required that serial
and license numbers be provided for all equipment to be used by the
bidder. The successful bidder failed to provide this information
for certain pieces of equipment, but was awarded the contract when
the City exercised its rights under the waiver of informality
clause in the tender documents. An unsuccessful bidder sued the
City of Edmonton and the matter made its way through the courts,
eventually landing at the SCC.

In a split decision, the SCC, applying the material
non-compliance test, held that the failure to include serial
numbers was not something that could materially affect the
price or the performance of the procurement. The court found that
the City was not aware of the successful bidder’s deceit until
after it had accepted the bid and it had not colluded with the
successful bidder during the bidding process to treat other bidders
unfairly. Once the City accepted the bid, it was permitted under
Contract A to waive this informality and award the bid to the
successful bidder. The court identified that a procuring entity has
no duty to investigate whether a bidder will comply with
tender requirements, and can rely on the terms of the tender
because each bidder is legally obliged to comply in the event that
a bid is accepted.

Bidder Beware – Qualifying Statements

Mere irregularities in bids should not result in the
disqualification of a bid that otherwise complies with all material
conditions of a tender.

However, bid qualifications are not “mere
irregularities”. Responses that, for example, differ in
quantity and quality from the tender requirements and that attempt
to qualify or modify the terms of the tender are typically
considered to be counter-offers (and incapable of acceptance). Even
if the qualifying statements may not render the bid a
counter-offer, attempts to qualify a bid can create two significant
problems:

• For bidders: qualifying statements in
  bids can render a bid non-compliant and incapable of
  acceptance.




• For procuring entities: accepting
  bids that modify or qualify tender requirements breaches the
  implied duty of fairness.

Acceptance of bid qualifications or modifications could give the
bidder a technical advantage over other bidders who, given the
opportunity, may have wished to also modify or qualify their bids
or submit counter-offers.

Even if a tender document contains a privilege clause, bidders
should take note that the exercise of the rights provided to a
procuring entity in a privilege or waiver clause are
optional – the procuring entity is not required to
exercise this right even if all bidders are
non-compliant⁶.

Takeaways

Bidders and procuring entities should keep in mind the following
guiding principles:

• The number one rule – always
  follow the rules set out in the RFP.




• The tendering process can create
  contractual obligations and trigger a duty of fairness on the part
  of the procuring entity towards all compliant bidders.




• The key implied terms of Contract A
  are:
  

  • to accept only a compliant bid;
    and

  
  

  • to be fair and consistent in
    assessment of bids.




• There is a difference between a
  bid that contains an informality and a bid that is
  materially non-compliant.




• If a bid is non-compliant or so
  qualified that it constitutes a counter-offer, no contract A exists
  and no duty of fairness is owed to that bidder.




• A broad privilege clause will not
  excuse the failure to comply with mandatory requirements.




• Over-application of the rights found
  in a privilege clause may run up against the duty of fairness which
  is owed when a Contract A is formed.




• Privilege clauses or waiver clauses
  are not the solution to a poorly structured RFP or bid
  response.

Footnotes

1 The Queen in Right of Ontario v. Ron
Engineering, [1981] 1 SCR 111 (Ron
Engineering).

2 The final written contract between the successful
bidder and procuring entity is referred to as “Contract
B”.

3 The duty of good faith, in the sense of fair dealing,
requires the issuing authority to act in good faith towards all
bidders and is generally implied throughout the tendering process.
The duty of fairness arises once Contract A comes in to effect and
is extinguished once Contract B comes in to existence. There is no
freestanding or “independent” duty of fairness absent the
existence of a Contract A.

4 Kinetic Construction Ltd. v. Regional District of
Comox-Strathcona, 2003 BCSC 1673 at para 30.

5 2007 SCC 3.

6 Recall our Bulletin on vague tender requirements [
As Clear as Mud – Why Taking a ‘Wait and See’ Approach to
Vague Solicitation Requirements is Never a Good Strategy]where
we explained that the obligation to clarify vague tender
requirements in advance of bid submission rests with
bidders. Trying to address a vague requirement by
qualifying your bid can be fatal to success.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.