An interesting read
Proceedings challenging public sector tendering processes are not particularly frequent in New Zealand. As such, when the courts are called upon to assess the lawfulness of an impugned tendering process, their decisions usually make for an interesting read. The Court of Appeal’s recent decision in South Waikato District Council v Roading and Asphalt Limited [2013] NZCA 566 is no exception.
Case summary
The case concerned the Council’s invitation for tenders for a contract for the disposal of solid waste at its landfill site in Tokoroa and transfer station in Putaruru. The tender documents indicated that bids would be “evaluated according to the Lowest Price Conforming method”. Under this method, the tender process was to be conducted in two stages: first, evaluaton of non-price attributes, with elimination of any tenderer that did not gain a pass for all the attributes; and second, consideration of price.
Critically, however, the invitation to tender said “lowest or any tender not necessarily accepted” and stage two of the process was described as follows (cl 1.1.4 of the tender documents):
“The second stage shall consist of determining which of the remaining (non-excluded) tenders has the lowest price.
The Schedule of Tenderers’ Resources shall be considered when evaluating the price attribute.
The lowest or any tender will not necessarily be accepted.”
The Council did not accept the lowest priced tender. Rather, it selected the tender that it considered would lead to the best economic outcome (due to the impact under the Waste Minimisation Act 2008 of waste diversion on a levy that was otherwise payable on waste disposed of at its facilities). It considered it was entitled to do so given the express statement in the tender that the lowest or any tender would not necessarily be accepted (a provision the Court said is known as a “privilege clause”).
In the High Court, Keane J had found that once a tender had passed muster under the first stage of evaluation, the determination of which tender should be accepted involved a simple comparison between the prices offered in the competing tender documents; that in purporting to reserve to itself, at the second stage, the right not to accept “the lowest or any tender”, the Council had gone outside the terms on which it had invited tenders to be made (i.e., the lowest price conforming method); that this approach had been settled by Gallen J’s judgment in Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469; that the importance that the Council placed on the waste minimisation levy was not made clear to the unsuccessful tenderer in writing; and that the Council had acted in breach of an implied term “to treat all tenderers fairly and equally” (which appears to have been in the context of a finding or concession that there was a process contract).
The Court of Appeal disagreed and allowed the Council’s appeal. In delivering the Court’s unanimous judgment, Heath J said the Court considered “that the tender documents in this case were such as to differentiate them materially from those used by Palmerston North City Council” (paragraph [39]). Among other things:
- in Pratt there was a specific clause stating that “The Principal shall only enter into a contract for the non-excluded tender with the lowest price”. There was no such provision in South Waikato District Council’s tender documents and, as such, “the tendering contractor was more likely to have focussed on the privilege clause than the contractor in Pratt” (paragraph [39](a));
- a statement in the tender documents that tenders would “be evaluated according to the Lowest Price Conforming method” was not an unqualified statement. Rather, the documents identified stage 2 of the process as requiring an evaluation of the “price attribute”, something that was not part of the usual “Lowest Price Confirming” model;
- the Council made it clear that the “Schedule of Tenderer’s Resources” would be “considered when evaluating the price attribute” and that the “lowest or any tender [would] not necessarily be accepted”;
- the form of tender to be signed by the tenderer contained an acknowledgement that the Council was not bound to accept the lowest or any tender; and
- the nature and purpose of a “bonus” for diversion of approved waste materials was spelt out fully and the unsuccessful tenderer had addressed the issue in its tender.
The Court observed that whilst, as Gallen J had noted in Pratt, much time and expense goes into preparation of a tender of this type, “it must be assumed that the tenderer has, in fact, read the terms of the tender document and tendered on that basis” (paragraph [40]). The Court held that, contrary to the unsuccessful tenderer’s case, “the Council deliberately adopted a more nuanced approach to the assessment of tenders so that, in light of the incentives created by the Waste Minimisation Act, it could assess the value of any tender submitted, as opposed to letting the tender on the sole basis of cost” (paragraph [43]).
The Court concluded that the High Court judge had “erred in placing too much emphasis on the generic nature of the tender methodology, at the expense of the specific contractual terms on which the Council was seeking bids”. On the true interpretation of the tender documents, the Court of Appeal said, “the Council did reserve itself the right to accept a tender other than at the lowest price offered” (paragraph [44]).
The Court also held that the Council was not in breach of an implied obligation to treat tenderers fairly and equally, an obligation – the Court said – “that arises out of the ‘process contract’ by which tenderers respond to particular requirements that have been put into the market by (in this case) a Council” (paragraph [45]). In this case, as in Pratt, the parties had accepted that a process contract did exist but, the Court said, there had been no breach of any implied obligation. In an interesting passage, the Court said:
“[49] In this case, as in Pratt Contractors Ltd v Transit New Zealand, it was accepted that a process contract did exist and that the Council had an obligation to act fairly and honestly. Like the Privy Council, we regard that issue as ‘somewhat controversial’ and leave open the question whether it is an invariable obligation assumed by any party that calls for tenders.”
The unsuccessful tenderer had also framed a cause of action around breach of the Fair Trading Act 1986. It was swiftly rejected.
Practical implications
This is an interesting decision with a number of practical implications for those that assist in drafting the terms of tender documents.
Terms of tender documentation can be critical
The first and perhaps obvious point is how critical the terms of a tender or RFP can be to the discretion of the tendering agency. The statements that the lowest or any tender would not necessarily be accepted were crucial.
There is, however, another point to make under this general head. In this case, counsel for the unsuccessful tenderer had argued that any evaluative exercise of the “price attribute” was limited to the “Schedule of Tendered Resources” and did not enable the Council to take into account other considerations. On this point, the Court said (at paragraph [44]):
“While the relevant clause was drafted infelicitously, we do not believe that it can properly be interpreted in that way. The relevant part of cl 1.1.4 of the tender document required the Council to consider two factors – the tenderers’ respective prices and the Schedule of Tenderers’ Resources. It did not exclude other factors from consideration ‘when evaluating the price attribute’. An evaluative exercise, involving an assessment of comparative value by reference to a series of criteria is very different from a mechanical requirement to pick the lowest of the prices offered.”
The Court’s reference to the ‘infelicitous’ drafting is worth noting. Whilst it is easy to judge in retrospect, this litigation may well have been avoided if more time or care had been spent on drafting the description of the Council’s evaluation approach and the rights it had reserved. As someone who has kept a close eye on tender documents released on the Government Electronic Tenders Service over the years, it is fair to say there has been substantial variability in quality across different agencies, with the tender documentation of some agencies being high quality and others being comparatively poor. Hopefully this inconsistency in quality will be remedied when MBIE releases model RFx documentation. In the meantime, agencies may wish to check their standard procurement templates for possible flaws or omissions. Agencies that do not procure on a regular basis could, for example, cross-check their templates against those of larger departments that do procure regularly and that take legal advice when doing so.
References to general evaluation methodology
This case is also notable for the potential impact that references to a general evaluation methodology can have on tenderers. “Lowest Price Conforming” terminology had been used in the tender documentation but in circumstances where qualifications meant that the pure Lowest Price Conforming model was not in play. There was, it seems, at least some (unfortunate) potential for confusion. The fact that skilled judges in the High Court and Court of Appeal differed in their interpretations suggests that the potential for confusion was real.
No process contract exclusion
In this case there does not appear to have been any express exclusion of a process contract in the terms of tender. Contractual claims based on a process contract can usually be defeated if such an express exclusion is included in the tender/RFP terms. It is for this reason that such exclusions are commonplace in departmental and other public sector RFPs and RFTs.
The value of legal review
Whilst this is a somewhat light remark, it was heartening to read the Court of Appeal’s observation that “it must be assumed that the tenderer has, in fact, read the terms of the tender document and tendered on that basis”, as it underscores the importance of getting the terms of tender or RFP terms right before release to the market.
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