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Battling Bidders: When open competition leads to legal confrontation
By Paul Emanuelli
For purchasers, bidder-initiated lawsuits have long been part of the tendering terrain. However, recent cases show how bidders can also pursue legal remedies against each other. These disputes tend to arise in two distinct situations: (1) between parties co-operating on the same tender submission; and (2) between competing bidders vying for the same contractaward. Recent bidder-on-bidder battles are described in the following examples.
Disputes Within Tendering Teams
In 1981 in R. v. Ron Engineering, the Supreme Court of Canada recognized that a notional contract known as Contract A can apply to the tendering process and create legal obligations and liabilities between purchasers and bidders. The courts have since been divided on how far to expand the scope of these Contract A obligations.
The relationship between a prime bidder and the subcontractors named in its tender is a case in point. The Supreme Court of Canada's 2001 decision in Naylor Group Incorporated v. Ellis-Don Construction Ltd. resolved years of uncertainty by applying the Contract A relationship to a prime contractor and subcontractor who were co-operating through a bid depository system.
In some situations courts have applied Contract A type obligations even where no formal bid depository system is used by parties on a tendering team. By way of recent example:
In A. Dynasty Roofing (Windsor) Ltd. v. Marathon Construction Services (1991) Inc. the Ontario Superior Court of Justice found that a successful bidder was under an implied duty to use the named subcontractor unless there was a reasonable justification for bypassing that subcontractor. In this case the named subcontractor refused to lower its price after close. The contractor awarded the subcontract to another party at a lower price. The Court held that the contractor's bid shopping created a sham of the bidding process. The contractor was found liable to the named subcontractor for lost profits and overhead costs. The defendant appealed but the Ontario Court of Appeal upheld the trial decision.
The recent decision of the British Columbia Supreme Court in Knappett Construction Ltd. v. Axor Engineering Construction Group involved a dispute between joint bidders. One of the joint bidders cut the other out of a contract award by entering into unilateral discussions with the purchaser. The Court found that the joint bidders had agreed to work with each other if selected and that the defendant had breached that obligation. The prejudiced plaintiff was awarded $500 000 in lost profit damages.
Given the inherent legal exposures, members of a tendering team would be wise to formalize their relationship at the outset of their initiative to help guard against such misunderstandings and disputes.
Claims Between Competing Bidders
While Contract A type duties have been applied within tendering teams, the courts have not applied Contract A duties between competing bidders. In a recent preliminary determination in Leeds Transit Sales Ltd. v. Ottawa (City), the Ontario Superior Court of Justice refused to recognize the Contract A based claims of one bidder against another. However, the Court allowed the lawsuit to proceed based on the following tort claims:
The tort of inducing breach of contract, which can arise where a party is aware of a contract between two other parties and induces one of those parties to breach its commitments to the other party. This tort could arise where a bidder induces a purchaser to improperly bypass a competitor's top ranked tender.
The tort of interference with economic relations, which can arise where a defendant intentionally causes the plaintiff to suffer an economic loss by unlawfully interfering with the plaintiff's business. As with inducing breach of contract, the Court recognized that in the right circumstances this tort could apply between bidders.
It is likely only a matter of time before bidders are successful in bringing such tort-based claims against competing bidders.
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Bidder Battles Part of the New Reality
While purchasing institutions have long been the primary target of tendering lawsuits, these recent legal developments show that bidders may be increasingly ready, willing and able to launch lawsuits against each other. Bidder battles are therefore likely to be an ongoing risk factor in the years to come. b2b
Paul Emanuelli is a Toronto lawyer whose practice focuses on government procurement and information technology. This article is excerpted from his forthcoming book, entitled Government Procurement, to be published in the Summer of 2005 by LexisNexis Butterworths. This discussion is for general information and should not be relied on as a substitute for legal advice. Comments can be directed to paul.emanuelli@sympatico.ca
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