It is not unusual for tender documents to reserve discretion to an owner to “waive formalities” in accepting a bid.  Such discretion needs to be interpreted in the context of the requirement that an owner may in no circumstances accept a “non-compliant bid”.  But, without further definition, what is considered a “formality” that may be waived?  What risks does an owner in a procurement process face if it waives a formality, or alternatively, if it refuses to exercise its discretion to do so?  These are the questions the Ontario Court of Appeal grappled with in Rankin Construction Inc. v. Ontario.[1]

Background

In August 2005, the Ontario Ministry of Transportation (“MTO”) issued a tender to widen Highway 406.  The tender documents required bidders to declare the value of any imported steel to be used in the project. Bids were ranked based on the lowest “Adjusted Tender Amount”, pursuant to which bidders received a 10% discount for steel that was domestically supplied. For this reason, the disclosure regarding imported steel was relevant to the Adjusted Tender Amount calculation. Importantly, the bid documents also stated that H-Piles – a specified component for the project – were not eligible for the 10% discount.

Rankin mistakenly believed that H-Piles were available domestically, and therefore did not declare the value of the H-Piles as imported steel.  It further erroneously declared a 10% price preference for H-Piles, impacting its Adjusted Tender Amount by $50,000 in its favour.  Rankin’s bid was the lowest overall tender and the lowest Adjusted Tender Amount.  However, even if the H-Pile mistake was corrected, its price would still have been the lowest by a margin of $1.7 million.

A competing bidder – Hard Rock Paving (“Hard Rock”) complained that Rankin’s bid was non-compliant and therefore the contract should be awarded to it as the next lowest bidder.

The MTO conducted an investigation, in which Rankin conceded the H-Pile error.  The MTO concluded that Rankin’s bid was non-compliant, and it was disqualified. The contract was awarded to Hard Rock.  Rankin sued MTO for damages, and lost at trial.  It appealed to the Court of Appeal, on the basis of, amongst other things, (a) the MTO had no right to investigate Rankin’s bid for non-compliance; (b) the nature of the non-compliance was a “formality”, and therefore should have been waived; and (c) a limitation of liability clause in the tender documents, which provided that MTO has no liability for any losses related to the non-acceptance of a bid, did not prohibit Rankin’s claim.

Owners have a right (though not a duty) to investigate non-compliance

Although recognizing that the Supreme Court of Canada in Double N Earthmovers Ltd. v. Edmonton (City)[2] found that there is no implied duty on an owner to investigate a rival’s allegations of non-compliance, that conclusion does not mean that an owner doesn’t have the right to conduct an investigation – provided the tender documents don’t prohibit it.

Here, there was no prohibition to investigate complaints, and the Court rejected the suggestion that such a restriction should be implied.  Rather, the Court found an implied term that the MTO would be fair and consistent in the assessment of submitted tenders.  There was no evidence that Rankin was somehow singled out for investigation, and therefore no basis to suggest that the MTO was acting unfairly or inconsistently.

An investigation of non-compliance needs to be reasonable, not right

The tender documents provided for a “discretion clause” – the right to waive “formalities” in a bid in the MTO’s interest. The questions then became (1) whether the H-Pile mistake was a “formality”, and (2) if so, was the MTO required to waive it.

The Court of Appeal recognized that instances of non-compliance are “seemingly common”.  Where the term “formality” is not defined, determining whether a particular deviation from the tender instructions is or is not a formality, is a difficult question.  For that reason, the Court’s analysis starts with the “hope” that the MTO would review its tender documents to address the lack of definition, which was seen as a shortfall.

Nonetheless the Court itself undertook an analysis of the H-Pile error and ultimately found, contrary to MTO’s conclusion, that it was a formality which could have been waived.  It came to this conclusion based on the finding that the error was an honest mistake (Rankin intended to use domestic steel for the H-Piles), and that the outcome, i.e. the cost to MTO, would have been the same even if the H-Piles were declared as imported steel.  In other words, Rankin’s non-compliance “did not materially affect the price or performance of Contract B”, and therefore amounted to an informality.[3]  Further, the Court found that as the tender process was essentially fair, and Rankin’s bid was materially less costly to the public purse,  balancing the interests of integrity of the procurement process, and obtaining the best competitive price, in this case also weighed in favour of concluding that the H-Pile error was a formality.

However, the Court went on to conclude that whether non-compliance amounts to a “formality” is not determinative of whether the owner acted appropriately.  The question is rather whether the owner’s analysis was reasonable, and in furtherance of the integrity of the bidding process:

Contract A does not require the MTO to waive formalities. In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder. Here, the MTO acted in good faith, and its conclusion that the appellant’s non-compliance was more than a formality – whether or not correct – was reasonable.[4]

The cautious approach taken by MTO was found to be both reasonable and understandable given the risk that if the H-Pile error turned out not to be a mere formality, MTO would have accepted a non-compliant bid and had exposure to liability from the non-successful bidders.

Limitation of liability clauses will most often be enforced

The tender documents contained a limitation of liability provision that provided:

The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents.

The Court considered the test established by the Supreme Court of Canada in Tercon v. British Columbia[5], in reviewing the enforceability of the clause. The only basis on which Rankin challenged the limitation clause, was to say it was not intended to apply to its circumstances: if the MTO rejected Rankin’s bid based on an investigation that it was not authorized to undertake and was wrong in its conclusion that the H-Pile error was a mere formality, then its conduct was outside of the tender rules.  The Court rejected this position.  It found the limitation language to be clear.  A bidder would only ever sue based on the allegation that the MTO breached either an express or an implied term.  Thus to conclude that the clause does not apply where there is a breach by MTO of the tender documents would effectively render the clause meaningless.[6] The Court recognized that there may be circumstances where the owner’s conduct is so egregious that a court would be justified in not applying a limitation of liability provision.  But this was not one of those cases.

Take Aways

The Court of Appeal was sensitive to the conundrums faced by owners, and responded by clarifying the basis on which discretion can be exercised.  Of note:

  • While an owner has no duty to investigate complaints, it generally has the right to do so, so long as the tender documents don’t preclude investigations and the process treats bidders fairly and equally.
  • Although the Court encouraged owners to clearly define what amounts to a “formality”, there could be risk in so doing.  An owner’s discretion needs to be broad enough to address circumstances that often can only be assessed in context.  Defining discretion with particularity may curb an owner’s ability to address unanticipated events and thereby unintentionally undermine the integrity of the procurement process.  What is key is that an owner undertake a bona fide assessment in good faith, and that its decision be reasonable.  As the Court of Appeal found, that trumps whether the owner is correct or not at the end of the day in determining whether the non-compliance was a formality.
  • Discretion is just that: discretion.  An owner isn’t required to exercise it, provided the decision not to is reasonable and made in good faith.
  • Fears that the Tercon decision would lead to courts not applying limitation of liability provisions has been quelled.  Such provisions are indeed enforceable.
  • The Court of Appeal’s decision should not be taken as the Court endorsing a practice of accepting “non-compliant” bids.  That prohibition remains clear.  The “non-compliance” discussed by the Court needs to be read in the narrow circumstance of a non-material deviation from the tender documents, i.e. a “formality”, where the documents specifically provide for a “discretion clause”.