This article is an excerpt from Government Procurement, which is available for purchase.
In its September 2014 decision in Rankin Construction Inc. v. Ontario, the Ontario Court of Appeal dismissed the appeal of a trial decision and upheld the government’s right to reject a non-compliant bid. The dispute dealt with a tender call issued by the Ontario Ministry of Transportation for the widening of Highway 406 in the Niagara region. Rankin’s low bid was rejected as non-compliant. It took issue with its rejection and sued the Ministry for lost profits. In the January 2013 trial decision, the Ontario Superior Court of Justice had upheld the government’s decision to disqualify Rankin’s low bid since it contained misrepresentations. The trial court determined that the bid was validly rejected due to Rankin’s failure to accurately disclose the amount of domestic steel it intended to use for its project.
As the trial court summarized, following the public opening of bids and prior to the award of a contract, a competing bidder and the local road builder’s association disputed the accuracy of the Canadian content representations in Rankin’s tender:
12 Following the tender opening, the MTO published a list of the bidders showing Rankin as the low bidder on both the Total Tender and the Total Adjusted Tender. In accordance with the Instructions to Bidders, the three lowest bidders were required to submit additional documentation to the MTO, including a detailed list of its unit prices for the various components of the project. These documents were utilized by the MTO to carry out a pre-award evaluation of the three lowest tenders.
13 Some time prior to October 11, 2005 the MTO received a complaint from a competing bidder Hard Rock Paving (“Hard Rock”) that Rankin’s bid was too low to do the work on the project. Hard Rock followed up with a letter dated October 12, 2005 asserting that Rankin’s bid was not compliant for failure to include H-Piles in its declared Value of Imported Steel since H-Piles are not manufactured in Canada, and claiming that the contract should be awarded to it as the next lowest bidder. The MTO received a letter dated October 19, 2005 from the Ontario Road Builders’ Association (“ORBA”) to a similar effect, asserting that, if it was found that Rankin’s bid did not properly declare the foreign origin of the H-Piles, its tender should be declared informal, or non-compliant, and the contract awarded to the next lowest bidder. It is noted that Hard Rock was a member of ORBA but Rankin was not.
The Ministry decided to look behind the accuracy of Rankin’s Canadian content calculations. It found that the concerns were valid. The Ministry ultimately determined that Rankin’s low bid should be rejected in order to preserve the integrity of the bidding process:
19 Mr. MacLean and Mr. Hennum each testified that the primary consideration behind the Ministry’s decision was the perceived need to maintain fairness among all bidders and the integrity of the tender process. In reference to the discretion clause at para. 11.1 of the Instructions to Bidders, by which the MTO retained the right to reject any or all tenders and to waive irregularities “in the Ministry’s interest”, Mr. MacLean testified that the key interest of the Ministry at the time was the maintenance of the integrity of the bidding process. He considered that a waiver by the Ministry of the non-compliance in Rankin’s bid would not be fair to all bidders. He questioned how confidence in the Ministry’s tender process could be maintained among contractors if the Ministry, having received a complaint about a non-compliant bid, chose to ignore the issue and accept a bid determined to be non-compliant.
Rankin challenged its disqualification, arguing that that the Supreme Court of Canada’s precedent setting decision in Double N Earthmovers v. Edmonton (City) prohibited purchasers from looking behind representations made in a bidder’s tender. The court disagreed, noting that the Supreme Court of Canada’s Double N decision held that purchasers were not required to investigate allegations of misrepresentation and non-compliance raised by competing bidders, but that they continued to have the right to investigate where concerns over the validity of bidder representations arose. In distinguishing the facts in the dispute from those in Double N, the trial court noted that in the latter, the City of Edmonton was sued after it failed to look behind the low bidder’s misrepresentation but that in this case the Ministry had chosen to exercise its right to make further inquiries after receiving bids:
28 The situation in the present case is different. The question is not whether there is a duty owed by an owner to all tenderers to carry out investigations of bids for non-compliance, but rather whether an owner is disentitled to carry out such an investigation, and whether, if it does so at the instance of a rival bidder, it thereby breaches an obligation to the low bidder whose bid is found to be non-compliant as a result of the investigation.
The trial court justified its rejection of Rankin’s assertion that purchasers were prohibited from investigating the accuracy of tender compliance information in a bid since turning a blind eye in the face of concerns over misrepresentation would undermine confidence in the tendering system:
39 In my view, to require an owner to stay its hand and refrain from making enquiries in the face of information that it will be impossible for a bidder to fulfil a material requirement of its bid, and to award the contract to such a bidder, does not promote the integrity of the bidding process. Public sector owners, such as the MTO in this case, have a long-term interest in protecting of the integrity of the bidding process. Their concern is not necessarily restricted to the individual project under consideration, but with the maintenance of a vigorous and competitive tendering process on future projects. Anything which would dissuade potential bidders from participating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest.
In rejecting Rankin’s argument, the court agreed with the Ministry’s assertions that purchasers have the right to investigate valid concerns over bidder misrepresentations that relate to compliance of the bid:
42 To impose a blanket prohibition on the right of a tender-calling authority to investigate whether it is possible for a bidder to fulfil the terms of its tender would threaten the integrity of the bidding process by encouraging the submission of bids which, while compliant on their face, may give bidders an unfair advantage over other bidders. To maintain an entitlement, but not an obligation, for an owner to investigate whether compliance is possible, would encourage bidders to rigorously prepare and scrutinize their bids to achieve compliance or run the risk of having their bids ruled to be non-compliant.
43 To entitle owners to investigate allegations of non-compliance, but not require them to do so, would address the concern expressed by the majority in Double N respecting the danger of unwarranted attacks by rival bidders resulting in possible unequal treatment of bidders and frustration of the process, by giving owners to right to choose to investigate only allegations of non-compliance considered to be legitimate and bona fide.
In coming to its conclusion, the trial court also determined that the Ontario government’s Procurement Directive and Procurement Operating Policy did not prohibit such investigations and that, in any event, these internal procedures were not expressly incorporated into the tender call rules and were therefore not part of the rules of the particular tendering process.
The trial court ultimately determined that Rankin’s bid contained material factual inaccuracies since it understated the amount of foreign steel required to do the work. This led to the inaccurate calculation of the Canadian content for the purposes of the 10 percent domestic preference and thereby impacted the price calculation in Rankin’s bid. The trial court therefore determined that the Ministry had properly rejected the bid as non-compliant due to these misrepresentations:
62 The accuracy of the Declared Value of Imported Steel is therefore crucial to the determination of the low bidder, as it bears directly on the Adjusted Total Tender of each bidder. An understatement by a bidder of its Declared Value of Imported Steel would therefore give that bidder an advantage over others in the tender process.
63 The PPCC formed an integral and fundamental element of the tender scheme for the project. Non-compliance with the requirement to provide an accurate Declared Value of Imported Steel would therefore be regarded prima facie as a material non-compliance. Because of the importance of the PPCC to the tender scheme, the MTO was entitled to rely on an expectation that submitted declarations of the value of imported steel would be accurate.
As the trial court noted, taking the facts in Rankin’s bid at face value would have resulted in an improper evaluation and improper award. The Ministry was therefore justified in looking behind the representations and rejecting Rankin’s bid.
The trial court also applied the governing three-part test from the Supreme Court of Canada’s Tercon Contractors Limited v. British Columbia (Transportation and Highways) decision and determined that even if the bid had not been validly rejected, the limitation of liability provision in the Ministry’s tender would have shielded the Ministry from liability to Rankin for lost profits.
Rankin appealed the trial decision. While the Court of Appeal ultimately agreed that the Ministry was within its rights when it rejected Rankin’s bid, it followed a somewhat different analysis than the trial court. Like the trial court, the Court of Appeal upheld the right to investigate for non-compliance even if the Double N rule did not require the purchasing institution to do so. However, unlike the trial court, the Court of Appeal determined that a Contract A had been formed between Rankin and the Ministry since it found that Rankin’s non-compliance in misstating the Canadian content in its bid was inadvertent and constituted a minor informality that was not fatal to the overall compliance of its bid. The Court of Appeal also noted that even when adjusted to remove the inappropriately claimed Canadian Content preference, Rankin’s bid remained the low bid. However, while the tender call terms allowed the Ministry to waive minor informalities, the Court of Appeal found that the tendering rules did not require the Ministry to do so and ultimately upheld the right to reject the bid:
43 I would add the following. Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process.5 And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible. Here, the tender process was essentially fair and the appellant’s bid was materially less costly to the public purse. Given this, in my view, a balancing of the public interest in promoting the integrity of the public bidding process so that the government can generally obtain the best prices, against the public interest in the MTO obtaining the best price possible in this particular case for widening Highway 406, also weighs in favour of the conclusion that the appellant’s non-compliance was a formality.
44 However, whether or not the non-compliance amounted to a “formality” is ultimately not determinative. Contract A does not require the MTO to waive formalities. In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder. Here, the MTO acted in good faith, and its conclusion that the appellant’s non-compliance was more than a formality — whether or not correct — was reasonable.
The Court of Appeal also considered Rankin’s challenge of the trial court’s ruling that any Ministry liability would have been shielded by the limitation of liability provision in the tender call:
53 Paragraph 11.3 of the Instructions to Bidders reads as follows:
The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents.
54 While the trial judge concluded that the appellant had no basis to sue the Province because no Contract A had arisen, he went on to consider whether, if wrong in so concluding, the appellant’s claim would be barred by para. 11.3.
55 Tercon, at paras. 62 and 122-23, sets out the three-step analytical approach to be followed when considering an exclusionary clause, which I would summarize as follows:
The court must first interpret the clause to determine whether it applies to the circumstances established in evidence. This will depend on the court’s assessment of the intentions of the parties, as expressed in the contract.
If the clause applies, the court must then determine whether the clause was unconscionable at the time that it was made.
Finally, if the clause is applicable and valid, the court must consider whether it should nonetheless refuse to enforce it because of an overriding public policy (to be proven by the party seeking to avoid enforcement of the clause) that outweighs the very strong public interest in the enforcement of contracts.
56 Applying this three-step approach, the trial judge concluded that even if the Crown had breached the terms of the tender by disallowing the appellant’s bid, the appellant’s claim was, as a matter of interpretation, barred by para. 11.3 of the Instructions to Bidders. He reasoned that had the MTO simply called off the project, the appellant would not have had a claim against the MTO. Its claim for damages arose out of the MTO’s acceptance of Hard Rock’s bid, and the non-acceptance of the appellant’s bid. It was therefore clearly covered by the wording of para. 11.3 — even if the MTO had erred in considering the appellant’s bid materially non-compliant. Further, para. 11.3 was not unconscionable at the time the contract was made: the appellant was a sophisticated contractor. And there was no overriding public policy that would justify the court’s refusal to enforce it: any error that the MTO might have made was made with the objective of promoting the integrity of the tendering process.
In its appeal Rankin argued that the trial judge erred in interpreting the limitation of liability provision as applying to the specific circumstances, maintaining that the clause should not apply where the Ministry was alleged to have broken its process rules. The Court of Appeal dismissed Rankin’s argument and upheld the trial court’s conclusion on this point, finding that Rankin’s reasoning would render the provision a nullity if it did not apply in instances of bid acceptance and bid rejection since those are a primary cause of litigation in the tendering process:
58 I would reject the appellant’s argument that para. 11.3 does not apply in the circumstances. Having considered the text of para. 11.3, in the context of the Instructions to Bidders as a whole, and in light of the commercial context of the tender documents, I agree with the trial judge that para. 11.3 bars the appellant’s claim. The language is in my view clear — both in the paragraph itself and in the context of the Instructions to Bidders as a whole. A bidder presumably would not sue unless it alleged that the MTO had breached a term — express or implied — of the tender documents by accepting another’s bid, or not accepting its bid. To interpret para. 11.3 as not applying where a breach by the MTO of the tender documents is alleged would effectively render it meaningless. Paragraph 11.3 is a commercial response to the increased litigation faced by owners arising out of the acceptance, and corresponding non-acceptance, of bids.
59 The relevant commercial context also includes that bidders are sophisticated parties and are free to choose not to submit a tender in the face of a broad exculpatory clause in the tender documents. And if, faced with such a clause, desirable bidders do not respond to requests for tenders, market forces will drive the owner to modify the terms of its tender documents to stimulate competitive tenders. For example, an owner might chose to limit an unsuccessful bidder’s damages to its costs of preparing its tender, instead of barring claims for profits lost as a result of the award of the tender to a competitor.
60 As noted above, the appellant does not take issue with the trial judge’s conclusion that, in the circumstances, there was no overriding public policy that would warrant refusing to enforce para. 11.3. It is possible that there may be circumstances where the conduct of the owner in the bid process is so aberrant that it would justify a court’s refusal to enforce an exculpatory provision in the tender documents on public policy grounds. This is not such a case.
The conclusions of the trial court and Court of Appeal on the enforcement of the limitation of liability clause was in line with prior decisions where the courts have ruled in favour of enforcing legal disclaimer clauses in tendering disputes after already concluding that there was no breach of the rules and no liability in the first place. However, the enforceability of such clauses is far less certain in instances where a breach of the rules and liability have been found by the court and the award of damages turns on the enforcement or non-enforcement of a liability disclaimer. As the Supreme Court of Canada’s controversial split decision in Tercon illustrated, when a court determines that a purchasing entity has broken the rules and, rather than being a moot point, the liability disclaimer stands as the final barrier between a prejudiced bidder and a lost-profit award, the enforceability of such a provision is far from certain. Rather than testing the limits of such clauses, the best limitation of liability strategy is to ensure that tendering processes are conducted in accordance with applicable tendering rules.
