In a tight labour market, calls for tenders may be answered by a small number of bids, each exceeding the owner’s budget. Owners may need to restructure the project, revise the scope of work and negotiate with the bidders or other parties. Bid documents normally contain a privilege clause to allow some flexibility, but a recent decision of the Nova Scotia Court of Appeal in Port Hawkesbury (Town) v. Borcherdt Concrete Products Ltd., 2008 NSCA 17, serves as a cautionary tale for owners who attempt to rely too heavily on “bare bones” privilege clauses and do not have other tools in their bid documents to avoid liability.

In 2003, the Town of Port Hawkesbury was building an arena with seating for about 1,000 spectators. The Town issued a bid for the manufacture, delivery and installation of pre-cast concrete bleachers. The bid documents contained the following “bare bones” privilege clause, “the Owner reserves the right to reject any and all Tenders that, in its sole discretion, are not in the interests of the Town of Port Hawkesbury.”

Borcherdt Concrete submitted a compliant bid that was substantially over the Town’s budget. The Town extended the bid time and added a second optional scope of work. At the end of the extended period, however, Borcherdt was still the only bidder and not only were both of its bids over-budget, it had actually increased its original bid by $10,000.

What the Town did then is the focus of the dispute. The Town had a quick conversation with Borcherdt to determine whether their bid could be substantially reduced but only minor reductions were possible. The Town explored it’s options and then, without rejecting Borcherdt’s bid, began negotiating with a third party on the basis of a different scope of work. A month later, the Town advised Borcherdt that its bid was rejected, and another month later, inked a deal with the third party for a limited scope of work on the basis that the Town itself would perform certain work. Borcherdt sued for breach of the implied term of good faith and fair treatment.

The Nova Scotia Supreme Court and the Court of Appeal both found in favour of Borcherdt on the basis that, unless expressly excluded, it is an implied term that an owner will treat bidders fairly and equally. The fact that the Town waited to formally reject Borcherdt’s bid, and that the Town negotiated with a third party in the meantime, is, the Town argued, permitted because of the privilege clause permitted the Town to reject Borcherdt’s bid. Both levels of court disagreed, concluding that while even a “bare bones” privilege clause did not require the Town to proceed with Borcherdt’s bid, the privilege clause does not excuse the Town’s otherwise unfair or unequal treatment of a compliant bidder.

In particular, the trial judge found several breaches of duty. First, the Town contracted with a non-complaint bidder - itself. In an interesting twist, the Court concluded that the Town, by doing certain installation work themselves, became a bidder for its own work, and as such, awarded the work to a non-compliant bidder.

Second, third party negotiations and scope changes after the opening of the bids were not part of the process envisioned by the bid documents. The fact that the Town engaged in this activity while Borcherdt was still “on the hook” under Contract A undoubtedly made it easier for the court to find this to be a breach of duty.

Third, the court found that the Town engaged in bid-shopping. Defined broadly, bid shopping is the use of the information gained in the course of a bid as a negotiating tool, with a view to obtaining a better price or other contractual advantage from a bidder or any other party. The courts accepted that the Town did not disclose Borcherdt’s bid to the third party, but was able to use the information as a “yardstick in measuring the third party bid”.

So what should the Town have done in these circumstances? The trial judge noted the Construction Contract Guidelines, prepared by the Province of Nova Scotia Office of Economic Development, Procurement Branch for guidance. The trial judge conceded that guidelines are not enforceable, but that they “are a measure in assessing what may be appropriate in terms of fair treatment”. As a result, at a “bare minimum”, the Town should have advised Borcherdt that there was a change in the scope of the work or at least, that it was negotiating with a third party. We can extrapolate that what the court was looking for was a real attempt to allow Borcherdt to participate in the process and be given a chance to revised their bid to the revised scope of work.

This reasoning is only helpful to a point and an owner in similar circumstances may nonetheless be left wondering exactly what to do. Just how much negotiation with an unattractive bidder is necessary to satisfy a judge who, years later, will review the owner’s conduct? After bids are opened, an owner can’t help but know what pricing to expect, so how can an owner proceed to revise the scope of work and negotiate with bidders or third parties without being accused of bid-shopping? These and other questions create uncertainty about the bidding process for owners, who, if there is any doubt, face a ‘tender trap’, where if they proceed with party “A”, they face a claim by party “B”, and vice versa. This reinforces the need to create bid documents that will withstand a rigorous interpretation by the courts. A couple examples of measures that we in our practice commonly run across include opting for a request for proposals instead of a binding call for tenders (including language upheld in Mellco Developments Ltd. v. Portage La Prairie (City), 2002 MBCA 125 (CanLII)) and including a strong limitation of liability clause (like the kind upheld in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2007 BCCA 592 (CanLII)). The right approach will, of course, depend on the needs of the owner and the particular project, but the point remains that “bare bones” privilege clauses are limited in their scope and other means of limiting liability should be explored.

For public sector owners or parties working with public sector owners, this case should also be noted for its application of procurement guidelines – while the court did not enforce the guidelines, it nonetheless noted that the content of the duty of fairness and equal treatment was informed by these guidelines. In British Columbia, for example, be aware of the Agreement on Internal Trade which applies to many public sector entities who are very active in construction in British Columbia.

If you have any questions or comments regarding this article, please do not hesitate to contact Michal Jaworski at 604.891.7747 or by email at mxj@cwilson.com.