Acting in Good Faith: A Requirement in Tendering

The concept of honesty and good faith between contracting parties has received a lot of attention since the Supreme Court of Canada issued its landmark decision in Bhasin v. Hrynew  in late 2014. In that case, the Court recognized that good faith contractual performance is a general organizing principle of Canadian common law, and that parties to a contract are under a duty to act honestly in the performance of their contractual obligations.

Well before Bhasin, however, the duties of honesty and good faith had been recognized in contracts of insurance and of employment as well as the tendering process. It is an implied or unwritten rule of every tender process that the owner must act fairly and in good faith in its dealings with bidders throughout the process. The courts have imposed this requirement in order to protect the integrity of the tendering process. Without some assurance of proper treatment and a fair process, parties are not likely to commit the time and money required to submit a bid.

The essential requirements of the owner’s implied duty of good faith are to:

• treat all bidders fairly and equally;
• follow the rules of the tender; and
• evaluate proposals using the stated criteria, and only those criteria.

Three recent cases demonstrate the importance of honesty and good faith in the tendering process.

In Elan Construction Limited v. South Fish Creek Recreational Association, a not-forprofit community association issued a call for tenders for the $19-million expansion of an existing sports complex. The plaintiff, Elan, was one of 11 contractors to submit a bid. Elan submitted the lowest price, but its bid did not receive the highest score on the association’s evaluation process, which also considered project schedule and experience. Elan challenged the award, arguing that the community association breached the duty of good faith it was owed by failing to evaluate its bid fairly and in accordance with the stated evaluation matrix.

The Court reviewed the association’s evaluation process and identified several flaws that constituted a breach of the duty of good faith owed to bidders. In evaluating the bids’ proposed schedules, the association used a methodology that the Court described as “arbitrary” and something that “could not have been within the contemplation of the bidders”.

The Court also criticized the association for having placed greater emphasis on the  bidders’ experience constructing arenas, bidders in the evaluation criteria. Although the association did not act dishonestly or with malice, the Court held that the implied duty of good faith required more than honesty. A bid evaluation that is conducted in an arbitrary manner or using undisclosed criteria, as the association was found to have done, will constitute a breach of good faith.

The Court concluded that Elan would have received the highest score, had the bids been properly evaluated. However, only nominal damages were awarded because the association was able to demonstrate that the project would not have been profitable.

Another recent case that considered the good faith obligation, Inter-Cité Construction v. Procureur General du Quebec, concerned a provincial highway project near Gatineau, Quebec. The plaintiff, Inter-Cité, was the lowest conforming bidder. However, four months after the opening of the bids, the provincial ministry cancelled the tender and did not award the contract because it was unable to obtain all the environmental authorizations required to carry out the work. Inter-Cité argued that the ministry had not acted in good faith in doing so, and sued to recover the cost of keeping its management staff and machinery assigned to the project “on hold” for the period that preceded the cancellation.

The Court held that the ministry’s conduct leading to the cancellation did breach its obligation to act in good faith in two respects. First, the ministry told bidders in the tender documents that the necessary environmental authorizations had already been obtained, which was not the case. Second, when it was revealed that the authorizations had not been obtained, it led Inter-Cité to believe that they were “on their way”, which was also not the case.

Whether intentional or not, the Court held that the ministry lacked transparency in its dealings with bidders, contrary to its obligation of good faith. Inter-Cité was awarded damages to cover the costs of its labour and equipment having had to remain idle.

In M.G. Logging & Sons Ltd. v. British Columbia, the plaintiff was the unsuccessful bidder on a timber licence auctioned by the Ministry of Forests. After originally being identified as the lowest bidder, M.G. Logging was not awarded the contract because it was determined that its bid was unclear as to the identity of the bidder. It was intended that the bid be submitted on behalf of “M.G. Logging & Sons Ltd.”, which was a registered contractor and therefore eligible to bid for the licence. However, the bid form listed a related company, “M.G. Logging Ent. Ltd.”, as the bidder, a company which was not registered and therefore not eligible to bid.

The plaintiff argued that the mistake in identifying the bidder was inadvertent and did not have a material impact on the evaluation of bids. There was also evidence that the ministry understood the true identity of the bidder. In light of those circumstances, the plaintiff argued that it was not treated fairly and that the ministry should have taken steps to resolve any uncertainty in the identity of the bidder.

The Court rejected this argument, noting that the obligations of fairness and good faith arise only upon the submission of a compliant bid. An owner does not owe the duty of fairness and good faith until a party submits a bid that substantially complies with the requirements of the tender call. Because the plaintiff’s bid was not compliant, it had no basis to argue that the ministry had not treated it fairly or breached some obligation arising under the implied duty of good faith.

Although it is an unwritten or implied rule, the owner’s obligations under the duty of good faith is an essential component of the tendering process, and the basis upon which many tendering disputes are decided. Understanding the scope and implications of these obligations is important for any tendering authority or party responding to a call for tenders.

For more information on the duty of good faith or the tendering process in general, please contact Steve.

For more information, please contact: