Owners and bidders take note: privilege and discretion clauses may not accomplish what you think they do. The BC and Alberta Courts of Appeal have released decisions clarifying the use of each of these kinds of clauses in the context of the competitive bidding process.

Privilege Clauses

A privilege clause permits owners not to accept the lowest, or any, bid, and to choose between bids on another basis. In Everest Construction Management Ltd. v Town of Strathmore, 2018 ABCA 74, one issue before the Court was whether a privilege clause entitles an owner to consider the increased costs caused by a later completion date proposed by a bidder, in addition to the prices quoted in the bids.

The Town of Strathmore issued tender documents for a reservoir and pump station project that included, among other things, a privilege clause that provided that “the lowest or any bid will not necessarily be accepted”. Although Everest submitted the lowest bid, Strathmore awarded the contract to the second lowest bidder, primarily due to its experience and proposed earlier completion date, and the increased costs Strathmore would have had to incur due to Everest’s proposed later completion date.

The trial judge dismissed Everest’s claim that Strathmore had breached its implied duty to accept only compliant bids and treat bidders fairly and equally. Everest appealed, arguing that Strathmore had breached its implied duty of fairness by considering the expected additional costs. Everest argued that Strathmore was only entitled to consider such costs if, in its tender documents, it had said it would or had said that the completion schedule was the paramount or only consideration.

The Court dismissed Everest’s appeal, reiterating that privilege clauses allow owners to not accept the lowest bid, and accommodate a more nuanced view of “cost” than prices quoted in bids. This nuanced view may allow an owner to adjust bid prices to reflect expected costs of later completion, if the tender documentation: (1) contains a privilege clause and (2) fairly discloses that the scheduled completion date will be a factor in evaluating bids. The Court noted it would be unreasonable to allow an owner to consider the additional costs of a later completion date if timing is identified as the most important or only criterion, but not if it is one of numerous relevant criteria.

Discretion Clauses

A discretion clause allows owners to waive minor or immaterial defects in substantially compliant bids. In Maglio Installations Ltd. v The Corporation of the City of Castlegar, 2018 BCCA 80, the City of Castlegar sought bids for the construction of a swimming area next to a river. The invitation to tender contained a discretion clause reserving Castlegar’s right to reject any or all tenders, waive defects in any bid or tender documents, and accept any tender or offer it considered to be in its best interests. It also required completion of a preliminary construction schedule. Due to certain external uncertainties, Castlegar could not confirm the construction milestone dates until after the tender closed.

Maglio submitted a fully compliant bid, and successfully sued for breach of contract when Castlegar awarded the tender to another bidder that had not submitted a preliminary construction schedule. Castlegar appealed, arguing that the preliminary construction schedule – or lack thereof – was immaterial because there were no firm milestone dates set during the bid period and the preliminary construction schedule would have had to be amended anyway. Castlegar also argued that because of the changing circumstances, the successful bidder’s provision of more information than requested in the preliminary construction schedule, and its commitment to meet the milestone dates, the preliminary construction schedule became immaterial and redundant. Castlegar contended that the discretion clause allowed it to forgive the defect and accept the bid.

The Court noted that the case law establishes that a discretion clause allows an owner to waive non-material defects in substantially compliant bids. The Court reaffirmed the two-step test to determine whether a defect is material: first, did the bidder fail to include an important or essential requirement of the tender documents? Second, was there a substantial likelihood that the defect would have been significant to the owner’s decision making?

The Court determined that the summary trial judge had applied the correct test and appropriately applied an objective standard to assess materiality. It reiterated that the post-bid conduct and views of the parties should not be relied upon to determine bid compliance. The Court dismissed Castlegar’s appeal.

Conclusion

Owners should be aware when preparing their tender documents that discretion and privilege clauses do not give them a “free pass” in the bid evaluation process. On the other hand, in the face of privilege and/or discretion clauses, bidders should not assume that owners will choose the lowest bid; owners may take other disclosed criteria into consideration. Both owners and bidders are encouraged to obtain legal advice to assist them in navigating the competitive bidding process.