This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In most countries, public institutions are subject, to a larger or lesser degree, to bid protest challenges based on statutory procedures, common law fair process duties, or a combination of both. Where a public institution is found to have breached applicable tendering rules, those bid protests can result in a series of procedural remedies, including redraft, re-evaluate, rescind, and redirect orders. These procedural remedies may also allow for financial compensation to losing bidders for their bidding costs or complaint costs. However, in some jurisdictions, financial compensation to losing bidders may go well beyond bidding and complaint costs and may also include lost profit awards. These awards provide financial compensation for the amount the losing bidder would have earned in profits had it been awarded the tendered contract. This discussion provides a global analysis on the lost profit remedy, dividing the procurement world into those jurisdictions that recognize the lost profit remedy, those that do not recognize that remedy, and those middle-ground jurisdictions that recognize that remedy in some situations but not in others.
Dividing the World into Three Camps
Where lost profit remedies are concerned, the world of government procurement can be divided into three camps:
- Statutory Lost Profit Jurisdictions: At one extreme lie those jurisdictions where, in addition to allowing for procedural remedies, statutory codes also allow losing bidders to sue for lost profits as a statutory right. In these jurisdictions, public institutions are subject to lost profit risks irrespective of the specific rules of their specific tendering processes.
- No Lost Profit Jurisdictions: At the other extreme are those jurisdictions where lost profit claims are neither contemplated under statutory codes nor recognized by the courts under case law precedent. These jurisdictions limit losing bidders to procedural remedies. While some may also allow for financial compensation for bidding costs and complaint costs, lost profit remedies are typically not available in these jurisdictions irrespective of the specific tendering format rules used by the government institution.
- Common Law Lost Profit Jurisdictions: The complex middle ground is comprised of jurisdictions that recognize statutory or common law procedural remedies while also, in some circumstances, recognizing common law lost profit claims. These complex middle ground jurisdictions are mainly made up of Commonwealth countries that recognize the Contract A process contract under their common law rules. In these jurisdictions lost profit remedies may be available depending on the specific rules used in the specific tendering process.
Statutory Lost Profit Jurisdictions
Statutory lost profit jurisdictions are at the high-end of the risk spectrum since the lost profit remedy is available against government institutions as a statutory right irrespective of the specific format and rules of the challenged bidding process. In these jurisdictions it is not necessary to prove that a Contract A bidding process contract was created at common law in order to obtain a statutory lost profit remedy. In other words, public institutions in these jurisdictions are subject to lost profit claims irrespective of how they structure their bidding process rules.
These jurisdictions include, for example, the United Kingdom, where, in addition to statutory procedural remedies, the lost profit remedy is established as a statutory remedy under the UK procurement regulations. Since the UK is a jurisdiction that historically recognized both common law juridical review and common law Contract A process contract lost profit remedies, the statutory remedies in the UK system are in addition to common law remedies that may also apply under administrative law or under commercial law. However, the enactment of the statutory remedies largely renders the common law remedies moot in situations where the statute governs the public procurement process.
Canada is another jurisdiction that recognizes the common law Contract A process contract but where, at the level of federal government procurement, the Contract A common law lost profit remedy has been overshadowed by a statutory remedy regime that has empowered the Canadian International Trade Tribunal to grant both procedural remedies and lost profit remedies irrespective of the specific tendering rules used in the challenged tendering process.
No Lost Profit Jurisdictions
At the opposite end of the spectrum lie the no lost profit jurisdictions that only recognize procedural remedies and limit financial compensation, if any, to bidding costs and complaint costs. These jurisdictions include the United States federal system, along with most, if not all, state-level procurement systems where statutory bid protest mechanisms do not contemplate lost profit awards. In these jurisdictions, case law precedent does not recognize lost profit claims since the courts have either been silent on the issue or have actively established precedent that precludes lost profit claims.
For example, in its September 1990 decision in City of Cape Coral v. Water Services of America, Inc., the Florida Third District Court of Appeal awarded Water Services America, Inc. (WSA) compensation for bidding costs due to the improper rejection of its bid, but rejected WSA’s $1 million lost profit damages claim. The Court rejected the WSA’s claim of entitlement to lost profit damages as compensation for the improper rejection. Citing a prior 1960 decision in William A. Berbusse, Jr., Inc. v. North Broward Hospital District, in which the court rejected a lost profit claim that was based on an alleged bidding process contract, the Court ruled that lost profits were not available to losing bidders under either a promissory estoppel or bidding process contract theory. As this decision illustrates, while improperly rejected bidders may challenge the legal validity of an award decision to void that decision and potentially receive financial compensation for their bidding costs, lost profit damages are not readily available as a bid protest remedy against government bodies in Florida.
Furthermore, in its May 2004 decision in Miami-Dade County School Board v. J. Ruiz School Bus Services, Inc., the Florida Third District Court of Appeal reversed a lower court decision that awarded lost profit damages to an unlawfully disqualified bidder. In its survey of case law from other US states, including California, Connecticut, Illinois, New Hampshire, New York, Arkansas, Kansas, Minnesota, New Jersey, Wisconsin, and Arizona, the Court noted that “the overwhelming weight of authority is against allowing an award of lost profits to unsuccessful bidders of public contracts.” While the Court noted that many jurisdictions permit the recovery of bid preparation and bid protest costs, it concluded that, as in other jurisdictions, the remedy of lost profit damages was not available to unsuccessful bidders in Florida. The Court therefore overturned the lower court’s award of lost profits and ruled in a manner consistent with past case law that denied this remedy to losing bidders.
This shows how the ongoing development of case law precedent may change the lost profit classification of jurisdictions unless the lost profit remedy is either formally recognized or extinguished under statute or under binding higher court precedent.
Another jurisdiction that thus far expressly rejects the availability of lost profits for losing bidders against government institutions is Botswana, where, as in the US, case law is on point to prohibit such claims. This is made evident in Attorney-General v. Public Procurement and Asset Disposal Board, where Botswana’s Court of Appeal ultimately ruled that bidders do not have the right to damages for “pure economic loss” either under the country’s procurement statute or at common law. The case dealt with a tendering process for an infrastructure project. The low bidder was rejected due to concerns about the financial riskiness of its bid. The low bidder brought a legal challenge, claiming it had suffered financial loss due to the improper rejection of its bid. While the trial court found that the evaluation process was indeed flawed, the Court of Appeal ruled that this did not give the bidder the right to damages for “pure economic loss”.
India and South Africa are two other large jurisdictions where bid protest remedies appear to be limited to administrative law procedural remedies and where the courts do not appear to have created case precedents that recognize lost profit remedies. And although national-level laws appear somewhat unsettled on the issue of lost profits, lost profit remedies do not appear common in Europe, where the various national bid protest systems are largely aligned with administrative law procedural remedies.
Common Law Lost Profit Jurisdictions
While statutory lost profit jurisdictions like the UK and the Canadian federal system lie at one end of the spectrum, and no lost profit jurisdictions like the US, India, Botswana, South Africa, and Europe appear to lie at the other, many jurisdictions lie in a more complex middle ground in respect to the risk of the lost profit remedy.
These middle-ground jurisdictions have not established statutory lost profit remedies but at common law their courts recognize the potential for lost profit claims depending on the tendering format and process rules used by the public institution in the specific tendering process. An awareness of tendering format use is most critical in these middle-ground jurisdictions since the availability of the lost profit remedy, and the ability to obtain the summary dismissal of any such claims, will turn on the specific terms of the specific tendering process. These jurisdictions include Canada at the sub-federal level, as well many other Commonwealth jurisdictions where the courts have adopted Canada’s Contract A process contract, including New Zealand, Australia, the Caribbean Commonwealth, and Samoa.
Much of the leading case law on this issue flows out of the Canadian jurisprudence since the Supreme Court of Canada first recognized the Contract A process contract in its 1981 decision in Ontario v. Ron Engineering & Construction (Eastern) Ltd. In fact, as Nicholas Seddon notes in 2018 in the sixth edition of his Australian textbook Government Contracts: Federal State and Local, while the Contract A process contract has been recognized by Australian courts, the precedents are few and far between. As Seddon observes, to better appreciate the applicable legal risks, Australian institutions need to look further afield to other jurisdictions with similar legal systems where the Contract A process case law is more developed. Seddon notes that “Canada, in particular, provides a rich seam of cases covering every conceivable problem that can arise in a tendering process.” As Seddon explains, the scarcity of Contract A lost profit cases in Australia can be explained by the fact that the process contract “has been eliminated in most government tenders by an express clause” since the “existence of a pre-award or process contract in government tenders is not automatic” but “depends on the intention of the parties.” In fact, Seddon finds it curious that many Canadian institutions have continued to expose themselves to these avoidable risks:
An ironic negative factor of the Canadian phenomenon is that, in the name of protecting the integrity of the bidding system, government bodies have on numerous occasions paid twice for a procurement. A development that is aimed at ensuring value for money through properly-conducted competitions has actually resulted in a large amount of public money being paid to compensate wronged bidders. One of the puzzles of the Canadian scene is that the deterrent effect of Contract A does not appear to have worked, given the proliferation of tender challenge cases.
Other institutions, including those in Australia, have avoided creating the similar body of case law precedent, while many Canadian institutions continue to expose themselves to these avoidable lost profit risks. In fact, the core of Seddon’s analysis of lost profit tendering law claims against government bodies is made up of Canadian cases, with the occasional reference to UK, New Zealand, and Australia case law.
In conclusion, the use of properly structured, non-Contract A negotiated RFPs in middle category jurisdictions allows for the significant reduction of risk against lost profit claims. However, in these middle ground jurisdictions, public institutions that use negotiated RFPs will remain subject to potential administrative law procedural remedies, either at common law, under applicable statutory frameworks, or both. A greater awareness of format use is therefore critical in many jurisdictions to properly manage the risks that are inherent in the public sector tendering process.
