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The risk continues
Court decision shows lawsuits still likely
By Denis Chamberland
In Purchasing b2b’s January/February issue, Paul Emanuelli touched on several bidder-on-bidder battles. Here’s a more in-depth look at one particular case, R. v. Ron Engineering, and its implications for purchasers, written by Denis Chamberland.
Most business people in Canada know the laws on competitive bidding apply to the public sector.
What most people don’t know is those same laws often apply in the private sector, between companies doing business with each other. What’s even less known is many of the laws that govern competitive bidding are found outside the tender document itself.
No matter how well drafted a request for proposal document might be, the case law will always come in to define the rights and obligations of the parties to the process. In many cases, particularly in the event of a dispute, the case law will be decisive.
Revolution in case law
Until not very long ago, purchasing was governed by traditional contract law. This changed abruptly in 1981 with the Supreme Court of Canada decision in The Queen in Rights of Ontario v. Ron Engineering and Construction (Eastern) Ltd.1 (“Ron Engineering”).
The case revolutionized the purchasing process in Canada by addressing tendering problems using something other than traditional contract law.
The facts in Ron Engineering are straightforward. Ron Engineering submitted a bid of $2.7 million, along with a bid deposit in response to a Government of Ontario tender. Minutes after the closing of the bids, Ron Engineering discovered it had mistakenly priced its bid too low by about $750,000. Since the mistake was an error in calculation, it was not obvious by a plain reading of the proposal document. The company immediately sent a telex to the Government notifying it of the error and asking that the bid be withdrawn.
Unfortunately for Ron Engineering, its bid was the lowest. The Government refused to allow the withdrawal and accepted the company’s bid. But when Ron Engineering refused to sign the contract for the construction work described in the tender document, the Government took the company’s bid deposit of $150,000 and awarded the contract to the next lowest bidder.
Ron Engineering sued for the return of its deposit, and the Government counterclaimed for damages from having to accept a higher bid. The trial judge sided with the Government while the Ontario Court of Appeal sided with the company.
The Supreme Court of Canada decided it was time to try to finally resolve a situation that had plagued the construction industry for years. Until then, bidders had too often been in the habit of submitting frivolous bids. If the lowest bidder thought the pricing of its bid was too low after all, it would withdraw its bid at any time after the closing of the bids, without suffering any legal sanctions. That left the issuer of the tender document stranded, having to incur the additional costs of navigating the procurement labyrinth.
On the facts, the Supreme Court of Canada sided with the Government. The tender document was clear that the bids were to be irrevocable and that bidders could not withdraw their bids after closing without losing their bid deposits.
Two contracts
The unique innovation of the Supreme Court of Canada in the case was its ruling that not one, but two contracts are created in a competitive bidding situation—Bid Contract A, between the issuer of the tender (the “issuer”) and each bidder, governs the competitive bidding process, and Tender Contract B, between the issuer and the successful bidder, governs the project work itself.
The Bid Contract arises at the moment a compliant bid is submitted to the issuer and both parties are bound by the rules and procedures stated in the tender document. The decision was designed to protect the integrity of the competitive bidding system by ending the arbitrary withdrawal of bids and stabilizing the purchasing cycle.
What is the importance of Contract A? When Contract A arises, the bidder is no longer free to withdraw its proposal after the closing of the bids. In turn, the issuer is not allowed to change the terms of the tender document after a bidder has been selected.
This is not always an easy path to follow for an issuer. There can be many legitimate—and unforeseen—reasons for wanting to amend bid documents after a bidder has been selected. The goal of Contract A is to freeze the process as of the closing of the bids so that all bidders are treated fairly and equally in the process that follows.
Impact of the case
The Contract A analysis was applied to literally thousands of practical purchasing problems since 1981. The courts have had a lot to say about purchasing, including the Supreme Court of Canada, which has consistently sought to balance the rights and obligations of the parties to the bidding process, particularly in the areas involving the following fundamental duties: to provide proper disclosure; to conduct a fair evaluation process; to award Contract B to the winning bidder; and to award Contract B as contemplated in the tender document.
The business of purchasing has become especially complex in the last five to ten years. Who could have imagined that a simple bid calculation error would one day come to revolutionize an entire discipline? b2b
Denis Chamberland is vice-president ABTS of Global LP, a procurement and IT consulting firm in Toronto; and a partner with the law
firm Aird & Berlis LLP. He may be reached at dchamberland@
abtsglobal.com or at (416) 865-3078.
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