What Is the “Process Contract” in an Rfp and How Does It Create Legal Obligations?

Concept

The Implied Promise in Competitive Bidding

In the world of formal procurement, a Request for Proposals (RFP) is often viewed as a straightforward invitation for suppliers to submit offers. However, within this process lies a legal doctrine, particularly influential in Canadian law, known as the “process contract” or “Contract A”. This concept transforms an RFP from a simple invitation into a binding set of rules governing the conduct of the bidding process itself.

When a procuring entity issues an RFP with specific rules and evaluation criteria, and a bidder submits a compliant proposal, a distinct contract, Contract A, is formed. This initial contract is separate from the ultimate agreement to perform the work, known as Contract B.

The creation of Contract A is not automatic. It hinges on the intention of the parties, inferred from the language of the RFP documents. If the RFP sets out a formal, structured process with clear rules for submission, evaluation, and selection, it signals an intent to be bound by those rules.

This establishes a legal obligation for the issuer to treat all compliant bidders fairly and in accordance with the published terms. The submission of a compliant bid, in this context, functions as the acceptance of the offer to participate in this regulated process, thereby creating Contract A. This framework was established to ensure the integrity of the competitive bidding system, providing bidders with assurance that their submissions will be evaluated impartially.

A process contract, or Contract A, is a legal framework that can arise from a formal RFP, binding the issuer to the rules it has set for the bidding process.

Distinguishing Bidding from Negotiation

The distinction between a traditional binding RFP and a non-binding Negotiated RFP is critical. A non-binding format allows for negotiation on price and other aspects of the proposal after submissions have been received. In these cases, the RFP documents often include explicit language to prevent the formation of a Contract A, stating that no legal relationship is created until a final written agreement is signed. This approach provides the procuring entity with greater flexibility.

Conversely, a traditional RFP that leads to a process contract establishes a more rigid framework. The issuer is bound by a duty of fairness and good faith to all compliant bidders. This includes adhering to the stated evaluation criteria and treating all participants equally.

Strategy

The Two Contract Paradigm

The “Contract A/Contract B” model provides a clear analytical framework for understanding the legal rights and responsibilities in a formal tendering process. Contract A, the process contract, comes into existence with each compliant bid submitted in response to the RFP. This means the issuer has a separate Contract A with every compliant bidder. The terms of Contract A are the rules of the tender process as laid out in the RFP documents.

The primary obligation under Contract A is the duty of fairness and good faith. This duty requires the issuer to evaluate all bids based on the disclosed criteria and to not accept a non-compliant bid. The formation of Contract B, the performance contract, occurs only when the issuer accepts one of the bids. At that point, a second, separate contract is formed with the successful bidder for the actual delivery of the goods or services.

Legal Precedents and Their Implications

Canadian courts have consistently enforced the obligations of Contract A, leading to significant consequences for procuring entities that breach its terms. In the influential case of Tercon Contractors Ltd. v British Columbia, the Supreme Court of Canada held the government liable for damages after it awarded a contract to an ineligible bidder. This decision underscored the seriousness of the duty of fairness and the binding nature of the process contract. The courts have found that implied duties under the Contract A/B framework include:

• Fairness ▴ All bidders must be treated equally and evaluated according to the same criteria.
• Confidentiality ▴ The confidentiality of bids must be maintained.
• Disclosure ▴ All relevant information must be disclosed to all bidders.
• No undisclosed preferences ▴ The evaluation must be based solely on the criteria set out in the RFP.

These implied duties are essential for maintaining the integrity of the tendering process. Any deviation from these principles can result in legal challenges and liability for damages, which often equate to the profits the wronged bidder would have earned had they been awarded the contract.

Mitigating Unintended Legal Obligations

Given the legal risks associated with process contracts, many organizations now take explicit steps to avoid their formation. This is typically achieved through carefully drafted clauses in the RFP documents. These clauses will often state that the RFP is a non-binding invitation for proposals and that no legal relationship or obligation will arise until a formal written agreement is executed.

The inclusion of such language is intended to signal that the issuer does not intend to be bound by the process contract framework. The following table outlines some common strategies for mitigating the risk of creating a process contract:

Execution

Drafting RFPs to Avoid Process Contracts

The most effective way to avoid the legal entanglements of a process contract is through precise and unambiguous drafting of the RFP document. The language used must clearly indicate the issuer’s intent to avoid a binding process. This involves more than simply adding a disclaimer; the entire document should be consistent with a non-binding framework. Any language that suggests a formal, rigid, and rule-based competition should be avoided.

For instance, using words like “offer” and “acceptance” can inadvertently signal an intention to create a binding process. Instead, terms like “proposal” and “negotiation” are preferable. The goal is to create a document that is clearly an invitation to negotiate, not a binding offer to enter into a process contract.

Clarity in RFP language is paramount; the document should consistently reflect an invitation to negotiate, not a binding commitment to a process.

Key Provisions for Non-Binding RFPs

To ensure an RFP is treated as a non-binding procurement tool, several key provisions should be included. These provisions work together to create a framework that gives the issuer maximum flexibility and minimizes legal risk. A well-drafted RFP should include the following:

1. No Contract A Clause ▴ A specific statement that the RFP does not create a “Contract A” or any other process contract.
2. No Obligation to Award ▴ A clause stating that the issuer is not obligated to award a contract to any bidder.
3. Right to Negotiate ▴ A provision that explicitly allows the issuer to negotiate with any or all proponents.
4. Discretionary Rights ▴ Language that reserves the issuer’s right to cancel, amend, or reissue the RFP at its sole discretion.

These clauses should be prominently displayed in the RFP documents to ensure that all potential bidders are aware of the non-binding nature of the process. The following table provides examples of how these provisions can be structured:

The Duty of Good Faith in Non-Binding RFPs

Even when an RFP is explicitly non-binding, issuers are not entirely free from legal obligations. Canadian law recognizes a general duty of good faith in all contractual dealings, and this can extend to non-binding procurement processes. While a non-binding RFP may not create a process contract, a court may still find that the issuer has a duty to act in good faith. This duty is less stringent than the duty of fairness in a process contract, but it still requires the issuer to act honestly and not in an arbitrary or capricious manner.

For example, an issuer could be found to have acted in bad faith if it used the RFP process to gather pricing information for its own purposes with no intention of awarding a contract. Therefore, even when using a non-binding RFP, it is important to conduct the process in a manner that is fair and transparent.

Reflection

Beyond the Document

Understanding the legal framework of process contracts is a foundational step. The true mastery of procurement, however, lies in recognizing that the RFP is more than a legal document; it is a communication tool that shapes the relationship between the issuer and potential suppliers. The decision to create a binding or non-binding process has significant implications for the types of proposals received and the nature of the ensuing business relationship. A highly structured, binding process may be appropriate for straightforward procurements where price is the primary driver.

In contrast, a non-binding, negotiated process may be better suited for complex projects where collaboration and innovation are key. The choice of procurement strategy should be a deliberate one, aligned with the overall goals of the project and the organization. Ultimately, the most effective procurement processes are those that are not only legally sound but also strategically astute.