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title

Supreme Court of Canada Reverses Course on Procurement Law

DATE

February 13, 2007

EXPERTISE

Construction, Engineering and Infrastructure

BACKGROUND

Every year Canadian businesses make purchasing decisions cumulatively worth billions of dollars through tendering processes. The prospective buyer (often characterized as the "owner") issues a description of the goods and services it wants to buy and invites potential suppliers to provide specific information about price, the terms of delivery and the quality of the goods or services they can offer. By tendering, the owner may lose some ability to negotiate but stands to gain from more competitive pricing by bidders.

Over the past 26 years, Canadian courts have consistently held that owners must treat bidders fairly and even-handedly. This principle has twice been affirmed by the Supreme Court of Canada since its decision in Ontario v. Ron Engineering & Construction (Eastern) Ltd. in 1981.[1] The legal framework for the analysis of the owner's duties is a notional contract ("Contract A") that arises when bidders submit proposals or bids in response to a request for tenders. The written and implicit terms of Contract A govern the owner's conduct in determining which bidder will win the tender and be awarded the contract for goods and services ("Contract B").

The rationale for requiring a level playing field in the tendering process is the commitment that suppliers make when they participate in the tender. A supplier has invested money and time in preparing its response. It must make an offer to provide goods or services on specific terms that must remain open for acceptance for a period of weeks or months. If it makes a mistake in quoting a price, it generally must deliver on the terms quoted even if this results in a loss.

In return for this commitment by bidders, it seems only fair that the owner must abide by the terms it has chosen to set out in the tendering documents. The owner's specific duties vary. In its tendering documents the owner may reserve the right to cancel the tender, not award any contract, or award a contract to a supplier other than the one who offered the lowest price. (This is commonly known as a "privilege clause".) Courts have nevertheless held one principle sacred: if the owner receives any bids which meet the requirements in its call for tenders, it cannot award the contract for goods or services to a supplier who has submitted a non-compliant bid. To allow an owner to award Contract B to a non-compliant bidder would be a direct violation of the implied duty of fairness in Contract A.

These have been the rules applied by Canadian courts to private tenders for many years. Based on a decision just released by the Supreme Court of Canada, however, it appears that the rules may have changed.

THE DOUBLE N CASE

In 1986, the City of Edmonton issued a call for tenders on a thirty-month contract to supply equipment and operators to move refuse at a landfill site. The request for tenders ("RFT") required bidders to propose two bulldozers and a scraper, each of which had to be 1980 or newer. Double N Earthmovers Ltd. and Sureway Construction Ltd. both submitted bids. Double N strongly suspected that Sureway did not have equipment that met the RFT requirements, and asked the City to verify the age of the equipment bid by Sureway on several occasions prior to contract award. The City ignored these warnings, even though it would have been easy for it to check the date associated with the registration number for the vehicles proposed by Sureway. Sureway was awarded the contract.

After notification of the contract award, Sureway admitted to the City that its equipment was in fact older than 1980, but convinced the City to waive the requirement for newer vehicles. Double N sued the City, claiming that it owed a duty to bidders to check the validity of information in the bids, particularly after it was put on notice of potential inaccuracies or defects in the information. Double N also claimed that the City had breached Contract A by concluding Contract B with Sureway on terms inconsistent with mandatory requirements set out in the RFT. In effect the City had broken the cardinal rule of procurement law by awarding the contract to a supplier who had submitted a materially non-compliant bid.

Based on past case law, it appeared that Double N had a strong case. In a five-to-four decision, however, the majority of the Supreme Court of Canada upheld the dismissal of Double N's claim by the trial court and the Alberta Court of Appeal.[2] It held that an owner has no duty to investigate the validity of information provided in bids. It also found that the City was entitled to negotiate with Sureway after contract award and ultimately sign a contract waiving the RFT requirement for newer vehicles, because the City had reserved the right in the RFT to negotiate with the lowest compliant bidder. In the view of the majority, the owner's duty to bidders is strictly confined to the period from the issuance of the tender document to contract award. The owner's obligation to treat bidders fairly accordingly does not survive the creation of Contract B with the successful bidder.

There was a strong dissent from this reasoning by four of the nine Supreme Court judges in the Double N case. In their view, the age of the vehicles to be supplied was a material term of the RFT issued by Edmonton. Once the City was put on notice of Sureway's potential non-compliance, it had a duty to investigate, because the duty to accept only a compliant bid would be meaningless if it did not include the duty to take reasonable steps to ensure that the bid is compliant. By later waiving Sureway's obligation to comply with the terms of the RFT, the City further breached its duty to other bidders. An owner cannot escape its obligations to other bidders by postponing the fulfilment of its duties under Contract A until Contract B has been entered into.

The minority also expressed concern that the majority's approach would encourage owners to be wilfully blind to potential defects in bids and allow them to enjoy both the benefit of the competitive bid process and the ability to negotiate. Justice Charron summed up the problems with the approach adopted by the majority [at para. 123]:

[.] I fail to see how the integrity of the bidding process is protected by allowing a bidder to get rid of the competition unfairly and then hash it out with the owner after it has been awarded the contract. Approaching the tendering process in this manner encourages precisely the sort of duplicity seen in the present appeal. A bidder can submit a bid that is either ambiguous or deliberately misleading but compliant on its face in some respects, secure in the knowledge that if it is awarded Contract B it will be in a strong position to renegotiate essential terms of the contract. And an owner can reason that it may be best not to resolve any ambiguity before awarding Contract B, since at that time all Contract A obligations towards other bidders will terminate and it can then enter into renegotiations with the successful bidder without fear of liability. This approach is not consistent with a fair and open process.

CONSEQUENCES OF THE DOUBLE N DECISION

The majority's decision in Double N may undermine the confidence of bidders that tenders will be evaluated fairly. Even if a supplier knows that a rival has provided inaccurate or misleading information in its bid, there may be no point in telling the owner because the owner has no legal duty to investigate the accuracy of any of the information provided. So long as the owner can truthfully state that it did not know the information was inaccurate, it can award Contract B to a bidder who was not substantively compliant with the terms of the RFT. Furthermore, after discovering the inaccuracy, the owner can conclude Contract B with the non-compliant bidder by waiving the original requirement in the RFT. According to the majority in Double N, an unsuccessful bidder who had submitted a compliant bid has no contractual remedy with which to address an award made to a non-compliant bidder in these circumstances.

This decision could also facilitate bid shopping by owners. If an owner realized that a bid was non-compliant, it could offer to waive the non-compliance in a case where it had reserved the right to negotiate following contract award. The power to waive non-compliance would allow the owner to negotiate other concessions from the supplier, such as a price or other conditions that had been offered by rival bidders. Based on the majority's decision in Double N, unsuccessful bidders might have no way of attacking this conduct since the owner's duties under Contract A become unenforceable once a bidder has been chosen.

From the perspective of owners, the Double N case is a welcome development since it will give them much more flexibility in the tendering process, provided they reserve certain rights in their tendering documents.

Sally A. Gomery

[1]. Ontario v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111; MJB Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619; and Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860.

[2]. Double N Earthmovers Ltd. v. City of Edmonton, 2007 SCC 3 (Case no. 30915 released January 25, 2007).

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

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