Summary
On May 23, 2007, the Court of Appeal delivered Reasons for Judgment in Continental Steel Ltd. v. Mierau Contractors Ltd., 2007 BCCA 292. This decision provides further insight into the circumstances in which an owner or contractor who is soliciting bids can reject the lowest price tender.
The Court of Appeal examined the effect of a “privilege clause” within tender documents, a clause which states that the owner does not necessarily have to accept the lowest bid. The Court confirmed that where tender documents contain a privilege clause, an owner or general contractor can take a more “nuanced” view of cost than simply comparing the bid amounts. In appropriate circumstances, the owner can accept a bid with a higher dollar amount without exposing itself to a successful lawsuit by the lowest bidder.
Background Facts
Mierau Contractors Ltd. (“Mierau”) was a general contractor submitting a bid for the construction of a school. The invitation required sealed bids for certain sub-contracts, including steel work, to be filed with the British Columbia Bid Depository. Mierau sent out bid invitations for the steel work to various subcontractors, including Continental Steel Limited (“Continental”).
Continental was the lowest bidder for the steel work with a tender price of $233,771.00. PMC Builders and Developers (“PMC”) was the second lowest bidder at $239,000.00, approximately $5,000.00 above Continental’s price. Mierau’s estimator reviewed the bids and considered the tight schedule for the completion of the school. Due to certain knowledge he had of Continental and his past dealings with that company, Mierau’s estimator believed that proceeding with Continental might result in disputes that could delay the completion of the project.
Mierau made inquiries of other construction companies that had had dealings with Continental. In response to those inquiries, Mierau received some discouraging comments about Continental. In addition, and based on information from another Mierau employee who had had discussions with Continental, Mierau’s estimator concluded that it was Continental’s standard policy to place liens on projects to ensure payment. Based on its inquiries, Mierau determined there was potential for difficulty and delay to the project if it awarded the steel work sub-contract to Continental.
Mierau concluded that the bid of PMC would provide the best value. Mierau’s estimator held the view that had Continental’s bid been $15,000.00 lower than PMC’s, he would have accepted the higher level of risk in proceeding with Continental and awarded the sub-contract to that company. However, with a difference in bids of only $5,000.00, Mierau believed the best value was to be had by awarding the sub-contract to PMC. Mierau did so and rejected Continental’s bid.
Even though there was a privilege clause within the tender documents that reserved to Mierau “the right to reject the lowest, or any tender, or all tenders, for any reason at [its] sole discretion”, the Court held that Mierau had an obligation to treat all bidders fairly. However, that did not mean the contractor was obligated to accept the lowest bid. Because it had a privilege clause in its documents, Mierau was entitled to take into account all factors and to act in its own best financial interests so long as in doing so it was not unfair to any bidder.
The Court found there were valid objective reasons for concluding that better value may be obtained by accepting a higher bid. In doing so, the Court adopted the reasoning from its earlier decision in Sound Contracting Ltd. v. Nanaimo (City), 2000 BCCA 312. The Court therefore found that Mierau was permitted to accept the second lowest priced bid, by invoking its privilege clause. It had the right to do so because it objectively determined that the second lowest bid was the best value and, in doing so, Mierau dealt with all bidders fairly.
This case also comments on the degree to which an owner or general contractor must investigate concerns about a bidding contractor or its ability to do the work before rejecting a low bid. At the trial level where the Court had allowed Continental’s claim and awarded damages against Mierau, the Judge had been concerned about Mierau’s failure to call evidence from two contractors that had given critical views of Continental to Mierau’s estimator. The Court, however, stated: “That is not the point.” Rather, to meet Continental’s case, Mierau only had to show that it “acted fairly” toward Continental. Mierau did not have to prove that Continental “had a bad reputation in the industry.”
Finally, the Court of Appeal relied on the Supreme Court of Canada’s recent decision in Double N Earthmovers Ltd. v. City of Edmonton et. al., 2007 SCC 3 in holding that there was no need for Mierau to follow up with Continental to investigate the alleged policy to file liens on jobs as a matter of routine in order to ensure payment. In Double N, the Supreme Court had held that an owner does not have a duty to investigate bids “to see if the bidders will really do what they promised in their tender.” What matters, according to the Court of Appeal, is that an owner or general contractor treat all bids “fairly and equally.” In the circumstances of this case, the Court of Appeal held that Mierau had done so in rejecting Continental’s bid and awarding the contract to PMC.
Important Principles
The following principles can be taken from this recent decision:
1. The law requires fair and equal treatment from an owner or a general contractor in choosing which bid to accept. This duty exists even in the presence of a “privilege clause” within tender documents.
2. If the tender documents contain a privilege clause, an owner or general contractor may look at more than price when determining which bid offers the best value. However, the criteria used in assessing bids must be applied objectively and not arbitrarily. The assessment must be equally fair to all bidders.
3. If two bidders’ prices are relatively close, and there are reasonable grounds to believe that one bidder may be disruptive or could potentially cause delay to a project, then the owner or general contractor can legitimately consider those factors in determining which bid offers the best value.
4. In responding to a claim of a low bidder who was not awarded a contract, the owner or general contractor does not have to prove that the bidder had a bad reputation in the industry, only that the process used to select the successful bidder was fair and equal to all bidders.
5. If there are sound financial reasons for accepting a bid with a higher price, it is likely that the Court will accept that there were “valid and objective” reasons for not awarding to the lowest bidder.
In conclusion, this decision will permit owners and general contractors somewhat more flexibility in not accepting the lowest priced bid. However, one must keep in mind that the Court relied heavily on the objective criteria that the general contractor applied in not accepting the lowest bid. The Court also relied on the fact that both bids were very close.
As an owner or general contractor, if you are considering accepting a bid other than the lowest, you should ensure that you act fairly and document the steps you have taken to objectively evaluate the bids. To avoid a successful claim from a low bidder, an owner or general contractor must be able to show objectively there was better value in accepting a different bid.
Prepared by former Associates, David Plunkett and Graham MacLennan
