By Marilyn Brown
(Originally published in the Summer 2012 edition of Caveat Emptor, the magazine of the Ontario Public Buyers Association.)
Having spent a significant amount of time and energy to prepare and issue a public call for tenders, the closing date arrives, the bids are opened and all of them exceed the budget for the work. What now? Assuming the procurement process you’ve initiated gives rise to Contract A rights and obligations, the receipt of over-budget bids places a purchasing institution in an inherently risky situation.
Some purchasers may look to the Canadian Construction Documents Committee Guide to Calling Bids and Awarding Contracts (the “CCDC Guide”) for guidance. Where the lowest compliant bid exceeds the purchaser’s budget, the CCDC Guide recommends that the purchaser negotiate with the lowest compliant bidder to “identify changes in the scope or quality of the work and their corresponding bid price reduction” and advises that purchasers include a clause in their call documents to allow for negotiations with the lowest compliant bidder. Alternatively, or if negotiations with the lowest compliant bidder are not successful, the CCDC Guide recommends that the purchaser invite only the three lowest compliant bidders “to re-bid on modified Bid Documents under a new bid call.”
Although these may sound like reasonable solutions, following these recommendations may result in a breach of the purchaser’s obligations at law and under trade treaties. It is important to remember that the CCDC Guide is not legislation, nor is it necessarily consistent with current case law, and it does not automatically govern a procurement process, even where CCDC documents are used. While the CCDC Guide may be a useful tool, it is critical that purchasers carefully consider whether the recommendations it includes are compatible with current legal and trade treaty obligations.
The right to negotiate does not mix well with the express and implied duties of a Contract A tendering process. Having required bidders to compete through the submission of irrevocable, legally binding bids, it is inconsistent to ask the bidder that submitted the most competitive bid to engage in negotiations and reduce its price. Further, as frequently reiterated by the courts, the implied duties under Contract A include the duty to award the contract as tendered. In order to negotiate a reduced price, the purchaser will have to allow for changes in the scope or specifications of the project, resulting in an award of a different contract than was tendered.
By issuing an appropriately drafted procurement document, purchasers can elect to operate outside of Contract A, and govern themselves by the law of traditional negotiations. However, where a purchaser elects to create Contract A, by including terms such as a requirement for irrevocable bids, the courts have not looked favourably on attempts to reserve rights, such as the right to negotiate, that are at odds with the implied duties under Contract A. In the case of Stanco Projects Ltd. v. British Columbia, the court held that it is a fundamental rule of the formal bidding process that a purchaser will not engage in post-bidding negotiations while also deriving the benefits of receiving binding tenders from bidders:
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.
As is often the case in procurement-related litigation, the outcome of cases with respect to post-bid negotiations have varied. In some cases, the courts have held that a purchaser is entitled to rely on a stated right to negotiate if it restricts its negotiations to the lowest bidder and does not attempt to use the low bidder’s price to negotiate with other bidders. However, significant risk arises if negotiations with the lowest bidder are unsuccessful – at that point, either negotiating with other bidders or seeking new bids for the same work has been found to constitute bid shopping.
Although, in the litigious world of Contract A, no solution is without risk of challenge, the lowest risk solution to the over-budget bid dilemma is to immediately cancel the process – without engaging in any negotiations or discussion with the bidders – revise the scope of the project to realistically align with the budget and allow all vendors to compete for the revised contract in a new procurement process. Purchasers that are required by legislation, provincial directives or trade treaties to engage in open competitive procurement processes for purchases above a threshold value risk contravening those requirements by following the CCDC Guide recommendation to issue a revised tender to only the three lowest bidders in the initial process. If the value exceeds the applicable thresholds, the purchaser is not permitted to engage in an invitational or limited competitive process, just because the initial process resulted in the receipt of over-budget bids. Where open competition is required, the purchaser cannot simply choose to invite bids from only three vendors as contemplated in the CCDC Guide recommendations.
Purchasers relying on the CCDC Guide to engage in negotiations within a Contract A bidding process may find themselves at the mercy of the courts, and discover that their cries of “budget constraints” fall on deaf ears. As we have seen through years of litigation, the implied duties of Contract A can be held to override even the most clearly worded reserved rights and privilege clauses. A right to negotiate is inconsistent with a requirement for irrevocable bids and the duty to award the contract as tendered, and trying to combine these competing rights and obligations opens the door to legal challenge. Rather than running the risks and fighting the battle in the courts, purchasers should carefully consider foregoing irrevocability in favour of flexibility, and using non-Contract A procurement formats that are designed to allow for negotiations with the preferred bidder.
