By Paul Emanuelli

This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

A close reading of Canadian case law reveals that there is no risk-free exit strategy when bids come in overbudget in a Contract A bidding process. In a classic catch-22 situation, purchasing institutions face a lost profit claim from bidders in any of the following scenarios:

  1. If the purchasing institution successfully negotiates a price reduction with the low bidder to bring the price within budget, other bidders can bring a lost profit claim alleging unfair process since they were denied the same opportunity to improve their pricing.
  2. If the purchasing institution attempts to negotiate lower pricing with the low bidder and those negotiations fail and force a retender, the low bidder can bring a lost profit lawsuit, claiming that the retender was a form of bid-shopping and that the price constraints were a fabrication.
  3. If the purchasing institution cancels and retenders without first attempting to negotiate price reductions with the low bidder, the low bidder can bring a lost profit action claiming that it was denied the opportunity to bring its cost within budget, while also asserting, as above, that the price constraints were a ruse to enable bid-shopping.
  4. If the purchasing institution simply cancels and abandons the project, the low bidder can still bring a lost profit claim for failing to award a contract to the best bid.

While these Contract A lost profit claims are not always successful, they do succeed in pulling a purchasing institution into potentially protracted and costly litigation. These lawsuits are often resolved with expensive out-of-court settlements since the public institution wants to avoid the controversy of high-profile litigation and lacks the endurance to spend the time and money required to defend itself in a lengthy lawsuit with unpredictable outcomes. In fact, a survey of the Canadian bid-shopping claims that went to trial illustrates the risk and unpredictability of bid-shopping lawsuits.

The seminal case in this area is the July 2004 decision of the British Columbia Supreme Court in Stanco Projects Ltd. v. British Columbia (Ministry of Water, Land and Air Protection), which found the government liable for bid-shopping in a dispute over a Contract A tendering process for a water system upgrade project. All the bids were overbudget, which is the common element in the bid-shopping cases. During the bid validity period, the government approached the low bidder seeking price improvements, while also seeking price improvements from the other bidders, with whom it shared the low bidder’s initial pricing information. The government then awarded the contract to one of the other bidders. The Court found the government liable for lost profit damages, stating “It strikes me as obvious that a tenderer would not expose itself to the expense and other risks of tendering if it were conceivable that its bid could be used by an owner as a mere bargaining tool in post-closing tender negotiations with that tenderer or other bidders.” The Court also stated that it was reasonable for suppliers who submit binding bids in a Contract A process to expect that those bids would not be used “as a springboard to engage in negotiations aimed at obtaining a better price or like advantage during the tender evaluation period”.

The Court also stated that once binding bids are submitted in a Contract A bidding process, “[a] tendering authority ought not to be entitled to contemporaneously purport to adhere to the tendering model and enjoy the benefits flowing from it and, once the bids have been revealed and are under consideration, to unilaterally implement the contrasting model of free bargaining.” The Court also stated that “bid manipulation of the kind I have described is repugnant conduct which has no legitimate place in the proper operation of the tendering paradigm.”

As this case illustrates, attempting to obtain post-bid contractual improvements can constitute bid-shopping under a Contract A bidding process. In fact, in its May 2006 decision, the British Columbia Court of Appeal upheld the trial decision and adopted an expansive definition of bid-shopping, which was described as “conduct where a tendering authority uses the bids submitted to it as a negotiating tool, whether expressly or in a more clandestine way, before the construction contract has been awarded, with a view to obtain a better price or other contractual advantage from that particular tenderer or any of the others.” In other words, post-bid negotiations that result in any contractual improvement from the original bid can attract lost profit claims under the Contract A process rules. This decision was followed by a flurry of subsequent bid-shopping claims across Canada.

Retendering While Original Bid is Still Alive is Bid-Shopping
For example, in its October 2006 decision in Port Hawkesbury (Town) v. Borchert Concrete Products Ltd., the Nova Scotia Court of Appeal found the Town liable for attempting to in-source a project after receiving overbudget bids. The case involved the construction of bleachers for the new $15 million Port Hawkesbury Civic Centre. Since the low bid was well overbudget, the Town decided to act as its own prime contractor and in-source the work. The Town sought new quotes from third-parties without first cancelling the original Contract A tendering process. The Nova Scotia Supreme Court found that this conduct was an “egregious attack on the integrity of the bidding process” that amounted to bid-shopping. The Town appealed this ruling, but the Nova Scotia Court of Appeal agreed with the trial court’s bid-shopping ruling and awarded $45,000 in lost profit damages to the overbudget low bidder. Whether formal cancellation before retendering would have turned the outcome is difficult to know. While the Town should have formally cancelled the process before re-scoping, that would not have prevented the low bidder from still suing for lost profits, arguing that it should have been awarded the contract and challenging the validity of the initial budget.

Cancelling Can Still Get You Sued for Lost Profits
In its October 2007 decision in Hub Excavating Ltd. v. Orca Estates Ltd., the British Columbia Supreme Court found the defendants liable for cancelling a tendering process. The case involved a tender call for a road and sidewalk construction project in a residential subdivision. The low bidder alleged that the defendants failed to act in good faith when they informed them that their bid was close to the engineer’s estimate, although in fact it was substantially higher. The Court found that the purchaser’s agent made negligent misrepresentations when it told the low bidder that it would get the “go-ahead” to perform the contract prior to the cancellation of the process. The Court awarded the low bidder $300,000 in damages.

While the purchaser was ultimately able to overturn the decision on appeal, the case illustrates the perils of pulling the plug on a Contract A bidding process for budgetary reasons, since those decisions can attract protracted lost profit claims. This case also illustrates the volatility of bid-shopping claims, since reversals and split decisions on appeal are a recurring thread that demonstrates how the courts have difficulty agreeing on what constitutes bid-shopping.

Cancellation Results in Split Decision on Appeal
In its July 2007 decision in R. v. Crown Paving, the Newfoundland and Labrador Supreme Court found the provincial government not liable for bid-shopping. In this case the government cancelled a highway maintenance tender call after the bids came in overbudget. It then negotiated an extension with its incumbent contractor, who also happened to be the higher of the two bidders on the cancelled tender call. The Court concluded that this was not bid-shopping because the government had cancelled the tendering process prior to initiating the subsequent contract extension negotiations. The fact that the government was able to show that the bids were significantly over-budget also helped in the defence against the bid-shopping claim, since that helped prove that the cancellation was for legitimate reasons. However, the trial decision was appealed. While the majority of the Newfoundland and Labrador Court of Appeal sided with the government and with the trial decision, the dissenting judge found that it was “inescapable that the Department was involved in a form of bid-shopping when it held in one hand the irrevocable bid by Crown Paving and with the other hand negotiated a contract extension” with the incumbent.

As this case illustrates, win or lose, dealing with overbudget bid situations under Contract A exposes the purchasing institutions to protracted litigation where the rules are retroactively applied by the courts with less than consistent and uniform results.

Single Bid Cancellation Results in Lost Profit Claim
In its March 2008 decision in Aloia Bros. Concrete Contractors Ltd. v. Richmond Hill (Town), the Ontario Superior Court of Justice allowed the municipality to cancel its bidding process without liability after receiving a single overbudget bid that exceeded the project budget by over 20 percent. The case involved an invitation to tender for a road construction project where the sole bidder submitted a $1.6 million bid, which was rejected by the municipal council. The bidder sued for its lost profits, arguing that the municipality had relied on undisclosed budgetary considerations to cancel. The Court rejected the claim, finding that the City was not liable for cancelling due to undisclosed budgetary constraints and was not required to negotiate with the sole bidder to seek price improvements. While the claim was ultimately unsuccessful, using a Contract A process gave the bidder the right to sue for lost profits in the first place, which required the municipality to either settle out of court or defend its cancellation decision.

Court of Appeal Divided on Whether Retender Was Bid-Shopping
In its June 2008 decision in Amber Contracting Ltd. v. Halifax (Regional Municipality), the Nova Scotia Supreme Court found the Region liable for bid-shopping after it cancelled and retendered due to budget constraints. The case involved a tender call for the construction and upgrade of a sanitary pumping station in Dartmouth, Nova Scotia. The initial bids came in over the budget estimate and the Region was unable to negotiate price reductions with the low bidder. The Region obtained a higher budget approval and then issued an almost identical new tender call and awarded to a bid that exceeded the original budget estimate. The original low bidder sued. The Court determined that the Region relied on a flawed and undervalued original budget estimate to cancel its initial tendering process. It also found that the Region’s real reason for retendering was to seek price improvements. The Court determined that this constituted bid-shopping and awarded lost profits to the original low bidder. The Region then succeeded in getting the trial decision overturned in an October 2009 split decision by the Nova Scotia Court of Appeal, where the two-judge majority found that cancelling and retendering did not constitute bid-shopping, while the dissenting judge agreed with the trial judge and concluded that the Region had engaged in bid-shopping.

As this case illustrates, the courts can be deeply divided on whether purchasers can pull the plug on a Contract A bidding process due to budgetary constraints, but are united in allowing bidders to bring lost profit claims in those situations.

Condo Corporation Sued for Cancellation
In its May 2009 decision in Cambridge Plumbing Systems Ltd. v. Strata Plan VR 1632, the British Columbia Supreme Court rejected a lost profit bid-shopping claim brought against a condo corporation by a low bidder. The case dealt with a Contract A bidding process for the replacement of a water system. The condominium owners voted against the low bid due to budgetary considerations and ultimately negotiated a contract with another bidder. The low bidder sued. The trial court noted that “If all bids are too high, the owner may legitimately reject them all for cost considerations.” However, this did not stop the low bidder from bringing the lost profit claim and alleging that the decision to reject its bid and negotiate a contract with a different bidder was a form of bid-shopping, nor did it prevent the condo corporation from incurring the time and expense necessary to defend against the Contract A lost profit claim to convince the Court that budget constraints, rather than opportunistic bid manipulation, was the reason behind the tender cancellation decision.

Bad Scoping Leads to Bid-Shopping Damages
In its September 2010 decision in CMH Construction Ltd. v. Victoria (Town), the Newfoundland and Labrador Supreme Court found the Town liable for lost profit damages in another Contract A bid-shopping case. The dispute involved a tendering process for renovations at a municipal building that resulted in the submission of a single overbudget bid. The municipality failed to formally terminate that bidding process, but re-scoped the required work into smaller projects and awarded three smaller contracts to other contractors. The original low bidder sued for lost profits. The Court blamed the bad scoping of the project specifications for the overbudget bid, stating that “budgetary concerns do not relieve an owner from its obligation to treat bidders fairly” and that the Town “specified work using certain materials in the Tender call which could not realistically be performed within the budget.” The Court found that the Town’s bad scoping “breached its implied duty of fairness owed to CMH by causing it to expend time, effort and money on a hopeless bid, then completely ignoring CMH’s interests, which it was contractually bound to consider, in devising and carrying out a remedial scheme, and ultimately awarding something other than contract B to other contractors.”

As this case illustrates, overly optimistic specifications can lead a project team into a Contract A lost profit claim and restrict the ability to safely re-scope those requirements. While a purchasing institution may have the right to cancel a tendering process under Contract A, a low bidder has the right to sue for lost profits and ask the courts to second-guess whether the original budget estimates were reasonable in relation to the original scope of work and the resulting cancellation decision.

Protracted Lost Profit Proceedings After Cancellation
In its November 2011 decision in Innovations for Audio Video Inc. v. Vancouver (City), the British Columbia Supreme Court upheld a small claims court ruling that found the City not liable for cancelling a bidding process due to funding issues. The dispute involved a Request for Proposals (RFP) for an ice rink sound system. The City cancelled the bidding process since no funding was available, but then awarded a contract to one of the bidders after funds were collected from a local community group. One of the unsuccessful bidders sued for $19,000 in lost profits, $57,000 in punitive damages, and $7,800 in legal fees. After a five-day trial, the small claims court found the City not liable for bid-shopping, but the bidder appealed. The British Columbia Supreme Court upheld the trial decision, finding that the City had the right to cancel the bidding process due to budgetary reasons. While the cancellation decision was ultimately upheld, the City was required to defend that decision in a multi-day trial and then respond to an appeal, which required the expenditure of further time and financial resources.

As this case study illustrates, budget-based cancellation decisions may be permitted in the right circumstances in a Contract A tendering process, but those cancellation decisions can be challenged with lost profit claims that will have to be defended at considerable time and expense.

Identical Retender Accepted Where Low Bid Unreasonable
In its January 2013 decision in Olympic Construction Ltd. v. Eastern Regional Integrated Health Authority, the Newfoundland and Labrador Supreme Court found the Health Authority not liable for bid-shopping after cancelling and retendering a contract due to budgetary constraints. The Contract A tendering process was for the construction of a building extension. After cancelling the first tendering process for budgetary reasons, the Health Authority awarded a contract in the second process to a bidder that was non-compliant in the first bidding process but had submitted pricing below the original low bidder. The low bidder from the first tendering process sued for lost profits, claiming that the Health Authority engaged in bid-shopping by retendering to get lower pricing from that originally non-compliant bidder. However, the Court found that the Health Authority had the right to cancel and retender since the plaintiff’s original $3 million bid was $500,000 higher than the best non-compliant bid in the first round of tendering, and $600,000  higher than the $2.4 million low bid selected in the second round of tendering. In fact, the Court ruled that cancelling and retendering without rescoping was permitted in the circumstances since the plaintiff’s original low bid was well in excess of the market value for the work in question.

As this case illustrates, in a Contract A tendering process, it is often difficult to distinguish between bid-shopping and legitimate cancel-and-retender decisions, since each case will be determined on its own facts. In this case, the Court second-guessed the value-for-money offered in the original low bid and found the pricing was too high. This is not an avenue of analysis common to other bid-shopping decisions. Purchasing institutions that have difficulty accurately setting project budgets in the first place could be hard pressed to prove that an overbudget bid was unreasonable and that it justifies retendering on identical terms, as permitted in this case. This lack of predictability makes dealing with overbudget bids in a Contract A process a precarious proposition.

Post-Bid Scope Additions Challenged as Bid-Shopping
In its December 2015 decision in Dynamic Painting v. Ball Construction, the Ontario Superior Court of Justice dismissed a lost profit claim in a Contract A tendering process for the award of a painting contract at the Wayne Gretzky Sports Centre in Brantford, Ontario. Dynamic Painting, one of the losing bidders, brought a lost profit claim alleging that Ball Construction, the contractor who was conducting the bidding process on behalf of the City, engaged in bid-shopping by obtaining post-bid price revisions for additional work and awarding a contract that included that additional work. The Court found that the testimony of a witness for the plaintiff bidder did not help the unfair process argument, stating that “Mr. Bauld did not say what the owner is supposed to do when new work, which is part of a particular aspect of the tender, in this case painting, needs to be added to the original scope before the sub-trade starts its work on the project.”

As this case illustrates, once a purchasing institution uses a Contract A tendering process to receive bids, any subsequent scope changes that may require follow-up bids prior to initiating work could be challenged in a lost profit bid-shopping claim. While in this case that claim failed, defending against a Contract A lost profit claim is a distant second option when compared to avoiding a lawsuit in the first place.