Legal Basics of Procurement – Part 2 (Duty of Good Faith)

The following article discusses the differences between traditional tendering contracts and request for proposals (or RFPs), in relation to the duty of good faith.

1. What is an invitation to tender?

The formative Canadian decision on the tendering process and competitive bidding in Canada is the Supreme Court of Canada decision in Queen (Ontario) v. Ron Engineering & Construction (Eastern) Ltd., (1981) 1 S.C.R 111 (“Ron Engineering”).

Before Ron Engineering, the law surrounding an invitation to tender was very different. A tenderer could withdraw its tender at any time prior to the acceptance of bids, as the act of bidding was seen as a non-binding negotiation rather than the acceptance of a contract. The decision in Ron Engineering changed this by adopting a Contract A/Contract B analysis in the tendering context. Contract A is created when a tenderer responds with a compliant offer to an invitation to tender. Upon the acceptance of a tender, a second contract arises. This second contract is Contract B, which is a binding agreement on the parties. This process is governed by the duty of good faith.

2. What is the Contract A/Contract B analysis?

The Contract A/Contract B analysis is central to the post-Ron Engineering landscape of tendering contracts. Contract A is referred to as a unilateral contract and arises upon the submission of a compliant bid by the tenderer. The contract is unilateral because its formation is dependent on the party submitting the bid for tender. If the tenderer submits no bid, then no contract is formed. The party putting the bid out for tender must accept compliant bids.

Once the bid has been submitted, the defining feature of Contract A in the tendering context is that Contract A becomes irrevocable. The consequence of such irrevocability is the obligation on both parties to enter into Contract B – the actual contract for service – upon acceptance of the tender. For greater certainty, the party putting the bid out for tender is obligated to act in good faith.

Importantly, once the tender has been accepted, there is an obligation on both parties to enter Contract B, which is the agreement to perform the work or service. Unlike a unilateral contract, the party accepting the compliant bid cannot revoke Contract B from the tenderer.

3. What is an RFP?

RFPs arose in the wake of the Supreme Court’s decision in Ron Engineering. The practical effect of Ron Engineering is to bind parties involved in large projects (such as construction or infrastructure) to a rigid and inflexible tendering contract process. Accordingly, there has been a focus to seek out new and creative ways of avoiding the obligations of a formal tender call that Ron Engineering has imposed.

Authors Paul Sandori and William M. Pigott explain RFPs in Bidding and Tendering: What is the Law?, 2d ed. (Toronto: Butterworths, 2000), at p. 239:

    “The owner that wants submissions from interested parties but does not wish to create Contract A, may choose to issue a request for proposals (RFP). Properly drawn, an RFP asks parties for expressions of interest and sets out the owner’s intention to consider those expressions of interest and then to undertake negotiations with one or more parties whose proposal(s) appeal to the owner.”

Generally speaking, an RFP is a document that solicits proposals, often made through a bidding process, by an owner interested in the procurement of a commodity, service or valuable asset.

4. When does Contract A/Contract B apply?

It would be simple to say that a Contract A/Contract B framework arises in all traditional tendering contracts, and that the Contract A/Contract B framework never arises when an RFP is used. But that is not true, and the Supreme Court confronted the issue of whether the Contract A/Contract B framework could arise in an RFP context in Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation & Highways), 2010 SCC 4.

The facts of Tercon involved the Province of British Columbia seeking to find a contractor to construct a gravel highway, through the equivalent of an RFP rather than a tendering process. The RFP contained an exclusion clause which prohibited any proponent from having a claim for any compensation as a result of participating in the RFP. The contract was awarded to an ineligible proponent, and one of the eligible proponents, Tercon, brought an action against the Province for damages, arguing that Contract A (i.e., the invitation to tender) was breached.

While the Province argued there was no Contract A as this was an RFP and not a traditional tender, the Supreme Court agreed with Tercon that, although the process was labelled as an RFP, it was a Contract A except for name and was subject to a duty of fairness that would be found in a traditional tendering arrangement.

Post-Tercon, it is clear that calling a process an “RFP” does not make it such and courts will examine the terms and conditions of a tender call in order to make a determination if the Contract A/Contract B framework ought to apply. The Court in Tercon also listed 13 factors that courts have recognized which are “indicative of an intent to form Contract A” (Tercon at para 81). These factors include the irrevocability of the bid, whether tenders are solicited from selected parties, and whether evaluation criteria are specified, to name a few.

5. Does the duty of fairness also apply to RFPs?

In the context of a traditional tender involving Contract A/Contract B, bidders must be treated uniformly. This duty of good faith implies an obligation of fairness on the part of the owner to treat all tenderers fairly and equally, without the application of hidden preferences, undisclosed non-customary bid evaluation criteria, or conduct which gives a tenderer an unfair competitive advantage over others. Such a duty is central to the traditional bidding process.

However, in an RFP (which is simply an invitation to negotiate) does a duty of fairness arise? In Tercon, the Court concluded that “any requirement to negotiate in good faith is repugnant to the adversarial position of parties in a negotiation.” Notwithstanding the Court’s language in Tercon, lower courts are seemingly divided on whether the duty to act and negotiate in good faith applies to RFPs.

In Khoury Real Estate Services Ltd. v. Canada (Minister of Public Works & Government Services), (1996) 33 C.L.R. (2d) 294 (Fed. T.D.), an RFP issued by the Ministry (that contained a procedure for evaluation of proposals) was the subject of judicial review by a proponent whose proposal was not accepted. The Court concluded that to ensure the integrity of the process, the Ministry was required to provide an explanation of the department’s assessment of a proposal, or “something more” than just an acceptance or rejection of a proponent’s proposal. The Court further said that by refusing to provide proponents with any information about their evaluation, the Ministry had failed in its responsibility to act fairly in evaluating proposals, which they concluded was a “key element” of the open tendering process.

In Mellco Developments Ltd. v. Portage La Prairie (City), 2002 MBCA 125, Scott J. held that the duty to act fairly lay on a continuum with a formal tendering process at one end and a mere request for proposals for a small task on the other end.

In Buttcon Ltd. v. Toronto Electric Commissioners, (2003) 65 O.R. (3d) 601 (Ont. S.C.J.), the Ontario Superior Court of Justice concluded that in a true RFP process, the duty of fairness entailed proposals being considered according to the same criteria. Thus, this line of cases seems to suggest there is always going to be a base line of fairness even if you are going by way of an RFP.

On the other hand, in Powder Mountain Resorts Ltd. v. British Columbia, (1999) 47 C.L.R. (2d) 32 (B.C.S.C.), an RFP that disclosed no precise specifications for the project and involved several factors beyond merely price was found to not trigger a duty of fairness. The Court had two important observations about the duty of fairness.  First, the Court found that there is no implied term in Contract A to negotiate in good faith as Canadian law has not recognized a duty to negotiate in good faith in commercial transactions. Second, the Court fleshed out that the fairness required in an RFP would consist of: (1) the person requesting the proposals refraining from negotiating with more than one party at once (unless the terms of the RFP contemplated otherwise); and (2) the negotiations with the successful bidder not being terminated solely because another bidder is interested.

In Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre, 2013 ONSC 2057, the Ontario Superior Court of Justice followed the Powder Mountain line of reasoning in finding that in a negotiation process where no agreement has been reached, there is no duty to act in good faith, except that a party may not misrepresent material matters to the opposite party during the course of negotiating an agreement.

Thus, the case law seems divided over whether a base line of fairness exists in a situation involving an RFP. As well, the Supreme Court recently released its decision in Bhasin v. Hrynew, 2014 SCC 71 which recognized that good faith contractual performance is an organizing principle of Canadian contract law.

The main takeaway from Bhasin, which may be relevant to parties engaging in an RFP, is that the decision likely only applies to the performance of contractual obligations, rather than in the negotiation of contractual obligations. That is because of the language of the case where the Court consistently refers to “contractual performance” as engaging a broad duty of good faith rather than pre-contractual negotiations, with the caveat that material misrepresentations are not allowed in negotiations.

However, it is possible that courts interpreting Bhasin may apply the duty of good faith to pre-contractual negotiations such as RFPs. The civil law already views a contract as a relationship between the parties governed by good faith. This good faith principle applies equally to the formation of the contract during negotiations, when the relationship begins.  The common law already looks to issues like fraud, misrepresentation and unconscionability when assessing contract formation in the common law. These considerations could just as easily fall under the organizing principle of good faith outlined in Bhasin.

6. Conclusion

Without a doubt, the legal framework around RFPs is uncertain. A creative attempt to break out of the strict confines imposed by Ron Engineering and the traditional tendering model may be doubling back on itself. Increasingly, courts at various levels have been more willing to impose a basic duty of good faith and import traditional tendering law into large projects procured through an RFP model.

The Supreme Court’s decision in Bhasin is further grounds for uncertainty in the RFP model.  On its face, the decision seems entirely directed at how the duty of good faith arises in contractual performance. However, by adopting good faith as an organizing principle of the common law, it may only be a matter of time before it is adopted as an organizing principle in pre-contractual representations and negotiations. This would have the effect of undermining the entire RFP system, which is designed specifically to allow for a free-flow of communication between an owner and proponent, without the rigid rules imposed by traditional tendering law.