eCaseNote 2010 No. 03

Tender Privilege Clauses – Communication is Key

CMH Construction Ltd. v. Victoria (Town), 2010 NLTD(G) 145

The Supreme Court of Newfoundland and Labrador (Trial Division) has recently released its decision in CMH Construction Ltd. v. Victoria (Town) which dealt with an owner’s duty of fairness to bidders in the tendering process.

In September, 2006, the Town of Victoria (the “Town”) received an approved budget of $120,000.00 to renovate the Victoria Municipal Centre and issued a Notice of Tender for the project. The Notice of Tender contained a standard privilege clause that the “owner will not necessarily accept the lowest or any tender.” The lone bid received for the project was from CMH Construction Ltd. (“CMH”), who proposed a bid price of $183,000.00.

Approximately one week after the tender closed, CMH contacted the Town to enquire as to the status of the project and was advised that the project was over budget and they were unsure what the next step would be. Shortly thereafter, the Town consulted with its consulting engineers, determined that there were three major components of the project that they wished to complete, and that the Town would perform the work on a project management basis. The Town proceeded with the project on the basis that town forces would be used to complete the work within the budget.

The Town commenced work on the project, but then awarded smaller scale contracts to various contracting companies to complete the work. In early December, 2006, after CMH enquired as to the status of the project and why work was being carried out by other contractors, CMH was advised that their bid had been rejected as it was well above the approved budget for the project and that the work was now being completed on a project management basis. The reduced scope project was ultimately completed under the original budget. However, no Town forces contributed labour to the project. It is also interesting to note that as of February, 2007, the Town had still not returned CMH’s bid bond.

In her decision, Madame Justice Hoegg outlined the case law surrounding the law of tendering, summarized many of the major cases in the area, and found that, while the Town had the right to not award the work or to reject CMH’s bid in reliance on the privilege clause, it must treat compliant bidders (which CMH was) fairly. Madame Justice Hoegg criticized the Town for providing specifications that did not realistically permit a bidder to bid within the project budget and stated that while it may not be possible to accurately estimate costs, it would surely have been obvious once the specifications were drawn up that the project would cost more than the allocated budget. She further stated that “while contractors knowingly assume risk that their bids may not be accepted, to my mind it is hardly fair to ask contractors to expend time, effort and money – not to mention tie up money in bid bonds – putting together bids which have no hope of succeeding.”

Madame Justice Hoegg recognized that there was no legislative requirement to formally reject a bid or give notice of the cancellation of a tender. However, she also indicated that not all legal responsibilities are born out of legislation. She outlined the following actions that amounted to unfair treatment of CMH:

  • “The Town failed to actually cancel the Tender and notify CMH;
  • The Town failed to reject CMH’s bid before awarding the work to other contractors;
  • The Town failed to advise CMH that the work was being completed by project management on the basis of substantially modified specifications; and
  • The town failed to provide CMH with the opportunity to request the new specifications so that CMH could consider whether it wished to bid on or propose to do the reconfigured work.”

Madam Justice Hoegg found that the Town had “an obligation to cancel the Tender and notify CMH accordingly, notify CMH that its bid had been rejected and return CMH’s bid bond, and notify CMH that the project was being reconfigured on new specifications on which CMH could bid if it so chose.” She confirmed that this process was found to be fair by the Federal Court in Glenview Corp. v. Canada (Minister of Public Works)1 and further approved by the Supreme Court of Canada in M.J.B. Enterprises v. Defence Construction (1951) Ltd.2 . Madame Justice Hoegg quoted from the Glenview decision that:

“A fair procedure requires that the party whose interests are to be affected by a decision be aware of the issues he must address in order to have a chance of succeeding.”

The law of tendering has long supported the fact that an owner owes all compliant bidders a duty of fairness (the so-called Contract A concept). The decision by Madam Justice Hoegg suggests that this duty of fairness extends to the pre-tendering stage where owners must not cause potential bidders to expend time, effort and money on bids which have no hope of being accepted for reasons that the specifications cannot be met within the available budget. Owners must also ensure that they communicate with bidders to ensure that they are aware of issues that arise with respect to their bids.

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