Bad faith and privilege clauses in tender documents

5 minute read
12 November 2015

“Privilege clauses”, which provide that the person issuing the call for tender is not required to accept any of the tenders received, including the lowest one, are found in nearly all tender documents and are often a matter of contention. As demonstrated in a recent judgment of the Superior Court in Inter-Cité Construction ltée v Québec (Attorney General) (Ministère des Transports), 2015 QCCS 4365, the use of a privilege clause may not always be sufficient for a work provider to avoid having to indemnify a bidder for its losses.

Factual summary

In that case, the Ministère des Transports of the government of Québec (the MTQ) issued a call for tenders for the extension of a highway. The tender documents for this project provided that the MTQ “held all required environmental authorizations for the work set out in the contract”.

At the conclusion of the tendering process, Inter-Cité Construction ltd. (“Inter-Cité”) was found to be the lowest compliant bidder. Though informed verbally of the result, Inter-Cité learned, two weeks after the opening of the bids, that the MTQ was still in the process of obtaining environmental authorizations and that the contract would only be signed once such authorizations were issued.

During the course of several months, Inter-Cité was repeatedly assured by the MTQ that the authorizations would soon be obtained and it set aside personnel and equipment in anticipation of the contract. Unable to obtain the authorizations, the MTQ finally cancelled the project 5 months after the opening of the tenders, invoking the privilege clause found in the tender documents.

In response, Inter-Cité instituted legal proceedings seeking an amount of $1,812,155.84 to cover the costs it incurred in preparing its bid and for personnel and equipment costs incurred while waiting for the work to begin.

Legal principles and positions

The legal principles applicable to calls for tenders are well established: the filing of a bid creates a first contract between each of the bidders and the work provider, also known as “Contract A”, which governs the tendering process; the successful bidder and the work provider will then conclude a separate contract, “Contract B”, for the work itself.

In this case, Inter-Cité claimed that, even though a formal contract was never signed, Contract B was concluded from the moment that it was deemed to be the successful bidder. In addition, it was mislead by the MTQ, who acted in bad faith, in relation to the environmental authorizations and could also be compensated under Contract A.

The MTQ, for its part, argued that Contract B was never formed and that, having validly applied the privilege clause, it was not liable to Inter-Cité under Contract A.

Findings of the Court

The Court found that Contract B was never formed: though it is possible for Contract B to be formed without a formal contract being signed, there must be an exchange of consents between the parties, and the MTQ’s consent had always been contingent on it obtaining the required environmental authorizations.

However, the Court found that the MTQ could not make the adjudication of the contract conditional on an element that it had not mentioned in the tender documents. The Court also found that the privilege clause could not be used by the MTQ to escape from a unfavorable situation it had caused. Furthermore, in misleading Inter-Cité in relation to the environmental authorizations and inappropriately invoking the privilege clause, the MTQ acted in bad faith even in the absence of any malicious intent on its part.

As a result, the Court found that the MTQ had breached its obligations under Contract A and ordered the MTQ to pay to Inter-Cité an amount of $1,335,134 in compensation for its personnel and equipment costs. With regard to the amounts claimed by Inter-Cité for the preparation of its bid, the Court denied this claim as Inter-Cité did not prove that these costs would not have been incurred had it been awarded the contract.

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