This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its December 2006 decision in J&A Developments Ltd. v. Edina Manufacturing Ltd., the Northern Ireland High Court of Justice, Queen’s Bench Division, found Edina Manufacturing Ltd. liable for seeking a second round of price-improvement bids that turned its tendering process into an illegal auction. The case involved a tender call issued by Edina Manufacturing for the erection of a workshop, offices, and associated works at the Lissue Industrial Estate in Lisburn, Northern Ireland. The plaintiff, J&A Developments Ltd., submitted the low bid. However, Edina Manufacturing sought follow-up bids from the three lowest bidders. After J&A Developments refused to lower its price, Edina Manufacturing bypassed its bid in favour of a lower follow-up bid submitted by a competitor. J&A Developments sued.
The Court found that the tender call was governed by a tendering process contract. It also found that the relevant industry code, the Code of Procedure for single stage selective tendering , referred to as the Code, was incorporated by reference into that process contract. As the Court noted, the Code contained the following provisions that were relevant to the bid-shopping claim:
Section 2.4 “good tendering procedure demands that the contractor’s tender price should not be altered without justification.”
Section 7.1 “As previously stated in Clause 2.4, good tendering procedure demands that a contractor’s tender price should not be altered without justification. In particular the NIJCC strongly deplores any practice which seeks to reduce any tender arbitrarily where the tender has been submitted in free competition and no modification to the specification, quantity or conditions under which the work is to be executed or to be made, or to reduce tenders other than the lowest to a figure below the lowest tender.”
Section 7.2 “Should the tender under consideration exceed the employer’s budget the recommended procedure is for a reduced price to be negotiated with the tenderer or based on agreed changes to the specification or the quantity of the work. The basis of negotiations in any agreement should be fully documented.”
Section 7.3 “Only when these negotiations fail should negotiations proceed with the next lowest tenderer. If these negotiations also fail similar action may be taken with the third lowest tenderer.”
As the above-cited provisions indicated, the rules of the challenged tendering process prohibited the practice of bid-shopping and, subject to a narrow exception for overbudget bids, assumed that contract award decisions would be made based on the initial bids. Those rules did not allow purchasing institutions to convert a bidding process into an open negotiation or auction. The Court was therefore highly critical of Edina Manufacturing’s attempt to obtain further price reductions:
Having assessed Mr Gibbons’s evidence and demeanour in the witness box I am satisfied that at the post-tender stage he was determined to engage in a battle of wits to force the price down as low as he could and that he was unconcerned by the propriety of the situation or the extent to which his actions might have complied with professional or trade standards.
To my mind, apart from the application of the Code to the procedure involved in trying to get the tenderers to reduce their prices, and adopting the reference to poker made by Mr Gibbons, to have asked the lowest tenderer to reduce his quotation without informing him that he was the lowest tenderer would be akin to requiring him to play poker without seeing his own hand. Each tenderer had already calculated his lowest price in competition with other contractors without knowing their prices; it is unfair and to my mind obviously so even to someone with no experience of the process to require the lowest tenderer to further lower his price without being aware that he has tendered the lowest figure. So far as I am concerned Mr Gibbons’s reference to poker was a significant one and I have no doubt that he saw the situation as simply a battle of wits in which he could produce a substantial saving for his firm without any consideration of ethics or fairness.
The Court therefore found Edina Manufacturing in breach of its duties under the implied tendering process contract. It awarded the plaintiff low bidder damages for its bidding costs and for 80 percent of its estimated lost profits on the project for a total award of £135,528.
As this case illustrates, once a purchasing institution engages in a formal bidding process and obtains competing bids under Contract A process contract rules, it cannot easily shift lanes into direct negotiations in an attempt to obtain better pricing. Where the flexibility to negotiate is required, purchasing institutions should take great care in drafting their process rules and pricing structures with the assistance of experienced lawyers who can help prevent the legal liabilities that can attach to bid-shopping claims.
