This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The courts have recognized the right to reject a low bidder for past performance issues; however, this right must be carefully exercised since it remains subject to legal challenge.
For example, the Carosi Construction Ltd. v. Niagara (Regional Municipality) case involved two separate tenders, one for the construction of storage tanks and the other for a project involving a water pollution plant. The plaintiff submitted the low bid for both projects, but both of its bids were rejected. The low bidder sued but the trial court found that the bidder failed to provide evidence that the region had acted improperly.
The Ontario Court of Appeal upheld the trial court decision and found that the Niagara Regional Municipality was entitled to reject the low bidder based on a bad reference. The low bidder maintained that it had been “blackballed” by a negative reference from another municipality for which it had previously worked. The Court of Appeal disagreed, noting that the owner was entitled to use a negative reference as a reason to bypass the low bidder and that this did not constitute “blackballing”.
As this case illustrates, low bids can be bypassed for valid reasons. Proper evidence of poor past performance can be relied upon in the right circumstances to avoid awarding a contract to a low bidder.
Similarly, in its decision in Sound Contracting Ltd. v. Nanaimo (City), the British Columbia Court of Appeal held that the owner was entitled to rely on a privilege clause to reject the low bidder due to past performance problems. The case involved a construction tender call which contained the traditional “lowest tender not necessarily accepted” privilege clause, as well as a clause stating that the contract would go to “the greatest value based on quality, service and price.” The City of Nanaimo awarded the contract to the second-lowest bidder. The low bidder sued and won at trial.
The Court of Appeal reversed the trial decision and recognized that the privilege clauses permitted the City to avoid awarding to the lowest bidder “if there are valid, objective reasons for concluding that better value may be obtained by accepting a higher bid.” However, the Court of Appeal stressed that the purchaser’s discretion must be exercised fairly, objectively, and in good faith.
The Court of Appeal found that the city was justified in considering the low bidder’s past performance on similar city projects and in deciding that due to past performance problems, the low bid would not result in “the greatest value based on quality, service and price.” The Court of Appeal also found that considering the bidder’s past performance was not an improper undisclosed criterion since “past dealings are probably the best indicator of how a proposed relationship will come to work out in practice.” However, the Court of Appeal was careful to caution purchasers against using their discretion “in such a way as to punish or to get even for past differences”, stressing that “[w]henever the low bidder is not the successful tenderer, any additional factors in the analysis will have to be shown to be reasonable and relevant.”
The Court of Appeal also cautioned against the arbitrary use of a privilege clause and found that its exercise remains subject to challenge by bidders and subject to the duty of fairness and good faith.
As these decisions illustrate, a privilege clause does not give an owner an unfettered right to reject the low bidder without valid reasons. The exercise of such rights remains subject to legal challenge by bidders and review by the courts. Owners should therefore exercise their privileges in a legally sound and defensible manner based on clearly documented reasons.
