February 11, 2008

What does “the owner is not obligated to accept the lowest or any bid” really mean?

Construction Law

Norm Streu and Chris Hirst

How much discretion do you have in the selection of tenders? If you are using standard tender documents, less than you may think.

The privilege clause included in most tender documents states: “the owner is not obligated to accept the lowest or any bid”.

Some people think that this clause gives the owner or general contractor the ability to choose whichever bid he or she pleases. It doesn’t. The courts have found that this clause merely allows an owner the discretion to consider factors other than price alone in assessing the cost of respective bids.

That discretion allows an owner to take a more “nuanced” view of cost than the prices quoted in the tenders, but it does not allow an owner to award the contract to anyone.

An owner can only rely on a privilege clause if there are legitimate and objective business reasons that support the owner’s decision.

The basic privilege clause does not relieve an owner of his or her other obligations, and in particular its obligation to treat bidders fairly or to accept only materially compliant bids.

Because of the limited nature of the discretion afforded by that traditional privilege clause, owners have broadened the wording of their privilege clauses.

It is common now to find privilege clauses that give owners very broad discretion in the selection of the preferred bidder, including the discretion to consider materially noncompliant bids.

The importance of these types of privilege clauses cannot be overstated.

Fundamentally, tendering law is contract law and ordinary contract principles apply.

A bidder’s decision to participate in the procurement process is considered by the courts to constitute an acceptance of the terms of the tender as drafted by the owner no matter how onerous the conditions included in the tender may be. Accordingly, from a contractor’s perspective, where the preparation of a bid for a particular project is going to be costly and labour intensive, a contractor should carefully review the tender in order to understand any limitations on its ability to seek redress from an owner prior to making that investment of time and resources.

Conversely, from an owner’s perspective, there is little to lose by the inclusion of various privilege clauses within the tender’s terms and conditions.

Until such time as contractors concertedly refuse to participate in a tender process due to perceived unfairness in the terms and conditions, a careful owner or general contractor will include a number of privilege clauses in the tender in order to reasonably restrict liability.

Norm Streu and Chris Hirst are partners in the Construction & Engineering Group of the Vancouver law firm Alexander Holburn Beaudin & Lang LLP. Norm is a past chair of the Vancouver Regional Construction Association.

If you have any questions about this decision, or any construction law related issue, please feel free to call Norm or Chris at (604) 484-1700.

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