A Contract Mind Meld

We previously mentioned our friend, the reasonable person, when determining intentions of parties entering a contract.

Intentions are important because they are required for mutual consent when entering legal relations. Both parties involved must have a common understanding of the basis and content of the contract, also known as consensus ad idem, or meeting of the minds. Domestic parties are objectively assumed to have not entered legal relations, whereas commercial entities are assumed to enter, unless there is specific information indicating the contrary.

This mutual understanding is typically resolved under the bargain theory of contract through negotiations. But there is one commercial situation where the typical process of negotiation is quite different.

A Competition for Bids

When a company is openly soliciting services from other entities, they send out a call for tenders, also known as an invitation to tender or call for bids. They then select a vendor from these competitive bids to use their goods or services.

The traditional analysis found that the call for tenders was an invitation to treat, the responding tender was the offer, and acceptance was selection of the winning bid. But this approach allowed for uncertainty in trade, in that bidders and owners could each cancel the process or circumvent the the terms of the invitation because there was no binding contract until selecting a bid.

Developments in Cases

In Harvela Investments v. Royal Trust Co of Canada, the court held the owner bound to the terms of the invitation to accept the highest bid per stated stipulations. The open tender is likened to the case in Carlil, and can be accepted by the general public.

The development of the tendering process was further refined in R. v. Ron Engineering and Construction (Eastern) Ltd., where a two contract analysis emerged to govern the process. Contract A was a unilateral contract governing the tendering process arising on the submission of a tender, and Contract B was a bilateral contract for the invitation to treat that was accepted when a tender was selected.

The two contract analysis was further refined in M.J.B. Enterprises Ltd v. Defence Construction (1951) Ltd, and demonstrated that the owner’s obligations under Contract A included only selecting a compliant tender.  It also demonstrated that Contract A was also bilateral, because the owner was also responsible for returning deposits, meaning that submission of a bid alone (performance) did not conclude the contract.  The owner also can reject the lowest bid, especially if taking a more nuanced approach, including the quality of work, past service, and projected timelines.

 Other Forms of Invalidation

There are some other examples of how tenders can be invalid that should be kept in mind:

•  not submitted before close of tenders
• not submitted on proper form
• altering tender form
• don’t have required information
• tenders conditional or qualified
• not compliance with specifications