Is the business of tendering fairer now than it was before Ron Engineering? Is the industry better off now? To some extent, yes. The courts have forced all participants to take a fresh look at the practice of bidding. Some individual injustices have been corrected. There is less bid-shopping. However, the overall effect is not positive.

Canadian tendering law: it’s all about good intentions

Bidding and tendering after a quarter-century of litigation

By Paul Sandori

Twenty-five years have passed since Ron Engineering fundamentally changed the law of tendering in Canada. The following is an architect’s view of the effect of that change, written by Paul Sandori, editor of the Construction Law Letter and senior consultant with Revay and Associates Limited.

A comment to this article, from a different perspective, by lawyer David Debenham of Lang Michener llp, Ottawa will be published in the upcoming January/February 2007 issue of this publication. His article entitled “The Canadian Tendering Law: It has Always Been About Fairness” was published in our November/December 2004 issue.

Readers comments are welcome and may be published in the next and subsequent issues of the Construction Law Letter.

In 1981, a quarter of a century ago, the decision of the Supreme Court of Canada in the Ron Engineering case transformed the traditional bidding system by introducing a “bidding contract” (Contract A) into what was — up until then — merely a solicitation of offers.

The Revolution

The pre-Ron Engineering system was a simple struggle for advantage. It was a fairly messy system, but served the industry well: Buildings got built, contractors generally made money. Bidders submitted their offers and promised to keep them open for a certain period of time; owners chose what they believed to be the most advantageous bid. One of the bidders got the job, the others tried elsewhere.

Bidders continued to bid knowing perfectly well that owners could — and sometimes did — accept non-compliant bids without penalty. Owners used the system knowing that bidders could — and sometimes did — legally withdraw nominally irrevocable bids by claiming they had made a mistake.

Nobody can argue with the good intentions of the court intervention — to ensure fair competition in the bidding process and certainty of outcome. But is the new system in practice truly fairer and more certain than the dead old model it replaced?

Fairness Comes at a Price

In the old system, the owner could not accept a bid once informed that it contained a mistake. Now he can. The immediate result of the Ron Engineering decision in 1981 was the new principle that a bidder generally cannot withdraw a bid by reason of mistake unless the mistake is evident “on the face of the bid” which is rarely the case. A genuine but hidden error in preparing the bid could, and on more than one occasion did, lead to the mistaken bidder paying costly damages or even being wiped out.

Several years after the original decision it gradually emerged that both parties to Contract A have obligations. The fundamental obligation of the owner is to treat all bidders fairly which means, in essence, not awarding the contract to a non‑compliant bidder. Most of the lawsuits now focus on this one issue — what is, and what is not, compliant with the bid documents. Compliance has become a minefield for owners and even their consultants:

• The owner can do its best in assessing a bid yet, when tested in court, the result can be found wanting. The court can find that the owner’s “subjective” opinion is invalid and substitute its own “objective” decision. A mistake in accepting or rejecting a bid may cost the owner a fortune.

• Traditionally, an owner would rely on its consultant’s advice in selecting a bid. Now, the issue of compliance creates for the consultant a risk completely out of proportion with any fee it can hope to get for advising its client in a bidding situation. An honest recommendation to the owner may result in the consultant being wiped out by damages if the court disagrees with the recommendation.

As far as I know, there is only one reason no owner has so far been forced into bankruptcy by mistakenly accepting a bid that, in the opinion of the court, was non-compliant: All the owners hit with such judgments have been public owners.

At least one consultant has been financially crippled for offering mistaken advice. The consultant was not negligent. It was just that, a couple of years later, the court knew better.

The compliance issue has pushed the issue of mistaken bids off the front burner in bidding litigation. After many unsuccessful attempts in the courts to evade directly the harsh results of mistaken bids, bidders have found an indirect solution that is rather demeaning but seems to work in some cases. The unfortunate mistaken bidder now tries to convince the judge that its own bid is non-compliant and cannot be accepted!

The More the Merrier?

Ron Engineering unlocked the floodgates of litigation. They are opening wider and wider. Subcontractors are now getting in on the feast and suing general contractors for awarding the work to a non-compliant sub and so contractors may now find their choice being second-guessed by a judge. In a recent case, the contractor’s decision not to accept the lowest subtrade bid cost it a tidy sum of money in damages. Can suppliers be far behind?

Obtaining prices from trades and suppliers is not the same as a bid call. Until the moment a subtrade is named in the general bid, a general contractor should be allowed to reject a subtrade bid for subjective reasons, such as “I don’t like your attitude. I don’t think I can work with you.” There will be no court available to help the contractor during the construction process if the sub with the bad attitude causes delay and extra cost. Help may be there afterwards, at the cost of more litigation.

Are We Fair Yet?

• Is it really fair for a bidder to create a windfall for the owner by having to pay the difference between its own mistakenly low bid and the next (realistic) one?

• Is it really fair for an owner or consultant to pay damages for a mistake in a contract award when — as has happened more than once — even a judge cannot reach the right decision and is corrected by an appellate court?

• Is the uncertainty of outcome in the process of awarding contracts fair? Owners and bidders now achieve certainty regarding compliance only at the end of a trial. In the bidding game, the referee sets the goalposts long after the game is over, and three other referees may later move them yet again. It can take nine referees to finally fix them for good.

The Hidden Cost

Contractors like being able to win their lost profit if their bid is unfairly passed over in favour of a non-compliant bidder. The rewards, if they win, are attractive: they profit on the lost job without having to do the work. But, to paraphrase the Trojan priest, fear the courts even when they bring gifts:

• All too often, costly effort invested in the preparation of a bid can be rendered instantly worthless by some error in the paperwork. It is a common occurrence to see an owner regretfully rejecting very good bids even for minor non-compliance, out of fear of litigation and the possibility that a judge may find the non-compliance significant enough to award substantial damages to the plaintiff (but such rejection may land the owner in court for rejecting a compliant bid).

• There is also the cost of delays in the awarding of contracts caused by uncertainty. In construction, time is usually of the essence; not so in legal proceedings. Disputes and litigation before the project even begins typically cause major delays and poisoned relationships during construction when co-operation and mutual trust are of utmost importance.

The Basic Misunderstanding

Bidding is not the Olympic 100-metre dash where the objective of the competition is simple, and the rules can be clearly defined: The winner is the person who crosses the finish line first.

Bidding is different. Hundreds of lawsuits over compliance have been decided by the courts in the last 15 years or so, and many hundreds more settled outside the courts. The flood continues unabated. Bidders and owners keep making compliance mistakes not because they are generally dumb and/or unfair but because bidding is not a simple competition.

A call for bids is just an early stage in an effort to assemble a large team that will collectively engage in the very complex task of constructing a building, and do it within the limits of the owner’s budget and schedule. Defining the exact requirements for such a task is extremely difficult; complying with them equally so. Attempting to address in advance issues that very often can only be recognized once the bids are in, is almost impossible. These difficulties have always been the raison d’être of the so-called privilege clause.

The problem is not solved by prequalification. All that does is to pull the possibly unfair subjective rejection of a bidder out of the competitive process and outside the ambit of Contract A. Is it fair to exclude some bidders by prequalification simply in order to avoid being censured by the courts for such exclusion under Contract A? Would not litigation for unfairness in the prequalification process be justified? Is that maybe the next step, opening the floodgates even wider?

Bid Documents

In summary, the intentions behind Ron Engineering are beyond reproach. The principal outcome, however, is a tremendous surge of litigation — and that, so far, only involves the public sector. The private sector generally carries on as before. Compliance litigation is truly a two-tier justice system.

All this litigation is clearly bad for the industry yet the typical bid documents have changed very little in the last quarter century. The construction industry seems worse than the Titanic: it seems unable to change course even after it hits the iceberg — it sails on undeterred towards the next one.

The revolution in the law of bidding has not inspired any new thinking. Generally, the only noticeable changes in the bid documents are the more and more elaborate privilege clauses that rarely achieve their objective. Several possible alternatives to the “business as usual” approach remain almost totally unexplored. One such method, prompt binding arbitration, was explored in a recent issue of the Construction Law Letter.

The law of bidding as it now stands is strong medicine, with serious side-effects. It may take the construction industry a long time to change course and adjust the way it does business in order to give effect to the first and avoid the latter. Until that change happens, a large amount of time, money and effort will continue to be transferred every year from construction to litigation.