This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its December 2003 decision in Pratt Contractors Ltd. v. Transit New Zealand, the Judicial Committee of the Privy Council recognized that the duty to evaluate tenders fairly and in good faith is an integral term of the tendering process under the Contract A process contract. The case dealt with a legal dispute on appeal from New Zealand involving a tender call issued by Transit New Zealand for the realignment of State Highway 1 at Vinegar Hill. Pratt was an unsuccessful bidder. As noted in the Privy Council judgment, the parties agreed that the tender call in question gave rise to a tendering process contract that included an implied duty to act fairly and in good faith:
Pratt alleges that the terms of the request for tenders (“RFT”) gave rise, immediately upon submission of the tender, to a preliminary contract which contained express and implied terms as to the method by which Transit would select the successful tenderer and that Transit acted in breach of these terms…. [T]ransit accepts, in the light of modern authority, that the request for tenders was not a mere invitation to treat and did give rise to a preliminary contract requiring it to comply with certain procedural obligations. It also accepts that the contract included an implied duty to act fairly and in good faith.
While the parties agreed that the duties applied, they disagreed on whether Transit New Zealand breached those implied duties when it bypassed Pratt’s low bids in two successive tendering rounds.
In the first round of tendering, Pratt’s bid was lower than the next-best bid by more than $1 million. As the Privy Council noted, during the evaluation, concerns arose over Pratt’s alleged past practice of lowball bidding:
Pratt’s reputation in the New Zealand road building industry (in which there are relatively few players) was not uncontroversial. It was thought by some to practise low balling, that is to say, tendering a low price to obtain the contract in the expectation of being able to make a profit by aggressive claims for additional payments. At the time of the tenders for the Vinegar Hill contract, it was in serious dispute with Ruapehu District Council over a roading contract in Pipiriki for which it had tendered $769,340. The Council dismissed Pratt on grounds of delay and an arbitration followed in which Pratt claimed $2.5 million of extras said to have arisen during its partial completion of the contract. Pratt and the Council blamed each other for the delay. The contract engineer, Mr Graeme Young of the engineering partnership Payne Sewell, formed an unfavourable view of Pratt’s business methods and engineering competence. But the arbitration was stayed because Pratt was unable to provide security for costs and did not proceed any further.
Since Transit New Zealand failed to arrive at a decision regarding the acceptance or rejection of Pratt’s initial low bid within the two-month period for the acceptance of tenders, it was required to retender the project.
In the second round of tendering, the contract was awarded to a competitor that scored higher than Pratt based on the evaluation of price and other factors. Pratt sued, arguing that the evaluation had been conducted improperly. The evaluation dispute turned on two issues: (a) whether Transit New Zealand was entitled to rely on undisclosed sub-criteria falling within its disclosed evaluation criteria; and (b) if its evaluators were entitled to rely on their past knowledge of Pratt, or if this constituted impermissible bias.
With respect to the sub-criteria issue, the Privy Council found that Transit New Zealand could rely on the undisclosed sub-criteria as long as they fell within the scope of the disclosed general criteria and were applied fairly and in good faith:
Their Lordships also agree that the adoption of the sub-attribute methodology does not mean that the TET were assessing attributes other than those specified in the RFT. As a matter of construction the sub-attributes, including financial viability, could legitimately be regarded as aspects of the principal specified attribute.… [I]t is nevertheless necessary to identify exactly what standard of conduct was required of the TET in making its assessment. In their Lordships’ opinion, the duty of good faith and fair dealing as applied to that particular function required that the evaluation ought to express the views honestly held by the members of the TET. The duty to act fairly meant that all the tenderers had to be treated equally. One tenderer could not be given a higher mark than another if their attributes were the same.
With respect to the alleged bias issue, the Privy Council held that the implied fairness and good faith duties did not prevent Transit New Zealand from scoring competing bidders differently if they honestly thought their attributes were different. Furthermore, these fairness and good faith duties did not compel Transit New Zealand to appoint evaluators who did not have past views about the competing bidders:
But Transit was not obliged to give tenderers the same mark if it honestly thought that their attributes were different. Nor did the duty of fairness mean that Transit were obliged to appoint people who came to the task without any views about the tenderers, whether favourable or adverse. It would have been impossible to have a TET competent to perform its function unless it consisted of people with enough experience to have already formed opinions about the merits and demerits of roading contractors. The obligation of good faith and fair dealing also did not mean that the TET had to act judicially. It did not have to accord Mr Pratt a hearing or enter into debate with him about the rights and wrongs of, for example, the Pipiriki contract. It would no doubt have been bad faith for a member of the TET to take steps to avoid receiving information because he strongly suspected that it might show that his opinion on some point was wrong. But that is all.
The Privy Council therefore upheld Transit New Zealand’s evaluation process and dismissed the rejected low bidder’s appeal. However, that decision also set a high-level precedent for recognizing that the Contract A process contract can apply to a tendering process and give a losing bidder the right to bring lost profit claims challenging the fairness of that tendering process.
As this case illustrates, implied fairness and good faith duties may apply to a purchasing institution in its evaluation of competing bids and give rise to lost profit claims under certain tendering formats. To enhance the defensibility of such evaluations, purchasing institutions would be wise to (i) disclose the evaluation considerations that will be factored into the ranking and selection of bidders, particularly when non-price factors will be considered; (ii) ensure that any undisclosed sub-criteria fall within the scope of the disclosed general criteria; (iii) ensure that all evaluation criteria are applied fairly and in good faith; and (iv) avoid using Contract A tendering formats that incent bidders to sue by making lost profit claims available as a bid protest remedy.
