How Does the Implied Duty of Fairness Limit the Power of a Privilege Clause in an Rfp?

Concept

The relationship between the implied duty of fairness and a privilege clause within a Request for Proposal (RFP) represents a foundational tension in procurement law. This dynamic is not a simple matter of one rule overriding another; instead, it is a nuanced interplay where the courts have sought to balance the owner’s discretion with the integrity of the bidding process. The entire framework pivots on a legal construct known as “Contract A” and “Contract B,” first articulated in the landmark Canadian case, R. v.

(Ont.) v. Ron Engineering & Construction (Eastern) Ltd..

When an owner issues an RFP, it is an invitation to treat. When a bidder submits a compliant bid in response to that RFP, “Contract A” is formed. This initial contract governs the bidding process itself.

The primary obligations under Contract A are the bidder’s promise to not revoke its bid and the owner’s corresponding duty to treat all compliant bidders fairly and in good faith. The award of the final project contract to the successful bidder then forms “Contract B.”

The implied duty of fairness, arising from Contract A, requires the procuring entity to conduct the bidding process in a manner that is equitable to all compliant bidders.

A privilege clause is a term inserted into an RFP by the owner, typically stating that “the lowest or any tender will not necessarily be accepted.” On its face, this clause appears to grant the owner absolute discretion to select any bid, or no bid at all, regardless of price or other stated criteria. However, the courts have consistently held that this discretion is not unfettered. The privilege clause operates within the confines of Contract A, and its exercise is limited by the implied duty of fairness and good faith owed to all bidders who have entered into this preliminary contract.

The core of the issue lies in what “fairness” entails. It requires that the owner evaluate all bids based on the criteria set out in the RFP. An owner cannot use a privilege clause as a shield to award a contract based on undisclosed preferences or criteria.

Doing so would undermine the integrity of the entire bidding process, as bidders rely on the stated evaluation criteria when preparing their submissions. If an owner could simply ignore its own rules, the process would become arbitrary and unpredictable, discouraging participation and driving up costs for all involved.

The Genesis of Contract a and the Duty of Fairness

The legal fiction of Contract A was created to bring order and predictability to the tendering process. Before Ron Engineering, a bid was generally considered a mere offer that could be revoked at any time before acceptance. This created instability for owners, who could be left with no viable bids if the lowest bidder withdrew after all other bids had been revealed. The creation of Contract A established that the submission of a bid is itself the acceptance of a unilateral offer from the owner, creating a binding process contract.

This process contract, however, is a two-way street. In exchange for the bidder’s irrevocable bid, the owner implicitly promises to conduct a fair evaluation. This duty of fairness is not a freestanding concept; it is an implied term of Contract A. Its existence is predicated on the formation of this initial contract, which in turn depends on the submission of a compliant bid. A bid that is materially non-compliant with the mandatory requirements of the RFP does not create a Contract A, and therefore, the owner owes no duty of fairness to that non-compliant bidder.

The Scope and Limits of Privilege Clauses

A privilege clause does grant the owner significant flexibility. It allows the owner to take a more nuanced view of “cost” than simply the bottom-line price. For example, an owner can legitimately use a privilege clause to justify selecting a higher-priced bid that offers a better warranty, a more experienced team, or a faster completion date, provided these criteria were disclosed in the RFP. The clause allows the owner to exercise business judgment and select the bid that represents the “best value” overall, not just the lowest price.

The limitation on this power is the prohibition against undisclosed criteria. The duty of fairness mandates transparency. If an owner wishes to consider factors other than price, those factors must be communicated to all bidders in the RFP documents.

The evaluation process must be consistent with what was promised. A privilege clause cannot be used to justify a decision based on a “secret preference.” This principle ensures that all bidders are competing on a level playing field, with a common understanding of the rules of the game.

Strategy

For both owners issuing RFPs and contractors bidding on them, understanding the strategic interplay between the duty of fairness and privilege clauses is paramount. A failure to navigate this legal landscape can lead to costly litigation, project delays, and reputational damage. The optimal strategy involves a proactive approach to drafting and interpreting tender documents to align with judicial expectations of fairness while preserving necessary commercial discretion.

Strategic Considerations for Owners

An owner’s primary goal is to design an RFP process that attracts competitive bids while retaining the flexibility to select the best overall value. This requires a carefully calibrated approach to drafting the RFP, particularly the privilege and evaluation clauses.

A key strategic decision is the level of discretion the owner wishes to retain. A broadly worded privilege clause, combined with clearly defined and weighted evaluation criteria, can provide significant flexibility. However, this flexibility is directly proportional to the risk of a legal challenge if the discretion is perceived to be exercised unfairly.

Owners must ensure that their evaluation process is not only fair in fact but is also seen to be fair. This involves creating a detailed and defensible evaluation matrix and meticulously documenting the evaluation process for each bid.

Drafting Enforceable Privilege and Discretion Clauses

Owners can bolster their position by using clear and unambiguous language in their RFP documents. A well-drafted RFP will:

• Explicitly state all evaluation criteria ▴ This includes not only technical and financial requirements but also any other factors that will be considered, such as experience, past performance, or proposed schedule.
• Assign weights to the criteria ▴ Where possible, assigning weights to the evaluation criteria provides transparency and reduces the risk of a challenge based on undisclosed preferences.
• Include a well-defined privilege clause ▴ This clause should explicitly reserve the right to not accept the lowest bid and to consider the specified evaluation criteria.
• Incorporate a discretion clause ▴ A discretion clause allows the owner to waive minor and immaterial defects in a bid that is otherwise substantially compliant. This can prevent the owner from having to disqualify a strong bid due to a trivial error.

A meticulously documented evaluation process is the best defense against a claim of unfairness.

Strategic Considerations for Bidders

For bidders, the primary strategy is to submit a fully compliant bid that meticulously adheres to all the mandatory requirements of the RFP. Any deviation from the prescribed format or requirements can render a bid non-compliant, thereby extinguishing the owner’s duty of fairness and leaving the bidder with no legal recourse.

Bidders should also carefully scrutinize the RFP documents to understand the “rules of the game.” This includes a thorough review of the evaluation criteria, the privilege clause, and any discretion clauses. If the evaluation criteria are vague or ambiguous, a bidder may choose to submit questions to the owner for clarification. This can help to level the playing field and ensure that all bidders are working from the same set of assumptions.

Assessing the Owner’s Discretion

When preparing a bid, contractors should assess the degree of subjectivity inherent in the evaluation criteria. The more subjective the criteria, the greater the owner’s discretion, and the more important it is for the bidder to differentiate its proposal on qualitative factors. The table below illustrates how different types of evaluation criteria can affect the owner’s discretion.

Ultimately, the tendering process is a legal minefield that requires careful navigation by both owners and bidders. A strategic approach that prioritizes clarity, transparency, and fairness is the most effective way to mitigate risk and achieve a successful outcome.

Execution

The practical application of the principles of fairness within the context of a privilege clause requires a disciplined and systematic approach to the entire procurement lifecycle. From the initial drafting of the RFP to the final award of the contract, every step must be executed with a view to maintaining the integrity of the process and defending against potential legal challenges. This section provides a detailed examination of the operational protocols and best practices for executing a fair and defensible procurement process.

Designing a Compliant and Effective RFP

The foundation of a successful procurement is a well-structured RFP. The document must be a clear and comprehensive guide for bidders, leaving no room for ambiguity regarding the owner’s requirements and evaluation methodology. The execution of this phase involves a multi-disciplinary team, including legal, technical, and procurement professionals, to ensure that all aspects of the RFP are robust and aligned with the project’s objectives.

Key Components of a Defensible RFP

A properly executed RFP should contain the following key elements:

1. Clear Instructions to Bidders ▴ This section should outline the submission process in detail, including deadlines, format requirements, and communication protocols. Any ambiguity in the instructions can lead to non-compliant bids and potential disputes.
2. Comprehensive Scope of Work ▴ The technical requirements of the project must be defined with precision. A vague scope of work can lead to bids that are difficult to compare, undermining the fairness of the evaluation process.
3. Explicit and Weighted Evaluation Criteria ▴ As discussed previously, all evaluation criteria must be disclosed. The table below provides an example of a detailed evaluation matrix for a construction project.
4. Robust Privilege and Discretion Clauses ▴ These clauses must be drafted by legal counsel to ensure they are enforceable and provide the desired level of flexibility without overreaching.

Conducting a Fair and Transparent Evaluation

The evaluation process is where the duty of fairness is most actively tested. The execution of this phase must be systematic, impartial, and thoroughly documented. An evaluation committee should be established, composed of individuals with the requisite expertise to assess the technical and financial aspects of the bids. All members of the committee should be trained on the principles of procurement law and the importance of adhering to the evaluation plan.

The exercise of discretion afforded by a privilege clause must be reasonable and based on the disclosed evaluation criteria.

The evaluation process should proceed in a structured manner. First, all bids should be reviewed for compliance with the mandatory requirements of the RFP. Any bid that is found to be materially non-compliant must be rejected at this stage.

Once the compliant bids have been identified, the evaluation committee can proceed to score them against the predetermined criteria. It is critical that the committee’s scoring is based solely on the information contained within the bids and that no undisclosed criteria are considered.

All aspects of the evaluation, including individual scores, committee discussions, and the final decision, must be documented in detail. This documentation will be the primary evidence used to defend the fairness of the process in the event of a legal challenge. A well-documented evaluation provides a clear record of how the successful bidder was selected and demonstrates that the owner’s discretion was exercised in a fair and reasonable manner.

The interplay between the duty of fairness and privilege clauses creates a complex legal environment for procurement. By executing a disciplined and transparent process, owners can mitigate their legal risks while still retaining the flexibility to select the bid that offers the best overall value for their project. For bidders, a thorough understanding of these principles is essential for submitting competitive and compliant proposals.

Reflection

The intricate dance between an owner’s reserved privileges and their inherent duty of fairness is a defining feature of modern procurement. The legal frameworks established by the courts provide a system for managing this tension, but they are not a substitute for sound business judgment and ethical conduct. The principles of fairness, transparency, and good faith are not merely legal obligations; they are the cornerstones of a procurement system that fosters competition, encourages innovation, and delivers value for all stakeholders.

An organization’s approach to procurement is a reflection of its corporate character. A process that is perceived as unfair or arbitrary will not only attract legal challenges but will also damage the organization’s reputation and deter high-quality bidders from participating in future tenders. Conversely, a commitment to a fair and transparent process builds trust within the contracting community, leading to more competitive bidding and better project outcomes. Ultimately, the most effective risk mitigation strategy is a deeply ingrained culture of fairness that informs every stage of the procurement lifecycle.