This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its July 2007 decision in Bluesky Communications Limited v. Attorney-General, the Supreme Court of Samoa recognized that lost profit claims could apply to tendering process challenges. The decision provides a useful overview of the development of Contract A process contract case law across the Commonwealth. The case dealt with a government bidding process for the award of a mobile digital cellular licence. Bluesky Communications Limited, who lost that process, alleged that the process was unfair because the licence was awarded to a non-compliant competitor and, as a result, claimed lost profits as a remedy.
The government brought an application for summary dismissal, arguing that lost profit damages were not available against a government tendering process, but the Supreme Court rejected the summary dismissal application. Citing leading legal authorities from multiple Commonwealth jurisdictions, the Supreme Court found that Contract A process contract claims could apply in the right circumstances to allow for claims of lost profit damages. The Supreme Court started its analysis with reference to the leading Canadian precedent that first recognized the Contract A process contract in Commonwealth case law:
Traditionally an invitation for tenders is an invitation to treat and not an offer. The tender is the offer. When a tender is accepted a contract is then formed. Counsel for the plaintiff in his helpful submissions argued that the tender process may give rise to a process contract which is referred to in some cases as a preliminary, collateral, subsidiary or class A contract. This is different from the principal contract which comes into existence when the tender is awarded to the successful tenderer. This principal contract is referred to in the Canadian cases cited by counsel for the plaintiff as a class B contract. In other words, the tender process may give rise to two types of contract, a process contract and a principal contract. In support of his argument, counsel for the plaintiff referred to the decision of the Supreme Court of Canada in The Queen v Ron Engineering [1981] 1 SCR 111. In that case, the owner of works to be performed called for tenders. In the tender documents, one of the conditions was that if a tenderer withdrew his tender within a specified time, the owner was entitled to retain the deposit. The respondent contractor put in a tender but then subsequently wanted to withdraw its tender within the specified time. The owner then retained the deposit. The respondent contractor took the owner to Court. In the Supreme Court of Canada it was held that the owner was entitled to retain the deposit. In delivering the judgment of the Court, Estey J said:
“There is no question when one reviews the terms and conditions under which the tender was made that a contract arose upon the submission of a tender between the contractor and the owner whereby the tenderer could not withdraw the tender for a period of sixty days after the date of the opening of the tenders. Later in these reasons this initial contract is referred to as contract A to distinguish it from the construction contract itself which would arise on the acceptance of a tender, and which I refer to as contract B.”
This analysis of the tender process differs from the traditional position that a tender process generally involves only an invitation to treat and no contract arises until the tender which is the offer is accepted. The New Zealand Courts picked up this analysis provided in Ron Engineering Co in two cases that were also cited by counsel for the plaintiff.
The Supreme Court then summarized the adoption of those principles in New Zealand and the United Kingdom, which culminated with the recognition of the Contract A process contract by the Privy Council:
The first of these cases was Markholm Construction Co Ltd v Wellington City Council [1985] 2 NZLR 520. The second case was Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469 where Gallen J said at pp.478-479:
“Authority makes it clear that the starting point is that a simple uncomplicated request for bids will generally be no more than an invitation to treat, not giving rise to contractual obligations, although it may give rise to obligations to act fairly. On the other hand, it is obviously open to persons to enter into a preliminary contract with the expectation that it will lead in defined circumstances to a second or principal contract…Whether or not the particular case falls into one category or the other will depend upon a consideration of the circumstances and the obligations expressly or impliedly accepted.”
In the case of Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 (CA) the defendant Council issued an invitation for tenders. The plaintiff, one of the three tenderers, submitted within the permitted time a tender which conformed with all the requirements of the tender process. However, its tender was marked “LATE” by mistake by the defendant Council. As a consequence, the plaintiff’s tender was not considered. The defendant Council then considered and accepted the tender from one of the other two tenderers. The plaintiff brought an action against the defendant Council for breach of contract. In issue was whether there was a preliminary contract between the plaintiff as tenderer and the defendant which issued the invitation for tenders. It was submitted by counsel for the defendant that an invitation for tenders was an invitation to treat and not an offer capable of acceptance; therefore no contract of any kind came into existence until the defendant chose to accept a tender or offer. Bingham LJ in a judgment concurred in by the other members of the Court held that the defendant was under an implied contractual obligation to consider the plaintiff’s timely and conforming tender in conjunction with the other conforming tenders or at least the plaintiff’s conforming tender should be considered if the other tenders were. The plaintiff also had a right to the same effect. Effectively, Bingham LJ held that there was a preliminary contract between the plaintiff and the defendant that the defendant would consider the plaintiff’s conforming tender in conjunction with the other conforming tenders that were considered.
More recently in Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313, McGrath J in delivering the judgment of the New Zealand Court of Appeal said:
“[1] This appeal concerns an engineering contractor who twice submitted the lowest tender bid but did not get the contract. It addresses the tension inherent in the relationships between those who call for tenders for construction contracts and those who submit them. The former generally seek to retain the fullest freedom to decide whether or not to accept, and if so which. The latter, who must commit time and expense to preparation of tenders, have the expectation that the competition for the contract will be conducted, and a contract awarded, in a principled way. That is especially so if they are dealing with a public agency.
[2] Traditionally the law of contract treated the tendering process as one of preliminary communication prior to contractual commitment. Since 1980 in a number of cases in Commonwealth jurisdictions, including New Zealand, there has been a fresh analysis of the nature of duties owed to each other by invitors and tenderers during the period prior to letting of construction and engineering contracts. The trend in these decisions has been towards a greater readiness by the Courts to recognise that parties may become bound by a preliminary contract to the processes that will be followed. The scope of the terms of such process contracts, express and implied, itself however can give rise to difficulties. At their heart lies the different interests of the parties in tender situation and the practical problems they can give rise to.”
McGrath J then went on to say:
[63] Historically the process of procuring tenders was not treated by the Courts as contractual in nature. The freedom of the invitor to accept or reject any tender was regarded as fundamental to the tender concept. Invitations to submit tenders were almost invariably treated as preliminary communications which took place before any contractual offer was made. While tenderers might be involved in considerable work and expense in tender preparation they were understood to assume the full risk that no contractual entitlement would eventuate from their efforts. The position was different if there were a particular stipulation in the invitation to tender, such as one binding the invitor to accept the lowest (or, as the case might be, highest) offer, but otherwise the invitor was not regarded as having an intention to become contractually bound in any way prior to its acceptance of a particular tender.”
Further on McGrath J said:
[77] Whether a request for tenders gives rise to a process contract, once a conforming tender is submitted, is in all cases a question of whether all the elements of contractual formation are made out at that point. Analysis of the terms of the invitation to tender is the starting point. Where the request makes no express commitment concerning the manner in which tenders received will be addressed, that may indicate the invitation was no more than an offer to receive them. On the other hand, as Blackpool and Fylde Aero Club indicates, the rigorous and comprehensive expression of requirements to be complied with by tenderers may give rise to an implied promise by the invitor to consider a conforming tender if others are considered. The law does not, however, have a policy which inclines towards enforcement of implied promises by invitors, even if they are public bodies, and whether there has been a binding promise as to process is to be ascertained by applying general principles of contract law concerning contract creation and implied terms.”
It is recommended that Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313 be read in full. That case went on appeal and was affirmed by the Privy Council in Pratt Contractors Ltd v Transit New Zealand [2005] 2 NZLR 433; [2003] UK PC 83.
The Supreme Court then summarized more recent jurisprudence, which recognized that the application of the Contract A bidding process contract, and the availability of lost profits as a remedy to prejudiced bidders, will depend on the specific rules established under the challenged bidding process:
In the more recent case of Prime Commercial Ltd v Wool Board Disestablishment Co Ltd [2006] NZCA 295, William Young P in delivering the judgment of the New Zealand Court of Appeal said:
[15] The law as to the circumstances in which the calling for tenders gives rise to a process contract was extensively reviewed in Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313 at [63]-[77] (CA), affd sub nom Pratt Contractors Ltd v Transit New Zealand [2005] 2 NZLR 433 (PC). The primary rule is that a tender process involves simply an invitation to treat on the part of the party calling for tenders with no contractual obligation crystallising until an offer is accepted, see Shivas & Westmark Investments Ltd v BTR Nylex Holdings NZ Ltd & Others [1997] 1 NZLR 318 (HC). But tender processes will sometimes create process contracts between the party calling for tenders and the tenderers, see for instance Blackpool & Fylde Aero Club Ltd v BTR Nylex Holdings New Zealand Ltd & Others [1990] 1 WLR 1195 (CA) and Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469 (HC). As noted by this Court in Quay Stevedoring Services Ltd v ENZA Ltd CA 214/00 15 November 2001, a party alleging a process contract must establish the ‘necessary elements’ of offer and acceptance and intention to enter a binding contract. Where there is a process contract the obligations under it on the party calling for tenders will, of course, depend upon what was agreed expressly or by implication. An assertion that the tendering party is not obliged to accept the highest or any offer must be respected but is not necessarily inconsistent with that party being subject to obligations as to the process by which tenders are to be evaluated.
[16] Cases in which the Courts have concluded that there were process contracts have often involved very formal tender procedures with one or more of the following characteristics: registration of interest by tenderers; detailed specification which tenders must comply with; a prescribed methodology (often detailed) for the evaluation of tenders; and an express or implied commitment to choose the successful tenderer based on such evaluation. We are not suggesting that process contracts can only come into effect in those circumstances. Indeed, the Blackpool & Fylde Aero Club case shows that this is not so. But the less formal the tender process, the less scope there is for implying any, or at least any onerous, obligations on the party calling for tenders.”
That the existence of a process contract is not automatic upon a tenderer submitting a tender to an invitation for tenders but depends upon an analysis of whether the elements of offer, acceptance, and an intention to create binding contractual relations are present was stated explicitly in Dockpride Pty Ltd & Anor v Subiaco Development Authority [2005] WASC 211 where Le Miere J in the Supreme Court of Western Australia said:
“[109] The existence of a pre-award or process contract in tenders is not automatic. Whether or not a process contract exists depends on the intention of the parties; Cubic Transportation Systems Inc v State of New South Wales [2002] NSWSC 656 at [31]- [44] per Adams J; Transit New Zealand v Pratt Contractors Ltd [2002] 313 at [77]-[78].”
While the Supreme Court ultimately rejected the government’s summary dismissal application, it also concluded that the onus of establishing the existence of a Contract A process contract remained with the plaintiff.
As this case study illustrates, while some jurisdictions recognize the availability of lost profit damages, even in those jurisdictions the onus remains on the plaintiff to show that a Contract A process contract was created in the specific bidding process. The law is clear that the process contract and the availability of lost profit damages will not automatically arise in every tendering process, not even in those Commonwealth jurisdictions that recognize the possibility of such claims.
