This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its September 2013 decision in Afolau Construction v. Samoa Sports Authority, the Supreme Court of Samoa awarded extra construction costs to a contractor after the government made a series of pre- and post-award scope changes. The case dealt with a tendering process for the construction of a sports complex. The plaintiff submitted a low bid of $4.4 million, which was significantly higher than the government’s budget. The parties negotiated three rounds of scope decreases and settled on an award for a reduced project at the cost of $2.8 million. The Cabinet then reconsidered its prior decision and decided to award the project for its original full scope for the original amount of $4.4 million. However, this new decision was made well after the expiry of the three-month bid validity period. The low bidder informed the government that it could no longer honour its original price and that it required a $370,000 increase to build to the original specifications.
As the Court noted, the parties had conflicting accounts as to what transpired at this point, with the plaintiff claiming it received verbal assurances that its adjustments would be granted, while the government claimed it made no such commitment:
As the plaintiff’s original bid in August 2005 was valid for three months, the defendant’s CEO on the 6th May 2006 wrote to the plaintiff to revalidate its bid. By the same letter it was suggested that the written contract should be executed the following week. On the 8th May 2006 the plaintiff responded in writing, detailing a price increase of $367,101.08. Upon receipt of this letter the defendant’s CEO arranged a meeting with Toluono Feti, (Feti) the plaintiff’s managing director, on Friday the same week.
The subject matter of the meeting was obviously to discuss the price increase from the original the bid made nine months earlier. What was said at that meeting is crucially conflicting. The plaintiff alleged that the defendant’s CEO assured the plaintiff that due to the urgency in completing the project in time for the games the increase in costs can be submitted later but to proceed with the construction. On the contrary, the defendant’s CEO maintained he never made such an assurance. In fact he told Feti that the contract would be re-tendered if the plaintiff insisted on the price increase.
When in early June 2006 the plaintiff received a draft copy of the written contract, the plaintiff responded in writing by letter dated 8th June 2006 referring specifically to the revised price variations submitted on the 9th May 2006, assurance by the defendant’s CEO at a meeting that additional costs may be submitted later in view of the urgency of the project. Feti also wanted clause 7.2 which specified the contract price at the original bid price to be removed for discussions later.
The defendant’s CEO did not respond in writing but stated in evidence he did not give any assurance and the works would be re-tendered if the plaintiff insists on price increase.
Later in the same month the contract was executed by the cabinet minister as the chairman of the Board of Directors of the defendant and Feti and his brother for the plaintiff. Again there is a conflict of evidence as to what said prior to the execution of the contract at the office of the Minister. Feti told the court that when he raised the issue of increased costs he was requested by the Minister to sign the contract as the project was becoming a matter of great urgency but the increased costs could be submitted later for approval. But the Minister denied making any assurance to the plaintiff. He was emphatic that he told Mr Feti the project would have to be re-tendered if the plaintiff insisted on a price increase.
To add further complexity to the dispute, the government introduced a series of additional major scope changes prior to the commencement of construction:
Before construction work began the defendant requested several variations, the major one being the re-orientation of the building which originally was to lie north to south to a west to east direction. As the land slopes downward towards the east and the requested variation required the length of the building to lie in the east to west direction major excavations and compaction of the site was required before the foundation program of the centre could commence. A total of six variations orally requested by the defendant were attended to. Extra costs to the plaintiff for four of the variations have been paid in full. Plaintiff’s claim for the variation to the building re-orientation has been paid in part as was the claim for the provision of extra structural steel for the mezzanine floor.
The plaintiff maintained it had entered into the contract for the stated sum of its original $4.4 million bid based on the government’s further assurances that it would subsequently be awarded the additional price adjustments. The plaintiff therefore sought the rectification of the contract to reflect the price increase.
As the Court summarized, when considering whether to grant a request for the rectification of a contract, courts will look at the contemporaneous written records of the parties at the time of contract formation for evidence of what they agreed to, and will place greater weight on that evidence than on the recollections of the individuals who were involved in those negotiations:
The rationale of rectification is that it is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time the written contract was entered. The simple issue the court has to address concerning rectification is simply whether the parties agreed that the increase in costs between August 2005 (when the plaintiff submitted its bid) and June 2006 (when the contract was signed) would be met by the defendant before the contract was executed. When rectification is claimed, evidence of negotiations and all other surrounding circumstances will be received. If the matter that has come to be the subject of debate is a matter that was not raised and addressed during the negotiations, and or was not otherwise shared by the parties so that there was no subjective common intention concerning it, there is no room for rectification: Ryledar Pty Ltd v Emphoric Pty Ltd (2007) NSWCA 65; 2007 (69) NSWLR 603.
It is also permissible when considering rectification or contract formation to look at the subsequent conduct of the parties towards one another, including what they have said to each other after the date of the alleged contract. Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 550.
It is therefore just as permissible to prove that one party told the other that the otherwise apparently binding contract was not in fact to be binding as it is to prove that they agreed upon a term but then did not correctly record that agreement in their written contract. McHugh JA in Air Great Lakes Pty Ltd v K. S. Easter Holdings (1985) 2 NSWLR 309, 337 drew attention to Corbin’s observation in Contracts (S57 Vol 3 at 385) that “we need not begin excluding parol evidence until we know a contract has been made.”
The course of negotiations of the parties needs to be examined for purpose of argument concerning rectification as well as the issue of variation. This is particularly vital considering the significant disagreement in the evidence about the statements made at various meetings before the execution of the contract.
Witnesses undoubtedly did their best to give accurate evidence, but in evaluating the best evidence, it is difficult to accept reliability of evidence that purported to be based on unaided recollection and lacked independent support from the written record or inherent probabilities.
When this trial occurred in 2012 and concerned events that happened as long ago as 2006 and those who testified were fairly busy characters who had much to attend to besides this transaction since the events relating to this transaction had occurred, this reflects nothing more than the ordinary fallibility of human memory. Oral evidence of any witness of what was said at the meetings of the parties must be identified with a contemporaneous record or features of the inherent probabilities of the situation which supported the oral evidence.
After reviewing the record, the Court found no evidence that the plaintiff had agreed to honour its original bid price after the expiry of the bid validity period:
There is no documentary evidence which indicated or suggested that the plaintiff agreed to construct the project at the original bid price. Neither the Minister nor the CEO or the legal advisor had ever accused Feti either verbally or documentary of falsely recording the events of earlier meetings, neither did any of them accused Feti of not honouring what he said in the earlier meetings if he did say he will stick to his original bid.
The Court also rejected the government’s assertion that it would have retendered the project, rather than agree to the price increase, since project scheduling and the unlikeliness of receiving lower bids at that stage made the option unfeasible:
Contentions by the CEO and the Minister that the works would be re-tendered have inherent weaknesses. In the first place the defendant did not have the time frame to re-tender the work. When the bids closed the plaintiff had not only the lowest bid but also the shortest time duration for completion of the project estimated at 7 months. Before the commencement of construction the defendant had already decided to realign the sports centre so that it will lie east to west instead of south to north to minimize the heat from the sun entering the building. This was no minor variation. It was time consuming, delaying construction work to September 2006, and incurring extra costs of over $160,000. Total costs of $264,531 for the variations were paid by the defendant to the plaintiff.
According to the project manager’s report to the defendant dated 24th July 2006 the excavations, and compaction of the land to accommodate the re-orientation of the building would be time consuming with a subsequent delay on the foundation program. In his next report dated the 25th September 2006 he told the defendant’s CEO that the site meeting at the sports centre had been postponed to the 28th September informing the CEO of a variation to a foundation pad which means that by the end of September 2006 the foundation work has only commenced.
If the CEO and the Minister were genuinely serious about re-tendering the project which would have accounted for at least another three to four months, it means the foundation work would commence about January 2007; some seven months away from the South Pacific Games. In the second place the re-tendering of the project would be totally against the spirit of urgency inherent in the Cabinet directive and the notification letter sent by the CEO to the plaintiff urging the plaintiff to start preparations to commence the construction. Thirdly to re-tender the project would have been impractical and illogical when considering that only four bids were received when the tenders closed and with the plaintiff being the lowest bidder at $4,383,765. The next lowest bid was $5,009,580; that is about $626,000 higher than the plaintiff’s, so that even with increased costs the plaintiff’s bid would still have been the lowest.
Furthermore, in addition to finding no evidence that the plaintiff had agreed to the original price amount, the Court also found written evidence from the plaintiff of its expectation to be paid the discussed adjustments in unrebutted contemporaneous correspondence:
The plaintiff’s letter to the Prime Minister dated 11 June 2008 (exhibit E to Feti’s affidavit) thanked the Prime Minister for meeting with Feti the day before. He also summarised outstanding payments due to the plaintiff including the $393,468 increased costs and variation costs.
Again the defendant did not respond in writing refuting what the plaintiff in his letter said took place or was agreed to. In my respectful view the conduct of the defendant reinforces the contention by the plaintiff that it was agreed by the parties prior to the execution of the agreement that increased costs can be submitted and will be met by the defendant at the completion of the project.
The Court therefore ruled that the rectification of the contract should be granted and the contract amended to include the additional costs which, including interest, totalled $397,000.
As this case illustrates, negotiating parties should be careful to accurately document the final terms of their deal. Failure to do so can result in protracted downstream disputes over fundamental issues, including performance terms and related pricing.
