Engineers & the law: Fair Bidding

Suppose you are an engineering consultant acting for a developer who has issued a request for proposals (RFP). The developer receives multiple proposals. The proponents have spent a great deal of time and effort in order to submit their proposals in accordance with the stipulated procedure set out in the RFP. The developer then chooses a non-compliant proposal because it came from his or her nephew. Legally, can the developer get away with that decision? The answer used to be “No,” until the B.C. Court of Appeal said otherwise, provided there are a few words in the RFP that exclude the developer’s liability.

On December 3, 2007, the British Columbia Court of Appeal issued its decision in Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), a decision that has caused some problems for tendering (and RFPs). The case is currently on appeal to the Supreme Court of Canada.

The Supreme Court of Canada has some choices. It could: (a) reaffirm the sanctity of the bidding process that has been protected by the courts over the past quarter of a century; (b) accept the reasoning of the B.C. Court of Appeal and arguably undermine its own tendering law created in the 1981 case of R. (Ont.) v. Ron Engineering; or (c) alter the law surrounding the procurement process in a novel way.

In 1981 the Ron Engineering case created the concept of “Contract A” and “Contract B” in the tendering process. That is, when an owner issues an invitation to tender and a bidder submits a compliant bid, an implied “Contract A” is created based on the terms of the tender documents. “Contract B” is the actual contract between the successful bidder and the owner. The courts have implied terms into Contract A that govern the tendering process, including implying a duty of fairness on owners to treat all bidders equally and fairly in the selection process. The selection of a non-compliant bid is an example of unfairness.

The facts in the recent Tercon case are relatively straightforward. The Ministry of Transportation decided to develop the Kincolith Highway in northern British Columbia and issued a Request for Expressions of Interest (RFEI) in February, 2000. Six parties responded to the RFEI, including Tercon Contractors Ltd. and Brentwood Enterprises Ltd. The Ministry issued an RFP to those six contractors, stipulating clearly that only RFEI respondents were eligible to respond to the RFP. Brentwood partnered with Emil Anderson Construction Co. to create a joint venture and responded to the RFP. Even though neither Emil Anderson nor the joint venture was a respondent to the RFEI, the Ministry awarded the contract to the joint venture. Tercon was ranked second and sued the Ministry because it had awarded the contract to an ineligible bidder.

At trial, the Supreme Court of B.C. found that the Ministry had breached Contract A by accepting a non-compliant proposal and by breaching its duty of fairness towards Tercon. The Ministry had argued that the RFP contained an exclusion clause that prevented payment of compensation for any claim by Tercon. Justice Dillon ruled that the Ministry committed a fundamental breach of Contract A in accepting a non-compliant proposal and that the exclusion clause was too broadly drafted to preclude recovery of damages for a fundamental breach. She reasoned that it was “inconceivable” that the parties could have intended that fundamental breaches were excused, especially in light of “the practice and legal requirement to accept only compliant bids.” The judge remarked that allowing the Ministry to accept a noncompliant proposal without any legal ramifications would “change the base of the tender system without notice” and would be unreasonable and unfair.

On appeal, the B.C. Court of Appeal ruled that the exclusion clause was sufficiently clear and unambiguous that it covered fundamental breaches. Consequently, even though it found that the Ministry was unfair in the procurement process, it was not liable to pay Tercon any damages for accepting the non-compliant proposal. The court accepted that such exclusion clauses would thwart “the public interest in an orderly and fair scheme for tendering in the construction industry,” but said that the solution lay in self-monitoring in the industry rather than judicial intervention.

The Supreme Court of Canada was asked to consider the B. C. Court of Appeal decision and it has granted leave to appeal based on, among other reasons, the decision’s national interest for the construction industry. Some legal commentators argue that the B. C. Court of Appeal decision undercuts the integrity of the tendering process and flies in the face of decades of case law starting with Ron Engineering in which courts have steadfastly protected the sanctity of the tendering process. In fact, some have even suggested that this case means the death of “Contract A” in the tendering process because now all sophisticated drafters of tender documents and RFPs will include a broad exclusion clause. In effect, such a clause will allow an owner to avoid damages while operating outside the legal constraints of “Contract A” established with Ron Engineering.

The B. C. Court of Appeal attempted to balance the tension between traditional contract law and the law of tendering. In previous cases, courts reconciled contract law while ensuring a fair tendering process by reading implicit terms into Contract A. Owners responded with explicit terms in their tender documents expressly allowing them more discretion in the selection process. The courts continued to require fairness as an implied term in order for the owner to rely on such “privilege” clauses. Under contract law, the validity of an exclusion clause depends on whether excluding liability is “unconscionable or unfair, unreasonable, or contrary to public policy.”

Now, after decades of courts upholding the sanctity of the bidding process, the B. C. Court of Appeal has told the construction industry that it will uphold exclusion clauses that expressly deny damages for unfairness in the procurement process.

If you are an engineer involved in advising a client regarding clauses in the tender documents or during the procurement process, or in recommending the award of contracts, be aware that this is an area of law fraught with legal pitfalls. Obtain legal advice yourself or ensure your client retains a lawyer well-versed in this area. If you are still game to venture into this area, here are some tips:

(a) if advising an owner, ensure there is an exclusion of liability clause that is clear, unambiguous, and sufficiently broad to cover fundamental breaches of Contract A. To be safe, set out a comprehensive list of specific breaches that are excluded from liability just in case the Supreme Court of Canada should decide that the exclusion clause in the Tercon case is, in fact, too broad or ambiguous. Even with a broad exclusion clause, ensure it is your client who makes the decision regarding award of Contract B, and avoid advising recommending a winning proposal or bid unless it clearly falls within the terms of the tender documents;

(b) if advising a client who is submitting a bid or proposal, review the tender documents or RFP carefully for exclusion clauses. If there is an onerous exclusion of liability clause and your client still wants to take the risk and submit a bid or proposal, then ensure your client understands that it may have a hollow remedy if the owner unfairly or improperly bypasses your client’s winning bid. Also, if there is enough time before closing, your client may wish to cooperate with other bidders to see if the owner will remove or modify the clause.

The Supreme Court of Canada decision will be coming soon. No matter what the decision, it will have an impact on the law of tendering. Stay tuned!

Owen D. Pawson is a partner at Miller Thomson LLP in Vancouver. See www.millerthomson.com

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“Some legal commentators argue that the B. C. Cour
t of Appeal decision undercuts the integrity of the tendering process and flies in the face of decades of case law …”

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“Now, after decades of courts upholding the sanctity of the bidding process, the B. C. Court of Appeal has told the construction industry that it will uphold exclusion clauses that expressly deny damages for unfairness in the procurement process.”