Process Contracts in tendering - How they can be avoided

By Sid Wang and Luke Buchanan.

Key Points:
A recent decision highlights risks for participants in tender processes, with implications for financiers of purchasers as well as receivers and administrators

Allegations concerning an alleged Process Contract were defeated by AMP Life Limited and AMP Henderson Global Investors Limited (together, "AMP") in a recent Federal Court case, Australian Agricultural Company Limited v AMP Life Limited [2003] FCA 1038.

The allegations were made by Australian Agricultural Company Limited ("AACo"), which sought an injunction that would have prevented AMP from completing the sale of one of the world's largest pastoral stations, Stanbroke Pastoral Company Limited, to the successful tenderer under a private tender process. AACo was an unsuccessful tenderer in that process.

AACo's case included an allegation that a Process Contract had arisen. It alleged that the Process Contract contained implied terms:

• that AMP would act fairly and in good faith in the conduct of the Stanbroke tender process
• that the evaluation of the competing tenders would accord with AMP Life's statutory obligations (under the Life Insurance Act) to give priority to the interests of owners and prospective owners of policies
• that the bid with the highest financial return (subject to certainty as to payment) would be preferred to bids with lower returns; and
• that the criteria disclosed to bidders would be the only criteria relevant to the final determination of the successful bidder.

It was alleged by AACo that these terms had been breached. The case gives rise to the following questions:

1. what is a Process Contract?
2. when does a Process Contract arise?
3. what are the terms of a Process Contract?; and
4. how can a Process Contract be avoided (or at least, how can a vendor ensure that the Process Contract does not contain any onerous implied terms)?

The answers to these questions are critical to any party conducting or participating in a tender process (either public or private).

What is a Process Contract?

It is widely known that the doctrine of offer and acceptance is fundamental in contract law. One of the requirements for the existence of a contract is the acceptance by one party of an offer made by the other.

The law draws a distinction between an offer, which becomes a contract upon acceptance provided other requirements (such as the need for consideration) are satisfied, and an invitation to treat. In broad terms, an invitation to treat is a statement made in negotiations which invites a response as part of the bargaining process but falls short of an offer capable of becoming a contract.

Traditionally, requests for tender and other statements of that nature have been viewed as invitations to treat, which is to say that they invite submission of tenders but no contractual relationship arises unless and until the party conducting the tender accepts the offer embodied in the tender submitted by the successful tenderer.

It is now clear, however, that a statement in the nature of a request for tender may itself constitute an offer which, upon acceptance, becomes a binding and enforceable contract. The resulting contract is known as a Process Contract.

When does a Process Contract arise?

The leading Australian authority in this area is Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1. That case concerned a tender conducted by the Civil Aviation Authority (the "CAA") for the award of the Australian Advanced Air Traffic System Acquisition Contract ("TAAATS II").

Hughes was the unsuccessful tenderer in a two-party bid for the TAAATS II contract. The gist of Hughes' claim was that the CAA had obliged itself to conduct the tender process fairly and in accordance with defined procedures and criteria but had failed to satisfy that obligation. Hughes sought damages on the basis of various causes of action, including breach of contract. In relation to that claim, Hughes alleged that a Process Contract had come into existence on the basis of two documents issued by the CAA to the tenderers.

In essence, Justice Finn agreed. He held that there were in fact two Process Contracts, although they operated sequentially, rather than concurrently. Justice Finn emphasised that the TAAATS II tender occurred in circumstances where an earlier tender process had been found to be "unsound and unfair", in an independent review. The Board of the CAA had adopted the report of the review team and invited Thomson and Hughes (both of whom had participated in the earlier process) to participate in TAAATS II. A formal meeting had been held to reassure Thomson and Hughes as to the processes which would be adopted and to secure their concurrence in those processes. Against this background, Justice Finn found that the parties had taken explicit steps to protect "the integrity of the bidding system" in TAAATS II; the documents giving rise to the Process Contract were important elements of that protection and were clearly intended to constitute a binding statement of the procedures which would be followed and the criteria which would be applied by the CAA.

In light of the reasoning in Hughes, it is clear that whether a Process Contract has come into existence in a particular case will depend upon whether the vendor has made statements that are intended to be binding as to the procedures which will be followed and/or the criteria which will be applied.

What are the terms of a Process Contract?

As with any contract, the terms of a Process Contract may be oral or written and express or implied. Generally, the express written terms will be those set out in the document(s) giving rise to the contract. However, it is also possible that a Process Contract will be found to contain implied terms.

In Hughes, Justice Finn held that the Process Contracts contained an implied term that the CAA would conduct its evaluation fairly and in a manner which would ensure equal opportunity to Hughes and Thomson. That finding was based partly on the usual tests for the implication of terms; that is, the implied term must be reasonable and equitable, necessary to give business efficacy to the contract, so obvious that "it goes without saying", capable of clear expression and not contradictory to any express term of the contract. However, it was also based partly on his Honour’s view that a term requiring good faith and fair dealing is implied in all Process Contracts (or at least, in all Process Contracts which arise in the context of a public tender). In this respect, his Honour stated:

"If the purpose of a tender process is to be accomplished, if contract-tenderers are to be given an effective opportunity to enjoy the fruits of the bid and not to have that opportunity destroyed by the unfair dealing of the other party to the contract, a duty such as I have described would appear to me to be a presupposition of such a contract."

Although the status of the CAA as a public body was stated to be a relevant factor in his decision, Justice Finn did not expressly limit his findings to public tenders. As a result, the judgment has been cited as authority for the proposition that duties of good faith and fair dealing should be implied in all Process Contracts.

How can a Process Contract be avoided (or at least, how can a vendor ensure it does not contain onerous implied terms)?

From a vendor's perspective, the menace is twofold. It lies in the potential for a Process Contract to arise (which may lead to an application for an injunction by an unsuccessful tenderer) and also in the terms which might be implied into such a contract.

In the litigation between AACo and AMP, Justice Sackville found that there was no serious issue to be tried as to whether AMP had breached the alleged implied terms of the Process Contract (if in fact a Process Contract had arisen, being an issue which his Honour left to one side). In making this finding, Justice Sackville stated that the following documents would have to be taken into account in determining what terms might be implied into the Process Contract:

• an Information Flyer issued by AMP, which expressly reserved AMP’s right to negotiate with one or more interested parties at a time, to provide additional information to any interested party (whether or not such information was provided to other interested parties), to withdraw from discussions, to enter into a similar transaction with another party or to determine not to progress with a transaction at all
• a Confidentiality Agreement between AACo and AMP, in which AACo agreed that AMP could (subject to the terms of any related documents) negotiate with any other party on any basis which AMP considered appropriate, could extend, suspend, terminate or otherwise vary the sale process by notice to AACo or could, in its absolute discretion, shortlist any number of bidders or select a preferred bidder (but was under no obligation to do so); and
• a set of bid instructions issued to shortlisted potential bidders, which expressly reserved AMP's right to terminate or alter the sale process at any time, to enter into exclusive negotiations with any interested party or to negotiate with multiple parties at any time (the bid instructions stated that, by continuing in the process, a tenderer was taken to agree to the conditions and to agree not to make any claim, action or demand in relation to the sale process).

Conclusion

The lesson for vendors is that the express written reservation of the vendor's right to conduct the tender process as it sees fit is critical in avoiding a Process Contract arising and the implication of terms which impose onerous obligations on a vendor. Financiers or purchasers, receivers and other insolvency practitioners need to be aware of this decision and monitor the tender process accordingly.

For further information, please contact Sid Wang and Luke Buchanan.