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OWNER'S OBLIGATION TO INVESTIGATE WHETHER TENDER COMPLIANT
A recent Ontario Superior Court of Justice case has again raised the issue of whether an Owner (or other tender calling authority) is under an obligation to investigate whether a tender submitted in response to a call for tenders is compliant with the tender terms, or whether the Owner can only evaluate the tender based on the face of the tender as submitted.
The Court appears to have widened the obligation on the tender‑calling‑authority beyond the obligations and limits imposed by the Supreme Court of Canada in the Double N Earthmovers Ltd. v. The City of Edmonton, et al. case (2007), 58 C.L.R. (3d) 4.
The facts in the Double N Earthmovers Ltd. case relate to the calling for tenders by The City of Edmonton for the supply of equipment and operators to move refuse at a waste disposal site. The tender documents issued by The City of Edmonton required that all equipment be 1980 or newer. The conditions for tender also provided that the tenderer was to provide the serial number and the City's licence registration number for each piece of equipment included in the tender. Sureway Construction, which was ultimately awarded the construction contract, listed a 1980 unit regarding Item 1 of the equipment and a “1977 or 1980 Rental Unit” as the equipment for Item 2. After tenders closed but prior to the City awarding the contract to the successful tenderer, Double N Earthmovers Ltd., who had also submitted a tender, advised the City that while Sureway Construction listed a certain piece of equipment as a 1980 unit, it in fact was clear from the serial number that it was a 1979 unit.
The City of Edmonton ultimately awarded the construction contract (Contract B) to Sureway Construction Alberta Ltd. and insisted that Sureway comply with the requirement that the equipment be 1980 or newer. Sureway advised that it would comply with the 1980 requirement but in fact supplied a 1979 unit. The City decided not to pursue the matter, and as reflected in an internal memo of The City of Edmonton, decided that “[t]his file is to be allowed to lie peacefully.”
The matter went through to the Supreme Court of Canada with the majority on a five-to-four decision holding that as the tender call allowed The City of Edmonton to waive an informality and as an informality was something that did not affect price or performance of Contract B “… the absence of licence and serial numbers for the rental unit are precisely the sort of informality condition 7 was designed to address.” The majority of the Supreme Court of Canada hence held that there was no duty on The City of Edmonton to investigate beyond the information contained on the face of the tender and held that on the face of the tender, Sureway's tender was a compliant tender.
The minority judgment of the Supreme Court of Canada on the other hand indicated that in their view substantial compliance requires that all material conditions of a tender be determined on an objective standard. The minority further held that the requirement that all equipment tendered be 1980 or newer was a material term of the tender. The minority judgment at paragraph 111 in part stated:
In the present case, it is not disputed that the requirement that all units bid be 1980 or newer was a material term of the tender. As noted earlier, this requirement was specified on the Tender Form, repeated again in the Equipment Requirements form, and referred to again in the Solid Wastes Branch Tender Specifications form. This was not an idle request. To the contrary, the City insisted on 1980 or newer equipment because in its experience older units tended to break down more frequently. The trial judge concluded that, in the view of the City, the age of the equipment was essential to the tender. Consequently, a failure to bid 1980 or newer equipment would result in a bid that was not substantially compliant with the City's tender request.
The majority of the Supreme Court of Canada held that the tender‑calling‑authority did not have to launch an investigation to satisfy itself that a tenderer will in fact do what the tenderer undertakes to do in submitting its tender form. The minority judgment of the Supreme Court of Canada, however, disagreed with the majority and indicated that the tender documents must be carefully reviewed and considered in their totality. The minority held that this was especially true where The City of Edmonton had been warned by Double N Earthmovers Ltd. repeatedly that in fact the Sureway documents did not meet the 1980 year requirement. The majority judgment was clear that The City of Edmonton was not asked to rely upon extrinsic information but look to the actual tender to determine if it was compliant. The minority judgment in part stated that the obligation to accept only a compliant tender requires that reasonable steps be taken to evaluate the tender for compliance before acceptance.
The issue of the obligation of the Owner to investigate whether a tender was compliant arose again in the 7th of January 2013 Ontario Superior Court of Justice decision in Rankin Construction Inc. v Her Majesty the Queen in the Right of Ontario,  O.J. No. 112, 2013 ONSC 139. The action arose out of a tender process for a contract for the widening of a portion of Highway 406 in the Niagara region of Ontario in 2005.
The plaintiff Rankin Construction Inc. was the low bidder but its tender was ruled non‑compliant by the Ministry and the contract was awarded by the Ministry to the tenderer submitting the second lowest tendered price. Rankin sued the Ministry for damages resulting from its lost gross profit on the contract, suggesting that the Crown breached its obligation to it by improperly ruling its tender to be non‑compliant and awarding the contract to a competitor with a higher tender price.
The Ministry asserted that it was not only entitled but in fact was obligated, in order to maintain the integrity of the tendering process, to disqualify Rankin's tender on the basis that Rankin's tender failed to properly declare the value of the Imported Steel it proposed to utilize on the project, which the Ministry said was a key requirement of the tendering process. One of the issues for determination by the Court was whether or not the Ministry was entitled to look behind the Rankin tender and to carry out an investigation with respect to the accuracy of the Declaration Value of Imported Steel set forth in Rankin's tender.
The value of imported (non-domestic) steel that tenderers were to use on the project was a critical factor in determining who was the low tenderer. The tender package contained a document entitled “Price Preference for Canadian Content”, which provided a formula providing a competitive advantage to tenderers commensurate with the proportion of Canadian‑produced (domestic) steel that they proposed to use on the project. Each tenderer was to include in its tender a “Declared Value of Imported Steel” and the declared value of imported steel was then subtracted from the total tender price and a 10 per cent discount was allowed to the difference (representing the total tender price excluding the non‑domestic steel products) to arrive at an adjusted total tender price for each tenderer.
Rankin Construction Inc. submitted a total tender price of $20,647,950 with the declared value of imported steel to be $170,000 to arrive at an adjusted total tender price of $18,600,155. Rankin's price, however, did not include the price of H‑piles in its declared value of imported steel. Rankin understood from its supplier that the H‑piles proposed to be supplied would be domestic and therefore Rankin did not include the $500,000 value of H‑piles in its declared value of imported steel. It was later determined that the H‑piles were manufactured in the United States and the value of H‑piles should have been included in the value of imported (non‑domestic) steel that Rankin proposed to use.
The other tenders were considerably higher than Rankin's tendered price as each of the other tenderers included the cost of the H‑piles in the calculation to determine the value of imported (non‑domestic) steel.
Prior to the time of award, the Ministry received a complaint from a competing tenderer that Rankin's tender was non‑compliant for failure to include the H‑piles in its declared value of imported steel, as H‑piles were not manufactured in Canada. Following receipt of the letter of complaint the Ministry instructed the head of the Estimating Section to investigate the imported steel declaration in Rankin's tender. Ultimately after the investigation the Ministry ruled that Rankin Construction Inc.'s tender was non‑compliant based on the inaccurate declaration of imported steel and, non‑surprisingly enough, the contract was awarded to the tenderer who had complained about Rankin's tender.
In defence of its actions, the Ministry indicated that while it had the right to waive irregularities its key obligation was to maintain the integrity of the tendering process and the waiver by the Ministry of a non‑compliance in Rankin's tender would not be fair to all the other tenderers. The Ministry in evidence questioned how confidence in the Ministry's tendering process could be maintained among contractors if the Ministry, having received a complaint about a non‑compliant tender, chose to ignore the issue and accept a tender determined ultimately to be non‑compliant.
Rankin argued that its tender on its face was fully compliant and that the Ministry was not entitled to look behind its tender and carry out an investigation to determine whether or not the declared value of imported steel was accurate. Rankin indicated that there was no defect or non‑compliance on the face of the tender and, therefore, the Ministry was obligated to award the contract to it.
The Court in rendering its judgment held that the Supreme Court of Canada in the Double N Earthmovers case dealt with the question as to whether or not an Owner had a duty to look behind the tender and carry out an investigation as to whether the tender complied with the tender documents. The Court held that the question was not whether there is a duty owed by an Owner to all tenderers to carry out investigations of tenders for non‑compliance, but whether an owner was disentitled to carry out such an investigation and whether, if it does so at the instance of a rival tenderer, it breaches an obligation to the low tenderer whose tender is found to be non‑compliant as a result of the investigation.
In coming to the conclusion that the Owner did not breach any obligation it had to the tenderers the Trial Justice adopted the words of Mr. Justice Strathy in North American Construction (1993) Ltd. v. York (Regional Municipality) (2009), 84 C.L.R. (3d) 89 Ont. S.C.J. where the Court at paragraph 30 stated:
The starting point in this analysis is to acknowledge the need to uphold the integrity of the tendering process and, as the Region's by‑law states, to ensure the fairness, objectivity and transparency of that process. As the Court of Appeal has recently stated in Coco Paving (1990) Inc. v. Ontario (Minister of Transportation) (2009), 79 C.L.R. (3d) 166,  O.J. No. 2547 (Ont. C.A.), [Coco Paving], at para 13, that need is particularly acute in the tendering of contracts by public bodies: “Confidence in the integrity of government bidding processes is a matter of considerable public importance”.
In the Rankin case the Court held in distinguishing the Double N Earthmovers case:
Although an owner may be entitled to take a submitted bid at face value, in my view an entitlement to do so may be something quite different from an obligation to do so.
The Court further went on to state that Contract A, which included an implied term that the owner will treat all bidders fairly and equally in the assessment of bids:
However, does this require an implied term that the owner shall not, or may not, investigate whether a bidder is capable of fulfilling the material terms of its bid, in the face of information that it may not be? In my opinion, for the reasons set forth below, there is no basis for implying such a term, as to do so would not promote the integrity of the bidding process.
In justifying that the owner was not obligated to take a submitted tender at face value the Court commented upon the implied duty of an owner to only accept a compliant tender. The Court at paragraph 38 and 39 stated:
38. It must be remembered that the other important implied term in the tender process is the implied duty on an owner that it will accept only a compliant bid, as recognized in M.J.B. At para. 41 of that case, Justice Iacobucci, writing for the Court, stated:
The rationale for the tendering process…is to replace negotiation with competition. This competition entails certain risks for the appellant. The appellant must expend effort and incur expense in preparing its tender in accordance with strict specifications and may nonetheless not be awarded Contract B…It appears obvious to me that exposing oneself to such risks makes little sense if the respondent is allowed, in effect, to circumscribe this process and accept a non‑compliant bid. Therefore I find it reasonable, on the basis of the presumed intentions of the parties, to find an implied term that only a compliant bid would be accepted.
39. In my view, to require an owner to stay its hand and refrain from making enquiries in the face of information that it will be impossible for a bidder to fulfil a material requirement of its bid, and to award the contract to such a bidder, does not promote the integrity of the bidding process. Public sector owners, such as the MTO in this case, have a long‑term interest in protecting of the integrity of the bidding process. Their concern is not necessarily restricted to the individual project under consideration, but with the maintenance of a vigorous and competitive tendering process on future projects. Anything which would dissuade potential bidders from participating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest.
The Court then quoted a little known author in an article entitled “The Law of Tendering” who stated:
The Courts appear to be accepting the principle that in dealing with tender cases the Courts' function is to protect and maintain the integrity of the tendering process as compared with dealing with the specific project in question.
The Court then went on to state that the fact that the majority judgement in the Double N Earthmovers Ltd. case in the Supreme Court of Canada:
… held that there is no implied duty on an owner to investigate allegations of non‑compliance by a rival bidder, does not mean that an owner does not have the right to do so.
In adopting the view that the owner is not restricted to look only to the face of the tender but can look behind the tender if it so wishes, does allow the integrity of the tendering process to be protected. The Court cited the observation of Justice Charron, writing for the minority in the Double N Earthmovers case at paragraph 123 where the minority judgment stated:
I fail to see how the integrity of the bidding process is protected by allowing a bidder to get rid of the competition unfairly and then hash it out with the owner after it has been awarded the contract. Approaching the tendering process in this manner encourages precisely the sort of duplicity seen in the present appeal.
Justice Broad of the Ontario Superior Court of Justice in the Rankin case went on further to comment:
42. To impose a blanket prohibition on the right of a tender‑calling authority to investigate whether it is possible for a bidder to fulfil the terms of its tender would threaten the integrity of the bidding process by encouraging the submission of bids which, while compliant on their face, may give bidders an unfair advantage over other bidders. To maintain an entitlement, but not an obligation, for an owner to investigate whether compliance is possible, would encourage bidders to rigorously prepare and scrutinize their bids to achieve compliance or run the risk of having their bids ruled to be non‑compliant.
43. To entitle owners to investigate allegations on non‑compliance, but not require them to do so, would address the concern expressed by the majority in Double N respecting the danger of unwarranted attacks by rival bidders resulting in possible unequal treatment of bidders and frustration of the process, by giving owners to right to choose to investigate only allegations of non‑compliance considered to be legitimate and bona fide.
Counsel for the successful defendant Her Majesty the Queen in the Right of Ontario advises that Rankin Construction Inc. has filed a Notice of Appeal regarding this judgment.