Tender Troubles: The Effectiveness of Privilege Clauses

As most experienced general contractors and subtrades know, the tendering process creates rights and obligations that must be taken seriously.  A recent case involving a dispute over the awarding of a steel work subcontract illustrates well the legal pitfalls of not giving a low bidder the contract (or subcontract in this case) on the basis of a ‘privilege’ clause (the one that reserves the right to deny a low bidder a subcontract or contract). 

FACTS

As part of its bid to act as general contractor for the construction of a school, a Contractor extended an invitation to tender for steel work.  The Contractor’s invitation included a ‘privilege’ clause reserving “the right to reject the lowest, or any tender, or all tenders, for any reason at their sole discretion.”  Two subtrades, Continental and PMC, submitted bids for the steel work. Continental’s was the lowest by about $5,000 under PMC’s second lowest bidd.  The Contractor won the contract and construction proceeded but with PMC, the second lowest bidder, completing the steel work.  Continental sued. 

At trial, the Contractor gave evidence that PMC was awarded the subcontract rather than Continental because Continental’s bid was not low enough considering the risks perceived by the Contractor in working with Continental.  The Contractor had previously worked with Continental and another steel contractor and noticed that there was considerable infighting and finger pointing between the two steel contractors in relation to certain change orders on a project for which the Contractor was general contractor.  At that time, the Contractor could not determine who was actually at fault, but saw this as a strike against Continental.  The Contractor also gave evidence that, following the close of the general contract bids, it had checked with four other general contractors who had worked with Continental and two of these gave negative references, although no direct evidence from these references was provided at trial.  Finally, the Contractor told the court that it believed Continental filed liens against projects as a matter of course as a method of securing payment, thereby causing unnecessary delays to projects.  This belief was founded on a conversation between employees of the Contractor and Continental.  As expected, Continental’s evidence contradicted this.

Continental sued for the profit it said it would have earned had it been awarded the subcontract; $65,000 (which translated to a profit margin of greater than 30%).  

ISSUE

Did the Contractor exercise its discretion fairly, objectively, and in good faith when awarding the subcontract to PMC? 

DECISION & COMMENTARY

Legally, a low bidder does not automatically win the right to perform the contract in question.  The low bidder must have the requisite experience and qualifications, and ‘privilege’ clauses, such as the one in this case provide a general contractor or owner, with discretion to reject a low bidder’s tender, but not arbitrarily.  At trial it was accepted that Continental had the necessary experience and qualifications.  The question was really one of whether the Contractor had sufficient justification to reject Continental’s low bid.

The Court rejected the evidence of negative references as they were obtained after the close of the general contract bids.  Continental’s rights were properly determined as at the date of the close of the general contract bids and not after.  The Court found the evidence “scant”, such that it could not form a valid basis for rejecting the bid.  The Contractor’s other evidence was viewed as similarly flimsy and insufficient to justify rejection of Continental’s bid.  Continental was awarded $60,000 plus costs. 

LESSONS LEARNED:

  1. Despite the wording of a ‘privilege’ clause, they are never a license to award contracts arbitrarily. Objective and reasonable justifications for rejecting a low bid must exist. 
  2. Good evidence of the reasons for rejecting a low bid ought to be obtained and documented before bids close. 
  3. A vague perception of a (sub)contractor’s “bad reputation” will not be enough to justify rejection of an otherwise qualified bid.


This article was written by Robert G. Kuhn and Ian C. Moes, lawyers who practice in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.