Substantial compliance can be pretty strict: complying with terms of tender
June 22, 2016 by Dirk Laudan & John Pratt
A “discretion clause” in terms of tender can give the owner the discretion to overlook technical non-compliance by bids, and allow them to accept bids unless they are materially or substantially non-compliant. Notwithstanding this, a decision by the British Columbia Court of Appeal in April 2016 shows how the requirement for substantial or material compliance can be applied quite strictly.
In the case True Construction Ltd. vs. Kamloops (City), the low bidder for a contract to build a new fire hall in Kamloops submitted a sealed bid more than a day before the deadline for bids, but did not include in its sealed bid a list of subcontractors. Including such a list was required by the instruction to bidders. Later, but still before the bid closing, the bidder submitted the required list of subcontractors to the City in a faxed appendix. The City nevertheless rejected the bid as substantially noncompliant. The bidder sued.
Because the tender included a discretion clause, the issue was whether the bidder’s failure to include the list of subcontractors in the original sealed bid constituted material non-compliance with the terms of tender, particularly in light of the bidder’s subsequent submission of that list by fax prior to the close of the tender.
The court began by stating a two-part test to decide if a bid has “substantially complied” with the instructions to bidders: (1) did the bid fail to address an “important or essential” requirement of the instructions; and (2) was there a “substantial likelihood” that the defect would have been significant to the owner’s decision-making. Under the first part of the test, where the tender requires specific information, and there is an indication that the information is material, then that information will be considered “important or essential” without further evidence. Under the second part of the test, the list of subcontractors would indeed be significant to the decision of which bid to accept, as it was material to the performance of the final project contract. In fact, the Court went so far as to say that there would have to be evidence of the “immateriality” of a requirement of the tender, before non-compliance with it would be considered merely technical.
The bidder’s subsequent fax did not cure the defect. The court reasoned that “allowing bidders to submit bids that are incapable of acceptance and then complete them” by later submission “subverts the scheme” of the tender. It might have given the bidder a “competitive advantage”, in that it would have allowed the bidder to negotiate with subcontractors and, if those negotiations were unsatisfactory, walk away from the bid by failing to cure the defect. By contrast, a bidder that had submitted a compliant bid in the first place would not have been able to do so. It was unfair, in the court’s opinion, to allow the bidder here to give itself such an advantage over other bidders who might have submitted originally compliant bids.
One point to take away from this case is that even if an owner is allowed by the terms of tender to overlook purely technical non-compliance, a bidder’s failure to follow mandatory procedures can be considered a substantial or material breach if it might give the bidder an advantage over others. It is also notable that the “substantial compliance” standard was applied quite strictly here. For contractors, this underscores the importance of complying as strictly as possible with instructions to bidders. For owners, it highlights the risks of dealing with bids whose material compliance may be open to question. The owner may have to decide upon the substantial compliance of a bid absolutely correctly if they are to avoid possible liability; there may be no margin for error.
This article is for information purposes only and may not be relied on for legal advice.
Dirk Laudan is a partner at the law firm of Borden Ladner Gervais LLP (BLG), practicing in the areas of construction, insurance and commercial litigation and arbitration. John Pratt is an associate at BLG practicing in the areas of construction, insurance, tort and commercial litigation.