By Paul Emanuelli

This article is an extract from the 5th edition of Government Procurement.

In its October 2018 decision in CG Acquisition Inc. v. P1 Consulting Inc., the Ontario Superior Court of Justice summarily dismissed a $150 million damages claim brought by a losing bidder in a negotiated Request for Proposals (RFP) process. As the Court noted, the case dealt with an RFP for the Liquor Control Board of Ontario (LCBO) to “negotiate with the LCBO and, if successful in negotiations, finalize an agreement related to the proposed sale and subsequent redevelopment of land located along the Toronto waterfront”. As the Court further elaborated, “the successful company would purchase the land, complete a development which would include a new LCBO head office and flagship retail location and lease back to the LCBO both the office and retail space”. P1 Consulting Inc. was hired as a fairness monitor on the project, which was also sponsored by Infrastructure Ontario.

The plaintiff, CG Acquisition Inc., was an unsuccessful proponent that was disqualified during that RFP process. It brought the claim for damages against the LCBO, Infrastructure Ontario, and P1 Consulting Inc., arguing that they breached their duty of fairness by not including P1 Consulting Inc. in the disqualification decision and by refusing to reconsider that decision. However, the Court dismissed the claim, finding that the fairness monitor was a consultant for the purchasing institutions and owed no duty to the proponents. Furthermore, the Court found that the RFP in question did not give rise to a Contract A tendering process and therefore could not be subject to a lost profit damages claim. The Court also found that the LCBO and Infrastructure Ontario did not owe any “free standing” commercial duty of fairness outside of Contract A under either contract law or tort law, and that proponent did not have the right to bring a lost profit claim outside of Contract A:

Did the Sponsors and/or P1 owe CG a duty of fairness?
I do not find that any of the defendants owed CG a duty of fairness.
By way of a starting point CG does not bring any claims against the defendants in contract, but rather in tort. Nevertheless, it frames its tort claims in the context of a duty of fairness. The tort claims flow from the ‘principle of fairness,’ says CG, with the result that said principle informs the other duties owed by the defendants.
Further, as noted, CG concedes that the Sponsors reasonably disqualified it as per the terms of the RFP. CG only takes issue with the way in which the Sponsors and P1 dealt with the reconsideration.
Insofar as the duty of fairness is concerned, I agree with the defendants that no such freestanding duty exists independent of a contractual duty unless the RFP documents explicitly provide to the contrary: Coco Paving (1990) Inc. v. Ontario (Transportation), 2009 ONCA 503, 79 C.L.R. (3d) 166 [Coco]. Unless and until ‘contract A’ is formed by the submission of a compliant bid, there will be no duty of fairness between a proponent and a sponsor. CG, by its own admission, never submitted a compliant bid.
In my view this observation is further supported by the decision of the British Columbia Court of Appeal in Hub Excavating Ltd. v. Orca Estates Ltd., 2009 BCCA 167 at para. 39, 92 B.C.L.R. (4th) 286, where it stated:
The contractual duty of fairness is an implied term of Contract A, and thus only comes into existence when that contract is formed. There is no free-standing duty of fairness in the bidding process independent of that contractual duty: Midwest Management (1987) Ltd./Monad Contractors Ltd. v. BC Gas Utility Ltd., 2000 BCCA 589, 82 B.C.L.R. (3d) 79, at para. 13. While the trial judge’s comment might support a duty of care in the context of tortious misrepresentation, it cannot form the basis for a finding of breach of contract arising from an owner’s decision to go to tender.
I am in agreement with the British Columbia Court of Appeal regarding the application of Midwest Management. Support for this conclusion is also found in the recent Ontario Superior Court decision in Kaymar Rehabilitation Inc. v. Champlain Community Care Access Centre, 2017 ONSC 1843 at para. 24.
Additional support for this conclusion is found in the statements of author Paul Emanuelli in his text Government Procurement, 3rd ed.:
D. Future Considerations Regarding Free-standing Fairness Duties
While rumours of a free-standing duty of fairness existing outside of Contract A may ultimately prove to be greatly exaggerated, a lingering uncertainty hovers over the tendering process on account of these reported sightings. The final resolution of this issue has been deferred as a matter for another day. In the interest of promoting greater certainty and less litigation, when that day comes, it is suggested that this matter be put unequivocally to rest. Fairness calls for certainty. In the final analysis, no claim should stand where no duty lies.
The reliance on vaguely articulated fairness and good faith duties as a means of scrutinizing purchasers’ conduct outside of a formal Contract A process creates unnecessary uncertainty in the procurement process. While a robust and reasonably well-defined regime has evolved to provide predictability within the Contract A paradigm, the application of a free-standing duty undermines the equality of bargaining position and contradicts the free negotiation principles articulated by the Supreme Court of Canada in Martel.
The recent legal trend, which helped resolve two decades of uncertainty, generally sees the courts drawing a clear distinction between the rules that apply to the formal tendering process and the rules that otherwise apply to direct negotiations. The free-standing strain of decisions offers no legal foundation, policy rationale or predictability for applying new duties to a non-Contract A procurement process. Failing to maintain this clear distinction between the Contract A paradigm and the negotiated paradigm simply serves to dilute the clarity and certainty created by MJB and Martel.

In this decision, the Court applied long-standing precedent that recognizes no right to bring lost profit claims against purchasing institutions that avoid Contract A by using negotiated RFPs under traditional contract law. In so finding, the Court also rejected the weak authorities presented by the plaintiff that purportedly recognized a “free standing” fairness duty that could give bidders the right to sue for damages outside of Contract A:

Did the Sponsors and/or P1 owe CG a duty of care?
CG relies on a number of cases that it submits stand for the contrary proposition that there is a duty of fairness in the bidding process owed prior to the formation of ‘contract A.’
In this regard CG relies upon the following cases: Mellco Developments Ltd. v. Newton Enterprises (1983), 2002 MBCA 125, 222 D.L.R. (4th) 67; McFadyen v. Ontario (Mining & Lands Commissioners) (2007), 41 M.P.L.R. (4th) 267 (Div. Ct.), Buttcon Limited v. Toronto Electric Commissioners (2007), 65 O.R. (3d) 601) (ON S.C.J.), and Leeds Transit Sales Ltd. v. Ottawa (City), 2004 CanLII 31377 (ON S.C.J.).
The first problem with CG’s reliance on these cases is that they do not provide any analysis as to why the defendants owe a duty of fairness on the facts of this case. All of Mellco, Buttcon, and Leeds are suits brought by frustrated proponents alleging that a successful competitor was non-compliant. Here, we have a suit brought by an unsuccessful proponent which admits non-compliance. Mellco, Buttcon, and Leeds do not provide guidance on how a sponsor should exercise its authority to reject bids.
Second, I accept the Sponsors’ submissions that CG’s reliance upon McFadyen is misconstrued as that case deals with administrative law principles which do not apply to this case.
These cases are distinguishable by virtue of the fact that they do not deal with a noncompliant RFP and a subsequent, gratuitous reconsideration. Those cases involve fairness in a context of a ‘contract A’ situation and do not acknowledge a free-standing duty in a RFP context.
The Ontario Court of Appeal in Coco followed the cases relied upon by CG. That case nevertheless stands for the proposition, in my view, that there is no duty of care or fairness in respect of a RFP proposal—particularly one that is non-compliant.
Further, more recently in the decision Grascan Construction Ltd. v. Metrolinx, 2017 ONSC 6424 [Grascan], a case involving judicial review, the Divisional Court held at para. 104 that:
The weight of authority supports the position of the Sponsors that no duty of fairness arises at the stage where potential bidders are prequalified. For these reasons I conclude that the LIP applicants cannot ask this Court to judicially review the Sponsors’ Decision. I intend, however, to consider the balance of the application as if I had concluded otherwise.
The Divisional Court in Grascan also discussed the potential prejudice that could be created if proponents were allowed to proceed even when RFP requirements were not met. In this regard the court stated at para. 127:
That, however, is not what I have concluded. I have found that the Sponsors did not breach any duty of fairness and that their decision was reasonable and so the applicants are really seeking special treatment and asking this Court to excuse their failure to include an AFL in their Prequalification Submission. I agree with Mr. Hamilton that the five Prequalified Applicants would have a good complaint if the applicants were prequalified even though they did not comply with all of the terms of the Project RFQ. The prejudice that would be suffered by the Sponsors and the five Prequalified Applicants and the RFQ Process is accordingly another reason to deny the application. Fairness requires that the LIP applicants be treated the same as all other applicants, and that this application be dismissed in its entirety.
I therefore do not accept CG’s argument that any ‘principle of fairness’ properly informs a duty to perform a service or carry out an investigation owed to CG by any of the defendants.

In applying the governing precedents, the Court shut down the plaintiff’s attempt to sidestep the Contract A analysis by bringing a lost profit claim under a tort-based duty of care in a situation where no Contract A duty of fairness was created by the negotiated RFP:

Did the Sponsors and/or P1 owe CG a duty of care?
I have found that CG cannot rely on a freestanding duty of fairness to invoke a duty of care in tort. Accordingly, any discussion with respect to whether the defendants owed CG a duty of care should begin with a discussion of the Anns test. The Supreme Court of Canada described the Anns test as follows in Childs v. Desormeaux, 2006 SCC 18, [2006] 1 S.C.R. 643 at para. 11:
In Anns v. Merton London Borough Counsel, [1978] A.C. 728 (H.L.), Lord Wilberforce proposed a two-part test for determining whether a duty of care arises. The first stage focuses on the relationship between the plaintiff and the defendant, and asks whether it is close or “proximate” enough to give rise to a duty of care (p. 742). The second stage asks whether there are countervailing policy considerations that negative the duty of care. The two-stage approach of Anns was adopted by this Court in Kamloops (City of) v. Nielson, [1984] 2 S.C.R. 2, at pp. 10-11, and recast as follows:
  1. is there “a sufficiently close relationship between the parties” or “proximity” to justify imposition of a duty and, if so,
  2. are there policy considerations which ought to negative or limit the scope of the duty, the class of persons to whom it is owed or the damages to which breach may give rise?
Further, as stated, in the subsequent Supreme Court of Canada decision in Design Services Ltd. v. Canada, 2008 SCC 22 at para. 47, [2008] 1 S.C.R. 737 [Design Services], if a prima facie duty of care is found at the first stage of the Anns test, and there are no residual policy concerns in negating the creation of that duty in the second stage, then a new category of duty is recognized.
There is certainly no reasonable expectation that P1 owed a duty to any non-compliant bidders, including CG, either in the context of the RFP or upon reconsideration. There is simply no sufficiently close relationship or proximity to justify the imposition of a duty in the facts of this case.
The same is also true with respect to the Sponsors. Having been properly disqualified in the procurement context where the terms of the RFP have been properly applied, I see no sufficiently close relationship between the Sponsors and CG to import a duty of care if the Sponsors undertake a reconsideration that they are not legally obligated to do.
Further, any finding of foreseeability must be grounded in a relationship of sufficient closeness such that it is just and reasonable to impose a duty of care taking into the account the expectations, representations and reliance of the parties. In the present case where CG, without legal foundation, asked for and received reconsideration, it would be unjust and unreasonable to suggest that some duty was created in tort.
Even if there existed a sufficiently close relationship or proximity to justify the imposition of a duty, in my view there are policy considerations which entirely negate the scope of that duty.
I accept the submissions of the defendants that a duty of care in tort would be contrary to public policy for the following reasons:
  • It would lead to indeterminate liability, especially in cases of pure economic loss and in procurements such as this one where the proposals included a team of various entities beyond just a proponent: Design Services, supra at paras. 59-67.
  • Procurements such as this one are balanced, efficient and ensure that goods and services are acquired at the lowest cost to taxpayers. They create a competitive negotiating environment in the pre-contract stage. As such, a duty would place procuring authorities in a disadvantaged commercial position and impair their ability to maximize value: Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860 at paras. 64, 119 [Martel].
  • Such a duty in non-binding negotiated RFPs would interject tort law, as after-the-fact insurance, against arms-length commercial parties’ failure to act with due diligence: Martel, supra at para. 68.
  • Such a duty would encourage needless litigation as extending negligence claims to nonbinding negotiated RFPs and would create lawsuits from “bitter bidders”.
These concerns are particularly relevant with respect to Fairness Monitors such as P1. Fairness Monitors are engaged to serve the procurement process and provide observations with respect to the issue of fairness and prepare a report at the conclusion of the procedure. Fairness Monitors perform an advisory and monitoring function. They do not make the decision. The decision is that of the Sponsors.
I agree with P1 that is in the public’s interest that Fairness Monitors be able to carry out their duties objectively and free from the prospect of litigation in the RFP context.
The defendants, particularly the Sponsors, owed CG no common law duty of care or fairness when CG submitted a non-compliant bid. It is arguable that the most pressing duty owed by the Sponsors was actually to maintain CG’s disqualification in order to maintain fairness towards other compliant proponents. The record shows that the Sponsors were mindful of this very concern.

In so finding, the Court summarily dismissed the disqualified proponent’s $150 million lost profit claim and awarded court costs against that losing proponent. While the plaintiff appealed this decision, the Ontario Court of Appeal, in its October 2019 ruling, determined that there had been no breach of any fairness duties and rejected the appeal.

As this case illustrates, properly structured negotiated RFPs that operate under traditional contract law rather than under Contract A tendering law serve as a useful risk mitigation measure that significantly reduces the risk of successful damages claims by losing bidders.