This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its July 2016 decision in Lutchmeesingh’s Transport Contractor’s Limited v. National Infrastructure Development Company Limited, the Trinidad and Tobago High Court of Justice recognized the application of the Contract A process contract to the challenged tendering process. However, the Court ultimately rejected the bidder’s claim after finding that the government was under no duty to provide reasons for terminating contract award negotiations when the parties failed to reach an agreement on price.
The case dealt with a tender call for the construction of a highway flyover. The National Infrastructure Development Company selected the complainant’s bid and invited it to enter into contract award discussions, but ultimately terminated those discussions without providing reasons after the parties were unable to agree on project costs. The complainant brought a legal action challenging that decision.
As the Court noted, both parties acknowledged that the bidding process in question could create the Contract A process contract and its resulting good faith duties:
The parties agreed to rely on their written submissions and the documents agreed by the parties for the resolution of these issues. In their written submissions both parties accepted that the ITT could give rise to binding obligations in two scenarios (i) upon submission of the tender (Contract A) and (ii) upon the actual contract being entered into for the execution of the project (Contract B). The Court permitted brief oral amplification of two issues which really goes to the heart of this case: (a) the meaning and content of the duty to act in “good faith” as implied in the term of Contract A and (b) does that duty to act in good faith or the limited contractual rights implied under Contract A include a right to provide the tenderer with reasons if the Defendant elects to withdraw from negotiations before the formation of Contract B.
The Court then elaborated on the governing law relating to the Contract A process contract as recognized across multiple Commonwealth countries:
The issuance of an ITT is obviously not an offer by the invitee. Equally a tender is merely an offer to the invitor which it may accept or reject. However, in a typical tendering arrangement there may arise two contracts. First, the tendering process itself is to be viewed as being guided by the terms and conditions agreed to by the parties which are gleaned from the express and implied terms arising from the invitation to Tender. This has been referred to as Contract A. See Harmon CFEM Facades Ltd v Corporate Officer of the House of Commons [1999] 67 ConLR 1.
The body of case law in the Commonwealth amply demonstrates that by the language used in the ITT, both parties, the invitor and tenderer, can create a tender evaluation process governed by rules and procedures which are more than a matter of mere expectation but can themselves have contractual force. To that extent the parties do intend to create contractual relations to the limited extent provided by their arrangement. This conclusion can be made by adopting the Contract A/B approach of the Canada Jurisdiction (M.J.B Enterprises Ltd v Defence Construction [1999] 1 R.C.S 619, Ellis Don Construction Ltd Naylor Group [2001] 2 RCS 943) or examining whether the language gave rise to a preliminary procedural contract (Pratt Contractors Limited v Transit New Zealand [2003] UKPC 83) in determining whether by the mandatory language used it is consistent with the imposition of binding obligations on the parties. (Hughes Aircraft Systems International v Air Services Australia).
Second, there is the actual contract covering the subject scope of works. This is referred to as “Contract B”. Both contracts deserve their own independent consideration and analysis and this case involves an interpretation of the rights and obligations of “Contract A” between the Claimant and Defendant.
The limited contractual rights and/or duties that arise in Contract A includes the right to consider the invitor’s tender in conjunction with all conforming tenders and a duty to act fairly and in good faith. But ultimately the determination of this agreed tender evaluation process is a task of examining the express terms of the ITT and the implied terms that of necessity must arise in such a contract. See Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195, Fairclough Building Limited v BC of Port Talbot (1992) 62 BLR 82, Pratt Contractors Limited v Transit New Zealand [2003] UKPC 83, Hughes Aircraft Systems International v Air Services Australia [1997] FCA 558, Cooperative Centrale Raiffeisen –Boerenleenbank BA v Motorola Electronics Pte Limited [2010] SGCA 47, Gerard Martin v Belfast Education & Library Board [2006] NICh 4, M.J.B Enterprises Ltd v Defence Construction (1951).
What is important therefore is that the submission of a tender in response to an invitation to tender may give rise to contractual obligations, quite apart from the obligations associated with the construction contract to be entered into upon the acceptance of a tender, depending upon whether the parties intend to initiate contractual relations by the submission of a bid. If such a contract arises, its terms are governed by the terms and conditions of the tender call and such terms that are to be reasonably implied. See M.J.B Enterprises Ltd v Defence Construction [1999] 1 R.C.S 619, para 19.
An example of the application of these principles is famously provided in Blackpool. In Blackpool, the Court of Appeal considered whether any breach of contract arose by the failure of the invitor to consider the tenderer’s bid which was mistakenly considered to have been received after the deadline for the submission of tenders and therefore not considered. The bid had in fact been submitted in time and had it not been for the error would have been considered. Bingham LJ found force in the argument that to resolve the question of whether obligations arose the question should be asked: how would the ordinary person reading the document construe it. He sought to examine what would have been the “confident assumptions of commercial parties both tenderer and invitor”. He considered that the limited right was at the very least protection of the tenderer that if he submits a conforming tender before the deadline he is entitled as of a contractual right to be sure that his tender will be opened and considered in conjunction with other conforming tenderers. Bingham LJ tested such a proposition with the “officious bystander test” as follows: “had the club before tendering inquired of the council whether it could rely on any timely and conforming tender being considered along with others I feel quite sure that the answer would have been “of course”.”
While the Court ultimately concluded that the parties had created a Contract A process contract in the specific bidding process, it also concluded that the good faith duties owed under this contract did not include the duty to provide reasons before cancelling contract award discussions and proceeding to another bidder:
The narrow issue in this case is whether the context of the duty of good faith or to act honestly includes a duty to give reasons if the tenderer elects to withdraw from negotiations and move on to another bidder. That freedom to move to terminate negotiations and convene fresh negotiations is an express term of the ITT and what good faith requires is sensitive to context:
“The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest…the development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm tree” justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinising the motives of contracting parties.” See Bhasin v Hrynew [2014] 3 S.C.R. 494, para 70.
“The principle of good faith exemplifies the notion that, in carrying out his or her performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interest will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith.” Bhasin v Hrynew [2014] 3 S.C.R. 494, para 67.
Good faith therefore is not an objective standard or abstract formula superimposed on parties as to what “should” be fair or “ought to be” honest dealings. It is a principle which recognizing on the one hand a degree of proper and acceptable conduct but on the other recognizes commercial realities, legitimate self-interests of contractual parties, freedom of contract and being careful not to make moral judgments on legitimate commercial arrangements.
To therefore state that the ITT gives rise to the implied duty to act fairly and in good faith is on its own unhelpful unless the Court can from the context of the parties’ dealings imply as fact specific terms which are consistent with or advance the general duty. Contracts are not however to be lightly implied. The Court must be able to conclude with confidence both that the parties intended to create legal relations and that the agreement was to the effect contended for. Per Bingham LJ in Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 at 1202.
Terms may be implied in a contract: (1) based on the custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed. See: M.J.B Enterprises Ltd v Defence Construction [1999] 1 R.C.S 619.
In Hughes Aircraft Systems International v Air Services Australia [1997] FCA 558 Finn J echoed the statement of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 256 where the learned Justice of Appeal stated:
“The implied term must be reasonable and equitable; necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it, so obvious that ‘it goes without saying’; capable of clear expression; and must not contradict any express term of the contract.”
A Court, when dealing with terms implied in fact, must be careful not to slide into determining the intentions of reasonable parties. The implication of the term must have a certain degree of obviousness to it, why if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis. See: M.J.B Enterprises Ltd v Defence Construction [1999] 1 R.C.S 619, paras 27, 28 & 29.
The following principles on the implication of contractual terms can be culled from the recent authorities of Marks and Spencer plc v BNP Paribas Securities Services Trust Company Ltd [2015] UKSC 72 and Attorney General of Belize v Belize Telecom Limited [2009] UKPC 10.
a. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association.
b. It cannot introduce terms to make the contract “fairer” or “more reasonable”.
c. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended.
d. The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.
e. In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen.
f. The implication of a term was “not critically dependent on proof of an actual intention of parties” when negotiating the contract.
g. However a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed to it if it had been suggested to them.
h. It is questionable whether reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable.
i. Business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisfied. In practice it would be a rare case where only one of those two requirements would be satisfied.
j. If one approaches the issue by reference to the officious bystander, it is “vital to formulate the question to be posed by [him] with the utmost care”; and
k. Necessity or business efficacy involves a value judgment. However simply put a term can only be implied if, without the term, the contract would lack commercial or practical coherence.
Lord Carnwath observed the fact that:
“While more stringent rules apply to the process of implication, it can be a useful discipline to remind oneself that the object remains to discover what the parties have agreed or “must have intended” to agree. In that respect it remains, and must be justified as, a process internal to the relationship between the parties, rather than one imposed from outside by statute or the common law. Per Lord Carnwath in Marks and Spencer PLC v BNP Paribas Security Services para 69. Per Lord Hoffman Attorney General of Belize v Belize Telecom Limited [2009] UKPC 10, para 25.
Objectivity which informs the whole process of construction should not descend into speculation about what the actual parties to the contract or authors (or supposed authors) of the instrument would have thought about the proposed implication.
In this case a justiciable cause of action can only arise if there is an implication of a term in the agreed evaluation process that the Defendant ought to provide sufficient or detailed reasons for the rejection of a tender. In answering this question the Court must not slide into speculation. It must not allow the value judgment of what is a necessary term of the contract or one which gives it business efficacy to be steered in favour of abstract notions of fairness ignoring commercial realities, the express bargain of the parties and their respective freedom of contract. In my view, there is no such implied duty in fact to provide any or any sufficient or detailed reasons for withdrawing from the tender.
In my view from the express terms of the ITT, the bargain struck by the parties set out earlier in this judgment demonstrates that the tenderer assumed the risk of making the tender. The cards were stacked heavily in favour of the invitor avoiding liability and giving it freedom to negotiate amongst multiple bidders in order of merit after failed negotiations.
There is no authority submitted which support the view that an implied duty to provide reasons exists in law in the limited context of contract A. In fact, Bingham LJ’s judgment in Blackpool goes affirmatively in the other direction that no such obligation arises at all. See Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 at 1202. In Harmon CFEM Facades Ltd v Corporate Officer of the House of Commons [1999] 67 ConLR 1, the obligation to provide reasons to an unsuccessful bidder was expressly provided for in the detailed 1991 Regulations governing the tendering process and awards of public contract. Moreover such regulations are governed by principles in European Union Law. A paramount consideration in such a legislative regime is a minimum guarantee of fair and equitable treatment. It is not difficult to see how in that context the duty to provide reasons would feature in the contractual obligations of the parties. Harmon however is no more an authority for the proposition that where competitive tenders are sought and responded to a contract comes into existence where the prospective employer impliedly agrees to consider all tenders fairly. The duty to act fairly is however one of context and must be interpreted having regard to the facts of each case. Harmon is no authority for a general implication of a term to provide reasons as a component of a duty of good faith in all contracts.
As discussed above the existence and content of the obligation to act in good faith is a question of fact. Whereas the parties have agreed in this case that there is a duty to act in good faith but this does not in the context of the express terms of the contract and the negotiations between the parties amount to the obligation to provide sufficient reasons. The clear terms of the ITT avoided reference to the provision of reasons to the tenderer and to furthermore insist on a term that sufficient or detailed reasons be provided simply begs the question: what would be sufficient or detailed reasons? Such uncertainty is an impractical business arrangement. Looked at another way the contract made between the parties as to the appropriate tendering process does not lack commercial or practical coherence without the implication of such a duty to provide reasons.
Naturally a protest would have been lodged where the tender can challenge the decision to withdraw from the negotiations. In this case the Defendant made it clear to the Claimant that it could not agree on cost and price. The onus is on the Claimant pursuant to the protest remedy to make out its case that the Defendant should not have withdrawn from the negotiations.
The Court therefore rejected the claim.
As this case illustrates, when bidding process rules are left unclear, this leaves the outcome open to legal challenge, which can include lost profit claims in Contract A tendering processes. While in this case the process rules were determined to not include an implied duty to provide a selected bidder with reasons before rescinding its selection and proceeding to another bidder, purchasing institutions could better mitigate the risk of similar legal challenges by avoiding the Contract A process contract in the first place. Rather, purchasing institutions should ensure that their bidding processes and contract award negotiations are governed by traditional contract law so that they can better avoid lost profit claims based on after-the-fact assertions of vague implied “good faith” duties under the Contract A model. Furthermore, purchasing institutions should also be transparent in any decision to terminate contract award negotiations since those decisions remain challengeable even outside of Contract A based on administrative law fair process duties and remain subject to procedural remedies under administrative law rules. In summary, engaging in final price negotiations with a selected proponent under properly structured negotiated Request for Proposals (RFP) processes is a better choice than experimenting with price negotiations using non-transparent procedures under Contract A process contract formats.
