April 22, 2019 by Ivona Zegrean and Alexander Spraggs
By replacing negotiation with competition, the tendering process in construction is intended to bring more certainty, fairness and efficiency to the allocation of contracts. Despite this, the tendering system is an idiosyncratic mechanism, giving rise to certain obligations that may take some by surprise.
The invitation to tender is a representation that bids will be considered by the owner. The bid itself constitutes an offer, which, if accepted by the owner, will generally result in the two parties entering into a construction contract. However, the peculiarity of the construction industry is that the relationship between the parties is governed not only by the construction contract itself, but also by a further contract, which arises automatically when a bid is submitted.
That first contract is referred to as Contract A and governs the conduct of the tendering process and the selection of the winning bid. The substantive construction work is governed by Contract B.
The coming into existence of Contract A depends on the parties’ intention to initiate contractual relations by one party requesting, and the other party submitting, a bid. If the owner is merely requesting proposals without a commitment towards entering into a contract, Contract A does not arise when a contractor submits a proposal.
The main terms of Contract A are, generally: the bid is irrevocable for the time specified in the tender, and both parties must enter into a construction contract upon acceptance of a tender. Deviation from Contract A’s terms may amount to a breach of contract and give rise to liability for damages.
The owner enjoys more bargaining power in determining the obligations of the contractor during the tendering process through the wording of the invitation to tender. This is why, in the absence of language to the contrary in the invitation to tender, the law implies certain terms in the contract to rectify this imbalance. Implied terms include the owner’s obligation to treat bidding contractors fairly and to select only a bid that complies with the terms of the invitation to tender.
Owners are free to, and usually will, include privilege clauses in the invitation to tender, which give them wide discretion in assessing and selecting bids. Courts will interpret privilege clauses narrowly, but will usually give effect to an express privilege clause, even if doing so would override implied terms, as long as the there is evidence of the parties’ intention to be bound by it.
The implied term of fairness encompasses the obligation of the owner to assess bids on the basis of the criteria set out in the invitation to tender and not to rely on hidden preferences and undisclosed standards in selecting a bid. The duty of fairness has also been held to represent a prohibition against “bid shopping” – meaning the owner cannot solicit a bid from a contractor with whom it has no intention of dealing and then use that bid as leverage to drive down prices.
The obligation to select only a compliant bid usually arises automatically if the tendering is conducted through a bid depository system. Unless provided otherwise in the invitation to tender, a bid need only be substantially compliant with the terms of the invitation to tender. Substantial compliance is an objective test, which will be satisfied if the bid complies with all the material terms of the tender call. Owners may include a privilege clause in the invitation to tender entitling them to accept a non-compliant bid or to waive an informality or defect in the bid. Such a clause will be closely scrutinized by the court and will not entitle the owner to waive a material non-compliance. For example, failure to disclose the value of any imported steel was considered to be a material non-compliance, and the owner could not rely on a privilege clause to accept the materially non-complaint bid.
The need for compliance also includes the requirement that the bid be delivered in the specified form and within the time called for in the invitation to tender. A tender submitted less than one minute after the specified time was found to be non-compliant in British Columbia but compliant in Ontario, a result that indicates substantial compliance with timing requirements may be the safer route to follow.
If the invitation to tender contemplates the parties entering into the actual construction contract, both the contractor and the owner are entitled to demand that such terms be enforced. A refusal to enter into Contract B following a successful bid is a breach of Contract A.
The focus of the law of tendering is on giving effect to the parties’ intent to initiate contractual relations by the submission of a bid in response to an invitation to tender, while promoting fairness and competition in the tendering process.
This column first appeared in the April 2019 issue of On-Site. You can read through the full issue here.
Ivona Zegrean and Alexander Spraggs practice construction law at Borden Ladner Gervais LLP. This article is provided for general information only and may not be relied upon as legal advice. Please send comments to firstname.lastname@example.org.