Public Bidding, Exclusion Clauses and Public Policy Concerns: Contracting Out of Liability for a Flawed Bidding Process

As discussed in my previous article,Invitations to Tender: Why it is Important Both Bidders and Solicitors to Follow Proper Process, the solicitation of bids for public projects must follow a fair and transparent process. The principles of that framework include:

1. an owner’s invitation to tender constitutes an offer to all potential bidders;

2. a contract. “Contract A” comes into existence when a contractor submits a bid in response to the invitation to tender;

3. the terms and conditions of Contract A are governed by the terms and conditions of the invitation to tender;

4. the rights of the parties crystallize when a tender capable of acceptance is submitted on an objective view of the material requirements of the invitation to tender;

5. if Contract A fails to materially comply with tender specifications, the rights of the parties to Contract A do not come into existence;

6. assessing material compliance is a two-part test analyzing: (1) whether there is a failure to address an important/essential requirement of the tender documents; and (2) whether there is a substantial likelihood that the defect would have been significant to the owner’s decision-making process when considering the rational of the invitation to tender requirements, effective fair competition and reasonable expectations of parties; and

7. discretion clauses in an invitation to tender cannot be utilized to give force to materially non-compliant bids; rather, such clauses can only be used to forgive minor defects in substantially compliant bids. 

In Mega Reporting Inc. v. Yukon (Government of), 2018 YKCA 10 (CanLII) the Court was called upon not only to scrutinize the tender process, but to determine if the Government of Yukon  could arrange a bidding process such that it could contract itself out of liability for any errors in the tendering process. The Court ultimately determined that Yukon and, by extension, other offering parties could contract out of liability subject so long as doing so was contractually clear and not uncontestably against public policy.

At the heart of the dispute was a request for proposals by the Yukon for a contract to provide court reporting and transcription services. The Plaintiff’s bid was rejected for technical reasons before its contract price was considered and the accepted bid ended up being a more expensive bid. The Plaintiff successfully sued at trial on the basis that Yukon had breached its duties of fairness in the bidding process and that its attempts to contract out of liability were rejected for public policy concerns. On appeal, that decision was reversed.

It its analysis, the Court of Appeal first approved the following three-prong test for determining whether to apply the exclusion clause may be enforced (citing, among others, Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII)):

1. whether as a matter of interpretation the exclusion clause even applies to the circumstances based on the intention of the parties;

2. whether the clause was unconscionable at the time the contract was made; and

3. whether the Court should nevertheless refuse to enforce the valid clause because of the existence of an overriding public policy that outweighs the very strong public interest in the enforcement of contracts, the proof of which lies on the party seeking to avoid enforcement. 

The Court went on to cite several authorities about the interests in having a fair, reliable and transparent bidding process competing with the notion that public policy concerns should be invoked to excise contractual terms only in clear cases in which the harm to the public is substantially incontestable. The case law cited pointed to the notion that bidders go into the bidding process with open eyes and can decline to bid where they disagree with the contractual relations created by a specific bidding process.

The Court ultimately found that the exclusion clause did not rise to the level of it being substantially incontestable that public policy had been offended; rather, the Court held that Yukon had an interest in the organizational structure of the procurement process which included the ability to shield themselves against liability. The Court emphasized that the Plaintiff was aware of the exclusion clause prior to bidding and accepted to bid anyway.

The Court found that the exclusion clause was clear and less ambiguous than exclusion clauses previously scrutinized by the courts. The Plaintiff was a sophisticated commercial party capable of appreciating the exclusion clause and remained willing to bid. It was not the Court’s place to step into the shoes of the Plaintiff and protect it from its own participation in the bidding process.

It is likely material that the Court emphasized that the staff responsible for the error were not acting in any kind of conflict of interest or that Yukon was otherwise engaged in fraudulent practices in awarding the contract to the Plaintiff’s competitor. Likely evidence of some intention to disfavour the Plaintiff intentionally would have triggered other concerns and increased the likelihood it might have secured success at the Court of Appeal.

Mega Reporting Inc. v. Yukon (Government of) is a cautionary reminder to bidders that, although the party making a request for a proposal or calling for bids is to run a bidding process in a transparent and reasonable way consistent with its tendering process, the offering party can nonetheless contract out of and absolve itself of liability for unintentional errors in that process. Bidding parties are expected to understand and appreciate the contractual relations created in the tendering process and should not bid where they do not wish to accept the terms of such relations.