Osgoode Hall Law School 4 th Annual Conference Construction Law

Osgoode Hall Law School4th Annual ConferenceConstruction Law Bidding and Tendering Post Tercon February 22, 2011 Denis Chamberland Baker & McKenzie LLP

Today’s Agenda • The appropriate procurement strategy/format • Procedural fairness where it counts • Bid shopping and ways to avoid it • Some lessons from Tercon 2

RFP RFP RFP RFP Tender (Term Sheet) (Contract) (Contract Attached) (Negotiating Partner) Sole Source (Objections Permitted) The Appropriate Format (1) • Request for Proposals vs Tender?

The Appropriate Format (2) • Tenders: • Price governs • Commoditized acquisitions (where owners know precisely what they want) • Simple evaluation procedure • Simplicity invites process shortcuts that undermine process integrity • Process not transparent to unsuccessful bidders (main issue where low bidder not selected)

The Appropriate Format (3) • Request for Proposals: • Price only one factor of many • Designed to tap creativity of market • More complex evaluation procedure • Complexity of process means more work upfront and more resources • Process is transparent and more likely to be supported by unsuccessful bidders

The Appropriate Format (4) • Where is RFP better suited? • Major public works projects • Solid waste collection services • Water & wastewater management services • Construction of operations & management services for organic waste processing plant • Major IT acquisition • Major medical equipment acquisition • Most outsourcing of any service or business function 6

Procedural Fairness (1) • What is an evaluation? • An appraisal of the merits of the proposals received • Should not be an appraisal of the proposals directly against each other • Instead, should be positioned as an appraisal against your requirements • Issue is important on a debrief*

Procedural Fairness (2) • What’s the purpose of the evaluation? • It establishes a ranking or score for each proposal • The ranking tracks the organization’s expressed requirements • Requirements set out in the tender call may or may not be complete or accurate

Procedural Fairness (3) • What are some evaluation tools? • ‘Mandatory’ (pass/fail) criteria • ‘Rated’ (weighted) criteria • Cost only • Combination of the above

Procedural Fairness (4) • Illustrations (i): • A) mandatory criteria only, with award to lowest compliant tender • Typical selection approach for the procurement of commodity goods (low technical expertise needed) • B) Mandatory and rated criteria (+ rated cost factor) • Typical for complex projects where price is not determinative (price is a one evaluation element)

Procedural Fairness (5) • Illustrations (ii): • C) Highest Technical Expertise • Useful with professional services RFPs • May state budget in RFP to avoid extreme fluctuations where bidders fail to understand the level of effort needed • All proposals will come in at or near the budget • Look for proposals offering greatest value (‘how much will you give me’?)

Procedural Fairness (6) • What should my scoring system look like? • Some systems are based on adjectives • Some systems (more common) are based on numerical scores • Key is that the system promote a fair and transparent competition

Procedural Fairness (7) • Adjectival scoring: • Exceptional – The submission exceeds expectations, excellent probability of success and in achieving all objectives • Good – Very good probability of success. Reasonably achieves all objectives • Acceptable – Has reasonable probability of success. Some objectives are not met. • Poor – Falls short of expectations and has a low probability of success. • Unacceptable – Submission fails to meet requirements and the approach has no probability of success

Procedural Fairness (8) • Numerical scoring (1): Criteria Points • Skills and experience 10% • Understands requirements 15% • Ability to meet timelines 15% • Proposed personnel 20% • Pricing 40% • GOOD START BUT….

Procedural Fairness (9) • Numerical scoring (2): • You need to describe the requirements for each criterion • Example: • Experience: does the proponent have experience on similar projects • “Those with X years of experience will receive more points”

Procedural Fairness (10) • Scoring – the last word: • It is almost always easier to defend an evaluation based on numbers than one based on words • Numbers tend to make the process more rigorous • Numbers look more scientific

Procedural Fairness (11) • What is the sequence of evaluation process? • Divide process into phases: • Review mandatory criteria (formal vs informal) • Review rated criteria (gated approach is most effective, with minimum points) • Review pricing

Procedural Fairness (12) • e.g. Risk management = 12 points • Identify the risk areas: • Legal risks: ie, relationship with third party acting as a preferred supplier (4 points) • Financial risks: ie, financial capability of bidder in long-term services arrangement (4 points) • Operational risks: ie, ability to coordinate with other players in a complex environment (4 points) • Technical risks: ie, uncoordinated information processes (4 points)

Procedural Fairness (13) • Each evaluator will be given: • the list of risks identified in previous stages of the evaluation; • the list of questions to be addressed at the oral presentations; • the risk-mitigation strategies proposed by each participant at the orals; and • a list of any outstanding or new risks identified at the orals.

Procedural Fairness (14) • Legal advice should be provided at the beginning of the evaluation session on whether any of the outstanding or new risks identified at the orals may be addressed through contracting

Procedural Fairness (15) • Negotiations with RFP preferred proponent (if identified): • Approach 1: single track negotiation › stay within scope of RFP › downside is pay high premium • Approach 2: dual track negotiation › stay within scope of RFP and set up transparent process rules • Open-ended negotiation until down-select is high risk • Negotiate and re-issue contract for Best and Final Offers • Question is always: How much flexibility is there? 21

3. Bid Shopping (1) • Leading case: Stanco Projects Ltd v. British Columbia (2004) (B.C.S.C.) • Ministry issued a tender for a water reservoir • It made a drafting error and wanted the price for a single epoxy-line reservoir and not two • Engineering consultancy for the Ministry went back to get new prices for the single reservoir • The prices had already been disclosed, and Stanco refused to re-submit, assuming it would be awarded the contract • Ministry awarded the contract to the new lowest price bidder 22

3. Bid Shopping (2) • The court in Stanco said the Ministry’s conduct breached the integrity of the procurement process and amounted to bid shopping or ‘conduct akin to it’ • The court described bid shopping as any use by a buyer of bids submitted to it ‘as a negotiating tool, whether expressly or in a more clandestine way’ • Not clear if requirement not to bid shop was an implied term of Contract A or part of duty of fairness 23

3. Bid Shopping (3) • Borcherdt Concrete Products Ltd v. Port Hawskesbury (Town) (2006) (N.S.S.C.) • Lone bidder’s bid was over the owner’s budget and in a ‘six-minute’ phone call bidder did not agree to lower its price • The owner decided to contract most of the work to a non-bidder and do part of the work itself • New contractual arrangement occurred before the tender process was declared terminated • Trial judged considered the owner’s conduct bid shopping and a breach of the owner’s duty of fairness • Important that owner did not disclose the bid price while shopping around for a better price 24

3. Bid Shopping (4) • Clow Darling Ltd v. Detra Builders Inc. (2007) (Ont. S.C.J.) • Prime contractor issued a call for subcontract bids for mechanical work on a large construction project • Prime contractor always intended to do the work itself, but just wanted a cost estimate • Court said it made no difference that no subcontract was ever let; conduct was bid shopping and breached the principle of fairness 25

Lessons from Tercon (1) • RFP was issued for a highway construction project • RFP said no joint venture allowed and Brentwood bid as a joint venture = non-compliant bid • Exclusion clause said: “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 the RFP, and by submitting a proposal each Proponent shall be deemed to have agreed that it has no claim.” 26

Lessons from Tercon (2) • Lower court said clause was “ambiguous”, so Tercon was awarded its loss profits ($3.3 million) • Appeal court said clause was clear and Tercon was out of luck • SCC majority said the exclusion clause only covered those claims arising “as a result of participating in [the] RFP”, not claims arising from the participation of other, ineligible bidders • For the majority, the fact that the Ministry had breached the express and implied terms of the bidding contract (Contract A) in a way that undermined the integrity of the tendering process was important 27

Lessons from Tercon (3) • SCC minority prioritized the sanctity of the principle of “freedom of contract”, so the exclusion clause governed • SCC was unanimous that doctrine of ‘fundamental breach’ should be laid to rest • Doctrine was developed by the courts to restrict the operation of exclusion of liability clauses so as to allow a party claiming to have been harmed to be granted a remedy • A breach of contract by the party trying to rely on the clause that deprived the other party of “substantially the whole benefit of the contract” was void 28

Lessons from Tercon (4) • Tercon sets out new approach for dealing with exclusion clauses: • (a) Does the clause apply to the facts? • Public procurement context is relevant • Intention of the parties is relevant • Is the clause ambiguous? • If the clause does not apply, the party intending to rely on it will not benefit from it 29

Lessons from Tercon (5) • Assuming the exclusion clause applies: • (b) Is the clause unconscionable at the time the contract was made? • Focus on time of contract formation • Unequal bargaining power/fraud? • Binnie J. said Tercon was not on par with Ministry but was a still a ‘sophisticated’ party • Emphasis is on allowing the market to self-regulate 30

Lessons from Tercon (6) • If exclusion clause applies and is valid: • (c) Should the court refuse to enforce the clause because of some “overriding public policy consideration”? • Focus is not on the impact of breach on a bidder or on the integrity of the bidding process • Focus is on the “broader public interest” 31

Lessons from Tercon (7) • Take aways from Tercon: • Case brings new uncertainty • 5-4 SCC split tells us there is a bias against use of some exclusion clauses • Over-broad exclusion clauses will probably antagonize a significant segment of the judiciary • Best practice is to review exclusion language very carefully in their own context, before the bid call document is released 32

Questions? denis.chamberland@bakermckenzie.com 416.865.2333 Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. 33

Osgoode Hall Law School 4 th Annual Conference Construction Law