Avoiding trouble in tenders


Avoiding trouble in tenders

Tendering is a process by which entities, commonly governments and private sector entities (Principal), procure goods and services competitively. Principals are usually familiar with the Request for Tender document (RFT), issued to invite applications from tenderers. However, many understate its importance. How an RFT is drafted can subject Principals to obligations under a process contract when reviewing tenders. A breach of a process contract enables an aggrieved tenderer to claim damages.

Differentiating between a procurement contract and a process contract

An RFT is generally not considered a legal offer that can be accepted by a tender submission. Instead, it is the proposal from the tenderer that is the legal offer, capable of acceptance by the Principal. This means that if a tender is accepted by the Principal, the result will normally be a procurement contract. A procurement contract will bind the Principal and the successful tenderer.

A procurement contract is different to a process contract. A procurement contract operates between the Principal and the successful tenderer after the tender process is complete. Conversely, a process contract operates between the Principal and all tenderers throughout the tender process. Process contracts do not exist every time the Principal requests tenders. Their formation is dependent on the drafting of the RFT.

When will a process contract exist?

A process contract is likely to arise when the Principal has evinced an intention to be bound by the tender conditions. For example, a process contract is likely created when the RFT expressly or impliedly outlines procedures to be adhered to during a tender process. The relevant question is: would a reasonable person in the position of the tenderer think that the Principal intends to be bound by the conditions outlined in the RFT?

Hughes Aircraft Systems International v Airservices Australia was the genesis of the process contract in Australia. In this case, the Civil Aviation Authority (CAA) issued an RFT that included criteria under which the tender submissions would be evaluated. The CAA then awarded the contract to Thomson based on a different set of criteria. The Court found that a process contract existed in this situation. By referring to evaluation criteria in the RFT, the Court determined that the CAA intended to be bound by such criteria. Accordingly, it owed a contractual obligation to all tenderers to follow the specified criteria during the tender process. The CAA was liable in damages to Hughes because of its failure to discharge its obligations under the process contract.

Other indicators of a process contract are when:

  1. the RFT contains promissory language – for example, that the tender process will be conducted in good faith;
  2. the RFT includes a timeline and detailed process in relation to the acceptance of applications;
  3. tenderers have expended substantial time, money and effort towards the tender process; and
  4. tenderers are required to accept conditions before they make an application.

Can a process contract be avoided?

As stated, a process contract does not exist in every tender process. This will depend on the factual circumstances in each situation. State Authority of NSW (STA) v Australian Jockey Club (AJC) was a case in which process contract did not exist because the STA’s RFT specified:

“The tenderer acknowledges and agrees that no legal rights or obligations will be deemed to have arisen between the vendor and the tenderer until a tender is, if at all, accepted.”

The Court held that this statement was a disclaimer. It showed that the STA did not demonstrate an intention to be bound by certain procedures during the tender process.

As a process contract can leave the Principal vulnerable to legal action, it may be beneficial to attempt to avoid them. This can be done by ensuring that the RFT:

  1. makes no commitment regarding procedures for the tender process;
  2. is drafted so as to give the Principal flexibility regarding how the tender process is conducted;
  3. contains no more than what is required by legislation or regulations;
  4. grants the Principal wide discretions – such as the abilities to accept a non-complying tender, call off a tender or not respond to all queries lodged by tenderers;
  5. contains disclaimers – such as the one in STA v AJC.

Tender deed as a possible solution

Despite the benefits of successfully avoiding the process contract described above, there is also one pitfall. If there is no process contract, the Principal cannot enforce:

  1. that tenderers’ obligations that the price offered in the tender will remain open until the conclusion of the process; or
  2. any warranty provided in the tender submissions.

To safeguard against this, the Principal can employ a tender deed. A tender deed will ensure that a tenderers’ obligations and warranties remain enforceable despite there being no process contract.

Conclusion

The law surrounding procurement is complex and highly circumstance-dependant. The importance of a carefully drafted RFT cannot be overstated. Imprecise drafting can leave the Principal vulnerable to legal action. Alternatively, drafting that clearly demonstrates the intention of the RFT and confers wide discretionary powers on the Principal can reduce the risk of aggrieved tenderers commencing legal action.

Please do not hesitate to contact our commercial or litigation team with any procurement related queries or if you need assistance drafting RFTs or tender deeds.

 

Christian Mennilli – Graduate at Law

Our Corporate and Commercial Lawyers