Can a Bidder Successfully Sue for Lost Profits If an Rfp Is Cancelled in Bad Faith?

Concept

The question of whether a bidder can successfully sue for lost profits following the bad-faith cancellation of a Request for Proposal (RFP) cuts to the core of public and private procurement law. The answer is complex and hinges on the specific legal framework governing the process. In many jurisdictions, the default position is that a bidder’s recourse is limited to the recovery of its bid preparation costs. This is because the issuance of an RFP is typically viewed as an invitation to negotiate, not a binding offer that can be accepted to form a final contract.

Without a final contract, there can be no breach that gives rise to a claim for the profits that would have been earned under that contract. However, this general rule is not absolute and can be overcome, particularly when the soliciting entity’s conduct crosses into bad faith.

The Implied Contract of Process

A critical legal theory that opens the door to claims beyond simple bid preparation costs is the concept of “Contract A.” Originating in Canadian law but influential in other jurisdictions, this theory posits that the issuance of an RFP can create a preliminary, implied contract ▴ Contract A ▴ between the issuer and each compliant bidder. This contract governs the bidding process itself. Its essential terms are the rules laid out in the RFP documents, including the promise of a fair and good-faith evaluation of all compliant bids. The ultimate agreement to perform the work is a separate contract, known as “Contract A.”

When a purchasing institution cancels an RFP in bad faith, it may be found to have breached this implied process contract. For instance, if an issuer cancels a tender simply to avoid awarding the work to a deserving but disfavored bidder, or to re-tender the project under different terms to benefit a preferred party, a court may see this as a violation of the duty of fairness inherent in Contract A. This breach of the process contract is the legal foundation upon which a claim for damages, including lost profits, can be built. Even in jurisdictions that do not explicitly follow the Contract A/Contract B paradigm, similar principles are often found in the implied covenant of good faith and fair dealing, which is a component of general contract law.

A claim for lost profits hinges on demonstrating that the issuer’s bad faith cancellation breached an implied contract governing the fairness of the bidding process itself.

The High Threshold of Bad Faith

It is important to understand that proving bad faith is a substantial hurdle for any disappointed bidder. Procurement entities are generally afforded a great deal of discretion in their decision-making, including the right to cancel a solicitation for a wide range of legitimate business or public policy reasons. A simple disagreement with the outcome, or even evidence of some errors in the evaluation process, is typically insufficient to support a bad-faith claim.

The conduct must usually be shown to be egregious, such as being driven by fraud, animus toward a specific bidder, or a clear intent to circumvent fair competition rules. Courts are often reluctant to substitute their own judgment for that of the procurement officials, so the evidence of bad faith must be clear and convincing.

Strategy

For a bidder contemplating a lawsuit for lost profits, the strategic focus must be on elevating the claim from a mere complaint about a lost opportunity to a well-documented case of a breached process contract. This requires a two-pronged approach ▴ first, establishing that the RFP process created binding obligations of fairness on the issuer, and second, assembling the evidence to demonstrate that the cancellation of the RFP was a direct violation of those obligations, undertaken in bad faith. The ultimate goal is to convince a court that but for the issuer’s improper actions, the bidder would have been awarded the final contract and earned the associated profits.

Establishing the Basis for a Claim

The initial strategic challenge is to establish that the issuer’s conduct gives rise to a viable cause of action for lost profits. The legal theory underpinning the claim will vary by jurisdiction, but generally falls into one of several categories:

• Breach of an Implied-in-Fact Contract ▴ This argument, aligned with the Contract A theory, posits that the detailed rules and promises in the RFP document constituted an offer for a process contract, which the bidder accepted by submitting a compliant bid. The strategy here is to meticulously analyze the RFP for language that promises a fair evaluation, an award to the lowest responsible bidder, or other commitments that constrain the issuer’s discretion.
• Promissory Estoppel ▴ In jurisdictions where the implied contract argument is weaker, a bidder might argue that it reasonably relied on the issuer’s promises of a fair process to its detriment (by expending resources to prepare a bid). If the cancellation was in bad faith, the bidder can argue that injustice can only be avoided by enforcing the promise, which could extend to awarding lost profits.
• Breach of the Implied Covenant of Good Faith and Fair Dealing ▴ This principle is often applied where a contract exists, but it can also be used in the pre-award context. The strategy is to argue that the issuer’s bad-faith cancellation frustrated the bidder’s legitimate expectations under the solicitation, violating the fundamental duty of good faith that underpins all commercial dealings.

Differentiating Recoverable Damages

A central part of the legal strategy involves educating the court on why bid preparation costs are an inadequate remedy in cases of bad faith. The following table illustrates the strategic distinction between the two types of damages.

The strategic pivot from seeking bid preparation costs to demanding lost profits is an assertion that the issuer’s misconduct fundamentally corrupted the integrity of the procurement process.

Proving Bad Faith Conduct

The most difficult strategic element is proving bad faith. This requires moving beyond speculation and gathering concrete evidence. The following table outlines the key elements of a bad faith claim and the types of evidence required.

Ultimately, the strategy must be to construct a compelling narrative, supported by evidence, that the cancellation was not a legitimate exercise of discretion but a deliberate act to undermine the fairness of the competitive process. This is the only path to convincing a court to take the extraordinary step of awarding lost profits.

Execution

Executing a successful lawsuit for lost profits requires a disciplined, evidence-based approach. Once the strategic decision to pursue litigation has been made, the focus shifts to the tactical execution of the case. This involves a meticulous pre-litigation investigation, a rigorous calculation of damages, and a clear presentation of the evidence to the court. The burden of proof rests squarely on the bidder, and success is impossible without a foundation of credible, verifiable data.

Pre-Litigation Diligence

Before a complaint is ever filed, a bidder and its legal counsel must undertake a thorough investigation to substantiate the claim of bad faith. Rushing into litigation without this groundwork is a recipe for failure. The following steps are essential:

1. Formal Debriefing Request ▴ Many public procurement frameworks entitle bidders to a debriefing. This is a critical opportunity to obtain information from the issuer about why the RFP was cancelled. The official reasons given can be pivotal evidence later on.
2. Public Records Requests ▴ For public entities, freedom of information laws (or their state-level equivalents) are a powerful tool. A bidder should request all documents related to the procurement, including evaluation sheets, internal memos, emails between evaluators, and any correspondence about the cancellation.
3. Preservation of Evidence ▴ The bidder must meticulously preserve all of its own records related to the bid, including cost estimates, communications with subcontractors and suppliers, and internal analyses of the project’s profitability.
4. Witness Interviews ▴ Identifying and interviewing potential witnesses, such as former employees of the issuer or other bidders, can provide invaluable insights into the decision-making process that led to the cancellation.

The Mechanics of Proving Lost Profits

To recover lost profits, a bidder must prove the amount of those profits with “reasonable certainty.” Speculation or guesswork is insufficient. The calculation must be grounded in hard data derived from the bid itself and the bidder’s historical performance. The core formula is straightforward ▴ Lost Profits = (Contract Price) – (Estimated Costs to Complete). However, the execution lies in substantiating each component of this formula.

Proving lost profits is an exercise in financial forensics, requiring a bidder to deconstruct its own bid to establish its projected earnings with reasonable certainty.

The following table provides a simplified example of how lost profits might be calculated and presented for a hypothetical construction project.

In court, this calculation would need to be supported by expert testimony from accountants and industry professionals who can validate the reasonableness of the cost estimates and the resulting profit margin. The bidder’s history of profitability on similar projects is also highly persuasive evidence. The key is to demonstrate that the profit calculation is not an optimistic hope, but a realistic projection based on concrete data.

Reflection

The legal frameworks governing procurement are, at their core, systems designed to balance competing interests ▴ the public’s need for efficient and fair allocation of resources, the issuer’s discretion to make sound business decisions, and the bidder’s right to a fair process. Understanding the potential for a lost profits claim is not merely about knowing the rules of litigation. It is about recognizing the points of friction and leverage within this system. For a bidder, this knowledge informs a more robust bidding strategy, one that is conscious of the need to document everything and to hold issuers accountable to their own stated processes.

For an issuer, it underscores the operational imperative of running a transparent, defensible, and rational procurement process. The possibility of such a lawsuit serves as a powerful enforcement mechanism, reminding all parties that the integrity of the process itself has value, and that violating it can have consequences far exceeding the cost of a rejected bid.