Recovering the Costs of Tender

A company submitting a tender often spends a great deal of effort and expense in its compilation, and therefore deserves to be treated fairly in the selection process.

The case of JA Developments -v- Edina Manufacturing, Armoura Ltd and others [2006] decided by Sir Liam McCollum in the Queen's Bench Division of the High Court in Northern Ireland, considered the contractual effect of the preparation of a tender for building work.

Seven contractors were invited to tender for the construction of a workshop, offices and associated works in Lisburn for the first and second defendants. The first defendant was controlled by Mr Gibbons, who was the employer. Mr Gallaher acted as architect for the defendants and was the fourth third party in this action.

The conditions of tender were contained in 'The Summary Schedule of Work', which at paragraph 120 stated: "Tendering procedure will be in accordance with the principles of the Code of Procedure for single stage selective tendering 1996" (the Code). At section 7.1 this includes the statement: "the NIJCC strongly deplores any practice which seeks to reduce any tender arbitrarily where the tender has been submitted in free competition and no modification to the specification, quantity or conditions under which the work is to be executed is to be made, or to reduce tenders other than the lowest to a figure below the lowest".

Following the submission of tenders on 9 April 2001, Mr Gallaher advised JA Developments (JAD) during a telephone conversation that its was the lowest tender and he would be recommending it for acceptance. Then a series of meetings were held at the request of the employer, Mr Gibbons, with each of the three lowest tenderers, at which they were invited to reduce their tender price - a practice often referred to as a Dutch auction. Mr Bleeks, on behalf of JAD, refused, but the next lowest bidder was awarded the contract after it agreed to reduce its price to about £18,000 below that of JAD.

Mr Bleeks of JAD brought an action against the defendants for the cost of preparing the tender and for loss of profit that he would have earned had he been awarded the contract.

The judge first considered the case of Blackpool and Fylde Aero Club Ltd -v- Blackpool Council [1990], in which it was found that a collateral contract can exist between a tenderer and an employer such that there was a clear intention to create a contractual obligation on the council to consider a tender. The judge concluded that paragraph 120 incorporated the Code into the tender documents, and that there was a binding contract to the effect that the principles of the Code would be applied.

In interpreting the meaning of paragraph 120, the judge found that the word 'procedure' was not limited to the preparation of the tender, but also includes its consideration and the decision made upon it by the employer, and further that "in accordance with the principles of" implies that the Code need not be followed to the letter in every respect so long as the principles are respected.

The judge decided that the action of Mr Gibbons was a clear breach of the principles of the Code and that JAD was entitled to recover damages.

It seems that JAD had seen this one coming and claimed against the architect, Mr Gallagher, alleging among other things that at all times he was the professional man advising Mr Gibbons, that Mr Gibbons relied solely on the advice of Mr Gallagher and that Mr Gallagher failed to advise of the significance of the Code and in particular the potential consequences of Mr Gibbons' proposal to conduct a Dutch auction.

Of interest to professional advisers is the restatement of the law as set out in Charlesworth and Percy on Negligence (8th Edition, para 8/42): "architects, surveyors and engineers are expected to have a practical working knowledge of the law relating to their professions, which is sufficient to enable them to perform their duties adequately".

The extent of a legal duty is a matter for the court to decide. In this case however, the two experts on architectural matters agreed that notwithstanding any lack in the use of the Code a competent architect would not be in a position to advise that the procedure adopted by Mr Gibbons would give rise to legal liabilities between the plaintiff and the first defendant. The position in the future as a result of this case may be different.

The judge agreed with the experts, but also went on to consider the point arising from Bolam -v- Friern Hospital Committee [1957] that in circumstances where there was a duty to warn (in this case that the procedure was not being followed, even though there was not a duty to advise of its legal consequences), the defendants must prove that if they had been so warned they would have acted differently. The judge decided on the evidence given by Mr Gibbons that he would still have conducted the Dutch auction, meaning that Mr Gallagher was therefore free of any liability. Of course, it is unlikely that this case would have been brought if JAD had not known that it was initially the lowest tenderer.

Finally, the Judge awarded JAD both the cost of preparing its tender (in the sum of £6,530) on the basis that JAD said that if it had known this practice would be adopted it would not have tendered in the first place, as well as the sum of £135,528 for the loss of profit, abated by an arbitrary 20% to account for the fact that there had to be some element of profitability in the availability of regular employees. This was a very high price to pay for a saving of some £18,000.

It has to be asked whether the award of both heads of damage can be right, as either JAD would not have tendered, in which case it would have avoided the cost of tendering but would not have earned the profit, or it would have won the work and in which case the cost of tendering would have been an absorbed overhead cost that would probably have been covered by the sum awarded for profit.

Rob Palles-Clark, director, Brewer Consulting

Summing up

Judgment: J&A Developments Ltd -v- Edina Manufacturing Ltd, Armoura Ltd and others [2006], NIQB 85, 11 December 2006.

The issue: Recovery of tender costs and loss of profit and the duty of an architect to advise.

The implication: In this case the incorporation into the tender documents of the NIJCC code for single-stage selective tendering created a contractual obligation to comply with the principles of the code and meant that to conduct a Dutch auction was a breach of the code, causing the employer to pay damages to a contractor who had been the lowest tenderer but who had not ultimately been selected. Construction professionals should give clear advice to clients about any tendering procedures to be followed and the importance of complying with them.