Rankin Construction Inc v Ontario: Lessons in the Law of Tender
On September 16, 2014, the Ontario Court of Appeal (“ONCA”) released its decision in Rankin Construction Inc v Ontario, 2014 ONCA 636 [Rankin]. In the decision, Justice Hoy helps to clarify the law of tender by addressing non-compliant bids and the use of exculpatory clauses.
In August 2005, the Ministry of Transportation (MTO) issued a tender to widen Highway 406 in Ontario’s Niagara region. At that time, tender required bidders to declare the value of any imported steel to be used for the project. Bids were ranked on the lowest Adjusted Tender Amount in which bidders received a 10% discount for Canadian steel. The tender documents noted that H-Piles were not eligible for the 10% price preference.
Rankin Construction (Rankin) mistakenly believed that Canadian H-Piles were available and did not declare the value of its H-Piles as imported steel. As a result, it obtained a 10% price preference and the Adjusted Tender Amount was approximately $50,000 in its favour. Rankin’s bid was the lowest overall tender and the lowest Adjusted Tender Amount. However, even if the H-Pile mistake was corrected, it would still have been $1.7 million lower than the next Adjusted Tender Amount.
A competing bidder, Hard Rock Paving (Hard Rock) complained that Rankin’s bid was non-compliant and the contract should be awarded to the next lowest bidder. The MTO conducted an investigation into the non-compliance and disqualified Rankin. Rankin sued for $5 million in lost profits. It was unsuccessful at trial and appealed to the ONCA.
II. The Law of Tender
Prior to outlining the ONCA’s analysis, a brief summary of the law of tender may be needed. In the Supreme Court of Canada’s (SCC) decision in Tercon Construction Ltd v British Columbia (Transportation and Highways) 2010 SCC 4 provides a concise overview of the law of tender. It was reproduced at length in Rankin:
For almost three decades the law governing a structured bidding process has been dominated by the concept of Contract A/Contract B initially formulated in The Queen in right of Ontario v. Ron Engineering & Construction (Eastern) Ltd… The analysis advanced by Estey in the case was that the bidding process, as defined by the terms of the tender call, may create contractual relations (“Contract A”) prior to the time and quite independently of the contract that the actual subject matter of the bid (“Contract B”). Breach of Contract A may, depending on its terms, give rise to contractual remedies for non-performance even if Contract B is never entered into… The result of this legal construct is to provide unsuccessful bidders with a contractual remedy against an owner who departs from its own bidding rules. Contract A, however, arises (if at all) as a matter of interpretation. It is not imposed as a rule of law.
On appeal to the ONCA, Rankin presented six issues. These can be collapsed into three arguments. First, the MTO had no right to investigate Rankin’s bid for non-compliance. Second, Rankin’s non-compliance was a mere “formality” and should not have lead to disqualification. Third, the exculpatory clause in the MTO’s tender documents did not prohibit Rankin’s claim.
For the reasons outlined below the ONCA dismissed the appeal.
(a) Investigations of Non-Compliance
In Double N Earthmovers Ltd v Edmonton (City), the SCC found the party who issues a tender (“owner”) does not have an implied duty to investigate allegations of non-compliance by a rival bidder. Despite this, Justice Hoy concluded an owner has a right to investigate allegations unless it is precluded by the tender documents.
This right to investigate complaints is contingent on the fair and consistent application of the right. In Rankin the court found no evidence that the MTO investigated complaints in relation to Rankin but not in relation to any other bidders, or that the MTO’s assessment of tenders was otherwise unfair or inconsistent.
(b) Materiality of Non-Compliance
Paragraph 11.1 of the MTO’s Instructions to Bidders provided a discretion clause which provided the right to waive formalities as the interests of the MTO may require. Consequently, Rankin argued its failure to include the H-Piles as imported steel was simply a formality and the MTO was required to waive it.
Justice Hoy undertook an analysis of the H-Pile error and found that it was a formality that could have been waived. However, the fact the non-compliance amounted to a formality was not determinative:
Contract A does not require the MTO to waive formalities. In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into Contract B with a non-compliant bidder. Here, the MTO acted in good faith, and its conclusion that the appellant’s non-compliance was more than a formality – whether or not correct – was reasonable.
This conclusion makes sense when one considers, as the ONCA did, that instances of non-compliance are seemingly common and determining whether specific instances of non-compliance are material is a difficult exercise. The court goes on to note that had the MTO identified the H-Pile error as a formality it would have risked being sued by the other bidders who also had entered into Contract A.
(d) Enforcement of an Exculpatory Clause
Paragraph 11.1 of the MTO’s Instructions to Bidders read as follows:
The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by any reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of the Tender, except as provided in the tender documents.
The SCC’s decision in Tercon sets out a three-step approach for considering an exclusionary clause. First, the court must determine whether the clause applies to the circumstances established in evidence. This depends on an assessment of the intentions of the parties as expressed in the contract. Second, if the clause applies, the court must determine if it was unconscionable at the time it was made. Third, if the clause is both applicable and valid the court must consider whether to refuse to enforce it because of an overriding public policy.
Rankin challenged the MTO’s exculpatory clause through step one of the Tercon approach. It argued that the MTO rejected its bid based on an investigation that it was not authorized to undertake. The court rejected this argument. It found that the language of the clause was clear and a bidder would be unable to sue unless the MTO had breached an express or implied term of the tender documents. As a result, the language of the MTO’s exculpatory clause provides a model for other tender agreements.
The ONCA’s decision in Rankin is complex and attempts to balance the interests of owners and bidders in the tendering process. When taken together, the issues outlined above direct owners to act fairly and consistently with bidders. If this is done, and the language of the tender documents is clear, owners should feel comfortable exercising discretion in the process.