The court found that under privilege clause, the owner did not have to give reasons for rejecting the lowest bid, but in not giving them it took a risk that a judge would be justified in finding a breach of the owner’s contractual obligation to treat a bid fairly.

Privilege Clause In Bid Document Includes Obligation Of Fairness

by Paul Sandori

Tarmac Canada Inc. v. Hamilton-Wentworth (Regional Municipality)

Privilege clause in bid documents provided Region with right to reject lowest bid ? company submitted bid lower than second lowest bid by $20,000 but was not awarded contract ? trial judge found privilege clause implied obligation of fairness ? Court of Appeal dismissed appeal ? while not obliged to give reasons, Region took risk in failing to give reasons

The main issue in this case was the meaning and scope of the so-called privilege clause in bid documents.

The Regional Municipality of Hamilton-Wentworth issued a call for bids to construct a road. Only prequalified contractors could submit bids. The bids were based on unit prices for the areas and quantities stipulated in the bid documents.

Thus, the only differences between the various bids were in the unit prices and the totals resulting from multiplying the given areas and quantities by those prices. There was no scope for variation of the work, the method of doing it or the nature or quantity of the materials to be used.

The privilege clause in the bid documents provided:

The Region reserves the right to reject any or all bids submitted or any part and the lowest or any bid will not necessarily be accepted.

There was no indication in the bid documents of any policy or criteria to be used in exercising the privilege.

George Wimpey Canada Limited (now Tarmac Canada Inc.) submitted the lowest of the six bids, with a total price of $8,507,000. The second lowest bid was that of Dufferin Construction Company, approximately $20,000 higher.

The Region?s Director of Roads, the official responsible for administering the bidding process and analyzing the bids, recommended that the contract be awarded to Tarmac as the lowest bidder.

However, Dufferin was a local contractor, paying large sums in realty and business taxes to the Region. It employed over 250 workers who lived in the area. At the time, most of them were laid off due to lack of work. Dufferin had worked for the Region before, on a number of projects, while Tarmac had not.

Dufferin lost no time in pointing all this out to the Region, adding that there would be no repercussions if the contract were awarded to other than the lowest bidder. The Region gave in and awarded the contract to Dufferin, without giving a reason.

Tarmac sued. It argued that the owner has a duty to all bidders to treat them fairly and in good faith, therefore the owner must accept the lowest bid subject only to qualifications stated or implied in the bid documents regardless of the privilege clause.

Tarmac relied on Chinook Aggregates v. Abbotsford to show that the owner does not have the right to rely on undisclosed criteria. The principle of fairness was clearly stated in the decision of the Supreme Court of Canada in Best Cleaners and applied in Kencor Holdings Ltd. v. R. The principle was also followed in several other cases.

The Region, on the other hand, took the position that the privilege clause was plain and unambiguous. It allowed the owner to reject the low bid without being obliged to give its reasons for doing so. This was made clear in the decision of the Ontario Court of Appeal in Acme Building & Construction Ltd. v. Newcastle (Town):

? even if there was acceptable evidence of custom and usage known to all the tendering parties, it could not prevail over the express language of the tender documents which constituted an irrevocable bid once submitted, and a contract when and if accepted.

The court in the Acme case decided that the privilege clause:

? gave the [owner] the right to reject the lowest bid and accept another qualifying bid without giving any reasons.

In that case, there was a privilege clause very similar to the one in Tarmac?s case, but there was no undisclosed policy of preferring local contractors. The owner accepted a bid that provided for an earlier completion date than the low bid and included a greater number of local subcontractors. The bid documents requested information on completion periods and local subcontractors.

The Region argued that the privilege clause was broad enough to allow rejection of the lowest bid for any reason other than fraud, including favouritism to a local contractor. The Regional Council should be answerable only to its voters when it rejects the lowest bid and the court should not interfere with such a political decision.

Justice Cameron of the Ontario Court found the words of the privilege clause in the contract to be short, simple and understandable. He found no custom in the trade which could modify them. The owner therefore could accept or reject any bid, and need not give reasons for rejecting the lowest bid.

However, Cameron J. found that the law implies an obligation of fairness when the owner exercises its rights under the privilege clause. When the Supreme Court in the watershed Ron Engineering decision laid down the law of bidding and tendering it emphasized the need to protect the integrity of the bidding system. This means that the owner must ensure that all bidders bid on the same basis, with no hidden preferences.

The language of the privilege clause was clear, but not clear enough: more explicit language would be required to exclude the implied obligation of fairness and good faith. Moreover, if there is any doubt, the rule of contra proferentem can be applied to interpret the clause against the party who drafted it. The court concluded:

In the circumstances of this case, the [general contractor] has established on the balance of probability that the [owner] did not act fairly or in good faith when it awarded the contract to a tenderer who was not the low bidder, and no basis of possible decision on other grounds was disclosed in, nor can one be implied from, the tender documents or any published policy of the [owner].

This finding does not strip the privilege clause of all meaning, added the judge. It still permits the owner to reject the low bid in the case of some force majeure, or if it decides not to proceed with the project because the bids are above budget, or if changed circumstances negate the viability of the project or adversely affect the low bidder?s qualifications. It would also permit rejection based on a pre‑published policy.

In coming to his decision, the judge took into account the fact that the owner did not give any reasons for its decision. He accepted that Acme gave the owner the right not to give reasons, but added:

? in the absence of possible grounds in the tender documents or a published policy ? [the owner] risks an adverse finding of fact by the court.

The court awarded Tarmac damages amounting to the difference between the revenue it would have received had it been awarded the contract and the costs it would have incurred in performing the work if economically and skillfully done. The Region appealed.

In a unanimous judgment, the Court of Appeal for Ontario upheld the decision of the trial judge. In Acme, the owner relied on the privilege clause in awarding the contract to a bidder who was not the lowest, but it gave reasons for doing so. These included the earlier date for completion specified by the successful bidder, and the costs that would save the owner. The completion date was a material term specified by the bid documents and the owner was entitled to base its decision on that element of the bids. There was no breach of the duty to act fairly.

The court rejected the Region?s argument that the trial judge was wrong in taking into account the Region?s failure to give reasons. The owner did not have to give reasons, but in not giving them took a risk. In view of the circumstances surrounding the award process, decided the court, the judge was justified in finding a breach of the owner?s contractual obligation to treat Tarmac?s bid fairly.

The court dismissed the Region?s appeal, with costs.

Court of Appeal for Ontario

McMurtry C.J.O., O?Connor and Sharpe JJ.A.

September 13, 1999