Canada: Alberta Court Of Appeal: Bidder's Reasonable Expectations Trump Privilege Clause

In the wake of a recent Alberta Court of Appeal (Court) decision, Elan Construction Limited v. South Fish Creek Recreational Association (Elan Construction), those who use a bidding process to award work on projects (owners) must ensure that a reasonable reading of the instructions issued to those who submit bids for the work (bidders) adequately disclose how the ultimate evaluation of bids will take place. Owners should follow this rule even where they have included a broad "privilege clause" in the instructions to bidders reserving the owner's right to exercise discretion in evaluating the bids.

In Elan Construction, the Court made it clear that privilege clauses "cannot be interpreted to include the ability to alter the bidding process in a manner which cannot be reasonably anticipated from a reasonable reading of the Instructions to Bidders."

BACKGROUND

In The Queen v. Ron Engineering, the Supreme Court of Canada held that when a party submits a compliant bid on a project, they enter into "contract A" with the party who solicited the bid. Contract A requires, among other things, that the party who solicited the bid award "contract B," the contract for the work, to a bidder in accordance with the bid documents.

The owner in this case, South Fish Creek Recreational Association (SFCRA), planned to build a major recreational centre in Calgary. It sought bids from potential contractors for that purpose. SFCRA awarded contract B to another bidder, rejecting the bid of the Elan Construction Limited (Elan). In 2015, while Elan Construction was before the Alberta Court of Queen's Bench, the main issues were whether the SFCRA had breached contract A in rejecting Elan's bid and awarding contract B to another bidder, and if so, what losses Elan had suffered.

Elan successfully proved SFCRA breached contract A, but the trial judge awarded nominal damages to Elan because the successful bidder had lost money on the project and Elan failed to prove it would not have suffered similar losses.

Elan appealed the damages award; SFCRA cross-appealed on liability. The Court affirmed the trial judge's decision on liability and reversed the damages award, substituting a substantive damages award to Elan.  

SFCRA's Liability Cross-Appeal

On its cross-appeal, SFCRA had taken the "robust position" that despite having provided a chart of criteria with applicable ratings points to bidders, the phrase "sole and unfettered discretion" conferred on it the right to use whatever methodology it saw fit to evaluate criteria after the bids were received, regardless of the contents of the bid documentation. The Court rejected this position stating, although "the language of 'sole and unfettered discretion' allows owners considerable room to manoeuvre when it comes to assessing bids . . . it is essential that the integrity of the bidding process be maintained."

The Court went on to say that "to maintain the legitimacy and integrity of the bid process, a reference to an owner's being entitled to evaluate criteria in their 'sole and unfettered discretion' cannot include the right to depart from fundamental contents of the Instruction to Bidders on which bidders would properly and reasonably place reliance in composing their bids" and "cannot be interpreted to include the ability to alter the bidding process in a manner which cannot be reasonably anticipated from a reasonable reading of the Instructions to Bidders. The right to evaluate whether a bidder has met a bid requirement in an owner's 'sole and unfettered discretion' does not confer on the owner the right to ignore, alter or delete bid criteria as they please."

In such circumstances, owners may be left to wonder whether privilege clauses reserving the owner's discretion are of any practical effect. While there is discretion in the assessment of listed criteria, the Court's key message is that owners are not granted the power, through a privilege clause, to assess bids in an arbitrary manner outside of the bidders' reasonable expectations based on the prepared documentation.

Elan's Damages Appeal

The Court found that in awarding nominal damages to Elan on the basis that the successful bidder lost money on the project, the trial judge had improperly placed the burden on Elan to prove that it would not have suffered similar losses. The Court made it clear that this was SFCRA's burden and that SFCRA had not adduced sufficient evidence to meet that burden with respect to most of Elan's claim, stating, "In essence, the trial judge's reasoning was a combination of speculation and improper reversal of the burden of proof." The Court therefore awarded Elan the full amount of profit it expected to make on the project, less the value of two losses suffered by the successful bidder that the Court was satisfied that Elan would also have suffered.  

CONCLUSION

Even where there is a broad privilege clause in the bid documents, owners must ensure that the ultimate bid evaluation occurs in a manner that could be reasonably anticipated from a reading of the instructions to bidders. Instructions should be drafted accordingly. Owners should not use undisclosed criteria to evaluate bids, as it puts them at risk of breaching contract A.

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