Introduction
When the Supreme Court of Canada granted leave to appeal from the decision of the Alberta Court of Appeal dismissing the claim of M.J.B. Enterprises Ltd. (“M.J.B.”) for damages for breach of contract against Defence Construction (1951) Ltd. (“Defence Construction”), the decision of the Court on the nature of the owner’s obligations upon receipt of tenders and the legal effect of the privilege clause in the tender documents was eagerly awaited by owners, contractors and professional service providers to the construction industry. The decision in M.J.B. was to be the first significant pronouncement from the Supreme Court of Canada on the law of tender since the landmark decision in The Queen in right of Ontario v. Ron Engineering and Construction (Eastern) Ltd. (“Ron Engineering”).
Since the decision in Ron Engineering in which the Supreme Court of Canada found that, upon the submission of a tender, a contract arose between the contractor and the owner which imposed certain obligations upon the contractor (referred to in the decision as “Contract A” as distinguished from the construction contract itself which was referred to as “Contract B”), a whole body of caselaw had developed which suggested that a contract is always formed upon the submission of a tender and that a term of this contract was the irrevocability of the tender. Lawyers acting on behalf of contractors were urging courts across the country to construe the dicta of Mr. Justice Estey in Ron Engineering of the desirability of preserving the integrity of the tender process as an invitation to impose or imply a duty of fairness and good faith on the part of the owner which required the owner to award a contract to the lowest bidder whether or not the tender documents contained a privilege clause. These efforts met with mixed success. For the most part, the courts were inclined to uphold and give effect to privilege clauses in tender documents which permitted the person calling for tenders to disregard the lowest bid in favour of any other tender. The general consensus among those in the construction industry was that the issues arising for determination in M.J.B. Enterpriseswould permit the Court to clarify and expand upon the principles arising from the Ron Engineeringdecision and provide a clear statement of the obligations arising out of the tender process.
The Underlying Facts
Defence Construction had invited tenders for the construction of a pump house, the installation of a water distribution system, and the dismantling of a water tank on the Canadian Forces Base in Suffield, Alberta. The instructions to tenderers included a privilege clause which stated:
“The lowest or any tender shall not necessarily be accepted.”
Amendments to the tender documents before tender closing required the tenderers to submit only one price per lineal meter for the water distribution system, regardless of the type of fill which would ultimately be designated by the engineer during construction. Four tenders were received, including one from M.J.B. Enterprises. The low bidder was Sorochan Enterprises Ltd. (“Sorochan”). The tender submitted by Sorochan included a handwritten note stating:
“Please note: unit prices per meter are based on native backfill (Type 3). If Type 2 material is required from top of pipe zone to bottom of sub-base material for gravel or paved areas, add $60.00 per meter.”
As noted by Mr. Justice Iacobucci, the instructions to tenderers included provisions outlining the conditions upon which a tender may be found to be invalid.
The courts in Alberta found that the note to the tender submitted by Sorochan invalidated the tender but that the privilege clause permitted the owner to accept the lowest tender submitted by Sorochan notwithstanding that the tender was invalid.
Sorochan was awarded the contract and performed the work. M.J.B. Enterprises advanced a claim against Defence Construction for the loss of profit and other damages which it sustained as a result of not having been awarded the contract as the company submitting the lowest valid bid.
The Issue
Mr. Justice Iacobucci characterized the issue in the opening paragraph of his judgment as follows:
The central issue in this appeal is whether the inclusion of a “privilege clause” in the tender documents allows the person calling for tenders (the “owner”) to disregard the lowest bid in favour of any other tender, including a non-compliant one.
In argument, M.J.B. contended that Defence Construction had an obligation to award the contract to the lowest compliant tenderer. Two arguments were advanced in support of that contention, the first that it was an explicit term of the tender contract (Contract A) that the construction contract be awarded to the lowest compliant bidder and the second that even if such a term was not expressly incorporated into the tender package, it was an implied term of Contract A.
The Decision
The Supreme Court of Canada reviewed the principles arising out of the decision in Ron Engineering, which it characterized as being the leading authority in Canada on the law of tenders, and declined to find any implied obligation on the part of the owner arising from the tender documents to award the contract to the lowest bidder. Specifically, the Court rejected the argument that, by adopting the Federal Standard Rules of Practice for Bid Depositories which, in turn, incorporated local rules where those local rules were not in conflict with the Federal Standard Rules, the owner had incorporated by reference in the tender documents an explicit obligation to award the contract to the lowest compliant bidder. The Court also rejected the argument that it was an implied term of the tender documents that the contract would be awarded to the lowest compliant tenderer. The Court expressly concluded that on a review of the tender documents, including the privilege clause, there was no support for the proposition that the lowest compliant tender was to be accepted.
The Court did find that on the basis of traditional common law principles relating to the circumstances in which a court may find an implied term of a contract, it was an implied term of the tender contract in this case that Defence Construction would accept only a compliant tender.
Analysis
In reviewing the principles arising from the decision in Ron Engineering the Supreme Court of Canada once again approved the analysis of Estey J. that the contractor’s submission of the tender in that case created a contract, termed “Contract A”, which was to be distinguished from the construction contract to be entered into upon the acceptance of one of the tenders, termed “Contract B”, and that the terms of Contract A were governed by the terms and conditions of the tender call.
The Court, however, expressly refuted the suggestion that Contract A is always formed upon the submission of a tender as well as the notion that it is always a term of Contract A that a bid submitted is irrevocable. While the Court acknowledged that there were many statements in Ron Engineering which supported these views, Mr. Justice Iacobucci found that:
Therefore, it is always possible that Contract A does not arise upon the submission of a tender, or that Contract A arises but the irrevocability of the tender is not one of its terms, all of this depending upon the terms and conditions of the tender call. To the extent that Ron Engineering suggests otherwise, I would decline to follow it.
I also do not wish to be taken to endorse Estey J.’s characterization of Contract A as a unilateral contract in Ron Engineering. His analysis has been strongly criticized.
In M.J.B., the Court did not carefully analyze the evidence in support of the argument that by referring to the Federal Standard Rules of Practice for Bid Depositories in the notice to the construction industry of the call for tender, Defence Construction had expressly incorporated by reference a term in Contract A that Contract B would be awarded to the lowest compliant tender. The Court dismissed the argument as unpersuasive given that it was unclear whether the Federal Standard Rules were to apply to general contractors or to trade subcontractors and given that the tender documents themselves contained no reference to the Federal Standard Rules of Practice.
In analyzing whether such a term was to be implied in Contract A, the Court applied the general principles for finding an implied contractual term outlined by the Supreme Court of Canada in Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711, 40 D.L.R. (4th) 385, that terms may be implied in a contract:
1. based on custom or usage;
2. as the legal incidence of a particular class or kind of contract; or
3. based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract” or as otherwise meeting the “officious bystander” test as a term which the parties would say, if questioned, that they had obviously assumed.
The Court went on to find that it was an implied term of Contract A that only a compliant tender would be accepted. As noted above, the Court expressly rejected the argument that the terms of Contract A required that the lowest compliant bid be accepted:
As mentioned, Le Dain J. stated in Canadian Pacific Hotels Ltd., supra, that a contractual term may be implied on the basis of presumed intentions of the parties where necessary to give business efficacy to the contract or where it meets the “officious bystander” test. It is unclear whether these are to be understood as two separate tests, but I need not determine that here. What is important in both formulations is a focus on the intentions of the actual parties. A court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties. This is why the implication of the term must have a certain degree of obviousness to it, and why, if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis. As G.H.L. Fridman states in The Law of Contract in Canada, Third Edition (1994), at p. 476:
In determining the intention of the parties, attention must be paid to the express terms of the contract in order to see whether the suggested implication is necessary and fits in what has clearly been agreed upon, and the precise nature of what, if anything, should be implied.
In this respect, I find it difficult to accept that the appellant, or any of the other contractors, would have submitted a tender unless it was understood by all involved that only a compliant tender would be accepted. However, I find no support for the proposition that in the face of a privilege clause such as the one at issue in this case, the lowest compliant tender was to be accepted. A review of the tender documents, including the privilege clause, and the testimony of the respondent’s witnesses at trial, indicate that, on the basis of the presumed intentions of the parties, it is reasonable to find an implied obligation to accept only a compliant tender.
Having found that the contract contained an implied term that only compliant tenders would be eligible, the Court went on to find a breach by Defence Construction of Contract A in accepting the (invalid) Sorochan tender which entitled M.J.B. to recover damages for breach of contract. The Court proceeded to consider other evidence which was introduced at the trial to determine whether, absent the breach, it was likely that M.J.B. would have been awarded the contract. On the basis of the fact that:
a) M.J.B. was the next lowest bidder to Sorochan;
b) M.J.B. had previous experience performing Defence Construction contracts;
c) Defence Construction had no reservations respecting the ability of M.J.B. to perform the work; and
on the basis of an admission at trial that, had Defence Construction considered the Sorochan tender to have been defective, it would have awarded the contract to the next lowest bidder, the Court found that, on a balance of probabilities, M.J.B. would, apart from the breach of Contract A, have been awarded the construction contract. The issue of the damages recoverable by M.J.B. was referred back to the Alberta Trial Division for consideration.
What Does the Decision in M.J.B. Mean to the Construction Industry?
Viewing the decision as a whole, the judgment in M.J.B. appears to amount to a re-affirmation of the fundamental principles of contract and, in particular, the freedom of contracting parties to determine the nature of the obligations which they are prepared to undertake.
The decision as a whole reinforces the principles of freedom of contract. The Court expressly finds that not all tender calls or the submission of tenders will necessarily give rise to contractual obligations or support a finding that a contract has been entered into when a bid is submitted. Whether or not the submission of a tender in response to a tender call will give rise to contractual obligations will depend for the most part upon what is contemplated by the tender documents. One could, without much difficulty, conceive of situations in which a court could characterize what has been termed a call for tenders to amount to nothing more than a request for an expression of interest which will not give rise to contractual obligations.
Where the terms of the tender documents are sufficiently definite to support a finding that the submission of a tender gives rise to Contract A between the person calling for tenders and the contractors submitting tenders, the obligations arising under Contract A will be determined in each case by the terms of the tender documents and, most importantly, by the terms of the “Instructions to Tenderers” and the Form of Tender.
The decision in M.J.B. reinforces the view that a court may not imply a term in a contract based on custom or usage to override the express provisions stipulated by the parties. The Court referred to its earlier decision in Cartwright v. Crickmore Ltd. v. MacInnes, [1931] S.C.R. 421, at p. 431 [1931] 3 D.L.R. 693, that:
There can be no recognized custom in opposition to an actual contract, and the special agreement of the parties must prevail.
Accordingly, it will presumably be open to an owner to expand the privilege clause in the tender documents in a manner which would enable the owner to accept even non-compliant tenders if the privilege clause is sufficiently broad to permit the court to find that such a term was part of Contract A. While a provision of this nature would provide little comfort to contractors submitting tenders, contractors would at least know before embarking upon the tender that the terms of Contract A, (assuming that the obligations arising from the tender documents are sufficiently definite to give rise to a contractual relationship), permit the owner a virtually unfettered discretion to accept either a compliant or non-compliant tender. Most tender documents require strict compliance in the submission of the form of tender. It is likely, therefore, that the tender documents will be construed by the courts to require the owner to accept only compliant bids unless a specific term is inserted in the terms and conditions which permits the owner to accept a non-compliant bid or to waive any defect in the form of tender.
From the owner’s perspective, the decision in M.J.B. will require owners and their consultants to exercise greater diligence in drafting the provisions of the tender documents to protect and advance the owner’s interests. Where the terms of the tender documents contemplate, either expressly or by implication, that only compliant bids will be eligible for acceptance, the owner and its consultants must be diligent to ensure that tenders under consideration comply in all material respects with the requirements of the tender documents. Contractors and their consultants will also have to ensure that the form of tender submitted complies in all respects with the terms and conditions of the tender documents.
From the contractor’s perspective, unsuccessful bidders would be well advised to carefully review the requirements of the tender documents and the bids submitted by their competitors to determine whether the accepted bid complied with the requirements of the tender documents and whether the privilege clause on its true construction permitted the owner to accept the tender of the successful bidder. If such a review establishes a breach of the tender contract, the unsuccessful contractor may be in a position to advance a claim for damages if it is able to establish, on a balance of probabilities, that, but for the breach by the owner, the construction contract would have been awarded to the unsuccessful bidder. Absent evidence that the contract would likely have been awarded to the unsuccessful bidder, damages for breach of the tender contract would likely be limited to the cost incurred to prepare and submit the tender.
What the Decision in M.J.B. Does Not Mean
The decision in M.J.B. does not necessarily mean that an owner does not have the discretion to accept a non-compliant bid. In each case, the court will look to the terms of the tender documents to determine whether in fact the submission of tenders will give rise to a contractual relationship and, if so, what the terms of that contractual relationship will be.
The decision in M.J.B. does not necessarily mean that an owner will be exposed to liability if it accepts a non-compliant bid. Here again, the nature of the owner’s rights and obligations under Contract A will depend upon the specific provisions of Contract A and, in particular, upon the particular provisions of the privilege clause, if any, which is included in the tender documents. The decision does mean, however, that, assuming that the terms of the tender documents are sufficiently definite to give rise to a contract upon submission of a valid tender, the owner will be liable for any breach of the terms of that contract, whether they be express or implied. If, of course, the terms of the contract are such that the owner is given a broad discretion by the privilege clause not to accept the lowest, or any, tender, give the owner the discretion to accept an invalid tender or to waive any defect in the tenders submitted, the acceptance of such a tender will not amount to a breach of Contract A by the owner.
In those cases where there is uncertainty respecting the nature of the obligations arising from the tender documents, it is more likely that a court will be inclined to imply a term which is necessary to give business efficacy to the contract. The court will not, however, find an implied term which is inconsistent with the express intentions of the parties to the contract. Where there is uncertainty respecting the owner’s obligations under the tender documents, the owner should carefully review the matter with its solicitors before accepting any tender.
