5 business people with white pieces of paper with question marks on them covering their faces representing Substantial Compliance or Identity Confusion

What is the correct legal entity of a bidder, what is the appropriate test for compliance, and is there an obligation on an owner to clarify obvious ambiguities in a bid? These seemingly simple procurement questions led to an interesting and detailed examination of the law surrounding compliance and owners’ obligations under Contract A.

On December 30, 2015 the B.C. Court of Appeal released its decision in the case of M.G. Logging & Sons v. Her Majesty The Queen in Right of the Province of British Columbia and the Ministry of Forests, Lands and Natural Resource Operations, 2015 BCCA. Both M.G. Logging and the ministry had appealed the lower court judgment, which held that the dispute between them was not suitable for a summary trial.

The underlying dispute began when M.G. Logging submitted a bid on a timber license auctioned by the ministry in 2012. Despite being initially identified as successful (in this case, the highest bidder), M.G. Logging was subsequently advised that its bid was non-compliant, and that the contract would be awarded to the next-highest bidder.

The alleged non-compliance revolved around the thorny issue of describing the correct legal entity of bidders. The invitation stated that only a registered BC Timber Sales Enterprise (BCTSE) was eligible to bid. M.G. Logging was a registered BCTSE, but a related company, M.G. Logging Ent. Ltd. (“Enterprise”), was not. The bid was submitted in the name of Enterprise, but included the unique ministry BCTSE registration number belonging to M.G. Logging. The ministry ultimately rejected the Enterprise bid as non-compliant, because Enterprise was not a registered BCTSE. M.G. Logging argued that the correct BCTSE registration number was enough to identify the bid as compliant, and when the ministry awarded the contract to the next-highest bidder, M.G. Logging sued for damages for breach of contract.

The trial Judge found insufficient evidence to determine the threshold issue on summary judgement – the issue of whether M.G. Logging had made a sufficiently compliant bid to bring Contract A into existence with the ministry. (As seasoned procurement professionals know, in the absence of Contract A, there can be no breach of contract claim in these circumstances.) The trial Judge determined that the bid submitted by M.G. Logging was ambiguous as to the identity of the bidder, the ministry had an obligation to clarify that ambiguity, and there was insufficient evidence to determine the matter without proceeding to a full trial. Both the ministry and M.G. Logging appealed that decision.

The B.C. Court of Appeal found sufficient evidence to decide the matter on summary trial. It then turned to examine the wording of the tender call, to decide whether the test of “strict” or “substantial” compliance applied in this case. (This determination depends primarily on whether there is discretion in the tender call which allows for substantial compliance, rather than strict compliance, which applies in the absence of any privilege or discretion clause.) The ministry submitted that no discretion clause was included, in accordance with its adoption of a strict compliance tendering regime for timber licences, because it reduces the potential for litigation, such as this case. M.G. Logging submitted that there was indeed a discretion clause, relying on Item 11 of the application form, which required applicants to:

11. declare that the information provided in this Application and the accompanying declaration is true and correct and acknowledge that if this Application or the accompanying declaration contains a material misrepresentation, omission or misstatements of fact, I/we may be subject to action taken under section 78 of the Forest Act.

M.G. Logging submitted that, by implication, non-material misrepresentations, omissions, or misstatements of fact are not subject to any penalty, and therefore the application and tender form was to be construed on the basis of substantial compliance, not strict compliance. M.G. further submitted that, because the ministry was easily able to figure out that the mistake was due to the correct BCTSE number but incorrect corporate name, the substantial compliance test was met.

M.G. Logging further submitted that, even if the test was strict compliance, there was an obligation on the part of the ministry to clarify obvious ambiguities in bids, and such clarification would have resulted in the M.G. Logging bid meeting that test.

Do the facts suggest that the appropriate test would have been substantial compliance? If so, was the Enterprise bid substantially compliant? On the other hand, if the appropriate test was strict compliance, did the Enterprise bid meet that standard? Was the ministry obligated to clarify the ambiguity in the Enterprise bid?

What would you decide?

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Answer

On the fundamental issue, the Court of Appeal agreed with the trial Judge, that the Ron Engineering analysis (Her Majesty the Queen in the Right of Ontario and the Water Resources Commission v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111) was the correct analytical framework for deciding the matter. The Court of appeal referred to the statement in Sound Contracting Ltd. v. City of Nanaimo, B.C. Court of Appeal, [2000] B.C.J. No 992, that it is the submission of a compliant tender which establishes the legal relationship, Contract A, between the parties. An owner owes no contractual duties to a bidder who does not submit a compliant bid. The Court of Appeal then turned to consider the arguments of each party.

Is there a discretion clause that would support the test of substantial compliance?

The Court of Appeal disagreed with the M.G. Logging submission on this point, finding that Item 11 of the application does not, on a plain reading, confer upon the ministry the discretion to accept a bid that is not strictly compliant. Section 78 of the Forest Act is instead designed to empower the ministry to impose penalties on a bidder independent of the bid process, such as cancelling any timber sales agreements entered into. The appropriate test, therefore, is strict compliance.

Is the M.G. Logging bid strictly compliant?

The Court of Appeal concluded that, “The identity of the contracting party is in my view an essential term of the contract. It would be open to other bidders to protest the award of the licence to a company other than the named applicant, especially when that named applicant was ineligible to bid because it does not have a BCTSE registration.”

Does the ministry have an obligation to resolve the ambiguity in the bid?

The Court of Appeal disagreed with the trial Judge’s reliance on the decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 S.C.C. 4 for authority that the owner must look beyond the name given for a bidder to determine who is actually making the bid. In a useful clarification of the law, the Court of Appeal stated:

“In Tercon, the Court did not find that an owner should look beyond the bid to determine who the real applicant is. To the contrary, the case turned on the province’s knowledge that the bid submitted by Brentwood was to be performed by Brentwood and an ineligible company. Because of that knowledge, the province accepted a bid it knew was non-compliant, thereby breaching its duty of fairness to complaint bidders. There is a marked difference between the finding in Tercon that an owner cannot turn a blind eye to the true identity of an applicant, and requiring an owner to take steps to determine who the applicant is when the bidder’s identity is ambiguous.”

In further alleging that the ministry had an obligation to clarify the ambiguity, M.G. Logging pointed to the express provisions in the invitation requiring the Timber Sales Manager to “take whatever steps are necessary to satisfy himself/herself that an application is bona fide,” including requiring further details from an applicant in order to do so. After reviewing the terms of the Invitation for Applications, the Court of Appeal found that this obligation only arises upon creation of Contract A, after closing but before official contract award. As the M.G. Logging bid was non-compliant on its face, there was no Contract A with M.G. Logging and, in the absence of Contract A, there were no ancillary obligations for due diligence or clarification.

The appeal by M.G. Logging was dismissed, and the appeal by the ministry was allowed, with costs payable to the ministry.

This article was originally published on June 8, 2016 in The Legal Edge

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