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The duty of good faith in contractual performance

By Dean G. Giles, Fillmore Riley LLP

 

A 2014 decision of the Supreme Court of Canada dealing with the question of good faith contractual performance, and a more recent lower court decision that applies its reasoning, could have a significant impact on the way in which contracts created as part of the tendering process are interpreted. 

The law applicable to tendering disputes dates back to the 1981 decision of the Supreme Court in Ontario v. Ron Engineering & Construction (Eastern) Ltd. In an effort to ensure that the integrity of the tendering process was preserved, the court established a paradigm in which two contracts are said to arise. The first such contract, Contract A, comes into existence when a compliant bid is submitted in response to a tender call. The actual construction contract, called Contract B, arises when the bid is accepted. 

Subsequent decisions of the Supreme Court refined and, to a certain extent, modified the Contract A/Contract B framework established in Ron Engineering. The most important of these decisions was likely MJB Enterprises Ltd. v. Defence Construction (1951) Ltd., in which the court stated that the terms of so-called Contract A will depend on the specific wording of the tender documents. Thereafter, in Martel Building Ltd. v. Canada, the court held that, as part of Contract A, “an implied term to be fair and consistent in the assessment of tender bids is justified based on the presumed intentions of the parties.”

In Bhasin v. Hrynew, the Supreme Court observed that the common law in Canada in relation to good faith performance of contracts was unsettled and piecemeal. To address this concern, the following two incremental steps were determined to be necessary:

An acknowledgement that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. 

A recognition that, as a further manifestation of this organizing principle of good faith, there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.

While Bhasin was not a construction case, the court expressly noted that the good faith requirement applies in the tendering process, stating as follows:

This court has also recognized that a duty of good faith, in the sense of fair dealing, will generally be implied in fact in the tendering context. When a company tenders a contract, it comes under a duty of fairness in considering the bids submitted under the tendering process, as a result of the expense incurred by the parties submitting these bids.

Elan Construction Limited v. South Fish Creek Recreational Association, decided earlier this year by the Alberta Court of Queen’s Bench, did arise in the tendering context. Elan Construction Limited (“Elan”) was one of a number of contractors that submitted a bid in response to a call for tenders from South Fish Creek Recreational Association (“SFCRA”) to expand a recreational facility. The tender documents disclosed that the bids would be reviewed using an evaluation matrix based on the criteria of price, completion date, experience and references. Ultimately, the general contract was awarded to a bidder other than Elan.

The parties agreed that, by virtue of the bid submitted by Elan in response to the call for tenders, a Contract A of the sort described by the Supreme Court in Ron Engineering arose. The issue before the court was whether SFCRA breached the contract by, among other things, assessing the bids on the basis of undisclosed criteria and negotiating with another bidder during the bid evaluation process. Elan argued that, had the bids been evaluated fairly and in accordance with the evaluation criteria set out in the bid documents, it would have been awarded the general contract (Contract B under the Ron Engineering framework).

In denying that it breached Contract A, SFCRA relied on the wording of Article 5 of the Invitation to Bidders, which it said operated as a full defence to the claim:

  • 5.1) The Owner reserves the right to reject any or all Bids received and also reserves the right, if it is in its interest to do so, to waive informalities in the Bid or failure to comply with all bidding requirements. The lowest Bid will not necessarily be accepted.
  • 5.2) By submitting a Bid, the bidder acknowledges and agrees that the Owner has, and is hereby entitled to exercise, the sole and unfettered discretion to award the points for the evaluation of the criteria noted below.
  • 5.3) By submitting a Bid, each bidder acknowledges and agrees that it waives any right to contest any legal proceedings regarding the decision of the Owner to award points under the criteria noted below.

 

Elan took the position that the bid documents, read as a whole, demonstrated an intention on the part of SFCRA to evaluate the bids in accordance with the evaluation matrix, which is not what happened. Elan further argued that Article 5 did not confer upon SFCRA an unfettered discretion, but rather a discretion that had to be exercised in good faith and on the basis of pertinent considerations to ensure fairness to all bidders and protect the integrity of the tendering process.

 

The issue before the court was whether SFCRA breached the contract by, among other things, assessing the bids on the basis of undisclosed criteria and negotiating with another bidder during the bid evaluation process.

 

In finding for Elan, the court found that SFCRA had an obligation to evaluate all of the bids fairly and consistently. It also determined that the tender scoring method used by SFCRA, which deviated from the evaluation matrix set out in the bid documents, was contrary to the reasonable expectations created by those documents. The court further held that deciding how the bids were to be scored only after they had been submitted was contrary to the principle of fairness. 

The court acknowledged there was nothing to indicate that SFCRA had acted dishonestly or with malice. Citing the principles articulated in Bhasin, however, it concluded that an obligation of good faith may require more than honesty and that conducting a bid evaluation in an arbitrary manner or on the basis of undisclosed criteria is enough to constitute a breach of Contract A.

It follows that parties to the tendering and procurement process, be they owners or bidders, are advised to consider what the principles of good faith and honest dealing require of them. It isn’t enough to act without malice or in an honest fashion. To avoid liability, parties must make certain they act fairly and consistently. 

 

Dean G. Giles is a partner with Fillmore Riley LLP who practises primarily in the areas of commercial, intellectual property and insurance litigation, covering such areas as general insurance defence matters, commercial liability insurance, professional errors and omissions, subrogation and policy interpretation. You may reach him at 204-957-8337 or This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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Piling Canada is the premier national voice for the Canadian deep foundation construction industry. Each issue is dedicated to providing readers with current and informative editorial, including project updates, company profiles, technological advancements, safety news, environmental information, HR advice, pertinent legal issues and more.