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Law surrounding the tender process

Newsletter Article 25 January 2011

Private enterprise and government agencies will often procure goods and services through the Tender Process. It is therefore important for those involved in the strategic and operational management of public and private sector organisations throughout Australia, as well as individuals and entities who provide of products and services to understand the law regulating the Tender Process.

Goods and services are exchanged through the medium of a contract. According to the fundamental principles of contract law, a contract is formed at the point where an ascertainable offer made by a capable party is accepted by another capable party. Additionally, there must be a common intention to be legally bound by the agreement, and both parties must provide consideration. Consideration would then be provided by payment of a sum of money by one party in exchange for the provision of management services by the other party. Importantly, once a legally binding contract is in place, a number of remedies are available for breach of contract.

Before entering into a contract, a government agency and potentially the private sector that requires the provision of goods or services will often issue a Request for Tender. A Request for Tender is “a published notice inviting suppliers who satisfy the conditions for participation to submit a tender in accordance with requirements of the request for tender and other request documentation” [1]. Suppliers interested in providing those goods or services will then submit a Tender, otherwise known as “a price, bid, offer, quotation, consultant proposal or expression of interest” [2]. The purpose of the tendering process is for the Requestor to locate a preferred Supplier in order to enter into a contractual relationship for the provision of the goods or services.

It is apparent, therefore, that the Tendering Process precedes the contractual relationship. A Request for Tender, for the purposes of contract formation, is not an offer. Instead, it is an Invitation to Treat, or, in other words, a “request to negotiate or make an offer with a contract in mind” [3]. As such, in Pratt Contractors Ltd v Palmerston North City Council [4], it was found that “the starting point is that a simple uncomplicated request for bids will generally be no more than an invitation to treat, not giving rise to contractual obligations”.

This reality poses a number of problems for Suppliers, who, unless their Tender is accepted, have no apparent contractual rights. In an economy where the cost of preparing a tender is constantly increasing, this is particularly unnerving. The Courts have accordingly realised that “this approach to the tendering process simply does not accord with the parties’ legitimate expectations” [5], and as such, have formed the institution of the “Process Contract”.

The Process Contract

The Process Contract is separate from the Tender Contract. The Tender Contract is formed when a Requestor decides upon a particular offer from one Supplier. The Process Contract essentially exists solely to protect the “integrity of the bidding system” [6]. The Process Contract applies to both public and private tendering, and creates “binding obligations on the party calling for tenders to evaluate each tender in a certain way” [7]. However, Process Contracts are not automatic, with their existence dependant “upon a consideration of the circumstances and the obligations expressly or impliedly accepted" [8].

In Hughes Aircraft Systems International Inc v Airservices Australia [9] two corporations tendered for a government contract. In negotiations prior to the submission of tenders, the parties agreed to a set of guidelines for the assessment of Tenders, in particular that there would be “fairness between the tenderers”. The Court found that Hughes Aircraft relied on these representations in deciding to participate in the Tender Process, and therefore selection of a tender “was required to follow the procedures and be in accordance with the criteria specified” [10]. A breach of the Process Contract was found when Airservices Australia failed to abide by the agreed guidelines for assessment and awarded the contract to another tenderer. Hughes Aircraft was subsequently awarded damages.

Therefore, where a Request for Tender sets out specific guidelines for the assessment or treatment of Tenders, it could be said that a Process Contract is formed. If the Requestor departs from these specified “terms”, they could be found to be in breach of the Process Contract. In this case, any “wronged” Supplier would be entitled to seek damages for any losses sustained in preparing the tender and, in some circumstances, for loss of profit [11].

It is increasingly common for Requestors to attempt to exclude a Process Contract from the Tender Process. The legality of such an exclusion clause in the Request for Tender is uncertain. In Cubic Transportation Systems Inc v New South Wales [12] an attempt to exclude a Process Contract was read down by the Judge who held that there was in fact a Process Contract in place. However, in State Transit Authority (NSW) v Australian Jockey Club [13] the Judge found an exclusion contract to be valid, stating that it was “abundantly clear that the plaintiff… was entitled to deal with individual Tenderers differently and was under no obligation to follow any particular process”. Despite inconsistencies in the law, it is likely that such a provision would be invalid where parties have agreed to a definable assessment process and that process has been departed from.

It is apparent therefore that the Process Contract is a common law concept existing to protect the “integrity of the bidding system” [14]. However, statute appears to also provide for the creation of legal obligations in the Tender Process. In particular, Section 52 of the Trade Practices Act 1974 provides that “a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. Therefore, if a Request for Tender outlines criteria for assessment that are markedly different to those actually intended to be used, the Requestor may be found to have breached this Section of the Act.

Tendering For Government

In addition to the Process Contract, Government Procurement is further regulated through the existence of a number of Procurement Guidelines. This is because “it is a matter of public concern that the government’s buying and selling should be properly conducted and that legal measures which encourage the responsible conduct of government business are to be encouraged” [15]. Whilst Procurement Guidelines are not legally binding, it is important to consider and understand the relevant Guidelines when submitting Tenders for Government as they are “the policy framework under which agencies govern and undertake their own procurement” .

At a national level, Government agencies must abide by the Commonwealth Procurement Guidelines. A copy of the Guide is available at http://www.finance.gov.au/procurement/procurement-policy-and-guidance/commonwealth-procurement-rules/. This Guide applies to procurement carried out by officials in agencies and in bodies subject to the Commonwealth Authorities and Companies Act 1997 and states that “value for money is the core principle underpinning Australian Government procurement” [17]. According to the Guide, value for money can be enhanced by: “encouraging competition by ensuring non-discrimination… promoting the use of resources in an efficient, effective and ethical manner; and making decisions in an accountable and transparent manner” [18].

The States also provide Procurement Guidelines which government agencies must abide by. Whilst they all follow similar principles, there are different provisions in place which may affect the procurement process. A list of the core applicable Guides is provided in the table at the end of this article.

Conclusions

The Tender Process is essentially made up of two different contracts which exist side by side: the Tender Contract and the Process Contract. In the case of government tenders, Procurement Guidelines may also influence the Tender Process. The scope of these contracts and Guidelines should always be understood by a Supplier before they submit a Tender to either a corporation or government agency.
 

STATE/ TERRITORY

DOCUMENT NAME AVAILABLE AT
NSW Code of Practice for Procurement http://www.nswprocurement.com.au/
VIC Procurement Policies (Master Manual) http://www.vgpb.vic.gov.au/
QLD Queensland Government Procurement Plan 2009–2012 http://www.qgm.qld.gov.au/
SA State Procurement Act 2004 http://www.spb.sa.gov.au/
WA Guide to Tendering with Western Australian Public Authorities http://www.dtf.wa.gov.au/
NT Procurement Directions http://www.nt.gov.au/
ACT Government Procurement ACT 2001; and Procurement Policy Unit http://www.procurement.act.gov.au/
TAS Purchasing Principles; and Purchasing Policies http://www.purchasing.tas.gov.au/

 

[1] Commonwealth of Australia, Commonwealth Procurement Guidelines (December 2008) 46
[2] NSW Government, Code of Practice for Procurement (January 2005) 11
[3] P. J. Butt, Butterworths Concise Australian Legal Dictionary, (3rd Ed, 2004) 235
[4] [1995] 1 NZLR 469 per Gallen J at 478-479
[5] Macquarie Generation v CNA Resources Ltd [2001] NSWSC 1040 at [52]-[53] as summarised in Nicolas Seddon, Government Contracts: Federal, State And Local, (4th Ed, 2009) 325
[6] R v. Ron Engineering & Construction (Eastern) Ltd [1981] 1 S.C.R. 111 at 273
[7] NSW Department of Services, Technology & Administration, Tendering Manual, (November 2010) Chapter 2, 6
[8] Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469 per Gallen J at 478-479
[9] (1997) 76 FCR 151
[10] Hughes Aircraft Systems International Inc v Airservices Australia (1997) 76 FCR 151
[11] Nicolas Seddon, Government Contracts: Federal, State And Local, (4th Ed, 2009) 353
[12] [2002] NSW SC 656
[13] [2003] NSWSC 726 at [25]
[14] R v. Ron Engineering & Construction (Eastern) Ltd [1981] 1 S.C.R. 111 at 273
[15] Nicolas Seddon, Government Contracts: Federal, State And Local, (4th Ed, 2009) 314
[16] Commonwealth of Australia, Commonwealth Procurement Guidelines (December 2008) v
[17] Commonwealth of Australia, Commonwealth Procurement Guidelines (December 2008) 10
[18] Commonwealth of Australia, Commonwealth Procurement Guidelines (December 2008) 10


Brian Ambler, Partner
Sydney

Newsletter Article 25 January 2011
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