The Power and the Peril of the Privilege Clause

Lindsay Parcells LLM, LLB, MBA

As procurement professionals know, Canadian courts have established a clear duty on the part of owners and respondents to respect the terms of ‘Contract A,’ which includes a duty by owners to reject non-compliant bids and proposals. This included duty is based on the notion that it would make little sense for bidders and proponents to expose themselves to the risks associated with the competitive process if the owner was allowed to then ignore that process and accept a non-compliant response. Failing to reject a non-compliant response and subsequently awarding ‘Contract B’ to a non-compliant respondent may result in a claim for damages by an unsuccessful respondent who submitted a compliant bid or proposal. If that claim is successful, damages will be awarded both for the unsuccessful respondent’s lost profit and, usually, for at least a portion of their legal costs. Owners that fail to reject non-compliant bids and proposals may therefore end up paying twice for the same goods or services that were procured – once to the company they awarded it to, and once to compensate the company they should have awarded it to, had they followed their own rules.

To protect against liability, owners will often include privilege clauses in their procurement documents. A privilege clause is a provision in the RFX that gives the owner a specific right or ‘privilege’ in the procurement process, typically the right to accept or reject any response in its discretion or the right to waive defects. Privilege clauses may also give the owner the right to negotiate with respondents, to communicate for clarification purposes, or to rectify ‘minor deficiencies.’ As litigation escalates and challenges become more frequent, we see a corresponding increase in the number and variety of privilege clauses owners choose to insert.

Privilege clauses are useful tools that give owners flexibility and discretion in the procurement process, and they can be particularly beneficial for owners in more complex procurements where there are uncertainties that may be difficult to predict. For example, in a procurement where an owner is seeking proposals for a project that requires complex technology, it may be beneficial to retain the flexibility to allow for further discussions with proponents after initial proposals are reviewed, leading perhaps to a final BAFO stage based on revised specifications.

Generally speaking, the more complexities and uncertainties in the procurement, the more likely it is that privilege clauses need to be included. Owners should, however, remember the benefits of moderation in using privilege clauses. Notwithstanding the advantages of the flexibility provided by privilege clauses, owners should also remember that, in general, there is a direct correlation between the prices received and the number of privilege clauses, as respondents factor in the uncertainties created by privilege clauses and include a ‘risk premium’ in their pricing. Worse still, they may even decline to participate if the opportunity is too uncertain.

Owners should therefore include only those privileges necessary for dealing with the specific uncertainties and complexities of the procurement under consideration, remaining mindful of the impact this may have on the competitive tension. An owner should decide whether a privilege clause is “nice” or “necessary” to have, and include only the latter.

Privilege clauses, in common with all other aspects of issuing and administering procurement processes, should be exercised fairly and in good faith. Remember that discretion is a double-edged sword: it leaves room for flexibility, but owners should expect to be challenged on why they did or did not exercise the discretion in any given case.

Lindsay Parcells LLM, LLB, MBA

Instructor

Joining NECI’s Instructor Team in 2016, Lindsay Parcells practices local government law with Lidstone & Company, Barristers & Solicitors, a firm specializing in local government law with offices in Calgary and Vancouver. Lindsay has been practicing law since 1991 in Alberta and British Columbia. He completed a Masters’ degree in Municipal Law from Osgoode Hall Law School in 2009 and a combined Bachelors of Laws and Masters of Business Administration degree from Dalhousie University in 1991. In addition to his practice in procurement law, Lindsay also advises clients in municipal law, land use, real property and corporate and commercial matters. Lindsay is a past Chair of the Municipal Law Section of the BC Branch of the Canadian Bar Association and currently serves as vice-chair of the National Municipal Law Section of the Canadian Bar Association. He can be reached at parcells@lidstone.ca.

Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.