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The Second Opinion: A Municipality Invokes an Illegal Clause in its Call for Tenders to Justify the Contract Award

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Posted in The Second Opinion
Martin Boodman

The decision in Entreprise P.S. Roy inc. v. Magog (Ville de) 2013 QCCA 617 considers the legality of conditions imposed by a municipality in a call for tenders and whether a municipality can invoke an illegal clause in its call for tenders to justify its award of the contract to the lowest “compliant” bidder.

Magog issued a call for tenders in which it imposed – apparently by error – the condition that the bidder not have had a contract terminated by a municipality for breach within the previous 5 years. The condition applied to judicial and non-judicial termination. The call for tenders stated that Magog’s goal was to select the lowest compliant bid.

The plaintiff, P.S. Roy inc., and defendant, ABC Excavation, were the only bidders. When the bids were opened, it was revealed that ABC was the lowest bidder. Roy inc., however, found out that several contracts between ABC and other municipalities had been terminated by the latter for breach. Accordingly, Roy inc. informed Magog of this fact. Magog obtained a legal opinion to the effect that its condition concerning termination of contracts was illegal. Therefore, Magog could ignore the condition and  award the contract to ABC, the lowest “compliant” bidder.

Roy inc. instituted proceedings to annul the contract awarded to ABC on the basis that its bid was not compliant and therefore not the lowest compliant bid. The Quebec Court of Appeal confirmed the Superior Court decision to the effect that the condition was illegal and could be invoked by the municipality to justify the award of the contract.

The Court of Appeal stated that a municipality can impose conditions for the award of contracts above and beyond those related to the costs of the contract. These conditions can relate to the competence or experience of the tenderer as long as they are announced in advance in the call for tenders. Any such condition must respect the principle of equal access to public contracts which prohibits conditions that are arbitrary, frivolous or whose object or effect is to circumvent a legal requirement. In this sense, conditions imposed by municipalities in a call for tenders are subject to judicial scrutiny.

The Court of Appeal held that the condition regarding termination of contracts would disqualify tenderers whose contracts had been terminated as a result of the unilateral decision of a municipality. A tenderer could be excluded without having an opportunity to explain the basis for or circumstances of the termination. Accordingly, the condition would not be an accurate measure of the reliability of the tenderer and was held to be inadequate and arbitrary.

The Court of Appeal stated that Magog could invoke the illegality of the condition it imposed because the condition contravened public order, despite the fact that might entail invoking its own turpitude.

The Court of Appeal recognized that the error committed by Magog in imposing the illegal condition could theoretically have distorted the competition inherent the bidding process and the principle of equal treatment of all potential tenderers. For example, it is possible that potential tenderers with competitive bids had excluded themselves from the process as a result of the illegal condition. The Court of Appeal deferred to the judgment of Magog to the effect that the public interest was best served without a new call for tenders, particularly given the fact that the illegal condition was imposed by error and in good faith. No other potential tenderers had complained about the process. In addition, the court held that Roy inc. did not suffer any prejudice as a result of the error because it was the second lowest bidder. Accordingly, the recourse of Roy inc. was rejected.

The Roy decision gives credence to the maxim that you cannot fight city hall. The Court of Appeal recognized that the tender process may have been unfair. The inclusion of  the condition in error means that Magog was negligent. However, The court permits Magog to  invoke the illegality of the clause and relies on this holding to determine that Roy suffered no prejudice, not being the lowest compliant bidder.  Further, there is something unsettling about ABC ultimately getting the contract when it appears that it must have known that it contravened the condition regarding contract termination at the time of submitting its bid.

The Roy decision might encourage or force tenderers to carefully scrutinize conditions in a call for tenders and possibly to obtain legal opinions as to their legality to determine whether to bid despite not being “compliant”. The Roy decision does not appear to encourage municipalities to do so.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions.  The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.