04 May 2006

Recent developments in tender process contracts

by Owen Hayford

Two recent cases provide further guidance on the legal requirements applying to government tender processes.

It has now been almost a decade since Justice Finn in Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 displaced traditional contractual analyses of public tender processes in Australia by finding that, in certain circumstances, a mere request for tender ("RFT") for a main contract may also give rise to a legally binding agreement, which he termed a tender process contract, governing the way in which the tender is conducted. Moreover, Justice Finn found that where the party issuing the RFT is a public body, any tender process contract that arises from it will contain an implied term requiring it to "deal fairly" with all the tenderers in assessing their bids and awarding the main contract.

Following Justice Finn's landmark judgment, those involved in competitive tender processes (and their legal advisers) have been left to grapple with the issues that decision presented, specifically:

  • when such tender process contracts may or may not exist
  • what their terms may be
  • what the scope and content of the implied duty of fair dealing may be; and
  • how tenders may be properly managed so as to avoid breaches of any pre-award period contracts.

While much judicial (and extra-judicial) consideration has been given to Justice Finn's general discussion of the role of fair dealing as an underlying principle of contract law in Australia, there have been few subsequent cases dealing with tender process contracts directly, Cubic Transportation Systems Inc v State of New South Wales [2002] NSWSC 656 being a notable exception. Significantly, the High Court has yet to consider the Hughes Aircraft case.

Two recent decisions, from the Privy Council and the Western Australian Supreme Court, however, may offer some guidance to public entities, private bidders and their lawyers.

Pratt Contractors Ltd v Transit New Zealand [2005] 2 NZLR 433

This case dealt with a dispute arising out of RFTs issued by Transit New Zealand, the Crown entity responsible for the management and maintenance of New Zealand's state highway and motorway system. Pratt Contractors Ltd, a company that had carried out a number of road-building contracts, brought claims against Transit in respect of Transit's conduct of two tender rounds for a contract to realign a state highway.

Specifically, Pratt alleged that Transit had, in rejecting Pratt's bids for the main contract, failed to follow Transit's own internal policies (contained in two manuals) as to the conduct of tenders. In this way, Pratt argued, Transit had breached the terms of the tender process contract between the parties, because the contents of those manuals were both express terms of the tender process contract and required to be followed as part of the implied term of fair dealing recognised in the Hughes Aircraft case. Furthermore, Pratt claimed that there had also been a breach of that implied term because several members of the Transit committee evaluating the tenders were of the opinion that Pratt had a reputation for "lowballing" on the financial aspects of its bids and were thus biased against Pratt.

Upholding the decision of the New Zealand Court of Appeal (which had overturned the first instance decision of the New Zealand High Court), the Privy Council found that Transit New Zealand had not breached its obligations under the tender process contract, including the obligation to act fairly and in good faith in conducting the tender.

Lord Hoffman, delivering the judgment of the Privy Council, stated that while Transit had accepted a tender from another party that did not comply with and should have been rejected under its detailed internal tender evaluation procedures contained in the manuals, this gave Pratt no right of action. The RFT issued to Pratt contained no reference to the manuals, and provided only that tenders would be evaluated in accordance with a broader weighted attributes method of assessment. Nor was the Privy Council prepared to find that the content of the manuals was to be impliedly incorporated into the contract.

Furthermore, in finding that Transit had not breached the requirement that it act fairly and in good faith (which Transit conceded was a term in the tender process contract), the Privy Council agreed with Justice Finn in the Hughes Aircraft case that this implied contractual duty does not demand of a party issuing an RFT the strict absence of bias that may be required under administrative, rather than contract, law standards of procedural fairness. In the words of Lord Hoffman, "The duty to act fairly meant that all the tenderers had to be treated equally", but this "did not mean that [the tender evaluation committee] had to act judicially". As such, there was nothing improper in Transit's tender evaluation committee taking account (as it assuredly did) of Pratt's reputation in the industry; this was a valid commercial consideration for Transit to bear in mind in deciding on the award of the main contract, and in the absence of unequal treatment of the tenderers by or bad faith on the part of Transit or the committee members it could not amount to a breach of the tender process contract.

Dockpride Pty Ltd v Subiaco Redevelopment Authority [2005] WASC 211

In this recent West Australian case the plaintiffs, Dockpride and Westpoint, were related companies involved in submitting an unsuccessful tender bid for a contract to purchase and redevelop an area of land in Perth; the defendant was the Subiaco Redevelopment Authority, a statutory body established to oversee that redevelopment. Among other claims, Dockpride and Westpoint sought damages from the Authority for what they alleged were its breaches of a tender process contract. The plaintiffs argued:

  • that there was either an express or implied term of that process contract requiring the Authority to accept only bids that complied with certain design guidelines contained in the RFT; and
  • that in communicating information about those design guidelines to a rival consortium (the successful bidder) but not to Dockpride and Westpoint, the Authority had failed to deal fairly and in good faith with all the bidders, thus breaching the implied term recognised by Justice Finn in the Hughes Aircraft case.

Justice Le Miere of the Supreme Court of Western Australia rejected those claims and found for the Authority.

Unlike in the Pratt Contractors case (in which it was accepted by the public body issuing the RFT that its conduct amounted to an offer, which had been validly accepted by the tenderer for a preliminary contract), in Dockpride the court was required to decide whether a tender process contract existed between the parties. The Authority argued that no such relationship could be in effect because the RFT (the offer for the tender process contract, on a Hughes Aircraft case analysis) had been issued to Westpoint but the tender (the purported acceptance of that offer) was submitted by Dockpride, a separate entity.

While Justice Le Miere endorsed this reasoning, holding that no tender process contract between the Authority and Dockpride could have arisen from the issue of and reply to the Authority's RFT, he nevertheless found that a tender process contract existed. Justice Le Miere stated "It is to be inferred from the tender documents and the conduct of the Authority and Dockpride that they intended to enter into a process or preliminary contract", noting that the conduct of the parties (for example, the Authority's seeking the agreement of Dockpride for an extension of the date for the acceptance of the successful tender) constituted "an acknowledgement that the parties were in a contractual relationship". To find otherwise, Justice Le Miere observed, would be to fail to recognise the "commercial realities" of the tender process and the "legitimate expectations" of the parties.

Having found that there was a tender process contract, Justice Le Miere was not however prepared to hold that the Authority had breached any of its obligations to Dockpride under that agreement. On the first implied term pleaded by the plaintiffs, that the Authority would not consider a tender that did not comply with certain aspects of the design guidelines contained in the RFT, it was held that no such term could be properly implied into the contract. The language of the guidelines was not mandatory or prescriptive and therefore did not suggest that they were to be terms of any process contract; they did not satisfy the criteria of the established test for the implication of terms "in fact" into a formal contract; and, perhaps most importantly, the "conditions of tender" document included in the RFT contained a clause specifically stating that the Authority would not be precluded from accepting a tender not in strict conformity with the RFT. Nevertheless, Justice Le Miere stated that the presence of such a clause in the RFT did not mean that the Authority would have been free, under the tender process contract, to accept a tender that was unresponsive to the design guidelines.

Justice Le Miere accepted the plaintiff's assertion that the Authority was obliged to act fairly and in good faith towards Dockpride, and following the Hughes Aircraft and Pratt Contractors cases held that the tender process contract contained an implied term to that effect. However, citing those same cases, Justice Le Miere observed that the duty of the Authority under this term was not as extensive in scope as that required in administrative law, though it did operate "at least to the extent that the Authority is precluded from acting subjectively in bad faith and must treat all tenderers fairly".

Applying these criteria to the plaintiffs' pleadings and the facts, Justice Le Miere found that Authority had not breached its obligation to Dockpride. Neither the Authority's selection of a tender that did not comply with aspects of the design guidelines, nor its communications with the successful tendering consortium (in response to matters raised by that consortium) that it would be prepared to accept such a non-compliant tender, constituted a breach of the Authority's obligation to deal fairly and in good faith with the plaintiffs. Indeed, Justice Le Miere took the view that the disclosure of those communications to Dockpride would have constituted a breach of the Authority's concomitant obligations to the rival tenderer.

Implications of recent cases

These two recent decisions on tender process contracts suggest several important points.

The facts and findings in both cases emphasise the importance of care and clarity in the drafting of RFTs and other documents associated with any tender processes. If it is not intended that the issue of the RFT or the submission of a tender will give rise to a tender process contract, then this should be stated. The RFT should clearly state the rules of the tender process; and the rules should provide the issuer of the tender with sufficient flexibility to respond to unexpected circumstances and, if necessary, modify the tender process (particularly on complex, major projects). A clear distinction should be maintained between those documents and policies that form part of the tender framework and those that are for the issuing entity's purely internal use; references in the RFT to the latter are best avoided.

Furthermore, as the reasoning of Justice Le Miere in the Dockpride case demonstrates, even when the issuance of an RFT and the submission of a tender does not of itself give rise to a pre-award contractual relationship, courts may still be prepared to find that the parties intended to enter into legal relations and have, by subsequent or other conduct, entered into such a contract. It follows that even when the RFT and associated documentation express that the intention of the party issuing the RFT is not to make an offer capable of acceptance by the submission of a tender, it is still necessary to follow the drafting principles for RFTs described above, in order to ensure that any contract which may exist is sufficiently flexible and contains only the terms and requirements that the issuing party is happy to be bound by.

More generally, the decisions in Pratt Contractors and Dockpride demonstrate that courts are aware of the competing interests that parties involved in tender processes have when it comes to the existence and nature of tender process contracts, and the tension between them when it comes to determining the terms of the any contract and particularly the scope of the implied duty to act fairly. Government bodies issuing tenders want to be able to act flexibly and commercially in conducting tender processes and selecting from bids, and (as Lord Hoffman put it in the Pratt Contractors case) "not be hobbled by quasi-procedural rules"; tenderers want to be assured that submissions will be judged transparently, impartially and in accordance with agreed criteria and frameworks. If the Hughes Aircraft case constituted a ground-breaking recognition in Australia of the legal effect of the undertakings made to tenderers in RFTs, the Pratt Contractors and Dockpride cases indicate an appreciation by courts of the practical and reasonable limits, especially to the implied term requiring fair dealing and good faith, of contract law restrictions on the actions of public bodies engaged in competitive, commercial tender processes.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.