Contractor pays for mistake in bid price

A contractor who made a mistake in price in a tender cannot walk away from its bid, even if the tender instructions call for submission of additional documentation, in which the mistake becomes obvious, the Ontario Court of Appeal recently held.[1] This decision is an important re-affirmation of the principle that contractors are bound by their bids even if they make a mistake in the price.

Gottardo’s mistake

In December 2000, the TTC opened the tenders it received for the construction of the Birchmount bus garage. Gottardo Construction Ltd. was the lowest bidder. Soon afterwards, Gottardo informed the TTC that it had made an error. In accordance with the tender instructions, the TTC requested additional information. Gottardo refused to supply it, except for a cost breakdown on which it gave different price for the work.

The TTC took the position that Gottardo was bound by its bid. Gottardo refused to sign the contract and the TTC rewarded the contract to the next lowest bidder, which was $434,000 greater than Gottardo’s. The TTC sued Gottardo and its insurer, CGU Insurance, to make up the difference.

Contract A and Contract B

The TTC relied on the principles initially expressed by the Supreme Court of Canada in the landmark decision of R v. Ron Engineering & Construction (Eastern) Ltd,[2] and two later cases, M.J.B Enterprises v. Defense Construction (1951) Ltd.[3] and Martel Building Ltd. V. Canada.[4] These cases establish the framework for competitive tendering in Canada . A unilateral contract, called Contract A, arises automatically between a tenderer and the owner upon submission of the tender. One of the terms of this contract is that the tenderer cannot withdraw the bid during the period set out in the tender instructions. If the tender is accepted, the tenderer and the owner enter into a construction contract, called Contract B.

Trial decision

Kitely J. dismissed the TTC’s action.[5] She held that Contract A was not complete because the tender instructions called for additional documents to be provided. Once these were submitted, the error in the tender amount was apparent. The TTC could therefore not compel Gottardo to honour the price (or recover from CGU on the bid bond). Kitely J. added that she would have granted Gottardo the equitable relief of rescission in any event.

Additional documentation does not delay the formation of Contract A

The Court of Appeal[6] reversed Kitely J.’s decision, following the three leading Supreme Court decisions referred to above, holding that provision in the tender instructions for TTC to request additional information from tenderers did not delay the formation of Contract A.

The question – which the trial judge failed to address – is: when did the parties intend to initiate contractual relations? In holding that the formation of Contract A was delayed until after additional information was provided and a tender accepted, the trial judge confused the creation of Contract A with the process that occurs after Contract A and leads to Contract B.

The court reiterated that

acceptance or rejection of the bid is not what leads to the creation of Contract A. Acceptance or rejection is the end point of the tender process…The fact that certain steps are taken and certain documents are to be produced by the tenderer after the submission and opening of tenders will not delay the formation of Contract A when the clear intent of the parties is to be bound as of the opening of the tenders. [emphasis added][7]

Here, from the tender documents and the fact that Gottardo was familiar with tendering processes, it was clear the parties intended to initiate contractual relations the moment the tenders were opened. The provisions allowing the TTC to request additional background documentation did not delay the formation of Contract A. Such provisions would only delay the formation of Contract A if “taken together with all the facts and circumstances, they reflected an intention by the parties to defer the creation of contractual relations”. Gottardo’s tender, therefore, amounted to an acceptance of the call for tenders and gave rise to Contract A. Gottardo was bound by its price.

The court also dismissed Gottardo’s argument that because it refused to provide the additional information requested by the TTC, its bid became non-compliant and incapable of acceptance. By submitting its tender Gottardo had agreed to provide additional documentation; its refusal to do so was a breach of Contact A. To allow a tenderer to escape Contract A by breaching it would defeat the integrity of the tender system, the court noted. Similarly, Gottardo could not rely on the fact that the price in its cost breakdown was different from the price in the bid.

The error in the cost summary was apparent only after Contract A was formed. Further, the summary was not provided in a form that complied with the tender instructions. A non-compliant document cannot be used by Gottardo to show an error on the face of the tender.

Rescission not available

The Court of Appeal also held that rescission was not available to Gottardo, finding “simply no grounds for equitable intervention”. Rescission was not available on grounds of mistake, as there was nothing in Gottardo’s initial bid to suggest an error in the price. At the time Contract A came into existence, neither the TTC nor Gottardo was aware of the mistake. Moreover, although some financial hardship to Gottardo would result from enforcement of the agreement, it would be insufficient to warrant rescission.

Published October 18, 2005