Refining Fairness: Precedent-Setting Cases in Procurement Law
March 7, 2019
In 2018, courts made significant rulings about what fairness means in procurement law from the perspective of owners and bidders alike. For example, in one case a court reaffirmed the long-standing principle that there is no contractual duty of fairness outside of the “Contract A” framework and rejected the notion that an independent duty of fairness arises under tort principles. Courts also issued important decisions delineating the scope of an owner’s duty to conduct a procurement in a fair, open and transparent manner, where such duty exists. Additionally, for the first time, a Canadian court has determined the scope of a public procuring authority’s administrative law duty of procedural fairness when considering debarring a contractor from participating in future procurement opportunities.
Some key procurement decisions from 2018 are summarized below.
In CG Acquisition Inc. v. P1 Consulting Inc., the Ontario Superior Court of Justice reaffirmed the long-standing procurement law principle that there is no duty of fairness outside of the “Contract A” framework.
In this case, an unsuccessful proponent in a request for proposal (RFP) claimed damages from the project sponsors, and the fairness monitor, after it was disqualified for including an ineligible person on its team. The proponent asked the sponsors (owners) to reconsider the disqualification on the basis that its mistake was inadvertent and harmless. The sponsors maintained their decision. In the action, the proponent primarily argued that the sponsors, and fairness monitor, owed it a duty of fairness arising from tort law, which required them to reconsider the disqualification adequately. Their failure to do so, the proponent argued, constituted negligent investigation and negligent provision of a service.
The court granted the defendants’ motions for summary judgment and dismissed the proponent’s action. The court reaffirmed that there is no free-standing duty of fairness in the procurement context. The court rejected the notion that the sponsors or the fairness monitor owed the proponent a duty of care in tort. It reasoned that there was insufficient proximity between the parties for the duty of care to arise because the proponent was properly disqualified. It also recognized a host of policy reasons to reject the proposed tort law duty of fairness: the duty would encourage litigation from “bitter bidders”; it would function as “after-the-fact insurance, against arm’s-length commercial parties’ failure to act with due diligence”; it could lead to indeterminate liability in cases of pure economic loss; and finally, it could impair procuring authorities’ ability to acquire goods and services at the lowest cost. Instead, the court suggested that the sponsors’ “most pressing duty” was to maintain the disqualification in order to be fair to the compliant proponents. The court also concluded that the procuring activities did not constitute a “service” within the meaning of the tort of negligent performance of a service and, in any event, that the sponsors and the fairness monitor had not acted negligently. The proponent has filed a notice of appeal.
When an owner owes bidders a duty of fairness under the “Contract A” binding procurement framework, the owner must conduct an open, fair and transparent procurement process. In 2018, courts made important decisions on the scope of that duty.
For instance, in Maglio Installations Ltd. v. Castlegar (City), the British Columbia Court of Appeal ruled that a municipality had to pay damages to an unsuccessful bidder after it accepted a non-compliant bid. The city had made an invitation to tender bids for the construction of a recreational swimming area. The plaintiff’s bid was fully compliant, whereas the successful bidder’s bid did not include the preliminary construction schedule required by the tender documents. The trial judge had found that the city breached “Contract A” and was liable to the plaintiff for accepting a materially non-compliant bid. On appeal, the city argued that the defect at issue was immaterial and subject to the city’s discretion under the tender documents to waive defects in any bid and to accept any tender.
The court rejected the city’s argument and upheld the trial judgment. It reaffirmed that an owner cannot use a discretion clause in tender documents to forgive material defects: discretion clauses permit an owner to forgive only minor defects in substantially compliant bids. A defect is material if the bid fails to address “an important or essential requirement of the tender documents” and “there is a substantial likelihood that the omission would have been significant in the deliberations of the owner in deciding which bid to select.” The court found that, on the evidence and in the surrounding circumstances, the preliminary construction schedule was an essential requirement of the tender documents, so the successful bidder’s non-compliance could not be waived.
However, courts will give effect to applicable exclusion of liability clauses in the face of alleged irregularities in the bid process. In Mega Reporting Inc. v. Yukon, a trial court awarded damages to an unsuccessful RFP proponent on the basis that the defendant owner breached its obligations of fairness, accountability and transparency in reviewing bids. The owner’s evaluation committee had failed to make a contemporaneous record showing how it evaluated proposals and did not create a formal score card or evaluation report for each proponent. The court of appeal, however, set aside the award and dismissed the claim. The RFP contained an exclusion of liability clause in which proponents waived damages for loss “for any reason,” including any loss arising from “actual or alleged unfairness” on the part of the procuring authority “at any stage” of the RFP process. The court of appeal applied the test for enforcing exclusion of liability clauses from Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), namely, whether the clause applies in the circumstances, whether it was unconscionable when made, and whether there is some “overriding public policy” that justifies not enforcing it. Based on this test, the court of appeal concluded the clause should be enforced: while the defendant had failed to observe “best practices” in the RFP, there was no “substantially incontestable” public policy reason to override the “clear and specific” exclusion clause. In CG Acquisition Inc. v. P1 Consulting Inc. (discussed above), the court also held that the valid exclusion of liability clause precluded the plaintiff’s claim for damages.
In Aquatech Canadian Water Services Inc. v. H2OInnovation Inc., the Alberta Court of Appeal considered whether to grant a stay to prevent the awarding of a contract following an allegedly unfair bidding process. The applicant, an unsuccessful proponent, brought a judicial review application challenging a public procuring entity’s decision to award a contract following an RFP on the basis that the successful proponent’s bid was non-compliant. The applicant also sought an interim stay to prevent the awarding of the contract pending its judicial review application. The successful proponent was not named as a respondent in either proceeding and successfully brought a motion to obtain intervener status. The unsuccessful proponent then appealed the intervention decision and further sought a stay from the court of appeal of the decision to award the contract.
Before the court of appeal, the applicant argued that, without the stay, its appeal would be moot because, by the time of the hearing, the successful proponent would have already commenced work. It also submitted that it could not be adequately compensated in damages given the RFP’s limitation of liability clause. It suggested that the successful proponent was unqualified, potentially putting the public at risk. Finally, the unsuccessful proponent argued that without the stay, it would face other losses, lose market share and suffer harm to its reputation. The court, however, rejected the appeal and emphasized that real evidence of irreparable harm was required to obtain a stay. The applicant’s conclusory statements about the loss of employees and business and damage to its reputation were “speculative at best” and the alleged risks to public safety were “entirely unsupported.” The court also found that the balance of convenience favoured the status quo, namely, letting the contract with the successful proponent begin.
Finally, 2018 saw a court reaffirm municipalities’ broad discretion to make business decisions and give important guidance on the limited scope of the administrative law duty of procedural fairness in public sector debarments.
In Interpaving Limited v. City of Greater Sudbury, the Ontario Superior Court of Justice (Divisional Court) upheld a city’s decision to debar a contractor from participating in municipal procurements for four years pursuant to a municipal bylaw. The city relied on three grounds for debarment under the bylaw: the contractor’s litigation against the city; documented evidence of poor performance, including health and safety violations; and the contractor’s abusive and threatening conduct toward city staff. When the contractor was notified of the debarment, it sought to have the decision rescinded. During a reconsideration process, the contractor met with the city’s decision-makers twice and delivered written submissions, but ultimately, the city confirmed the decision. The contractor then sought judicial review of the debarment on the basis that it was made in a procedurally unfair manner and that it was substantively unreasonable.
The court upheld the city’s decision. As for the duty of fairness, the majority of the court (Justices Wilton-Siegel and Thorburn) reasoned that, while municipalities owe contractors they are considering debarring a duty of procedural fairness, the duty is limited because debarment decisions are discretionary, commercial decisions and do not involve an adjudication of rights: there is no right to obtain a contract from a municipality. The majority held that a municipality’s limited duty of fairness requires it to give the contractor notice of its intention to debar and the proposed penalty, a summary of the proposed grounds, an opportunity to respond, and reasons for the ultimate decision. On the facts, the majority concluded that any breach of the city’s duty of fairness in making the initial debarment decision had been cured by the subsequent reconsideration process. (Justice Ellies, a dissenting judge, would have set aside the decision on procedural grounds.) Finally, the court unanimously confirmed that the city’s decision was substantively reviewable for reasonableness, not correctness. It found that the decision was reasonable in light of the evidentiary record before the decision-makers and that a four-year debarment was a reasonable period to give the parties a “fresh start.”
This decision was recognized as one of the most significant of 2018 and was featured in Lexpert’s Top 10 Business Decisions of 2018.
Defendants in procurement law matters can be encouraged by the developments in the case law in 2018 described above. Courts made important rulings on what fairness means in the procurement context and reaffirmed the principle that absent a binding procurement scenario giving rise to a “Contract A,” there is no duty of fairness whose breach could give rise to damages. In the administrative law context, courts also defined the scope of the administrative law duty of procedural fairness when a public procuring entity is considering debarring a contractor from bidding.
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