An invitation to tender imposes contractual obligations to act fairly

Case law over recent years has established that a company issuing an invitation to tender (ITT) is making an offer, not necessarily to award the contract to the best bidder (depending on the terms of the invitation), but at least to comply with the procedures set out in the ITT. This offer will be contractually binding as between the company and all those that respond to the invitation in accordance with its terms. However, whether there is a further implied obligation to act fairly or in good faith in consideration of tenders has been a matter of debate.

A recent case from New Zealand, decided by the UK's Law Lords (acting as the Privy Council under the system for ultimate appeals from Commonwealth countries), gives some useful pointers as to the extent of these obligations in practice.

The background

The case concerned a road-building tender for Vinegar Hill. One of the tendering companies, Pratt Contractors Ltd ("Pratt"), had a controversial reputation in New Zealand – some accused it of "lowballing" – tendering a low price to win contracts in the hope of making a profit by aggressive variation claims. It had also sued a local authority over tendering procedures and was in dispute with another over a contract which had gone over schedule and massively over budget (the Pipiriki project).

The national highway authority, Transit New Zealand ("Transit"), was the contracting entity. By statute, Transit was obliged to use approved competitive tendering procedures known as CPP. Alongside these rules, Transit was also required to draw up its own detailed procedures and Transit had two such manuals, on Tender Evaluation and Contract Administration. The CPP allowed contracts to be awarded on the basis of the lowest price conforming tender or on a weighted attribute method. Under the latter, each tenderer would be scored out of 100 on non-price attributes such as experience, track record, technical skills, resources, management skills and methodology. Tenderers scoring under 35 on any criterion would be excluded from further consideration. Price would be graded on the basis of deviation from the median conforming tender price. The various scores would then be adjusted according to the weighting given to them in the contract and cumulated. The contract would be awarded only to the highest scoring tender.

The ITT

Among the significant provisions of the ITT were the following:

• Transit reserved the right to reject all tenders;
• Tenders would be evaluated in accordance with the CPP using the weighted attributes method;
• If no tender had been accepted within 2 months of closing, each tenderer was to be notified whether or not his tender was still under consideration. Tenders were to remain valid for 2 months;
• Award of the tender was conditional on the tenderer being able to provide a performance bond.

The evaluation team

The tender evaluation team ("TET") set up by Transit included two staff of consultants who designed and supervised the project. They had both been involved in the Pipiriki contract. The third member was a Transit employee.

The tenders

Pratt's tender was $4.5 million – over $1 million less than the next highest tender. When evaluating non-price attributes, the TET divided the attributes into sub-categories. Pratt failed on technical skills because of perceived weaknesses in its back up staff and and on resources because of its financial viability (because it had been unable to evidence that it could provide a bond). Considering financial viability as part of resources was contrary to the Tender Evaluation Manual.

The recommendation of the TET was that Pratt should be excluded from consideration because it had failed on two non-price attributes. It referred to the need to select a contractor with a consistent record of completing contracts without undue delays or cost overruns or a history of involving costly litigation procedures" and concluded that it would be unwise to consider Pratt for the contract.

Transit's manager, Graham Taylor, keen to secure a $1 million saving, approached Pratt about three areas - the lack of back-up staff, the financial viability issue and the methodology implicit in the low price which raised concerns about variations. Pratt engaged further contract staff and provided a letter of intent for the issue of a performance bond. However, before the final issue was resolved, the two month period of validity of the tenders expired and Mr Taylor was advised, wrongly, that in law he could not accept one of the tenders unless all the tenderers extended their bids. He therefore exercised its right not to award to any tenderer and re-advertised the tender.

The TET for the second round included a new consultant, Mr Gifford, who had also worked on Pipiriki but this time with the replacement contractors, Hayes, who had impressed him. In the second round, Pratt submitted a higher priced tender, using a slightly different methodology presumably to take account of Mr Taylor's concerns. It passed on all non-price attributes but did worse on some of them than previously. Hayes, on the other hand, submitted a lower price than in the first round and scored higher on non-price attributes because of Mr Gifford's experience of them.

Hayes had failed to comply with the detailed procedure in the ITT for submission of tenders, providing their tender in a single envelope rather than splitting the price and non-price information into two envelopes. Under Transit's manuals, their tender should have been rejected. However Mr Taylor did not reject it – he simply removed the price information before passing the tender to the TET so that it would not affect their analysis.

The effect of the changes in evaluation was that Hayes earned the highest overall score and was awarded the contract. Soon afterwards Pratt went out of business.

The court's conclusions

The question for the court was whether Transit had breached its contractual duty to Pratt to consider its tender in accordance with the express and implied terms of the ITT. The Privy Council concluded:

• that Transit did not need to comply with its own internal guidelines where these were not incorporated by reference in the contract – therefore there was no obligation to reject Hayes' tender in the second round;
• that the division of the criteria stated in the ITT into sub-criteria and the scoring of the tenders on the basis of those sub-criteria was not a breach of the contract procedures even where these sub-criteria had not been notified to the tenderers, since they were merely aspects of the specified criteria;
• the duty to act fairly and in good faith did not give rise to an implied term that the customer must eliminate any risk of bias in its selection procedure – this would be to import a concept from public law which was inappropriate in a commercial context. Nor did Transit have to act judicially, give Pratt a hearing or engage in a debate of the rights and wrongs of past events such as the Pipiriki contract.
• The duty "required that the evaluation ought to express the views honestly held by the members of the TET. All tenderers should be treated equally so that one tenderer could not be given a higher mark than another if their attributes were the same. But Transit was not obliged to give tenderers the same mark if it honestly thought that their attributes were different. Nor did the duty of fairness mean that Transit were obliged to appoint people who came to the task without any views about the tenderers, whether favourable or adverse. It would have been impossible to have a TET competent to perform its function unless it consisted of people with enough experience to have already formed opinions about the merits and demerits of roading contractors."

Conclusion

The court took a very pragmatic approach to its analysis of the duty on a party requesting tenders. It was concerned not to "judicialise" the competitive tendering process. It will be reassuring to operators and prime contractors to know that in awarding contracts they are entitled to take account of their own experience of, and honest opinions on, tendering companies.

For further information on tendering procedures please contact Judith Aldersey-Williams in the Aberdeen office at [email protected]