Monday, 17 November 2014

Keeping Construction and Tendering Contracts Separate

Author: Corbin Devlin 

Tender documents are often "living" documents. A problem arising on one project prompts a construction owner to insert a new contract term to address the problem on subsequent projects. This is good practice in itself, a sort of continuous improvement process. But a common result of this process is that contract terms are put in the wrong place. In particular, there is a recurring problem with tender documents that intersperse construction terms with proper tendering terms. For example, it is common to see conditions such as "Contractor will use only materials ABC in performing the Work" or "Installation by XYZ certified installers" right in the invitation to tender. These terms and conditions belong in the construction agreement, not in the invitation to tender.

What's the difference where these terms are placed? Isn't the invitation to tender incorporated by reference into the construction agreement anyhow?

The legal problem is that the invitation to tender (Contract A) creates a binding agreement between each bidder and the construction owner. Each bidder (and the construction owner) has a contractual obligation to respect the terms of the invitation to tender – and a contractual right to enforce the terms of the invitation to tender. On the other hand, the construction agreement (Contract B) is binding on only one bidder - the successful bidder - and construction owner. The terms that should bind each and every bidder are terms such as “Bids submitted later than 4 p.m. on closing date will be rejected.” But the owner only requires the successful bidder – not each bidder - to actually perform the work. So it is only the successful bidder that requires to comply with construction specifications such as, for example, "only materials ABC to be used in construction" or "materials to be installed by XYZ certified installers."

What is the harm in binding all bidders to such terms? After all, the owner wants to ensure that all bidders are bidding on the same thing. Frankly, the harm is that this practice causes lawsuits. A few years ago the Double N Earthmovers case (Double N Earthmovers Ltd. v. Edmonton (City of), 2005 ABCA 104) went all the way to the Supreme Court of Canada because of a related problem. The City of Edmonton prescribed certain equipment specifications for the work – and this requirement was found in the tender documents. One of the unsuccessful bidders sued when the City ultimately entered a construction agreement that allowed for different equipment specifications. The City was held not liable. But if the equipment specifications were not embedded in Contract A (the invitation to tender), but instead placed in Contract B where they belong, then this lawsuit might have been avoided.

I'm writing this article because the Double N case does not illustrate an isolated incident. I have seen numerous disputes that could have been avoided but for the confusion caused by construction agreement terms embedded in tendering documents. The owner who specifies "XYZ certified installers" probably does not contemplate that an unsuccessful bidder might have the right to enforce this specification. But placing that specification in the invitation to tender may have that effect.

Of course, the fix to this problem is relatively simple. As mentioned, the proper place for construction terms and conditions is in the construction agreement. Something like the requirement to provide “XYZ certified installers" should be located in the scope of work appendix. The proposed construction agreement, or maybe (depending on circumstances) just the scope of work appendix, should be an attachment to the invitation to tender. The invitation to tender should specify that the successful bidder will enter a contract on the attached terms and conditions, or for the attached scope of work. And the invitation to tender should expressly reserve the owner’s right to negotiate the construction agreement terms with the successful bidder.

1 comment:

  1. Construction contracts are very important. i have learnt a lot of things form your blog. Gordon Rutty is a real estate manager that provides the services of construction.

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