What Is the “Contract A/Contract B” Theory and How Does It Impact Rfp Drafting and Liability?

Concept

The Inadvertent Handshake

In the world of procurement, the tendering process is a carefully choreographed dance. Yet, many organizations are unaware that by simply inviting bids, they may be extending an inadvertent handshake, creating a binding legal relationship before a single deliverable is even contemplated. This phenomenon is the core of the “Contract A/Contract B” theory, a legal doctrine that transforms the procedural act of bidding into a substantive, enforceable agreement. Its origins lie in the landmark Canadian Supreme Court case, R. v.

Ron Engineering & Construction (Eastern) Ltd. which established that a formal, binding preliminary contract ▴ dubbed “Contract A” ▴ is formed the moment a compliant bid is submitted in response to a tender invitation. This initial contract governs the tendering process itself, imposing a set of rights and obligations on both the owner and the bidder. The subsequent, more familiar agreement to perform the actual work is “Contract B.”

The implications of this two-contract structure are profound. Contract A’s principal term is the irrevocability of the bid; a bidder cannot simply withdraw their offer without consequence once submitted. This provides the owner with certainty and protects the integrity of the competitive bidding system. In exchange, this preliminary contract imposes a significant duty of fairness and good faith on the owner.

This duty requires the owner to treat all compliant bidders equitably, to evaluate bids based on the criteria set out in the tender documents, and, crucially, to reject non-compliant bids. The creation of Contract A is not a mere formality; it establishes a distinct legal framework for the procurement process itself, separate from the ultimate performance contract.

The submission of a compliant bid in response to a tender call forms a preliminary binding agreement, “Contract A,” which governs the bidding process with a duty of fairness, preceding the main performance agreement, “Contract B.”

The Anatomy of a Two-Part Obligation

Understanding the dual-contract structure is fundamental to grasping its impact on liability. Contract A binds the bidder to their submitted price and terms, while obligating the owner to a fair and transparent evaluation process. If a bidder submits a compliant bid, they are legally bound to enter into Contract B if their tender is selected. Attempting to withdraw can result in the forfeiture of their bid deposit and potential liability for damages.

Conversely, the owner is bound to the rules of engagement they established. They cannot introduce “hidden” evaluation criteria or show favoritism. The Supreme Court of Canada has repeatedly affirmed that a key obligation under Contract A is the owner’s duty to reject tenders that are non-compliant with the stated requirements.

This framework introduces a significant layer of legal risk into what many consider a pre-contractual phase. An owner who mishandles the evaluation process ▴ for instance, by accepting a bid with a material defect over a compliant one ▴ can be sued by the aggrieved compliant bidder for breach of Contract A. The damages in such a case are not trivial; they can extend to the profits the compliant bidder would have earned had they been awarded Contract B. This legal reality forces a level of procedural rigor and discipline upon the procurement process that is often underestimated. Every step, from drafting the initial request to the final award, is governed by the terms of this implicit preliminary contract.

Strategy

Navigating the Contract a Minefield

The automatic formation of Contract A is not always desirable. For complex projects where specifications are fluid or where the owner wishes to negotiate with proponents, the rigidity of the Contract A/Contract B framework can be a significant hindrance. The strategic challenge for procurement professionals is to design a solicitation process that gathers competitive proposals without inadvertently creating a binding preliminary contract. The key lies in clearly signaling the parties’ intentions through the careful drafting of the procurement documents, particularly the Request for Proposals (RFP).

Courts have determined that the use of the label “RFP” instead of “Tender” is not, on its own, sufficient to prevent the formation of Contract A. The substance of the document and the intentions of the parties are what matter. To create a non-binding process, the RFP must be structured to be a request for expressions of interest that will form the basis for further negotiation, rather than an offer that is accepted by the submission of a compliant bid. This requires a fundamental shift in drafting, moving away from rigid, pass/fail requirements and toward a more flexible, qualitative evaluation framework. The goal is to create a process that resembles a “beauty contest” rather than a formal tender, allowing for dialogue, clarification, and negotiation before any binding legal relationship is formed.

Strategic RFP drafting, using explicit disclaimers and privilege clauses, is essential to create a flexible, non-binding procurement process and avoid the automatic legal obligations of Contract A.

Drafting for Discretion the Role of Privilege and Disclaimer Clauses

The most potent tools for preventing the formation of Contract A are explicitly drafted privilege and disclaimer clauses. These provisions are designed to sever the legal link that would otherwise be established upon the submission of a proposal.

• Privilege Clauses ▴ These clauses reserve rights for the owner, with the most common being the statement that “the lowest or any tender will not necessarily be accepted.” While powerful, these clauses are not absolute. Courts have interpreted them as allowing an owner to consider a more nuanced view of “cost” beyond the bid price, such as the financial impact of different completion dates, provided this is disclosed in the RFP. However, a privilege clause does not give the owner carte blanche to act unfairly or in bad faith.
• Disclaimer Clauses ▴ These are more explicit and are aimed directly at preventing the Contract A/Contract B analysis from applying. A well-drafted disclaimer will state clearly that the RFP is not a tender, that no contractual relationship will arise upon the submission of a proposal, and that the owner reserves the right to negotiate with any or all proponents, or to cancel the process at any time. This language makes the owner’s intention unambiguous.

The following table illustrates the strategic difference in drafting approach:

Execution

Liability the Double-Edged Sword

The Contract A/Contract B theory creates a landscape of reciprocal liability. For bidders, the primary risk is the irrevocability of their bid. A mistake in pricing, discovered after the bid is submitted, does not entitle the bidder to simply walk away.

As established in Ron Engineering, an attempt to do so constitutes a breach of Contract A, entitling the owner to accept the next lowest bid and sue for the difference in price, in addition to keeping the bid deposit. This places a heavy burden on bidders to ensure their submissions are accurate and that they have the capacity to perform the work for the price quoted.

For owners, the liability stems from the duty of fairness inherent in Contract A. This duty is not abstract; it has concrete, and costly, consequences. An owner who awards Contract B to a non-compliant bidder breaches Contract A with all other compliant bidders. The legal exposure can be significant, as an unsuccessful compliant bidder can sue for their lost profits ▴ the profits they would have realized had they been awarded Contract B. This creates a powerful incentive for owners to conduct their procurement processes with meticulous care, ensuring that all bids are evaluated strictly against the criteria laid out in the tender documents. The use of a privilege clause, while providing some discretion, does not absolve the owner of this fundamental duty of fairness.

The dual-contract theory imposes strict liability ▴ bidders are bound by their submitted price, while owners are liable for conducting a fair and transparent evaluation process as defined in the tender documents.

Mitigating Liability through Procedural Integrity

The execution of a defensible procurement process hinges on procedural integrity. Whether the intent is to create a binding Contract A process or a more flexible, non-binding RFP, the rules of the game must be clear and consistently applied. The following table outlines key liability considerations and mitigation strategies for owners.

Ultimately, the most effective execution strategy is clarity. The procurement documents must be an unambiguous reflection of the intended legal relationship. If the goal is the certainty and price discipline of a formal tender, the documents should embrace the Contract A framework. If the goal is flexibility, negotiation, and a customized solution, the documents must be drafted with carefully worded privilege and disclaimer clauses that explicitly negate the formation of Contract A. Attempting to achieve both simultaneously ▴ the control of a formal tender and the flexibility of an RFP ▴ creates ambiguity, and in the world of procurement, ambiguity is the parent of liability.

Reflection

Beyond the Document

The Contract A/Contract B theory serves as a powerful reminder that procurement is a system of interlocking obligations. The documents ▴ the RFP, the tender, the addenda ▴ are merely the visible architecture of a deeper legal and ethical framework. Understanding this framework is not about memorizing case law; it is about recognizing that every choice in the design of a procurement process has a corresponding consequence in liability and fairness. The true measure of a procurement system’s sophistication lies not in the complexity of its documents, but in the clarity of its intent and the integrity of its execution.

As you assess your own operational protocols, consider where ambiguity may reside. Where does the potential for an inadvertent handshake exist? Answering this question is the first step toward building a procurement function that is not only compliant, but also a source of strategic advantage.