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Legal Notes: Avoiding the ‘tender trap’

John Bleasby
Legal Notes: Avoiding the ‘tender trap’

It’s understandable that those seeking contracted third-party services want the best quality for the best price. However, when tenders are issued and still open, there are rules that must be followed.

Two Canadian cases, separated by more than 10 years, demonstrate how one can either avoid or fall into the “tender trap.”

In the early 2000s, the Halifax Regional Municipality (HRM) called for tenders to upgrade a sanitary pumping station. Cost estimates were developed based on reports prepared by the engineers who designed the improvements.

However, the prices tendered by all three bidding contractors exceeded those estimates. HRM then informed all three it was cancelling the tender. Later, HRM entered into negotiations with the lowest of the three bidders, Amber Contracting, hoping to get a lower price. This didn’t happen and negotiations ceased.

Twelve months on, HRM issued a new tender call under more or less the same specifications. This time the original three bidders tried again, as did a new bidder, Eisner Contracting. All four exceeded the originally estimated price. Nevertheless, Eisner was awarded the contract for being the lowest.

Learning their bid failed for a second time, Amber charged that HRM was “bid shopping” and had breached its contractual duty of fairness and good faith. Amber asked the court to award it the profit lost on the first bid, due to the fact it had not taken an additional project as a result being published as the lowest bidder the first time around.

Although Amber was awarded damages in a lower court hearing, the case made its way to the Federal Court of Appeal.

Writing for DLA Piper, Scott Alden and Alyson Eather note that, “the primary focus of the court was the privilege clauses and the extent to which those clauses affected the implied duty of fairness that HRM owed Amber. In the context of the broad discretion conferred by the privilege clauses, the appeal court found that the fact that HRM wanted to obtain a lower price did not breach the duty of fairness.”

The lower court ruling was overturned.

In other words, there was no “bid shopping.”

“However, in the court of appeal’s opinion, bid shopping would have occurred if, during negotiations, HRM threatened to reject Amber’s low bid for the next highest bid unless Amber reduced its price – a situation that did not occur,” write Alden and Eather.

Fast-forward to 2018 and 2020, and similar situations in Montreal.

In both those years, the City of Montréal called for tenders for snow transport. In both cases, the TMD Group was the lowest bidder. However, the city considered all bids too high. It turns to another transport company, Transrvac, concluded an agreement, and then informed TMD that it was invoking its reserve clause and cancelling the call for tenders.

TMD argued because the tender was still open and it had therefore been prevented from bidding on other work, the city could not turn around and come to an agreement with Transvrac. It claimed damages to the extent of the lost profits.

Writing in Miller Thomson’s Quebec construction newsletter, Yann-Julien Chouinard says even though the city had the intention of getting the best price for taxpayers, their tactics, “could discourage companies from participating in tenders given the time and money to invest in preparing a bid in addition to preventing these companies from bidding on other projects.

“Acting as it did, the city violated its legal and contractual obligations. It has not been transparent or fair, and has haggled its contracts. In other words, the court is of the opinion that the city committed a fault towards TMD by negotiating with Transvrac while keeping the call for tenders in effect. TMD was therefore granted the lost profits for these contracts.”

The City of Montreal has applied for appeal.

Worth noting is that in Halifax, the tender was cancelled prior to issuing a new one. In Montréal, separate party negotiations took place while the tender remained in place.

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