If the owner gives the construction contract to someone whose bid was non-compliant, the issue is whether the owner has in any way committed a breach of Contract A.

Discretion clause allowed owner to consider non-compliant bids

Paul Sandori
Revay and Associates Limited
Editor, Construction Law Letter

Kinetic Construction Ltd. v. Comox-Strathcona (Regional District)

Owner accepted bid containing two qualifications • discretion clause allowed for owner to reject or retain non-conforming bids • unsuccessful compliant bidder sued owner • claim dismissed at trial and on appeal • there was no breach of contract as discretion clause allowed for acceptance of non-compliant bid • each case to depend on exact words of contract

In 2002, the Regional District of Comox-Strathcona in British Columbia issued a Request For Proposals for the construction of an infrastructure project. Six proposals were submitted; the lowest were those of Kinetic Construction Ltd. and D. Robinson Contracting Ltd.

The bid documents contained the following so-called “privilege” (23.1) and “discretion” (23.2) clauses:

23. ACCEPTANCE

1. The Owner reserves the right in its absolute discretion to accept the Tender which it deems most advantageous to itself and the right to reject any or all Tenders, in each case without giving any notice. The lowest or any Tender will not necessarily be accepted. In no event will the Owner be responsible for the costs of preparation or submission of a Tender.
2. Tenders which contain qualifying conditions or otherwise fail to conform to the instructions to Tenderers may be disqualified or rejected. The Owner may, however, in its sole discretion, reject or retain for its consideration Tenderers, which are non-conforming because they do not contain the content or form required by the Instructions to Tenderers or for failure to comply with the process for submission set out in these Instructions to Tenderers.

The bids were analyzed by an engineering consultant, Earth Tech Inc. The consultant preferred Robinson but found that its bid contained two qualifications which decreased the scope of the work covered by the bid. Nevertheless, in Earth Tech’s opinion, the defects in Robinson’s bid were minor, and the bid was acceptable. Based on the consultant’s recommendation, the contract was awarded to Robinson.

Kinetic asked the B.C. Supreme Court to award it damages suffered as a result of not having been awarded the contract. Its main argument was that the Robinson bid was non-compliant and therefore could not be accepted.

In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., the Supreme Court of Canada decided that a privilege clause (“lowest or any tender shall not necessarily be accepted”) entitles the owner not to award the contract to the lowest bidder. However, said the court, there still remains an obligation not to award the contract to a non-compliant bidder. A non-compliant bid does not represent acceptance of the owner’s offer to enter into a Contract A. It is merely a counter-offer, and cannot create Contract A.

If there is a discretion clause in the bid documents (“the Owner may, …in its sole discretion, reject or retain for its consideration non-compliant tenders”), then a non-compliant bid will not automatically give rise to a Contract A.

The trial judge found that Kinetic’s bid, which was compliant, created a Contract A with the District automatically, the moment it was submitted. In contrast, Contract A arose between Robinson and the District when the District exercised its privilege to consider its bid despite the bid’s non-compliance. The District was entitled to award Contract B to Robinson on the basis of the discretion clause, decided the judge, and dismissed Kinetic’s claim.

Kinetic appealed. The Court of Appeal for British Columbia unanimously rejected the appeal.

Justice Braidwood of the Court of Appeal decided that there was no breach of contract between Kinetic and the Owner because of the discretion clause:

Each case must depend on the exact words of the contract between [the parties]. Accordingly, I see no error in the conclusion reached by the learned trial judge and I would dismiss this appeal.

Justice Southin and Justice Oppal agreed. There is no question that in this case Contract A arose, added Justice Southin. If the owner gives the construction contract to someone whose bid was non-compliant, the issue is whether the owner has in any way committed a breach of Contract A. The terms of Contract A are found in the invitation to bid. There was no breach because Clause 23 construed in light of the whole of the invitation permitted the District to do what it did.

It is interesting and rather confusing to note that, in January 2004, three other judges of the same Court of Appeal (Chief Justice Finch and Justices Mackenzie and Thackray) reached a different conclusion in Graham Industrial Services Ltd. v. Greater Vancouver Water District.

The owner’s right to rely on the discretion clause as a term of Contract A only arises if a valid Contract A is formed, wrote Chief Justice Finch in that decision. Contract A is only formed if a bid is compliant. Without Contract A, the discretion clause is not operative. An inoperative discretion clause cannot give the owner the power to decide that a bid is compliant even if, on an objective analysis, the bid is materially non-compliant.

Although the Supreme Court of Canada examined the effect of the privilege clause in M.J.B. Enterprises, in that case the clause related to the owner’s exercise of discretion after Contract A had already been formed. The Court did not address the ability of the owner to dictate subjectively when Contract A would arise through a discretion clause in the bid documents.

So, we have a tie at the appellate level. The issue has nowhere to go but up — to the Supreme Court of Canada.

Court of Appeal for British Columbia
   Southin, Braidwood and Oppal JJ.A.
   September 16, 2004