Summer Tendering Update: Reasonable Expectations and Negative Contingencies

by Bennett Jones LLP
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[co-author: Stephanie Clark – Student-at-Law]

A recent decision from the Alberta Court of Queen’s Bench and Court of Appeal in Elan Construction considered and clarified two aspects of tendering law.

In Elan Construction Limited v South Fish Creek Recreational Association, 2015 ABQB 330, the Alberta Court of Queen’s bench ruled that, despite the reservation of “sole and unfettered discretion” for the benefit of an owner when applying bid evaluation criteria, an owner could not depart from the reasonable expectations of the bidders which were formed by the terms and conditions of the tender documents. With that said, the Court of Queen’s Bench found there were no damages to the wronged bidder considering the selected bidder had lost money on the project.

On appeal, in Elan Construction Limited v South Fish Creek Recreational Association, 2016 ABCA 215, the Court of Appeal confirmed the Court of Queen’s Bench’s decision on the interpretation of the “sole and unfettered discretion” clause but overturned the damages decision and awarded damages. The Court of Appeal confirmed that while a reduction in the quantum of damages for a successful claim for lost profits is possible, the breaching party must plead such defence and show compelling evidence to establish that events which resulted in lost profits or increases expenses of the initial winning bidder (negative contingencies) would have affected the losing bidder if they had won the tender.

Exercise of Discretion Cannot Depart from Bidders’ Reasonable Expectations

Background

In Elan Construction, the South Fish Creek Recreational Association issued a tender for the expansion of a recreational complex. The tender included an evaluation matrix which allocated points to various elements, including contract price and date of completion.

The tender documents emphasized the significance of an August 1, 2011, completion date but did not make it a hard condition. In addition, the “Instruction to Bidders” included a provision to the effect that Fish Creek retained “sole and unfettered discretion” over the evaluation of the bids.

Elan Construction Limited submitted a bid with a completion date of August 1, 2011, and the lowest bid price. Chandos Construction Ltd. submitted a bid with a completion date of August 31, 2011. After receipt of the bids, Fish Creek implemented a points allocation system which assessed the bid based on how far the completion date was from the average date submitted by all bidders, which was September 5, 2011. This alternate points system used in the evaluation was not disclosed anywhere in the tender documents.

The trial judge held that Fish Creek had breached the bid process. On appeal, the Court upheld the trial judge’s decision with respect to the breach because the deviation-based points structure was a marked departure from the bidders’ reasonable expectations.

Discussion

The trial judge and the Court of Appeal agreed that the emphasis on August 1, 2011, in the tender would have communicated to any reasonable bidder the importance of meeting that date.

To that end, the Court was not swayed by Fish Creek’s argument that they had reserved discretion in the tender documents. The Court accepted that the term “sole and unfettered discretion” gave Fish Creek considerable room to maneuver when assessing the bids, but concluded such discretion “cannot include the right to depart from fundamental contents in their Instructions to Bidders on which bidders would properly and reasonably place reliance in composing their bids.” The discretion that Fish Creek argued for would have effectively allowed Fish Creek to alter its criteria without prior notice to the bidders which would fail to maintain the “legitimacy and integrity of the bid process”. The Court concluded that “the right to evaluate whether a bidder has met a bid requirement in an owner’s “sole and unfettered discretion” does not confer on the owner the right to ignore, alter or delete bid criteria as they please.” Consequently, the trial judge found that Fish Creek had breached the bidding process.

This decision places important limits on the reservation of discretion in a tender. The clear statement of the Court in Elan Construction demonstrates that a bid process set out in tender documents creates a reasonable expectation for the bidders which cannot be trumped by a reservation of discretion.

Was Elan Entitled to Any Damages?

While the trial judge in Elan Construction found that Fish Creek had breached the bidding process, it held that Elan had suffered only nominal loss and declined to award Elan any material damages in part because the winning bidder, Chandos, had suffered significant losses on the project. The trial judge accepted Fish Creek’s proposition that these losses would likely have been incurred by Elan as well. The Court of Appeal overturned the trial judge’s ruling with respect to damages. In particular:

  • The trial judge found that Elan would have incurred increased costs equal to the difference between what had been under-quoted by a subcontractor to Elan and the higher price for the same work that the subcontractor had quoted to Chandos. The Court of Appeal found that this finding relied on an assumption that Elan would not have been able to negotiate a better deal with such subcontractor. In addition, it was in evidence that the subcontractor had also provided a quote to another bidder and Elan had an additional quote from another subcontractor. Elan conceded that it was open to the trial judge to find that the initial quote to Elan was in error. The Court of Appeal found that the trial judge could have reasonably reduced Elan’s damages by the difference to the next-highest amount that the subcontractor had quoted to another bidder and reduce the damage by that amount.
  • The trial judge found that Elan would have suffered the same losses as Chandos did with respect to the default of several of Chandos’ subcontractors. However, Chandos and Elan only had two subcontractors in common and only one of the common subcontractors had gone into bankruptcy. Accordingly, the Court of Appeal reduced Elan’s damages only by the loss from that subcontractor’s bankruptcy.
  • The trial judge found that Elan would have suffered the same losses as Chandos did as a result of delays due to poor weather and design flaws. Chandos had settled these delay costs with Fish Creek. The Court of Appeal found that this relied on an assumption that Elan’s schedule, which had an earlier start date, would have run into the same delays. It also assumed that Elan would have prepared for or reacted to those negative contingencies in the same way, and that Elan would have negotiated a similar deal with Fish Creek. The Court of Appeal did not reduce Elan’s damages by any of Chandos’ delay damages.

Discussion

The Court of Appeal agreed that lost profits may be reduced by negative contingencies. However, the Court clarified that the breaching party must plead and prove how those negative contingencies would have affected the losing bidder. It is not enough to simply prove that the winning bidder suffered damage or loss.

The Court cautioned against a purely speculative comparison, stating that it would be tantamount to “comparing visible apples to invisible oranges.”

This is an important clarification of the damages that may be awarded as a result of a breach of the tendering process. Tenderers should take note that the onus is on them to plead and establish how one contractor’s damages might be compared with the losing bidder’s if the losing bidder had won the tender.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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