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City Had Good Reason To Award Contract To Second Lowest Bidder

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by Journal Of Commerce last update:Jun 8, 2011

The privilege clauses in the request for bids release the defendant from the obligation to award the work to the lowest bidder if there are valid, objective reasons for concluding that better value may be obtained by accepting a higher bid.

City Had Good Reason To Award Contract To Second Lowest Bidder

by Paul Sandori

Sound Contracting Ltd. v. Nanaimo (City)

Due to prior dealings, City analyzed contractor?s bid and factored in an engineer?s monitoring costs and amounts for work deletions, legal, staff and arbitration expenses ? City did not factor in the engineer nor cost of deletions in second lowest bid ? contract awarded to second lowest bidder ? previous dealings provided the basis for additional criteria when determining which bid provided the greatest value based on quality, service and price ? City had ultimate discretion to award the contract

In June 1990, Sound Contracting Ltd. submitted a bid to the city of Nanaimo, British Columbia, for a project known as Hammond Bay, and was the low bidder.

Prior to this bid, Sound had carried out the Terminal Avenue Project for the City. At bid time, Sound was low but the project was over Nanaimo?s budget. Nanaimo cut work to get within budget and Sound claimed for its overhead and related charges for the deleted work. When Nanaimo balked, the claim went to arbitration. The arbitration decision was under reserve when the Hammond bid was submitted on June 12.

On June 15, the arbitrator delivered his decision on Terminal Avenue and awarded Sound approximately $8,000 in relation to the deleted work. The total award cost Nanaimo an additional $22,600 on a final contract price of $180,000.

When analyzing Sound?s bid, the City therefore assumed it would have to hire an engineer to monitor Sound and factored that cost into the analysis of the bid. It also factored in an amount it might have to pay for anticipated work deletions, and the likely costs of legal, staff and arbitration expenses.

On the analysis of the second lowest bid, neither the engineer nor the cost of deletions was factored in. The staff determined that the contractor?s work could be supervised by the City?s own employees, and that that contractor had never claimed for contract deletions or made any previous claims resulting in extra arbitration costs.

Sound?s bid of $540,639 was numerically the lowest bid for the Hammond Bay project. The second low bid was $573,330. Nanaimo?s staff concluded that awarding the contract to Sound ?may in fact not be the lowest overall cost to the City.? In his report to the City, the staff reported:

It is staff?s conclusion that to award the tender to the low bidder, Sound Contracting, would result in a cost to the City in excess of the second low bid ... Most significantly, if the contract were awarded to Sound it would be imperative based on the City?s past experiences with this particular contractor, that an independent, qualified inspector be hired to supervise the work on a daily basis. This would add to the project costs.?

City Council concluded that the second low bid was the most favourable to the City, and the one which would result in the best overall value. Accordingly, the contract was awarded to the second lowest bidder. Sound sued.

The trial judge held that it was unfair of Nanaimo to evaluate the two bids differently. She found that Nanaimo imported undisclosed criteria in ruling against Sound?s bid and was, therefore, liable for a breach of Contract A.

The City of Nanaimo appealed. It argued that it was not applying undisclosed criteria but rather choosing the bid that it believed would give ?the greatest value based on quality, service and price.?

The Court of Appeal reviewed the case in light of the recent decision of the Supreme Court of Canada in the case of M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. The issue in that case was whether privilege clauses permitted the owner to award the contract to a non‑compliant bidder. The Court decided that it could not, but then went on to speak about privilege clauses generally.

The request for bids on the Hammond Bay contract included several such clauses:

Article 18. Tender Rejection

The Owner reserves the right to reject any or all tenders; the lowest will not necessarily be accepted.

The City of Nanaimo reserves the right to waive informalities in or reject any or all tenders or accept the Tender deemed most favourable in the interests of the City of Nanaimo.

Article 19. Award

Awards shall be made on tenders that will give the greatest value based on quality, service and price. Preference shall be given to local suppliers where quality, service and price are equivalent.

In addition, the bid form submitted by Sound expressly provided that Nanaimo ?...is in no way obligated to accept this Tender.?

In M.J.B., the Supreme Court adopted with approval the traditional views stated in Goldsmith on Canadian Building Contracts, 4th ed. (1988):

The purpose of the [tender] system is to provide competition, and thereby to reduce costs, although it by no means follows that the lowest tender will necessarily result in the cheapest job. Many a ?low? bidder has found that his prices have been too low and has ended up in financial difficulties, which have inevitably resulted in additional costs to the owner, whose right to recover them from the defaulting contractor is usually academic. Accordingly, the prudent owner will consider not only the amount of the bid, but also the experience and capability of the contractor, and whether the bid is realistic in the circumstances of the case. In order to eliminate unrealistic tenders, some public authorities and corporate owners require tenderers to be pre-qualified.

In other words, the decision to reject the ?low? bid may in fact be governed by the consideration of factors that impact upon the ultimate cost of the project.

Writing for the Supreme Court in M.J.B., Mr. Justice Iacobucci said:

Therefore even where, as in this case, almost nothing separates the tenderers except the different prices they submit, the rejection of the lowest bid would not imply that a tender could be accepted on the basis of some undisclosed criterion. The discretion to accept not necessarily the lowest bid, retained by the owner through the privilege clause, is a discretion to take a more nuanced view of ?cost? than the prices quoted in the tenders?. [Emphasis added]

Chief Justice McEachern, writing for the Court of Appeal in the Sound case, concluded that

? the privilege clauses in the request for bids release Nanaimo from the obligation to award the work to the lowest bidder if there are valid, objective reasons for concluding that better value may be obtained by accepting a higher bid.

The previous dealings between Nanaimo and Sound provided the basis for the additional criteria addressed by the owner?s staff who, in the opinion of the court, have not been shown to have acted unfairly or other than in good faith in determining which bid provided the ?greatest value based on quality, service and price? to the City. The court would not substitute its own analysis for that of the owner in whom the discretion to award the contract ultimately resided.

The consideration of past dealings between the parties did not constitute an undisclosed criterion:

In fact, past dealings are probably the best indicator of how a proposed relationship will come to work out in practice. I would caution, however, that this discretion must not be exercised in such a way as to punish or to get even for past differences.

Justice McEachern concluded that Nanaimo had shown sufficiently good reason for its decision to award the construction contract to the second lowest bidder. In a unanimous decision, the court allowed the appeal and dismissed Sound?s action.

Court of Appeal for British Columbia

McEachern C.J., Esson and Hall JJ.A.

May 17, 2000

last update:Jun 8, 2011

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