Vaguely Drafted Bidding Rules Lead to Bid Dispute

By: Paul Emanuelli

This article is an extract from the 5th edition of Government Procurement.

In its December 2019 decision in Her Majesty the Queen v. Intact Insurance Company, the Manitoba Queen’s Bench granted a summary judgment against a low bidder that failed to honour its bid. The dispute dealt with an Invitation to Tender (ITT) issued by the government of Manitoba for highway paving. The low bidder was selected within the bid irrevocability period and was therefore under a legal duty to enter into the tendered contract. The bidder failed to do so and therefore forfeited its bid bond.

The bidder argued that its bid was non-compliant since it failed to submit certain safety certification forms with its bid and that its bid therefore could not be selected for award. The case turned on the interpretation of that certification requirement and on whether the failure to comply with that requirement rendered the low bid non-compliant and voided the bid bond.

As the Court summarized, the interpretation of the tendering process rules remains subject to the general rules of contractual interpretation. Those rules do not require reference to terms outside the written rules when the intention of those written rules is clear and precisely drafted:

Contract Interpretation Principles

The principles of contract interpretation are not in dispute. Both parties referred to numerous authorities and decisions including: Thomas G. Heintzman, Bryan G. West & Immanuel Goldsmith, Heintzman and Goldsmith on Canadian Building Contracts, 5th ed (Toronto: Thomson Reuters, 2019); Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4, [2010] 1 S.C.R. 69; Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 (S.C.C.) (QL); Geoffrey L. Moore Realty Inc. v. Manitoba Motor League (c.o.b. CAA Manitoba), 2003 MBCA 71, 173 Man.R. (2d) 300 (QL); Dunn v. Chubb Insurance Co. of Canada, 2009 ONCA 538, 97 O.R. (3d) 701; Syncrude Canada Ltd. v. Hunter Engineering Co., [1989] 1 S.C.R. 426 (S.C.C.); and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 (QL).

The primary principle of contract interpretation is to determine the parties’ intention and from the plain, primary and natural meaning of the words that are used set out in the entire context of the whole contract.

In Geoffrey L. Moore Realty Inc., the Court of Appeal summarized the principles at para. 26 as follows:

In brief summary then, to determine the intentions of the parties expressed in a written contract, one looks to the text of the contract as a whole. In doing so, meaning is given to all of the words in the text, if possible, and the absence of words may also be considered. If necessary, the text is considered in light of the surrounding circumstances as at the time of execution of the contract. The goal is to determine the objective intentions of the parties in the sense of a reasonable person in the context of those surrounding circumstances and not the subjective intentions of the parties. If, after that analysis, the text in question is ambiguous, extrinsic evidence may be considered.

2019 MBQB 190 (CanLII) Page: 14

The Supreme Court of Canada in the decisions of Eli Lilly & Co. and Sattva Capital Corp. make it clear that it is unnecessary to consider any extrinsic evidence at all when the written contract being interpreted is clear and unambiguous on its face. (See Eli Lilly & Co. at para. 55)

In Sattva Capital Corp., the Supreme Court of Canada dealt with interpretation of a written contractual provision and the factual matrix at para. 57 as follows:

57 While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62).

In Fontaine v. Canada (Attorney General), 2014 MBCA 93, 310 Man.R. (2d) 162 (QL), the Manitoba Court of Appeal followed the approach in the Geoffrey L. Moore Realty Inc. case and stated at para. 71:

In addition to evidence of the objective intention of the parties, the factual matrix can also include evidence of the commercial purpose of the contract, its aims and objectives and evidence of the nature or custom of the market or industry in which the contract was executed. See King at para. 72.

The goal of the court, as pointed out in the Geoffrey L. Moore Realty Inc. case, is to determine the objective intentions of the parties in the sense of a reasonable person in the context of those surrounding circumstances.

With respect to the issue of bid bonds, the Court confirmed that the express terms of the tendering rules typically establish the forfeiture of a bid bond as the sanction against a contractor that refuses to honour its tender once selected:

The plaintiff referred the court to the decision of Cambridge Plumbing Systems Ltd. v. Strata Plan VR 1632, 2009 BCSC 605, 97 B.C.L.R. (4th) 137 (QL), which dealt with the importance of a Bid Bond in relation to a stated period of irrevocability under Contract A as follows at paras. 60 – 62:

60 The bid bond is critical during the tendering process because it provides for damages in the event that any contractor refuses to enter into the construction contract or fails to perform under that contract. That is, in addition to providing assurance to the owners regarding performance under Contract B, the bid bond is material to the tendering process because it guarantees Contract A’s irrevocability, which is a principal term of Contract A.

61 The consent of surety, on the other hand, is the guarantee from a reputable surety company that it will provide the requisite security for future obligations that might arise under Contract B, should it be awarded. This is critical security, of course, but it is material to the performance of the construction contract, not to the tendering process. This is a temporal distinction that differentiates the two forms of security within the Contract A/ Contract B analysis.

62 Given its importance to the tendering contract and construction contract, it is not surprising that the express terms of the tender call emphasize the requirement for bid security. As the security for both Contracts A and B, the duration of the bid bond is essential to the owner in the tendering process. If the bid security is not available at the 90-day mark, the owner does not have the required assurance that the contractor will enter into Contract B, which undermines both the basic principle that bids are irrevocable, and the integrity of the tendering process, as noted in Silex.

Turning to the interpretive issues in dispute, while the Court accepted that non-compliant bids are incapable of acceptance and that bidders are therefore not liable for failing to enter into contracts when their bids are non-compliant, it rejected the bidder’s claim that the bid in question was non-compliant for failing to provide the required form. As the Court concluded, the wording of the tender call stated that bidders “should” provide a Contractor Certification Form (CCF) with their bids, but not that they “must” do so. Further, the rules stated that the form would be required within three days of the selection of a bid, failing which the bid bond would be forfeited:

In my view, the defendant’s submission is inconsistent with a review of the Tender documents, the intention of the parties and the applicable tender law. The Special Provisions are not ambiguous and state clearly that the CCF is not required to be submitted at the time of the bid. It is encouraged, but not necessary for a bidder to do so. Further, the Special Provisions make it clear that the failure to submit a CCF within three business days upon written request may result in forfeiture of the Bid Bond. Contract A arises forthwith upon the submission of the Bid. On its face, the Bid contained no error and was in compliance with the Tender documents. All bidders were required to submit a Bid Bond for 10% of the amount of their bid. Line West complied with that requirement.

The Bid Bond is designed to ensure the performance of the obligations of the bid under Contract A and stands exposed to the risk of forfeiture upon the breach of those obligations by the bidder. In this case, Line West chose to submit its Bid knowing that the Special Provisions required a fully executed CCF and a declaration that Line West had one of the required the safety program certifications.

If the defendant’s submission is accepted, then no claim could be made on a Bid Bond if the Contract is not awarded to another bidder within 30 days after the bids were opened, regardless of Line West’s breach of the conditions of the Tender.

Further, if the defendant’s submission is accepted, a successful bidder, could purposely delay advising that it was refusing to enter into Contract B until after the 30 days had elapsed and then take the position that it was automatically relieved of any obligation to enter into Contract B because no Contract was awarded. In my view, such an interpretation would be inconsistent with the objective intentions of the parties, the Special Provisions as reviewed above and the integrity of the Tender process.

The Court also determined that the terms of the tendering process required bidders to comply with the pre-conditions of award, including the submission of the required certificate, providing that the selection of the bid occurred within the irrevocability period, even if the formal award occurred after the irrevocability period expired. While the Court agreed that the tendering terms were ambiguous on that point, it relied on the business efficacy principle of contract interpretation and concluded that this was the only reasonable way to read the process rule in question since bidders would otherwise be able to avoid their obligations by stalling during the irrevocability period and then relying on their own delay as a way to avoid its duty to honour its bid:

The last sentence of GC 3.4 states:

… If no award is made within thirty calendar days of the date on which tenders were opened then all bidders will automatically be relieved of any obligation to enter into a Contract with the Department.

The defendant submits that the Contract was not awarded to the next lowest bidder until March 28, 2017, which was more than thirty days after the date on which bids were opened. Accordingly, the defendant submits all bidders including Line West were relieved of any obligation to enter into Contract B thirty days following the date the bids were opened.

The defendant submits that the express language of the Tender is unambiguous and does not refer to the plaintiff’s intention to award a Contract. The plain language of GC 3.4 distinguishes between “endeavour to award the contract” within fifteen days and “award” of the Contract within thirty calendar days. The defendant submits that the Tender establishes a 30-day deadline to award the Contract and GC 3.4 does not state that if the plaintiff is endeavouring to award the Contract, the 30-day deadline to award the Contract ceases to apply.

The plaintiff submits that the plain, primary and natural meaning of GC 3.4 is to specify a period of irrevocability for all bids. In other words, the last sentence of GC 3.4 applies when no contractor is notified that it is the successful bidder. The plaintiff submits that GC 3.4 is not applicable to permit Line West and the defendant to escape liability. Line West’s Bid was accepted and Line West then breached the Tender requirements to be awarded the Contract.

The plaintiff submits that in determining the objective intention of the parties from the plain and ordinary meaning of the words that were used in the context of all of the words of the Tender, the reference to “all bidders” is to all bidders who are waiting to be advised their bid had been accepted. The period of irrevocability and a bidder’s obligations would cease after 30 days if “no award is made”. This is required to enable bidders to move on and allocate resources to other contracts and not have ongoing and indefinite exposure to the potential the owner will accept their bid. The plaintiff submits that the last sentence of GC 3.4 ensures that bidders who have not been advised they are the successful bidder are not required to enter into Contract B after 30 days have elapsed.

Further, the plaintiff submits that GC 3.4 was not intended to apply to a bidder like Line West, whose bid had been accepted and who then subsequently, before 30 days had elapsed, breached the requirements of the Tender. In other words, the plaintiff submits that GC 3.4 is not applicable in the current circumstances and it is not available as a defence for the defendant.

There is some attraction to the position advanced by the defendant. The plaintiff did not award the Contract within 30 days. The notice letter specifically stated that Line West must submit a fully executed CCF prior to being awarded the Contract. I agree that when read in isolation, the plain and ordinary meaning of the words in GC 3.4 means that when “… no award is made within thirty calendar days …”, all bidders are relieved of any obligation to enter into a Contract. However, in this case, Line West’s Bid was accepted as set out above and therefore further analysis is required to determine the objective intentions of the parties. It is necessary to examine the words in the context of all of the words in the Tender and the Special Provisions which were drafted to apply specifically to the Tender.

I agree with the submission of the plaintiff that the last sentence of GC 3.4 was not intended to apply in the circumstances of this case. The clear and unambiguous meaning of GC 3.4 is that the bidders are relieved of any obligation to enter into a Contract if no award is made. In this case, Line West was advised that it was the successful bidder and was required to meet the terms and conditions of the Tender to be awarded Contract B. Line West failed to do so which gave rise to the plaintiff’s right to claim against the Bid Bond and Line West is not relieved of its obligation to comply with the Tender by virtue of the last sentence of GC 3.4.

The Court ultimately ruled in favour of the purchasing institution and determined that the bidder should forfeit its bid bond for failing to enter into a contract after its low bid was selected for award during the irrevocability period. However, imprecise drafting created a procedural ambiguity that could not be resolved by reading the terms in isolation and instead required reliance on broader interpretive principles to resolve the dispute. With the benefit of hindsight, rather than stating that “if no award is made” within the irrevocability period, bidders would be relieved of their obligation to enter into a contract, that term should have been drafted to read “if no bid is selected” within the irrevocability period, bidders would be relieved of their duty to enter into a contract. In other words, a more careful use of terms would have avoided the ambiguity in the process rules.

As this case illustrates, precise drafting helps to avoid inconsistencies and ambiguities that can later be relied on as interpretive arguments by contracting parties who are trying to avoid their contractual commitments.