A recent tendering decision from the Court of Queen's Bench of Alberta, Elan Construction Limited v. South Fish Creek Recreational Association, 2015 ABQB 330 (PDF) provides useful guidance for procuring bodies on how courts will analyze a challenged bid evaluation. The Court found that the bid evaluation methodology was unfair. This case is also interesting because although the losing bidder proved that it should have won the bid, and that the owner's exclusion clause did not apply, the Court awarded only $1,000 of nominal damages because the unanticipated negative circumstances that actually occurred on site would have resulted in no profits for the bidder.
An appeal and cross-appeal have been filed in this action and therefore this bulletin may require updating in the future.
There are some important points from the trial level decision.
- Careful planning of a bid evaluation is necessary to ensure that a methodology does not result in an arbitrary evaluation of bids contrary to the expectations for evaluation disclosed to bidders. This case shows how easily a scoring system established after bids are received can result in a departure from the evaluation criteria.
- Specific criteria that are important to evaluators must be set out in the bid documents. In this case, the actual evaluation criteria were not consistent with the disclosed categories of evaluation criteria and resulted in an unfair evaluation process.
- The Court referenced the recent Supreme Court of Canada case of Bhasin v. Hrynew, 2014 SCC 71 that establishes the organizing principles of good faith in contractual performance, but it is unclear whether that case will be interpreted to add a new layer of good faith analysis to the pre-existing tendering law duty of fairness.
- The exclusion clause was found not to obviate the owner's obligation to treat all bidders fairly and equally and to disclose all criteria by which bids will be evaluated, although there was no significant analysis on this point and no discussion of whether a well-drafted clause may have been effective. Owners should therefore continue to assume they must follow the process set out in the tender documents
- A finding that a bid evaluation was conducted unfairly in breach of Contract A will not necessarily result in significant damages for lost profits.
The Bid Documents
The South Fish Creek Recreational Association (SFCRA) had planned to expand its existing recreational facility for some years by adding two ice surfaces and some multi-purpose rooms. In 2010, having retained a lead consultant and project manager, SFCRA posted a tender package to the COOLNet tender website. The invitation to bid stipulated that bidders must be prequalified by the City of Calgary supply management group. Prequalification entailed mainly financial capacity and Occupational Health and Safety requirements.
The bid documents set out the evaluation criteria, which were based on a matrix, to be scored out of 100. 35 points were allocated to "Price," 35 to "Date of Completion," 20 to "Previous community and arena experience" and 10 points for "References for above projects." The problems for SFCRA arose with the implementation of these seemingly reasonable criteria.
Elan Construction Limited (Elan) submitted a bid but the contract was awarded to a different bidder. Elan commenced the action against SFCRA and claimed that SFCRA did not evaluate the bids in accordance with the evaluation matrix and used undisclosed criteria. Elan argued that if the bids had been evaluated fairly and in accordance with the matrix, it would have won. Elan's bid price was the lowest, and showed a substantial completion date that matched the one provided in the bid documents.
The case focused on the evaluation of the "Completion Date" and "Experience" components of the evaluation matrix. Before analyzing these, the Court set out the relevant law that applies to tenders and their evaluation.
First, the Contract A/Contract B framework applies. Contract A arises on the submission of the bid and governs the evaluation and award of the contract, and Contract B is the construction contract itself. The Supreme Court of Canada has refined the law through several cases, finding that the terms of Contract A will be determined by the contents of the bid documents and Contract A includes an implied term that the procuring authority will treat all bidders fairly.
In addition, the Court referred to the recent SCC decision, Bhasin v. Hrynew, 2014 SCC 71, which found that good faith contractual performance is an organizing principle of the common law of contract and that there is a duty to act honestly in the performance of contractual obligations. The Bhasin v. Hrynew case included references to the duty of good faith in the tendering context. It is not yet clear whether that case will have an influence on or add a new layer of good faith obligations to pre-existing tendering law duties of fairness.
When the SFCRA team evaluated its bids it followed the overall evaluation design and allocated points for the four listed categories. The Court confirmed the use of a matrix is an unobjectionable method. However, the Court found that SFCRA departed from the evaluation criteria in several material respects. This resulted in a breach of Contract A.
First, when the completion dates were evaluated, the scorers took the average completion date proposed by the bidders (with an outlier excluded) to set a baseline, then awarded scores based on proximity to that date. The bid documents stated that the requested finish date was August 1. The result of this was that Elan, whose completion date was August 1, scored less than the actual winner, whose completion date was closer to the average, September 5. Further, the 35 points for completion date was broken down into 30 points for substantial completion and 5 points for deficiency completion. It is not at all clear why an owner would have used a methodology that awarded more points for a later date rather than an earlier date. There was no mention of this breakdown in the bid documents and the methodology was established after bids were received.
This resulted in an "arbitrary standard that could not have been in the contemplation of the bidders" and created "the kind of undisclosed evaluation criterion that the Supreme Court of Canada has said constitutes a breach of Contract A."
Second, the Court found problems with the evaluation of the experience component. One issue was that bidders were awarded points for their LEED certification. This, although possibly part of a bidder's experience, was not specifically referenced in or required by the bid documents. Another issue was that some (but not all) bidders were interviewed after the bids were submitted and scored based on the interview. There was no mention of interviews in the bid documents, although the bid documents mentioned the right for SFCRA to request additional information from bidders.
Elan's key person was not available for the interview and subsequently its score suffered. Further, the scoring favoured those with recent arena experience. The Court noted that this was not unreasonable, but the emphasis should have been disclosed in the bid documents.
Last, the winning bidder provided a different candidate for the post-bid interview than the person who was listed in the bid. SFCRA unsuccessfully argued that this was a mere informality, which could be waived. The Court found that "such an informality is limited to only minor non-compliance with the strict requirements of the bid documents."
Exclusion of Liability
Next, the Court found that SFCRA was not relieved from liability by the exclusion and privilege clauses. The Court stated, in simple terms, "the case law set out above demonstrates that such clauses do not obviate an owner's obligation to treat all bidders fairly and equally and to disclose all criteria by which bids will be evaluated." Importantly, the Court confirmed that there is no requirement for a finding of dishonesty or malice for an exclusion clause to be inoperable, and that the duty of good faith requires more than honesty.
The exclusion clause stated:
5.3 By submitting a Bid, each bidder acknowledges and agrees that it waives any right to contest any legal proceedings regarding the decision of the Owner to award points under the criteria noted below.
The Court did not go into any detailed analysis of the exclusion clause or the applicable case law. It may be relevant to note that the exclusion clause was narrowly drafted to exclude a "right to contest any legal proceedings" regarding "the decision of the Owner to award points under the criteria noted below." It may be that it was obvious to the Court the clause did not apply once the Court found that the owner evaluated on the basis of the undisclosed criteria and not the "criteria noted below."
Having determined that SFCRA breached its Contract A obligations, the Court turned to damages. Where a procuring body has breached Contract A, a bidder who would have been awarded the Contract B but for the breach is entitled to either damages for lost profit or damages for the costs incurred in the preparation of the bid. A bidder cannot recover under both categories.
Elan presented its lost profits claim based on a 5% profit margin, which was calculated after showing its historical range with an average of 13%. The Court agreed this was a reasonable starting point, but then discounted this by specific factors.
The Court looked at the actual construction project to determine the measure of Elan's lost profits. Unfortunately for the winning contractor, the project was unprofitable. Two subcontractors needed to be replaced at significant cost. An unusually cold winter resulted in delays during the civil works which impacted the whole project. Design and engineering issues also caused major delays. The Court found that these three problems would have impacted Elan in the same way, had it won (Elan had listed the same subcontractors in its bid). Additionally, SFCRA found an error in Elan's bid, whereby one of its subcontractors had submitted an erroneously low bid, which cost Elan had agreed to absorb.
The Court confirmed that unanticipated site conditions can result in a substantial reduction in damages for expected profits and accordingly calculated that the lost profits were zero. SFCRA then attempted to argue that there should be an alternative $25,000 award for bid preparation costs. The Court awarded nominal damages of $1,000 to recognize that SFCRA had breached Contract A.
The Court did not indicate what the analysis of lost profits would have been if the project went better than expected and Elan would have reasonably earned more than the 5% expected profit.
For those involved in procurements, this decision confirms the existing state of the law and introduces the possibility that the organizing principle of good faith will apply to the tendering process. The ineffectiveness of the exclusion clause reinforces the importance of the owner setting out and following its evaluation criteria and methodology.
For further materials regarding procurement documents, refer to Ten Plus Pointers for Drafting Procurement Documents.