February 8, 2012

Ontario court finds privilege clause in tender permits bypass of lowest bidder

Bid Protest Bulletin | Paul Emanuelli

In a formal binding bidding process, owners are under an implied duty to award to the low bid.

However, this duty remains subject to exceptions, particularly where the owner includes reserved rights and privileges in its tender call that permit a bypass of the low bid or the cancellation of the tendering process. The specific rules contained in a tender call play a significant role in shaping the owner’s implied duties, including the implied duty to award to the low bidder.

For example, in its January 1987 decision in Elgin Construction Co. v. Russell (Township), the Ontario High Court of Justice found that the owner was entitled to rely on a privilege clause in its tender call to avoid awarding the contract to the low bidder. The case involved a municipal tender call for the construction of a sanitary sewer and water distribution system. The lowest bidder offered a completion time of 52 weeks. The township bypassed that bidder in favour of a higher bidder who promised a 28-week completion time. As the court noted:

...although the plaintiff’s bid was lower than Atomik Construction Company’s bid, the cost to the township, in accepting the plaintiff’s bid, would have been greater than if it accepted Atomik Construction Company’s bid (bearing in mind the total of the relevant bids plus contemplated engineering supervision costs).

The low bidder sued, maintaining that there was an industry practice of awarding tendered contracts to the low bidder. However, the court found that the privilege clause contained in the tender call prevailed over any implied industry low bid rule:

It is my opinion that no “custom of the trade” can be deemed to qualify the most explicit words of the advertisement that “Tenders are subject to a formal contract being prepared and executed. The township reserves the right to reject any and all tenders and the lowest or any tender will not necessarily be accepted,” and the equally explicit words in the “Information for Tenderers”, as stated in para. 12, “The Corporation reserves the right to reject any or all tenders ... without stating the reasons and the lowest or any tender will not necessarily be accepted.”

Since the court found that the express tender call terms trumped any implied industry low bid rule, the township was within its rights to rely on its privilege clause to bypass the lowest bid in favour of a higher bid whose better completion time actually made it the least expensive option.

While in certain instances those reserved rights and privileges enable an exception to the implied winning bidder rule, the cases show a complex interplay between that implied rule and the owner’s reserved rights. On balance these cases reveal the following governing principles:

(1) As a general principle, the tendered contract should be awarded to the bidder with the highest ranking tender based on the tender call’s evaluation criteria.

(2) A privilege clause reserving the right to bypass the winning bidder generally overrides the application of the implied winning bidder rule.

(3) The exercise of reserved rights and privileges is not an unfettered right. It remains subject to legal challenge and judicial oversight. In order to protect the integrity of the bidding process, the courts place significant restrictions on the manner in which these reserved rights and privileges are exercised.

Owners who fail to award to the apparent winning bidder should therefore be prepared to defend their actions with sound reasons and show that they acted in good faith.

Paul Emanuelli's procurement law practice focuses on all aspects of the tendering cycle including bid dispute resolution. This article is extracted from Emanuelli's Government Procurement textbook published by LexisNexis Butterworths. Reach Paul at paul.emanuelli@procurementoffice.ca.

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