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CONTRACT LAW IN CONSTRUCTION
Presentation and Workshop Booklet
Scott Alden
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Session 1 - Workshop 1 - Defining Contract Through Negotiation The purpose of this exercise is to consider and discuss when the contract was formed. Read through the timeline of correspondence set out below and discuss the following: 1. When was the contract formed? 2. Why has your group nominated that date? The following facts have been taken from the following case: OTM Limited v Hydranautics [1981] 2 Lloyd’s Reports 211. 8 September 1978 Hydranautics letter-tender to OTM: “Hydranautics offers to supply a chain tensioning device to OTM. Letter offer included Hydranautics standard terms and conditions." 29 September 1978 OTM telex to Hydranautics: “It is our intention to place an order for one chain tensioner … A purchase order will be prepared in the near future but you are directed to proceed with the tensioner fabrication on the basis of this telex. The purchase order will be issued subject to our usual terms and conditions." 2 October 1978 OTM purchase order issued to Hydranautics included the following: “Acceptance of contract: the written acceptance of this contract, the commencement of performance pursuant thereto... by the seller constitutes an unqualified acceptance by the seller of all the terms and conditions of this contract. This contract… constitutes the entire agreement between the parties either oral or written…” 2 October to 20 October 1978 Exchange of telexes, dealing with various contractual issues. Hydranautics made no objection to OTM terms issued on 2 October. Hydranautics advised they had already commenced work based on Hydranautics' offer. 20 October 1978 OTM telex to Hydranautics agreeing to one outstanding issue in the negotiations and asking if OTM should issue a new purchase order. 20 December 1978 Hydranautics telex to OTM which advised that there was no need to issue a new purchase order and the telex contained the following: “Acceptance of buyers’ offer is conditional and subject to…the following conditions… Unless buyer shall notify seller in writing to the contrary within 5 days of receipt of this document the buyer shall be deemed conclusively to have accepted the exact terms and conditions hereof.” 3 January 1979
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OTM signs acknowledgement of order and returns it to Hydranautics. Chitty on Contracts defines ‘acceptance' in the law of contract: “An acceptance is a final and unqualified expression of interest of assent to the terms of an offer. On this test, a mere acknowledgement of an offer would not be acceptance nor is there an acceptance where a person who has received an offer to sell goods merely replies that it is “his intention to place an order.” ANSWER:
Contract Formation - Possible Dates
Yes/No If Yes - Why?
8 September 1978
29 September 1978
2 October 1978
2 October to 20 October 1978
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20 October 1978
20 December 1978
3 January 1979
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2. Process Contract - Exclusion Terms and Conditions
You are asked to treat the information in this document as confidential and to communicate it only to the people directly involved in the preparation of your proposal.
This request for proposal is issued on the understanding that no charge will be made for preparation of your proposal or other information that may be supplied.
The information provided in your proposal will be considered to form the basis for contract negotiations in the event that your proposal is accepted.
There is no intention to create legal relations by this RFP. The request may result in negotiations for the award of a contract, but of itself is not an offer that applicants/Proposers accept by submitting a proposal. To avoid doubt, no process contract will arise by the issue of this RFP.
By responding to this RFP you acknowledge acceptance of the principles specified within this documents. The extent of acceptance of these principles will be a factor taken into consideration when evaluating responses. Where a principle is not acceptable for any reason the you must:
identify the relevant principle and state to what extent it is not acceptable, and
provide an alternative principle that is acceptable.
The lowest priced, or any proposal may not be accepted. The Ministry reserves the right to negotiate for only selected parts of any offered proposal.
The Ministry reserves the right to undertake background checks on the financial viability of successful Proposers prior to contract negotiation.
Preference will be given to proposals that meet the specified requirements and demonstrate an understanding of our needs, exposures and risks.
The Ministry reserves the right to extend the closing date for RFP responses and to accept or decline late or incomplete proposals at its discretion.
The Ministry has used reasonable efforts in compiling this RFP. It will not be liable to Proposers for any inaccuracy or omission in the RFP or any additional information the Ministry may not provide.
The Ministry reserves the rights to cancel, amend, re-issue or withdraw all or part of this RFP and/or process under it at any stage prior completion of contract negotiations without incurring any liability.
Information relating to the examination, clarification, evaluation and comparison of proposals and the recommendations for selection of Proposers is confidential to the ministry and will not be disclosed to Proposers or any other persons not officially concerned with such process.
Proposer information, proposals and contracts may be reviewed by other government bodies such as the State Services Commission, the Treasury, the Office of the Controller and Auditor-General.
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This RFP, and any contract arising from it, will be construed according to and governed by New Zealand law.
All submitted proposals, and any material submitted by the Proposer to substantiate the proposal, become the property of the ministry and will not be returned to the Proposer, at any stage, irrespective of the outcome.
The preferred Proposer/s will be invited by the ministry to enter into negotiations with a view to entering into a contract. If agreement cannot be reached, the next preferred Proposer may be invited to enter into negotiations.
Once a contract has been executed, the Ministry will notify each Proposer of the outcome of the RFP process.
Proposers must not directly or indirectly provide any form of inducement or reward to any representative of the Ministry in respect of this RFP.
All pricing will exclude GST.
Assessment of Proposals
Factors to be taken into account when evaluating proposals will include the criteria listed below. The key criteria markings and weightings will be determined by the Ministry, prior to any evaluation of proposals taking place.
Assessment of the capability to deliver the required services will be based on the documentation provided and may also take into account:
the proposed approach to the language transactions;
proposed staff capability in providing the services;
proposed development and monitoring of key performance measures;
the ability of the Proposer to deliver the required services efficiently and effectively and of high quality.
Proposers must acknowledge in their proposals that they accept all the terms and conditions and information requirements contained in this document. The preferred Proposer/s will be invited by the Ministry to enter into negotiations with a view to entering into a contract. If agreement cannot be reached, the next preferred Proposer may be invited to enter into negotiations.
Once a contract has been signed with the preferred Proposer, the Ministry will then notify unsuccessful Proposers of the outcome of the RFP process.
Question
Is a Process Contract formed?
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SUPREME COURT OF CANADA Tercon Contractors Ltd. v. British Columbia (Transportation and Highways),
2010 SCC 4, [2010] 1 S.C.R. 69
[60] As noted, the RFP includes an exclusion clause which reads as follows:
2.10 . . .
Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim. [Emphasis added.]
[61] The trial judge held that as a matter of construction, the clause did not bar
recovery for the breaches she had found. The clause, in her view, was ambiguous and, applying the contra proferentem principle, she resolved the ambiguity in Tercon’s favour. She also found that the Province’s breach was fundamental and that it was not fair or reasonable to enforce the exclusion clause in light of the nature of the Province’s breach. The Province contends that the judge erred both with respect to the construction of the clause and her application of the doctrine of fundamental breach.
[62] On the issue of fundamental breach in relation to exclusion clauses, my
view is that the time has come to lay this doctrine to rest, as Dickson C.J. was inclined to do more than 20 years ago: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, at p. 462. I agree with the analytical approach that should be followed when tackling an issue relating to the applicability of an exclusion clause set out by my colleague Binnie J. However, I respectfully do not agree with him on the question of the proper interpretation of the clause in issue here. In my view, the clause does not exclude Tercon’s claim for damages, and even if I am wrong about that, the clause is at best ambiguous and should be construed contra proferentem as the trial judge held. As a result of my conclusion on the interpretation issue, I do not have to go on to apply the rest of the analytical framework set out by Binnie J.
[63] In my view, the exclusion clause does not cover the Province’s breaches in
this case. The RFP process put in place by the Province was premised on a closed list of bidders; a contest with an ineligible bidder was not part of the RFP process and was in fact expressly precluded by its terms. A “Contract A” could not arise as a result of submission of a bid from any other party. However, as a result of how the Province proceeded, the very premise of its own RFP process was missing, and the work was awarded to a party who could not be a participant in the RFP process. That is what Tercon is complaining about. Tercon’s claim is not barred by the exclusion clause because the clause only applies to claims arising “as a result of participating in [the] RFP”, not to claims resulting from the participation of other, ineligible parties. Moreover, the words of this exclusion clause, in my view, are not effective to limit liability for breach of the Province’s implied duty of fairness to bidders. I will explain my conclusion by turning first to a brief account of the key legal principles and then to the facts of the case.
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Session 3 - Workshop 2 - Early Contractor Involvement
Facts The Spice Girls have announced that they will reform as the world’s biggest and arguably best all girl band for a final worldwide tour before retiring from the pop industry. In response to this, and to meet the expected high demand from NSW the government has announced that it will build a new state of the art entertainment centre and that this concert will be its first event. The site has been chosen but there are concerns regarding both ground conditions and contamination. The announcement is that the Spice Girls aim to be doing the tour during 2013 and that they expect to be in Australia in the middle of the year. Original estimates for the project suggest that it would take 3 ½ to 4 years to complete the project. The government has 3 years to call tenders and build the entertainment centre. The state has announced that it will fully fund the project. The project budget is $250 million which must not be exceeded. The project is required to satisfy probity requirements including value for money and probity.
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Exercise 1 Question 1 Consider the government’s major risks for this project using the table below: Issue No.
Material Risk Consequences Likelihood Risk Level
1.
2.
3.
4.
5.
6.
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Question 2 How should the project be procured?
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Question 3 What is the best way for the project to be procured whilst satisfying probity?
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Exercise 2: Threshold Issues following the selection of ECI Model Facts The NSW Government decides to use an ECI model for Stage 1 of the project. Question 1 Should a single or double ECI process be used? What considerations should the NSW Government take into account in making its decisions?
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Facts Assume that the NSW Government decides to use a double ECI process for Stage 1 of the project. Question 2 What are some of the risks to the Principal in running a double ECI process and how can these risks be dealt with?
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Question 3 What type of Stage 2 contract should be used? If there are a number of potential Stage 2 contract types, what considerations should the NSW Government take into account in making its decision?
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Facts During Stage 1, the developed design and program for the project demonstrates that it can comfortably be completed before 1 April 2014. The issue remains that pricing developed by both Stage 1 Contractors indicate that the cost for design, construction and commissioning is between $250 million and $300 million. Question 4 How can the NSW Government come in or under budget?
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Session 4 - Workshops The purpose of Workshops 3, 4 and 5 is to provide a general indication of the types of risk issues that can arise in infrastructure projects and how to approach the allocation of risk between the parties. SCENARIO Road Worx Pty Ltd (Road Worx) and the State Government have entered into a contract for the design and construction of a 100km toll road extension to an existing public highway. Workshop 3 - Analysing Risk We have discussed the Australian Standard's principle that risks should be borne by the party best placed to manage them. Keeping in mind however that parties are free to allocate risk between themselves, use this principle to decide who should bear the risk of the following: Risk issue Party best placed to bear risk Occupational health and safety risks (eg. injury to workers)
Delay (generally)
Delay in project completion due to:
1. Weather?
2. Latent conditions?
3. Delay in the provision of materials?
4. Unrealistic work program?
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5. Interference by Principal?
6. Interference by Superintendent?
7. Suspension due to unsafe work practices?
8. Suspension for convenience of Principal?
9. Vandalism to work site (destroying site sheds and machinery, theft of plant and causing delay to program)
10. Excessive rain leading to flooding of the site
Damage to third party property and personal injury occurring during the carrying out of the works (public liability)
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Development approvals
Change in legislative requirements/government policy
Design risk (i.e. Design not suitable for geology/site)
Community opposition
War, terrorism, invasion, civil unrest etc (Force majeure)
Provision of access to site
Paying the contract price (if a design and construct contract)
Obtaining finance under the PPP
Political/sovereign risk
Patronage risk (i.e. Financial risk of failing to recoup sufficient income from tolls)
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Session 4 - Workshops SCENARIO Road Worx Pty Ltd (Road Worx) and the State Government have entered into a contract for the design and construction of a 100km toll road extension to an existing public highway. Workshop 4 - Recognising Liabilities and Using Indemnities Indemnities
Before the contract was finalised, the contractor proposed to cap its liability 'arising out of or in connection with the performance of the contract, including with respect to any breach of contract, negligent or unlawful act or omission by it or its officers, employees, subcontractors and agents, to the Contract Price'. What risks, if any, would this create for a principal?
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In the contract between the parties, the principal agreed to cap the contractor's liability for loss of or damage to the principal's property to $10 million. The contractor negligently destroys $15 million worth of the principal's property. Who is legally liable for the $5 million in damage above the $10million cap?
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During contract negotiations, the contractor said that it was prepared to promise, in the contract, to indemnify the principal for the contractor's liability to the principal. Would that indemnity be of benefit to the principal?
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ATTACHMENT 1
Sydney Water Corporation v Makucha [2010] NSWSC 114
Facts
A Confidentiality and Business Implementation Agreement (Agreement) was
purported to have been entered into between Sydney Water Corporation (Sydney
Water) and the defendants on 3 December 2009. The Agreement was complex and
required execution of numerous additional agreements. Under the Agreement:
Sydney Water would enter into a Parent Company Shareholders Agreement
with Paul Makucha Pty Ltd (PMH) and would pay PMH between $100,000 and
$1,000,000 for a 50% equity interest in Sydney Water M Pty Ltd (Parent
Company).
The Parent Company must acquire all of PMH's shareholdings in 31 project
entities, and this was to be paid for by Sydney Water. In addition, the Parent
Company was required to pay an entry fee of between $100,000 and
$1,000,000, $25,000 for associated goodwill and $25,000 for the shares.
In relation to two of the project entities, on acquisition by the Parent Company
of PMH's shareholding in those companies, an additional payment by way of
annual royalties (of approximately $100,000 pa) was required.
Sydney Water to pay $16 million royalties for the use of its own name and logo,
in respect of a new class of goods.
Sydney Water was to pay PMH an introduction, establishment and intellectual
property royalty fee of $350,000 and 10% of the valuation of the total value of
the intellectual property.
Sydney Water to pay Mr Makucha $100,000 for him to deal exclusively with
Sydney Water.
Mr Harvey was promised a financial reward through his proposed appointment
as a trustee of the charitable trust.
Some of the projects contemplated by the Agreement to be conducted through
different project entities included the analysis of narcotics from sewage,
diabetes analysis, the operation of offshore desalination plants in ships
operated by nuclear power or liquid gas, water trading, and the purchase and
resale of drinking water around the world using ships specially designed
according to specifications of Mr Makucha.
Ultimately once all the payments under the various agreements were combined,
Sydney Water was liable to pay millions of dollars.
The Agreement was executed for Sydney Water by Mr Ed Harvey. He signed the
Agreement against an execution clause which stated:
Signed by SYDNEY WATER CORPORATION by its
authorised representative who has delegated authority
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to sign for and on behalf of Sydney Water Corporation
(SWC) and to bind SWC and under instrument of
delegation (Book Number ).
Mr Harvey did not have actual authority to sign the Agreement for Sydney Water. He
had delegated authority to approve payments of up to $100,000 in connection with
transactions involving real estate. Accordingly, this Agreement was outside his
delegated authority.
Sydney Water commenced proceedings seeking a declaration that it did not enter
into a valid and binding agreement with the defendants. Sydney Water claimed that
Mr Harvey who was employed as the “Property Asset Manager" had no actual
authority, nor did he have ostensible authority, to sign the Agreement on its behalf.
Sydney Water also claimed that if the Agreement were otherwise binding, it was
entitled to rescind the Agreement because, to the knowledge of the defendants,
Mr Harvey had a conflict between his duty to his employer and his personal interest.
The defendants contended that Mr Harvey had ostensible authority to bind Sydney
Water to the Agreement. The defendants relied on s 20ZD(3)(d) of the State Owned
Corporations Act claiming that Sydney Water held out Mr Harvey to be a Property
Asset Manager and to have the authority to exercise the powers and perform the
duties customarily exercised or performed by an officer in that position.
The defendants applied for interlocutory relief based on clause 13.3 of the
Agreement which reads as follows:
13.3 Sydney Water acknowledges that PMH, Makucha
and Sydney Water P do not presently have the financial
resources to fairly instigate or defend proceedings
involving them and Sydney Water (“Proceedings”). In
order to address this imbalance, Sydney Water agrees
to provide financial assistance to PMH, Makucha and/or
Sydney Water P where such Proceedings have been
commenced and Sydney Water agrees to ensure that
they have the same level of financial backing as Sydney
Water does in the Proceedings.
The defendants accordingly sought orders that Sydney Water pay them:
$25,000 in respect of costs incurred to date;
$200,000 in respect of costs estimated to be incurred in the proceedings;
and
a further $25,000 per month for six months to meet costs including
photocopying, office rent, printing, stationery, secretarial costs, wages for
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the first defendant, Mr Paul Makucha, accounting fees, banking charges,
travel costs, incidentals and other overhead expenses.
Issues
The following issues were required to be considered:
2 Whether there was a serious question to be tried so that the defendant was
entitled to enforce the clause in the Agreement requiring Sydney Water to
provide financial assistance to the defendant in respect of proceedings
between them?
3 Whether Mr Harvey had ostensible authority to bind Sydney Water to the
Agreement?
4 Whether the Agreement signed by Mr Harvey was binding on Sydney
Water?
5 If the Agreement was found to be binding whether Sydney Water validly
rescinded the agreement?
Decision
The Supreme Court of NSW found in favour of Sydney Water and ordered that the
defendants’ notice of motion be dismissed with costs. White J held that Mr Harvey
did not have ostensible authority to bind Sydney Water to the Agreement, and even if
the Agreement was binding, Sydney Water was entitled to rescind, and did rescind, it
upon becoming aware that the Agreement contained a promise of financial reward to
Mr Harvey.
Therefore, it was held that there was no serious question to be tried that would entitle
the defendants to enforce clause 13.3 of the Agreement.
Ostensible Authority
Although Mr Harvey purported to act on behalf of Sydney Water, White J stated that
for a principal to be bound by authority ostensibly, but not actually, conferred on its
agent, there must be a representation by the principal, and not by the agent himself,
as to the extent of the agent’s authority. White J held that there was no holding out
by Sydney Water of any authority of Mr Harvey to act for it.
The defendants raised previous dealings of Mr Harvey on Sydney Water's behalf to
evidence his authority, but it was held that the dealings raised were consistent with
Mr Harvey’s position and was far removed from making contracts of the kind of the
Agreement.
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It was held that the Agreement purported to commit Sydney Water to transactions of
such financial magnitude and covering such a diverse and exotic field of activity, and
containing terms apparently so financially disadvantageous to Sydney Water, that it
was hard to conceive that a person in the position of “Property Asset Manager” of
Sydney Water, would be accustomed to committing Sydney Water to such
transactions.
It was also relevant that the Agreement purportedly provided for Sydney Water to
engage in activities which fell outside its principal functions. Under the Sydney Water
Act, the principal functions of Sydney Water are to provide, construct, operate,
manage, and maintain systems or services for:
(a) storing or supplying water, or
(b) providing sewerage services, or
(c) providing stormwater drainage systems, or
(d) disposing of waste water,
where it has been granted operating licences to enable it to do so. A number of the
transactions envisaged by the Agreement fell outside this ambit.
Furthermore, the Agreement did not deal with matters which were part of the day-to-
day management of the operation of Sydney Water. It would not be within the power
of the chief executive officer, let alone his or her delegate, to commit Sydney Water
to the transactions envisaged by the Agreement. It was apparent to the defendants
that Mr Harvey was purporting to exercise only a delegated power and that the terms
of the delegation were contained within an instrument. Had the defendants checked
the terms of the instrument, it would have been apparent that Mr Harvey had no
authority to sign the Agreement.
Moreover, the defendants were put upon inquiry of Mr Harvey’s authority by the very
nature of the transaction. On its face the Agreement was one for Sydney Water to
embark on a joint venture in new areas of business and not as part of its existing
business. The Agreement contained onerous terms for Sydney Water. These terms
and the benefits to be provided to Mr Harvey all should have raised suspicion that
the board of Sydney Water would not approve, and had not approved, the
transaction.
It was held that Mr Harvey did not have ostensible authority to bind Sydney Water to
the Agreement.
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Breach of Fiduciary Duty
Even if the Agreement had otherwise been binding, Sydney Water was entitled to
rescind it upon becoming aware that the Agreement contained a promise of financial
reward to Mr Harvey through his proposed appointment as a trustee of the charitable
trust, and gave him a personal interest in being appointed to directorships. Those
provisions placed Mr Harvey in a position where his personal interest conflicted with
his duty to his employer. A secret payment made to an agent of a person with whom
the payer is dealing, or proposes to deal, when the payer knows that the payee is
acting as agent, is, for the purposes of the civil law, a bribe. It requires no proof of
corrupt purpose and it is immaterial whether the payment is by way of gift or whether
it is for services rendered or is made for any other reason.
There is a general principle that a fiduciary (the agent) must not, without the informed
consent of the principal, place himself or herself in a position where his or her duty
and interest may conflict. Where the third party knows of the agent’s conflict, the
contract entered into between the principal and the third party will be liable to be
rescinded by the principal if the principal does not give its informed consent, although
if the principal knows of the conflict and the agent’s intention to contract on its behalf
and does not object, it might be estopped from rescinding. A third party who pays
money knowing it to be for the personal benefit of the agent, or promises the
payment, cannot avoid rescission on the ground that he assumed that the agent
would disclose the position to the principal.
Counsel for the defendants submitted that the provisions of the Agreement providing
a personal benefit for Mr Harvey could be severed. The Court stated that this
submission did not meet the point that the reason a principal is entitled to an
opportunity to consider whether to affirm or rescind the transaction is that the
principal has been deprived of the disinterested advice of its agent who has acted
with a divided loyalty. Although, the benefit of any payment Mr Harvey would have
received could be held as payment in trust for Sydney Water, the vice of the
transaction was not remedied merely by depriving Mr Harvey of any benefit he
received when acting in a position of conflict of interest and duty.
Accordingly, even if the Agreement were initially binding on Sydney Water, there is
no basis for the defendants to dispute the validity of Sydney Water’s rescission.
Implications
This decision raises a number of issues relating to delegation and authority to bind
for government agencies and third parties dealing with government agencies.
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For third parties entering into agreements with government agencies it is imperative
that the instrument of delegation or power of attorney under which the agreement is
signed by the government agency is examined to ensure that the person signing has
the authority to bind the agency. This is of particular importance when the
agreement contains onerous provisions for the government agency, as it will be
considered that you have been put on inquiry by the very nature of the transaction.
For government agencies, it is important that policies and procedures are
implemented to reduce the risk of employees abusing their position and binding the
agency to disadvantageous agreements. If this situation were to arise, agencies must
take swift action and rescind the agreement as soon as possible.
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ATTACHMENT 2
Constructive Bid shopping Found to be Breach of Implied Term of Good Faith
What happens when the bid prices exceed the project budget - is it just a
matter of money or are there legal risks involved?
For almost all government projects, prior to calling tenders, a project budget is set,
normally based on an analysis of the estimated cost of completing the project.
However, it is often the case that these estimates do not reflect the bid prices.
When faced with bids that far exceed both the estimate and the budget for the
project, the principal is faced with a number of choices. One option is to ascertain
whether or not the cost estimates, and therefore budget, were incorrectly calculated
or unrealistic and to seek further funds. Other options may include re-tendering
based on the same specification or a different reduced specification, or abandoning
the project either indefinitely or until such time as further funds are available, or
abandoning the tender and the project completely.
There are significant probity and procurement considerations in assessing which
strategy to implement in this context, and the recent 2008 Canadian case of Amber
Contracting Limited v The Halifax (Regional Municipality) 2008 NSSC 208
highlighted this.
The Facts
In this case Halifax (Regional Municipality) (HRM) called for tenders for the upgrade
of the Plymouth Road sanitary pumping station located in Dartmouth, Nova Scotia.
HRM engaged consulting engineers to design and estimate the costs of the pumping
station. Their estimate for construction was CAD$158,240. The HRM budget for the
project was CAD$249,000, which included the cost of consultants.
Three Contractors bid on the project, all of whom tendered a price which far
exceeded the estimate and the project budget. In accordance with the conditions of
tender, the tendered prices were published on the HRM website and also by the
Construction Association of Nova Scotia.
As a consequence of the tendered prices, HRM cancelled the tender and informed
each tenderer of this decision by letter. Despite cancelling the tender, HRM entered
into negotiations with the lowest priced tenderer, Amber Contracting Limited (Amber)
in an attempt to negotiate a price which was acceptable to HRM. Amber's original
tendered price was CAD$621,000. No significant acceptable cost savings could be
negotiated.
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Almost 12 months following the original call for tenders, HRM issued another tender
for the construction of the pumping station. The plans and specifications were
substantially the same as those issued in the original tender.
Four tenders were received, three of which had participated in the original tender
process and one which had not. All tendered prices again exceeded the budget and
the estimate. The lowest priced tenderer, Eisener Contracting, which was not one of
the original tenderers, was awarded the Contract at a tendered price of
CAD$579,282.83.
The Claim
Amber claimed that:
HRM had breached the contractual duty of fairness and good faith owed to
Amber through the process contract by engaging in the process of 'bid
shopping';
HRM, having breached its duty of fairness and good faith, could not rely on the
clause in the tender document which provided that HRM reserved the right to
reject all tenders not considered to be satisfactory or to abandon the tender
process at any time without recourse by the contractor;
it should be awarded damages equal to the amount of its lost profit on this
contract, especially in light of the fact it did not take on an additional project
after the publication of its position as lowest bidder.
HRM argued that there was no implied contractual obligation to award the contract to
the lowest bidder in the first tender. It further contended that by issuing a second
tender after publicly opening and cancelling the first tender, no unfairness or
compromise to the initial bidders resulted.
It relied on the contractual terms of the tender documents which provided that:
HRM reserved the right to reject all tenders, abandon tenders and call for
additional tenders;
no term or condition shall be implied, based upon any industry or trade
practice or custom, any practice or policy of HRM or otherwise, which is
inconsistent or conflicts with the provisions contained in these conditions; and
HRM had the right to cancel the request for tender at any time and without
recourse under the contract and that HRM had the right not to award the
contract.
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ATTACHMENT 3
Exclusion of Liability and the Process Contract – What is the impact of the
implied term of good faith?
It is not uncommon for conditions of tender to include an exclusion of liability
provision in the event of a breach of the process contract. How effective such
exclusion or limitation of liability clauses are in the context of the process contract is
not regularly considered by the courts. In Australia the issue has not been raised
since the case of Cubic Transportation Systems Inc v State of NSW & Ors [2001]
NSW SC 1195 . In the recent decision of Tercon Contractors Ltd. v. British Columbia
(Transportation and Highways) 2010 SCC 4, the Canadian Supreme Court
considered the impact of an exclusion of liability clause on the implied and express
obligations of fairness arising from a tender process.
The Facts
The Province of British Columbia issued a request for expressions of interest for the
design and construction of a highway. Six teams responded with submissions
including Tercon and Brentwood. A few months later, the Province informed the six
proponents that it now intended to design the highway itself and issued a request for
proposals (RFP) for its construction. The RFP set out a specifically defined project
and contemplated that proposals would be evaluated according to specific criteria.
Under its terms, only the six original proponents were eligible to submit a proposal;
those received from any other party would not be considered. The RFP also
included an exclusion of liability clause which provided:
Except as expressly and specifically permitted in these
Instructions to Proponents, no Proponent shall have any
claim for any compensation of any kind whatsoever, as
a result of participating in this RFP, and by submitting a
proposal each proponent shall be deemed to have
agreed that it has no claim.
As it lacked expertise in drilling and blasting, Brentwood entered into a pre-bidding
agreement with another construction company, Emil Anderson Construction Co.
(EAC), which was not one of the six qualified bidders, to undertake the work as a
joint venture. Ultimately, Brentwood submitted a bid in its own name with EAC listed
as a “major member” of the team. Brentwood and Tercon were the two short-listed
proponents and the Province selected Brentwood for the project.
Tercon brought an action in damages against the Province, alleging that the Ministry
had considered and accepted an ineligible bid and that, but for that breach, it would
have been awarded the contract.
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The Decision
At first instance
The trial judge found that the Brentwood bid was, in fact, submitted by a joint venture
of Brentwood and EAC and that the Province, which was aware of the situation,
breached the express provisions of the tendering contract with Tercon by considering
a bid from an ineligible bidder and by awarding it the work. The trial judge also held
that, as a matter of construction, the exclusion clause did not prevent recovery for the
breaches the court had found. The clause was ambiguous and the court resolved
this ambiguity in Tercon’s favour. Her honour held that the Province’s breach was
fundamental and that it was not fair or reasonable to enforce the exclusion clause in
light of the Province’s breach. Tercon was awarded approximately $3.5 million.
The Court of Appeal set aside the decision, holding that the exclusion clause was
clear and unambiguous and barred compensation for all defaults.
Tercon appealed and the issues raised were whether the successful bidder was
eligible to participate in the RFP and, if not, whether Tercon’s claim for damages was
barred by the exclusion clause.
The appeal
In a narrowly split decision 5:4 the Supreme Court of Canada allowed the appeal.
The majority held that the Province breached the express provisions of the tendering
contract with Tercon by accepting a bid from a party who should not even have been
permitted to participate in the tender process and by ultimately awarding the work to
that ineligible bidder. The bid by the joint venture constituted “material
non-compliance” with the tendering contract and breached both the express eligibility
provisions of the tender documents, and the implied duty to act fairly towards all
bidders.
The majority held that there was a process contract in place between those that had
submitted a compliant bid and the Ministry. The express terms of the process
contract were found in the tender documents. The contract also contained implied
terms according to principles set out in a number of Canadian cases. There was an
implied obligation of good faith in the contract and the Province breached this
obligation by failing to treat all bidders equally by changing the terms of eligibility to
Brentwood’s competitive advantage.
The Province took active steps to conceal the reality of the true nature of the
Brentwood bid. The court held that the Province: (1) fully understood that the
Brentwood bid was in fact on behalf of a joint venture of Brentwood and EAC; (2)
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thought that a bid from that joint venture was not eligible; and (3) took active steps to
obscure the reality of the situation.
The exclusion clause
The majority held that the exclusion clause, which barred claims for compensation
“as a result of participating” in the tendering process, did not, when properly
interpreted, exclude Tercon’s claim for damages. The Province’s liability did not arise
from Tercon’s participation in the process that the Province established, but from the
Province’s unfair dealings with a party who was not entitled to participate in that
process. By considering a bid from an ineligible bidder, the Province not only acted in
a way that breached the express and implied terms of the contract, it did so in a
manner that was an affront to the integrity and business efficacy of the tendering
process.
The parties did not intend, through the words found in this exclusion clause, to waive
compensation for conduct, like that of the Province in this case, that strikes at the
heart of the tendering process. Effective tendering ultimately depends on the
integrity and business efficacy of the tendering process, which requires all bidders be
treated on an equal footing. In the context of public procurement, in addition to this,
there is the need for transparency for the public at large. Clear language would be
necessary to exclude liability for breach of the implied obligation, particularly in the
case of public procurement where transparency is essential.
The majority stated that even if they were incorrect and the clause did not exclude
Tercon's claim for damages, the clause is ambiguous and should therefore be
construed contra proferentem ie in favour of Tercon.
The Dissenting Judgment
The minority found that the Province's conduct, while in breach of its contractual
obligations, fell within the terms of the exclusion clause. The minority held that the
clause was clear and unambiguous and no legal ground or rule of law permitted a
court to override the freedom of the parties to contract with respect to this particular
term, or to relieve Tercon against its operation in this case. They found that the
public interest in the transparency and integrity of the government tendering process,
while important, did not render unenforceable the terms of the contract Tercon
agreed to.
Furthermore, they found that the exclusion clause was not unconscionable. While
the Ministry and Tercon did not exercise the same level of power and authority,
Tercon was a major contractor and was well able to look after itself in a commercial
context so there was no relevant imbalance of bargaining power. In addition, the
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exclusion clause was not as draconian as Tercon portrayed it. Other remedies for
breach of the process contract (specific performance or injunctive relief, for example)
were available.
The minority stated that if the exclusion clause was not invalid from the outset, they
did not believe the Ministry’s performance can be characterised as so aberrant as to
forfeit the protection of the contractual exclusion clause on the basis of some
overriding public policy. While there is a public interest in a fair and transparent
tendering process, it cannot be ratcheted up to defeat the enforcement of the
process contract in this case. There was an RFP process and Tercon participated in
it, accordingly the exclusion clause applied to this case.
Implications
This decision has significant implications for both the tendering organisation and
bidders.
For tendering organisations aiming to include a bullet-proof exclusion clause in the
tender documents, careful consideration must be exercised when drafting the clause.
The clause must be drafted with specificity to exclude breaches of both express and
implied obligations. While it is important that the clause is clear, it is best to ensure
the process is run in accordance with the tender documents to avoid reliance on the
exclusion clause.
For public tenders in particular, the decision imposes an additional obligation on the
government to ensure that the procurement process is fair and transparent.
For bidders, the decision provides a basis to challenge broad exclusion clauses and
demonstrates the court's willingness to limit the application of exclusion clauses
where possible to safeguard the integrity and business efficacy of the tendering
process. However, ultimately the court will enforce a clause which is clear and
reflects the reasonable expectations of the contracting parties. Accordingly, bidders
should ensure they comprehend the tender documents and assess the risks before
deciding to participate in a tender process.
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ATTACHMENT 4
Withdrawal of Offers during the Tender Process – Can the Process Contract
Protect the Position of the Principal?
Since the process contract was first established in Australia, the trend has been for
tenderers to use this relatively new contractual right for their benefit; for example as
leverage when losing a tender, to gain information about competitors or to disrupt or
delay the awarding of a potentially lucrative contract to a competitor.
Little attention has been given to the way in which the process contract may protect
the rights of the Principal when calling tenders.
The creation of the process contract and its implications in the Australian tender
process is based on a range of administrative and contract law principles. In the case
of Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council the court described
the process contract as a solution to 'an unacceptable discrepancy between the law
of contract and the confident assumptions of commercial parties both tenderers and
principals'.
Of particular concern to principals is the risk that a preferred tenderer may refuse to
execute a contract following detailed evaluation and in turn lead the principal to
contracting with the second best value for money tenderer.
The two cases under consideration in this article highlight this potential but also show
how the process contract may be used to protect the principal. Importantly, this may
lead some principals to reconsider excluding the operation of the process contract.
Ron Engineering
The Queen in the right of Ontario and the Water Resources Commission v Ron
Engineering & Construction (Eastern) Ltd is one of the few reported cases in which a
principal was successful in enforcing its rights under the process contract in
response to an action brought by a tenderer. The case specifically dealt with the
issue of the irrevocability of a tender once submitted by the tenderer. In the case the
Supreme Court of Canada demonstrated that the revocability of an offer must be
determined in accordance with the ‘General Conditions’ and ‘Information for
Tenderers’.
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The General Conditions required Ron Engineering to submit, with its tender, a
deposit in the amount of C$150,000. The purpose of the deposit was to ensure the
tenderers’ performance of their obligations under the General Conditions. The
conditions stated that if a tenderer withdrew its tender or the Commission did not
receive the executed agreement within a certain time, the Commission could retain
the deposit.
Immediately following the submission of their tender Ron Engineering discovered
that they had miscalculated their lump sum fee by C$750,000. It then sought to
withdraw its tender without penalty and argued that due to the mistake its offer was
not capable of being accepted. The Commission did not accept the withdrawal and
after evaluating the tenders selected Ron Engineering as the successful tenderer.
The Commission sought to engage Ron Engineering and forwarded a copy of the
agreement for execution. Ron Engineering declined to enter the agreement and the
Commission refused to refund the deposit and proceeded to accept another
tenderer.
Ron Engineering brought an action against the Commission for the recovery of the
deposit. The Court held that a unilateral contract arose upon the submission of the
tender, if the tender was submitted in accordance with the Terms and Conditions,
whereby Ron Engineering could not withdraw its tender for a specified period of time.
As Ron Engineering submitted its tender in accordance with the General Conditions
it was not able to recover the deposit.
This decision was made despite the general contract principle that an offer can be
revoked, subject to communication, at any time until it is accepted. However, as was
shown here, notwithstanding this general rule the courts are willing to find a special
species of contract that exists in the tendering context which places an obligation on
the tenderer to not withdraw its tender following the closing time and date and during
the validity period.
Blue Cross
City Polytechnic of Hong Kong v Blue Cross (Asia–Pacific) Insurance is an example
of the way in which a principal can proactively enforce its rights under the process
contract as a consequence of the withdrawal of an offer during the evaluation phase.
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Blue Cross had tendered to provide medical and life insurance benefits for the
employees of the City Polytechnic for a three year period. One of the tender
conditions required Blue Cross to keep its offer open for acceptance for a period of
three months.
One week after submitting its offer Blue Cross wrote to the Polytechnic withdrawing
its tender with 'immediate effect'. City Polytechnic refused to accept the withdrawal
and purported to accept Blue Cross’ tender by letter of acceptance.
Blue Cross refused to issue City Polytechnic with an insurance policy and the
Polytechnic was required to enter into a contract with the next lowest priced tenderer,
who had a premium approximately HK$4.3 million per annum higher than that
tendered by Blue Cross.
City Polytechnic brought an action against Blue Cross for the total difference,
approximately HK$13 million, arguing that the tender conditions created a binding
contract rendering Blue Cross’s tender irrevocable.
It was not disputed by City Polytechnic that the position under general contract law is
that an invitee to a tender process would be entitled, with impunity to withdraw the
tender at any time before acceptance.
Implied contract
However the modern law of contract does contemplate, in a tendering situation, an
implied contract which binds the tenderer to keep the tender open for acceptance up
until the expiry of the validity period. In order for this implied contract to exist it is
necessary to show consideration passing from the principal to the tenderer.
The court found that consideration in this implied contract consisted of the obligation
to consider fairly and equitably all bids received by City Polytechnic, including the
one received by Blue Cross. The Court said in order to determine whether such an
implied contract existed, it was necessary to look strictly at the terms of the tender
conditions
The court further noted that the tender process was of a formalised nature, laying
down clear, orderly procedures on how Blue Cross was to submit its tender. In
addition the court stated that '[A]n express or implied term on the invitor’s part that he
will, after the deadline, consider all timely and conforming tenders before deciding
which, if any, tenderer will be awarded the contract tendered for, can, in suitable
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circumstances, amount to valuable consideration to make all the tenders irrevocable
between the tender deadline and expiration of the specified period.'
The Court found that the fact that 'the City Polytechnic would go to the trouble of
entertaining all conforming and timely tenders is, in my judgment, sufficient
consideration to hold Blue Cross to its promise to keep the offer embodied in its
tender open for the three month period' set out in the tender conditions.
Lessons to be learnt
Ron Engineering and Blue Cross contain lessons for both principal and tenderer. For
those organisations calling tenders these cases are a timely reminder that the
process contract and the obligations and rights they create can protect the principal,
and not just create risks and liability as has been the trend in recent years. Principals
may want to consider this and note that this potential benefit is lost when excluding
the operation of the process contract in its entirety, which is becoming increasingly
common.
For tenderers it serves as a warning to be careful about fulfilling their obligations to
the principal under the process contract and to consider the risks when seeking to
withdraw a tender. Such a withdrawal may give rise to a right of the principal to
recover damages in the event that the principal seeks to proceed to the execution of
the formal contract with the withdrawing tenderer.
Tenderers need to make sound business decisions about bidding for work through
the tender process and to ensure that errors or omissions in the tender document are
discovered prior to submission as withdrawal may give risk to significant legal
exposure.
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ATTACHMENT 5
Parallel negotiations found to be misleading and deceptive
Undisclosed parallel dealings were found to be misleading and deceptive in a recent
case involving protracted negotiations and two of Australia's retail giants, but the
plaintiff's victory was pyrrhic as it lost a damages claim entirely, mostly through ill-
considered use of the phrase "deal breaker" at the negotiating table.
The facts
In November 2007, the Port Macquarie-Hastings Council, for a second time, publicly
invited expressions of interest (EOI) in purchasing and developing a supermarket
development site. Both Woolworths and Coles responded and the council accepted a
conditional offer from Woolworths.
Negotiations between the council and Woolworths ensued, and various drafts of a
contract for sale were exchanged between solicitors.
One of the main unresolved issues was council contribution to any contamination on
council land, with Woolworths originally requiring an indemnity over any
contamination encountered. The council was unwilling to provide the indemnity, but
agreed to accept liability for removing any contaminant found up to a limit of
$500,000. Woolworths agreed to this position, provided it was able to undertake
further due diligence on contamination during the period between exchange and
settlement, and was given a right to rescind the contract should the cost of removal
or remediation be excessive. Council, however, did not agree to these provisos.
In mid 2009, while it was still negotiating with Woolworths, the council also started
negotiating with Coles as a backup plan, but deliberately did not tell Woolworths.
Negotiations between Woolworths and the council reached an impasse, and council
sold the land to Coles.
Woolworths subsequently commenced proceedings against the council and Coles,
arguing that it suffered loss by their conduct, and claiming damages. Woolworths
contended that, had the council disclosed to it that it was negotiating with another
party, it would have agreed to proceed on the terms required by council and would
have bought the land.
Issues
At issue in the case, Fabcot Pty Ltd v Port Macquarie-Hastings Council [2010]
NSWSC 726, was:
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whether the council had engaged in conduct which was misleading or
deceptive or likely to mislead or deceive in contravention of s.42 of the Fair
Trading Act 1987 (NSW) (the Act);
if so, whether Coles was knowingly involved in the contravention;
whether Woolworths suffered any loss by the conduct complained of, and if
so the quantum of its loss; and
the council's cross-claim against Woolworths, saying that Woolworths
engaged in conduct which was misleading by holding out that its position was
that it would not proceed with the purchase of the land unless certain
conditions were included in the contract, when its true position was otherwise.
The council argued that if Woolworths suffered loss by its conduct, it
correspondingly suffered loss by Woolworths' conduct, and it claimed
indemnity.
Decision
Justice Hammerschlag of the NSW Supreme Court held that the council's conduct
was in the circumstances misleading or deceptive or likely to mislead or deceive.
However, Woolworths had not established any loss by that conduct. Further, it had
failed to establish that Coles knowingly participated in the contravention.
Misleading or deceptive conduct
His Honour said that the circumstances of the case were such as to give rise to the
clear and reasonable expectation on Woolworths' part that the council would inform it
(if it were the case) that the negotiations it was conducting with Woolworths were not,
or had ceased to be, exclusive. Any reasonable person in Woolworths' position would
have had such an expectation because:
the EOI process entailed an initial selection of one, and only one, candidate
for negotiation;
the significant time and money Woolworths was about to spend in seeking to
realise the opportunity following the acceptance of the conditional offer; and
Woolworths was under the misapprehension that the council was negotiating
with it exclusively.
Woolworths had no binding contractual exclusivity arrangement from the council, and
there was no statutory inhibition on the council dealing with Coles. This, however, did
not displace the reasonable expectation that the council would not clandestinely
conduct negotiations outside the framework of the process without telling Woolworths
that the negotiating relationship was no longer exclusive. The Act imposes a norm for
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conduct in trade or commerce, and the council fell far short of that norm, not
inadvertently but deliberately. The deliberate silence over the fact that negotiations
with Woolworths were not, or had ceased to be, exclusive was in the circumstances
misleading or deceptive or likely to mislead or deceive and a contravention of s.42(1)
of the Fair Trading Act.
Did Woolworths suffer any loss?
His Honour said that to determine whether Woolworths suffered any loss the first
question to be answered was whether Woolworths would have shifted position. The
second question was whether, if Woolworths would have shifted position, what the
chances were that a sale to it of the land would have happened.
The repeated use of the term "deal breaker" by Woolworths' employees left no doubt
that Woolworths was prepared to walk away. His Honour was not satisfied that
Woolworths would have forsaken its principles, even had it been informed that its
position was no longer exclusive, or that Coles was in the wings.
Coles' knowledge
Although it was unnecessary to consider whether Coles was knowingly involved in
the council's contravention of s.42(1), his Honour nevertheless considered the
matter. He found that Coles did know the council had been negotiating with
Woolworths, but that Coles was told very little and did not know the state of
negotiations. Even if Coles knew or believed that at some point the council was
negotiating exclusively with Woolworths, Coles was not aware that the council had
not disclosed to Woolworths that its position was no longer exclusive.
Accordingly, Woolworths' claim against Coles failed.
Quantum
His Honour then considered the amount of damages he would have assessed had
Woolworths suffered any damages by the council's conduct.
As it did not acquire the development site, Woolworths proceeded with the
refurbishment of the Food for Less store it operated in Port Macquarie and the
construction of a freestanding Dan Murphy's outlet next door. Accordingly, the court
said that damages suffered by Woolworths would be the difference between the
financial position it would have been in, had the development proceeded, and the
position it was in, that is, without the development, but with the refurbishment of the
Food for Less store and the new stand-alone Dan Murphy's.
Having regard to expert evidence, his Honour held that Woolworths would have been
entitled to an ultimate revenue figure of 5.22 per cent.
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Council's cross-claim
His Honour held that the council was not misled by anything said or done by
Woolworths, and, if it was, it had suffered no loss. Accordingly, the cross-claim failed.
Implications
This case illustrates the importance of avoiding protracted negotiations which involve
significant costs to both parties. It also serves as a warning that threats to walk away
should not be bandied around without careful consideration, as this may impact on a
party's ability to claim damages in the future, if the transaction were to fall through.
Finally, government bodies need to be mindful of expected norms of behaviour in a
tender process and be aware that to breach them may be misleading and deceptive.
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ATTACHMENT 6
Well drafted RFT saves Government from liability to tenderers
When principal’s engage with the market for the procurement of goods and services,
normally careful consideration and time is spent reviewing conditions of contract to
ensure that this document adequately manages risk and addresses the specific
requirements of the principal. The recent case of IPEX ITG Pty Ltd (in liq) v State of
Victoria [2010] VSC 480,highlights the importance of adequate review and drafting of
the invitation to tender document to ensure that any exposure to process contract
risk is minimised through the drafting of the terms of the invitation to tender.
Facts
On 20 May 2002, the Parliament of Victoria issued a written Request for Tender for
System Integration Services (RFT) to implement a new desktop standard operating
environment for the Parliament.
The Plaintiff, (Ipex) was one of a number of tenderers who submitted a tender in
response.
The RFT document was detailed and included an overview of the selection process
and evaluation criteria, the terms and conditions, description of Parliament’s existing
IT environment and a list of Parliament’s requirements.
A Tender Evaluation Plan was prepared at the same time as the RFT, but this was
not made available to tenderers.
Recipients of the RFT were invited to attend a briefing session which clarified a
number of matters and answered questions. Prior to the closing of the tenders
various questions (69 in total) were asked by tenderers. Each question and answer
was circulated to all tenderers including Ipex.
After the close of tenders the evaluation and selection process took place. A
qualitative functional evaluation took place followed by a cost evaluation. Thereafter
a value for money analysis took place resulting in a short list of two and finally a
selection of the successful tenderer.
On 16 July 2002, Ipex was told that its tender had been unsuccessful and Ipex was
invited to attend a “detailed de-brief”.
On 9 September 2002 Ipex instituted proceedings against the State of Victoria. In
summary, Ipex claimed that as the lowest priced tenderer, it should have been
awarded the contract.
Issues
The issues to be determined by the court were:
6 Whether the submission by Ipex of a tender in response to the RFT gave
rise to a process contract.
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7 Whether Parliament acted fairly and reasonably and in good faith and
complied with the criteria and approach referred to in the RFT.
Decision
Sifris J of the Supreme Court of Victoria dismissed Ipex's claim, despite having found
that a process contract existed between the parties, as Parliament did not depart
from the RFT.
Process contract
Ipex alleged that, as a consequence of it having submitted a conforming tender, Ipex
and the State of Victoria entered into a process contract which comprised the terms
set out in the RFT together with further terms which were to be implied.
His Honour stated that to determine whether the parties intended to bind themselves
contractually to comply with the proposed tender process depended on the intention
of the parties as disclosed by the tender documents.
Having reviewed the relevant case law on process contracts1, his Honour stated that
the authorities suggested that courts are more willing to find process contracts as
governing the relationship of the parties pre-award in cases where a timeline and
detailed process, including evaluation criteria, are set out in such a way that
suggests that an obligation (promissory in nature) to follow such timeline and process
had been incurred.
His Honour stated that it was abundantly clear that each case must be considered on
its own facts. Each request for tender and the relevant context and circumstances
must be examined separately in order to determine whether there is any intention to
create an immediately binding contract as to process.
At the conclusion of such an examination his Honour concluded that the presumed
intention of the parties was to enter into a legally binding process contract. The RFT
was not simply a document that provided relevant information but rather included in
some detail the specific criteria that would form the basis of the evaluation. The
decisive factor was a clause in the RFT which contained detailed evaluation criteria
that Parliament said “will” or “must” be applied. This clause and others suggested a
commitment, promissory in nature, to abide by a process particularly in relation to the
evaluation of tenders.
Accordingly, the parties were found to be bound by the process contract.
Conduct of Parliament
1 Hughes Aircraft Systems International v Airservice Australia (1997) 76 FCR 151; Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469; Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195; Transit New Zealand v Pratt Contractors Ltd [2002] 2 NZLR 313; Cubic Transportation Systems Inc v New South Wales [2002] NSWSC 656; Dockpride Pty Ltd & Anor v Subiaco Redevelopment Authority [2005] WASC 211.
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The question as to whether Parliament acted fairly and reasonably and in good faith,
and complied with the criteria and approach referred to in the RFT, required a
detailed analysis of the conduct of Parliament.
The essence of Ipex’s complaint was that the State engaged in conduct that
departed in a number of respects from the RFT including:
Reliance upon flawed evaluation criteria in the assessment of tenders.
Failure to do a proper value for money analysis.
Failure to inform Ipex of the evaluation criteria weightings.
Failure to inform Ipex that tenderers would be shortlisted.
Reliance upon matters which would particularly influence the evaluation of
the tenders, which were not incorporated into the RFT and were not
communicated to Ipex.
Failure to comply with the evaluation process set out in the RFT.
Having reviewed each of the alleged departures by Parliament, his Honour found:
That the evaluation procedure and weightings complied with the RFT and
the Evaluation Plan.
An obligation to assess tenders on the basis of value for money does not
compel the selection of the cheapest tender. In any event, Parliament had
expressly reserved for itself the right not to accept the lowest quotation in
the RFT. Given this express term, there was no basis for Ipex to contend
that the lowest quotation gave it any entitlement to be selected.
There was no obligation to inform the tenderers of the actual weightings to
be applied to the criteria.
The RFT expressly reserved the right to continue to negotiate with one or
more selected tenderers, His Honour stated that Parliament did not breach
the process contract, but on the contrary it acted pursuant to the contract.
The RFT properly defined the scope of the Project and all tenderers were
treated equally and in accordance with the terms and condition set out in
the RFT.
As all tenderers were judged by equivalent criteria the decision not to take
the financial and privacy and legal criteria into account did not affect the
outcome of the evaluation process.
His Honour concluded that none of the conduct complained of was anything other
than conduct specifically permitted and contemplated by the RFT as clarified by the
industry briefing and the 69 questions. The Parliament did what it said it would do. It
did not depart from the RFT in any of the respects identified, and to the extent that
there was any departure it was either de minimis, irrelevant or specifically permitted
by the process contract.
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His Honour further stated that in any event, there were express terms in the RFT to
the effect that Parliament reserved for itself the right to not accept the lowest
quotation, negotiate with tenderers and change any details of the RFT. Accordingly,
to the extent of any departure from the RFT within any of the above reserved rights
such departure was specifically permitted.
Reliance
Ipex argued that it took a minimalist approach in its tender, which focused on cost as
it relied upon what an individual employee of the Parliament had told Ipex that “cost,
cost, cost” would be the major determinant.
It was an express condition of the RFT that tenderers ought not to rely upon
information provided to them by any person, including employees, agents and
consultants of Parliament, with the exception of matters expressly set out in the RFT
or advised in writing. Accordingly, his Honour held that if Ipex misapprehended the
selection criteria, that was not due to any fault of the Parliament or as a result of
anything contained in the RFT.
Conclusion
This case represents a further entrenchment of the process contract in Australia. It
serves as a reminder to those issuing invitations to tender to carefully consider that
the tender process may give rise to contractual rights and obligations. Accordingly, it
is important to understand the legal implications of the tender conditions. The facts of
this case demonstrate the need to adequately train all personnel involved in the
tender process in relation to the relevant risks to ensure that representations, such
as the one that gave rise to this claim, are not made.
Moreover it highlights that tender documents must be reviewed and drafted to ensure
that they give principals the widest discretion possible and express rights to vary the
tender process at the principal's sole discretion.
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ATTACHMENT 7
Consequential loss - new meaning but the drafting remains the same
When negotiating construction and supply contracts it is common for contractors and
suppliers to rely on company policy to not accept under any circumstances liability for
consequential loss (this is usually in conjunction with a request to limit overall
liability). After being a vexed question under Australian law for a number of decades,
what is meant by 'consequential loss' has been clarified by a recent decision
delivered by the Victorian Court of Appeal. Despite this clarification, there remain
clear principles that should be followed when drafting consequential loss clauses to
ensure their precise and certain operation.
Prior to the Peerless case
Before the decision of the Victorian Court of Appeal in Environmental Systems Pty
Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26, Australian courts generally followed
a line of English authority that the term 'consequential loss' in exclusion clauses
represented losses which fell within the second limb of the rule in Hadley v
Baxendale (1854) 9 Ex 341. This is loss that does not arise naturally according to the
usual course of things but which the parties, at the time they made the contract,
contemplated as being the probable result of a breach of contract. Because of this
interpretation, it was possible that despite the presence of an exclusion for
consequential loss, loss that fell within the first limb of Hadley v Baxendale (which
consists of loss arising naturally from a breach in the usual course) would be outside
the operation of the consequential loss exclusion.
For instance, it is not difficult to contemplate circumstances in which loss of profit or
loss of production arises as a natural and direct consequence of a breach. Therefore,
based on the above interpretation, any clause purporting to exclude consequential
loss may be rendered wholly ineffective.
The principles in Peerless
The Victorian Court of Appeal in Peerless held that the above interpretation was
incorrect and that under Australian law, exclusion clauses, such as a consequential
loss clause, in a commercial context, should be given its 'ordinary and natural
meaning' as would be conceded by 'ordinary reasonable business persons'. In
applying this principle, rather than applying the distinction between losses
recoverable under the first and second limbs of Hadley v Baxendale, the Court
focused on the true distinction between what was described as 'normal loss’ and
‘consequential loss’. This distinction was expressed as follows:
‘Normal loss which is loss that every plaintiff in a like situation will suffer and
consequential losses, which are anything beyond the normal measure, such as
profits lost or expenses incurred through breach.’ (emphasis added)
Implications
It is clear that the decision in Peerless changes the law in Australia. Previously an
exclusion of consequential loss may not have been sufficient to exclude loss of
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profits, loss of production and other categories of loss unless those losses fell within
the second limb of Hadley v Baxendale.
As a consequence of this decision, it is apparent that clauses that exclude
consequential loss will be interpreted by the courts as excluding all losses which are
not 'normal losses'. However, what is meant by the concept of 'normal loss'? What
is meant by ‘every plaintiff in a like situation’? To determine such questions, the
following may be relevant:
The particular characteristics of the plaintiff.
The background and circumstances of the breach.
The background and circumstances giving rise to the loss.
As a consequence of the uncertain nature of the test developed by the Court, the
following advice should be adopted by parties to fully protect their position.
Advice for contractors and suppliers
For contactors and suppliers, it still remains prudent that consequential loss clauses
specifically identify each category of loss that is intended to be excluded. It is also
recommended that the clause be drafted as widely as possible to cover all potential
legal causes of action.
An example of such a clause defining consequential loss would be as follows:
'Consequential Loss’ means loss or damage arising from a breach of contract, tort
(including negligence), under statute or any other basis in law or equity including, but
without limitation, the following:
(a) loss of profits;
(b) loss of revenue;
(c) loss of production;
(d) loss or denial of opportunity;
(e) loss of access to markets;
(f) loss of goodwill;
(g) loss of business reputation, future reputation or publicity;
(h) damage to credit rating;
(i) loss of use; and
(j) indirect, remote, abnormal or unforeseeable loss,
or any similar loss whether or not in the reasonable contemplation of the parties at
the time of execution of the contract.
Advice for principals
It is imperative for principals that carve outs are introduced to ensure that the broad
operation of a consequential loss clause is watered down and the other party
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remains liable for specific losses. This is particularly critical in relation to third party
liability claims.
An example clause is as follows:
Consequential loss does not include:
(a) loss arising from an occurrence:
(i) covered by a policy of insurance in the name of the party; or
(ii) which but for an act or omission of the party (including in respect of its disclosure
obligations to any insurer) would have been covered by a policy of insurance in the
name of the party that the party is required to effect under the contract;
(b) loss arising from death or personal injury;
(c) loss arising from any criminal acts or fraud;
(d) loss arising from any wrongful or intentional act or omission or wilful misconduct;
(e) loss arising from liability for liquidated damages (or, if liquidated damages are
unenforceable, liability for failing to reach practical completion by the date for
practical completion) under the contract;
(f) loss arising from an infringement of any intellectual property right;
(g) loss arising from a breach of the confidentiality provisions of the contract;
(h) loss arising from liability under any of the express indemnities contained in the
contract; and
(i) loss arising from liability which by law, the parties cannot contract out of.
Conclusion
The negotiation of appropriate terms for a consequential loss clause arise frequently
when drafting construction and infrastructure contracts. Despite the recent change
articulated by the Victorian Court of Appeal, any exclusion clause for consequential
loss should be carefully considered, particularly the breadth of the clause and how it
allocates overall liability between the parties.
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ATTACHMENT 8
F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA 193 – be specific –
indemnity clauses and their effectiveness at protecting interests
Much time is spent by lawyers and their clients considering and negotiating the
allocation of risk in commercial deals. Indemnities and indemnity clauses play an
important role in this. Many commercial contracts and agreements contain indemnity
clauses, but the question is how effective they are at actually transferring the risks
between the parties. The answer to this depends on how much time is given to the
drafting of these clauses and the actual words used.
The recent decision of F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA
193 considered in detail the construction of indemnity clauses, the rules of
interpretation, and followed in NSW, the latest interpretation principles expounded by
the High Court of Australia in Andar Transport Pty Ltd v Brambles Ltd (2004) 317
CLR 242.
Facts
In this case an action was brought against Transfield for personal injuries sustained
by Mr Vranjkovic who was employed by Chadwick Building System on the
construction site of the Sydney Airport domestic terminal railway station. Mr
Vranjkovic tripped on some pipes and fell and injured himself. The pipes were left in
position by Normoyle for Chadwick to install at some later stage. Both Normoyle and
Chadwick were subcontractors to Transfield.
The Claim
Mr Vranjkovic claimed damages from Transfield. Transfield sought a contribution
from both Chadwick and Normoyle on the grounds that they were joint tortfeasors
and, in the alternative, under the indemnity in the subcontract they both had with
Transfield.
The Decision
At first instance Truss DCJ upheld Transfield’s claim against Normoyle on the
grounds that Normoyle was liable under the indemnity provisions of the subcontract.
The clause provided that:
'The Subcontractor shall indemnify and keep indemnified
[the Joint Venture] and their respective officers,
employees and agents against all claims, demands,
proceedings, liabilities, costs, charges and expenses
arising out of any act, neglect or default of the
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subcontractor, its employees or agents relating to its
execution of the Works'
On appeal the court applied the principles expounded in Andar and said that
indemnity clauses must be construed strictly. Moreover the Court confirmed that
where there is any ambiguity in relation to contractual provisions then the clause
should be construed against the party seeking to rely on the indemnity.
In this case what was considered was whether the indemnity was to be construed
broadly as an indemnity for any act, neglect or default generally or narrowly. A
narrow and strict interpretation would mean that liability under the indemnity would
only arise when there has been an act of negligence or default such as from a
breach of a tortious, contractual or statutory breach.
The court paid particular attention to the phrase 'arising out of any act, neglect or
default' in determining whether or not an obligation to provide the indemnity arose for
the particular damage suffered. The phrase 'arising out of' was an expression
meaning 'causation' however such causation was not an open ended concept. This
phrase meant more than the mere existence of links between an act, neglect or
default. The court said that both 'neglect' and 'default' involved some concept of a
breach of a legal duty. 'Neglect' in this case meant an omission that constituted
negligence whereas 'default' meant a failure to fulfil a duty imposed by contract or
statute'.
The court went on to consider the meaning of 'act' when juxtaposed against the
words 'default and neglect'. Again the court found that to be liable under the
indemnity clause there must be an 'act' involving a breach of a legal duty.
Conclusion
In summary the court found that the subcontractors would only be required to
indemnify Transfield where an act or omission amounted to negligence or a breach
of contract or statutory duty. In this case it was found that neither subcontractor had
committed a breach either of their contractual obligations or statutory duties.
Therefore neither of the subcontractors were liable to Transfield under the indemnity.
This case is another reminder to all those involved in the drafting and interpretation
of indemnity clauses to carefully consider the construction of the clause and how it
may be interpreted should it need to be relied upon. Indemnity clauses, amongst
other things, must be clear, specific, where possible stipulate the circumstances
under which the indemnity will arise, be considered in light of any exclusion of liability
clauses found elsewhere in the agreement and state what damages will be payable
in the event of the clause being successfully invoked. Lawyers should be aware of
boilerplate indemnity clauses and consider whether such standard clauses will
transfer liability for the specific risks that are of concern to the client.
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The existence of common law remedies for breaches of contract, tortious and
statutory duties should also be remembered when drafting and negotiating indemnity
clauses. Whilst indemnity clauses dilute the need to show causation as a specific
element of the claim and also obviate the need to mitigate loss, common law
remedies may bring about a similar result for parties.
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ATTACHMENT 9
Erect Safe Scaffolding v Sutton
Facts & outcome at trial
8 The Plaintiff, Ian Sutton, commenced proceedings against Australand
Constructions Pty Ltd (Australand) and Erect Safe Scaffoldings (Australia)
Pty Ltd (Erect) in the District Court of New South Wales in relation to
injuries sustained by him on 21 October 2002. The Plaintiff, an employee of
Dalma Formwork Pty Ltd (Dalma), was working on the construction of a
commercial building when he struck his head on crossbar ties supporting
scaffolding.
9 Australand was the head contractor on site. Australand retained Dalma to
carry out formwork and Erect to erect and maintain scaffolding. Dalma was
not a party to the proceedings. However, Australand and Erect each relied
on section 151Z of the Workers Compensation Act (WCA) in their defence
maintaining that any damages payable should be reduced to reflect the
liability of Dalma.
10 The written contract between Erect and Australand (agreement) contained
indemnity and insurance provisions in favour of Australand. Relevantly,
clause 11 of the agreement provided that:
The Subcontractor (Erect) must indemnify Australand
against all damage, expense (including lawyers' fees
and expenses on a solicitor/client basis), loss (including
financial loss) or liability of any nature suffered or
incurred by Australand arising out of the performance of
the Subcontract Works and its other obligations under
the Subcontract.
11 Clause 12 provided that:
Before commencing work, the Subcontractor (Erect)
must effect and maintain during the currency of the
Subcontract, Public Liability insurance in the joint names
of Australand and the Subcontractor to cover them for
their respective rights and interests against liability to
third parties for loss of or damage to property and the
death or injury to any person. …
12 Goldring DCJ found Erect and Australand had breached their duty of care
to the Plaintiff by creating and failing to remove the danger posed by the
crossbar ties. His Honour apportioned liability between Erect and
Australand on a two thirds one third basis, with Erect contributing the
greater share. The trial judge awarded damages to the Plaintiff in the
amount of $663,369.97, plus costs and refused to make any reduction in
accordance with section 151Z of the WCA. Importantly, Goldring DCJ found
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clause 11 of the agreement was engaged and Erect was required to
indemnify Australand. Further, his Honour found that in breach of clause 12
Erect had failed to maintain a policy of public liability insurance extending
coverage to Australand.
Appeal
13 Erect and Australand appealed. The NSW Court of Appeal was comprised
by Giles JA, Basten JA and McClellan CJ at common law.
14 The appeal concerned three issues. Firstly, Erect submitted the trial judge
should have found Dalma was in part liable for the Plaintiff's accident, and
that having regard to section 151Z of the WCA, an appropriate reduction
should be made in the damages awarded. Secondly, Erect argued the
damages awarded were excessive in any event. Australand joined the
appeal of Erect in respect of the first two issues. Thirdly, and most
significantly, Erect submitted the trial judge erred in finding it was liable to
indemnify Australand pursuant to clause 11 of the agreement and was
liable for breach of clause 12.
15 McClellan CJ, with whom Basten JA agreed on this issue, apportioned
liability 60% to Erect, 25% to Australand and 15% to Dalma. Their Honours
found Dalma had breached its non-delegable duty of care to provide the
Plaintiff with a safe place and system of work and, in accordance with
section 151Z of the WCA, damages should be reduced accordingly. The
appeal as to damages otherwise failed. Giles JA apportioned liability 50%
to Erect and 25% each to Australand and Dalma, but otherwise agreed.
16 In regards to the agreement, McClellan CJ, with whom Giles JA agreed,
found Erect was not required to indemnify Australand. Their Honours
agreed there was no obligation on Erect to obtain insurance extending
indemnity to Australand for its liability to the Plaintiff. Basten JA disagreed,
finding the indemnity operated and Erect was in breach of clause 12 of the
agreement.
Judgment by McClellan CJ
17 McClellan CJ agreed with the trial judge and found Australand owed a duty
of care to the Plaintiff which it breached. This duty was described as a duty
'not to erect or permit to be erected on its site, scaffolding in a way that
people walking along planking laid on the scaffolding would strike their
heads on protruding ties'.
18 McClellan CJ felt that the question which had to be resolved was whether,
within the meaning of clause 11 of the agreement, the liability of Australand
'arises out of the performance of the subcontract works' by Erect.
19 Erect argued that clause 11 did not impose a liability on it in respect of a
breach of duty by Australand. It submitted that the clause should be
understood so that the 'performance' was confined to that of the
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subcontractor, and Erect was only liable for damage occasioned by any act
or omission which it committed. It was further submitted that by finding
Erect liable to indemnify Australand for breach by Australand of its duty to
the Plaintiff, the trial judge affectively turned Erect into the insurer for
Australand for Australand's own acts or omissions as head contactor.
Quite helpfully, McClellan CJ considered a number of the often cited cases dealing
with interpretation of indemnities in his judgment.
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