(Click to jump to prefered section)
Tendering is common process for businesses supplying goods or services to other businesses or the public sector.
At a basic level a supplier might quote for a job or write a letter saying why they should be given the business. More formal tenders often apply to bigger jobs or for supply contracts spread over time. Public-sector works in particular often involves tendering processes.
Historically, a call for tenders was viewed as an invitation to treat. A tender submitted by a bidder was considered to be no more than an offer which did not give rise to any legal obligations unless or until it was accepted by the principal. Prior to acceptance, it was possible for the bidder to withdraw or amend its offer.
Similarly, because there was no legal relationship created unless and until acceptance, it was also possible for a principal, after receiving tenders, to negotiate with the bidders in an attempt to alter the scope of work or the bid price. Such ‘bid shopping’ might be viewed as unlawful under the current judicial approach - depending on the tender circumstances - and has received trenchant criticism as undermining the legitimate expectations of tender participants and the competitive process itself.
In order to maintain the integrity of the tendering process and to give effect to the reasonable expectations of the parties who engage in it, the Supreme Court of Canada, in a landmark decision, introduced the “two contract” model into the law of tendering. Under this model, the tendering process may give rise to of the formation of two separate contracts:
- The first, known as the ‘bid’ or ‘process‘ contract, governs the manner in which the tendering process is to be conducted.
- The second contract is the ‘substantive‘ contract to perform the work that has been bid, which comes into existence once the bid is accepted by the principal.
The relevant tests were neatly summarised in a 2006 Court of Appeal decision as follows:
The primary rule is that a tender process involves simply an invitation to treat on the part of the party calling for tenders with no contractual obligation crystallising until an offer is accepted, see Shivas & Westmark Investments Ltd v BTR Nylex Holdings NZ Limited & Ors  1 NZLR 318 (HC).
But tender process will sometimes create process contracts between the party calling for tenders and the tenderers…
A party alleging a process contract must establish the “necessary elements” of offer and acceptance and intention to enter a binding contract.
Where there is a process contract, the obligations under it on the party calling for tenders will, of course, depend on what was agreed expressly or by implication.
An assertion that the tendering party is not obliged to accept the highest or any offer must be respected but is not necessarily inconsistent with that party being subject to obligations as to the process by which tenders are to be evaluated. [note this was a property sale tender, hence the reference to “highest price”]
After recognising that process contracts can come into existence in a variety of circumstances, the Court made the general observation that “the less formal the tender process, the less scope there is for implying any, or at least any onerous, obligations on the party calling for tenders.”
Where a process contract arises, this usually means that:
(i) A principal’s invitation to tender constitutes an offer to all potential bidders to enter into a process contract.
(ii) The moment a bidder submits a conforming tender in response to that offer, a process contract comes into existence and the rights and obligations of the bidders and the Principal under that process contract are crystallized.
(iii) The instructions/RFP/RFT forms issued to tenderers establish the specific terms and conditions of the process contract. There will also be implied terms of good faith and fair dealing.
(iv) One of the terms of the process contract will be an obligation that the bidder is (generally) contractually bound to enter into the substantive contract (ie the second contract), if the principal accepts its tender. [The effect of ‘discretion clauses’, which permit a principal to waive irregularities or non-conformities in a tender submitted, is considered further below]
(v) The tender contract comes to an end when a principal either 1) enters into the substantive contract with one of the bidders; 2) rejects all of the bids; or 3) when the specified period of the tender process (if applicable) expires.
Competitive commercial bids may be sought under a variety of guises eg:
Request for Proposal (RFP);
Request for Tender (RFT)
Request for Expression of Interest (REoI or RFEI)
Invitation to Quote etc
However, titles (RFT/RFP) are not determinative.
Whatever the title given to the contracting process, a key question is whether the parties intend to form contractual relations governing the process for the tender. If so, then it is likely that a process contract exists.
The formality of the process i.e. the extent to which the tender process is formally defined;
Whether there is a deadline for submission of tenders;
Whether bids are irrevocable for a defined period;
Whether there is a commitment to award the substantive (second) contract at the conclusion of the process;
Whether the substantive contract has specific terms and conditions not open to negotiation, and the detail of such specifications;
Any onerous obligations on tenderers (eg complicated and comprehensive requirements for bid content);
Pre-qualification or multiple tender rounds (not only is pre-qualification an indicator of a process contract, but a principal that uses a pre-qualification process may also fetter their ability to (say) later reject a tender during bid evaluation on the basis that the bidding contractor does not have the necessary skill, capacity or experience for the project); and
Payment of deposits or bonds.
The contents of the written bid documents issued by the principal will be vital (Pratt v Transit). As recognised in various cases (eg Prime Commercial, Pratt v Transit), specific conditions in tender documents which preserve flexibility for the principal will not necessarily exclude a process contract.
However, it has been found that by adopting appropriate tender language, principals can afford themselves a wide discretion or can positively prevent any process contract coming into existence.
Subject to the specific terms of the tender documents, various obligations may be implied into process contracts:
2.1 The duty to consider a tender:
“If [the tenderer] submits a conforming tender before the deadline he is entitled, not as a matter of mere expectation but of contractual right, to be sure that his tender will after the deadline be opened and considered in conjunction with all other conforming tenders or at least that his tender will be considered if others are.”
The duty to consider conforming tenders has been recognised in various New Zealand cases e.g. Gregory v Rangitikei DC.
2.2 The duty to act fairly and in good faith:
In Roading & Asphalt Limited v South Waikato District Council, Keane J recognised that:
 A related issue is whether the Council was also under an implied duty to treat tenderers fairly and equally and to comply closely with the terms of tender. That too turns primarily on the terms of tender, and any related conditions of the substantive contract.
 The argument in favour of implying such a term is, as the Supreme Court of Canada said in Martell Building Limited v Canada, this:
Implying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process, and benefits all participants involved. Without this implied term, tenderers, whose fate could be predetermined by some undisclosed standards, would either incur significant expenses in preparing futile bids or ultimately avoid participating in the tender process.
 In the next paragraph the Court nevertheless emphasised that contracting parties are free to set their own terms and these may override ordinary considerations of fairness and equality:
Nevertheless, the tender documents must be examined closely to determine the full extent of the obligation of fair and equal treatment. In order to respect the parties' intentions and reasonable expectations, such a duty must be defined with due consideration to the express contractual terms of the tender. A tendering authority has 'the right to include stipulations and restrictions and reserve privileges to itself in the tender documents'.
2.3 The Duty to reject non-compliant bids
2.4 The obligation to consider only disclosed criteria in evaluating bids
The discretion given to a principal by a privilege clause must be exercised fairly and objectively. Where an owner applies a secret preference in evaluating a tender or participates in bid shopping, it might well be found to have breached the terms of the process contract, notwithstanding the existence of a privilege clause.
2.5 No bid shopping
The term “bid shopping” refers to the practice of soliciting bids from contractors and then using that information in attempt to negotiate a better price/deal with the interested parties (or even third parties). Essentially, it involves the manipulation of bidders and the tender process to achieve a better outcome for the principal.
It is likely that courts will take a dim view of parties found to have engaged in bid manipulation or “bid shopping”.
Consultants and advisors to principals should bear in mind the potential to be found ultimately responsible to compensate an aggrieved bidder where the tendering process is found to be flawed.
In addition to the process contract, there are other laws which – depending on the circumstances – may apply to a tendering process.
(i) Contractual Remedies Act 1979
(ii) Fair Trading Act 1986
(iii) Commerce Act 1986
(vii) Conflict of Interest/bias/apparent bias
There are a number of e-tender systems available to tendering parties, each of the systems generally offering similar communication tools (such as messaging to all parties), document management tools and audit trails.
The functionality and process aspects of current e-tendering systems are similar and attempt, at most points, to mirror the legal requirements of a paper tendering system. The components of the systems will facilitate the process of pre-qualification or registration, public invitation, tender submission, close of tender, tender evaluation and award of tender.
Tendering on-line is now sometimes encapsulated in more comprehensive project manage software – where the tendering and contract allocation is the first part of the on-line process, but the process continues to enable tracking of the project once underway and management/oversight through to completion and sign-off, submission of final invoices and payment of final price instalment.
Two common types of e-tendering are:
- Where the principal wishing to conduct an online tender engages a specialist e-tender service supplier. See, for example, www.tenderlink.com, or www.tenders.net; and
- Where one of the tendering parties (usually a head contractor or supplier with project management responsibilities) provides the e-tendering technology for use by all participants.
The key to developing, implementing or managing any e-tendering system is in converting (or indeed, enhancing) the functionality of the traditional paper based system to an electronic environment while maintaining legal compliance.
Against this background, the legal issues that arise in an e-tendering system include:
Given the ease with which documents and identity can be manipulated in an electronic environment, it is necessary to employ an e-tendering system that minimises the potential for a person to submit a tender without the appropriate authority or for a person to forge a tender adopting another person’s identity. Accordingly, some form of prequalification or registration (or at least a password system) may be necessary to prevent this from occurring, and also to enable the tender manager and principal to stay informed on parties accessing the Site.
A further advantage of prequalification in an electronic environment is that addendums and any inquiry-feedback (if provided for) can be easily communicated by email to all potential tenderers.
(b) Time of Close of Tender
The time at which a tender will legally be received by the principal is of particular importance to the question of non-conforming tenders. In an electronic environment, additional factors may impact on the ability of a tenderer to submit their tender on time. For example, the principal’s server may be unreachable at the time for submission of the tender. Is the tender late in this situation? What is the position of the tenderer?
An offer to tender is generally effective upon receipt (although the terms of the tender may alter this).
Accordingly, in a paper based tendering system, the tender is generally effectively received once it has been placed in the tender box. In an e-tendering system, there may be some uncertainty as to when an offer is received.
Section 11 (Time of Receipt) of the Electronic Transactions Act 2002 provides:
An electronic communication is taken to be received,—
(a) in the case of an addressee who has designated an information system for the purpose of receiving electronic communications, at the time the electronic communication enters that information system; or
(b) in any other case, at the time the electronic communication comes to the attention of the addressee.
Where the tender is not governed by New Zealand law, then the relevant tendering laws in the jurisdiction will need to be followed. By way of example, Article 15(2) of the Uncitral Model Law (adopted in numerous countries) provides:
Unless otherwise agreed between the originator and the addressee, the time of receipt of a data message is determined as follows:
(a) If the addressee has designated an information system for the purpose of receiving data messages, receipt occurs:
(i) At the time when the data message enters the designated information system; or
(ii) If the data message is sent to an information system of the addressee that is not the designated information system, at the time when the data message is retrieved by the addressee;
(b) If the addressee has not designated an information system, receipt occurs when the data message enters an information system of the addressee.
The operation of s11 ETA or Article 15(2) raise various questions, ie. how is an information system designated?
The conditions of tender should designate the information system (that is, the “electronic tender box”) and the time at which it will be deemed to enter that tender box (possibilities include upon receipt of an email confirming the tender had been received or at the time noted on the e-tender website).
(c) Award of Tender and Formation of Contract
Government agencies and private sector principals alike need to keep and maintain records of the tender process in the event of litigation. This applies to both paper based and electronically formed contracts following the tender process.
Types of E-Tendering
As e-tendering is a relatively recent concept, some systems offer more automation than others.
A simplistic e-tender system might involves only principal-to-bidder communication. This allows the principal to post the tender advertisement and documents on a website and the bidders download the tender documents. However, the documents are still submitted in paper. There is no two-way communication occurring in an electronic environment.
More automated options include tender submission and two-way communication. This is where the tender documents are downloaded from a website and also submitted electronically. There is two-way communication between the principal and bidder and the distribution of any addendums and negotiation take place electronically. However, the tender is not awarded electronically.
Fully automated processes would involve electronic contract formation and post-formation contract management (ie. on-going contract administration carried out electronically via collaboration software, perhaps through (say) to electronic final sign-off in installation tenders).
The security and legal requirements of the e-tendering process will depend upon the nature of the electronic process to be used.
E-tendering security requirements are similar to other electronic commerce systems. There is a need to address the integrity, confidentiality, authentication and non-repudiation in e-tendering communications. Key issues include:
The need to provide secure access to critical systems, particularly in the case of the tender box which stores the tender submissions after the tender closing time. Submitted tenders are highly confidential documents, which are often a target for business collusion.
The security of an e-tendering system relies crucially on the recording of the date and time at which events occur within the system, as well as on the compliance to agreed timelines. This is particularly important at the close of tender as late tenders may be deemed to be non-conforming.
E-tendering systems generate and process electronic documents that are part of business activities and, accordingly, need to be preserved as records within a record keeping system in order to comply with relevant legislation and standards. The evidentiary integrity of electronic records and data is important.
System availability is crucial, particularly during the tender submission stage before the close of tender time.
Some examples of specific security mechanisms include:
Encryption for electronic communications;
Unique username and password to identify pre-qualified tenderers (meaning that only authenticated tenderers will be allowed to download the tender specification).
Tender advertisements, addendums and inquiry responses should be digitally signed by the principal.
Encryption of sensitive tender documents, such as offers, while stored;
Security mechanisms are available that simulate the physical tender box, and can ensure that electronic tender documents cannot be opened before the designated opening time in the tender conditions (and can require two persons to open).
Access control mechanisms within the e-tendering system to restrict access to e-tendering data and applications.
Several security mechanisms are available to enhance the evidentiary weight of electronic records captured within an e-tendering system, including:
Digital time-stamping to provide timestamp integrity, which can be implemented as a trusted third party service; and
Digital signature mechanisms to provide authentication and non-repudiation that will determine the origin and integrity of records.
The terms and conditions of tendering must always be considered in the light of the relevant circumstances, including any specific laws governing either the conduct of the principal (if a public body) or the subject matter of the tender itself.
Specific types of tendering terms and conditions could include:
(i) An ‘Onyx’ clause, confirming that no legal relations are intended to come into effect;
(ii) A Privilege clause, reserving the right not to accept the lowest or any bids;
(iii) A Discretion clause, permitting the principal to waive irregularities in a tender submitted to it;
(iv) Appropriate compliance/risk management clauses et Limitation and exclusion of liability clauses, privacy, confidentiality etc;
(v) Impose specific obligations on the Tendering parties to ensure that their tender is accurate and all financial amounts are correct and sufficient (ala March Construction);
(vi) Disclaim an obligation to review tenders for errors prior to the close of tenders;
(vii) A process to enable tenderers to raise queries/ambiguities for clarification in bid submissions, with responses distributed to all bidders/pre-qualified prospects.
(viii) Ensure that the principal secures full contact details of the bidder’s officer responsible for receiving and sending correspondence regarding the RFT;
(ix) If detailed evaluation criteria are to be applied, preserve some flexibility if appropriate eg:
The awarding of the contract is intended to be based on the evaluation criteria set in this RFT and the accompanying Standards. The Principal is under no obligation to award the contract to one of the tenderers, and reserves the right to depart from the stated evaluation method at its discretion.
(x) A broader reservation of rights might be appropriate eg:
The Principal reserve the right to (either themselves or by instruction to the project manager):
issue written amendments to this RFT, including varying the specified requirements;
suspend or cancel this RFT process, in whole or in part, at any stage prior to completion of contract negotiations, without incurring any liability;
accept or decline any or all responses;
not give any reason for any rejection of any respondent or response, or for any suspension or cancellation of this RFT process;
select a shortlist of any number of responses on any basis and enter into negotiations with any shortlisted respondent;
alter any date or time in the RFT process;
undertake due diligence relating to any respondent at any time during the RFT process;
apply or change and give whatever weight it wishes to any criteria relating to evaluating responses;
Internet Tender Terms and Conditions
In addition to the tender terms and conditions discussed above, relevant internet tender conditions could include:
Pre-qualification (or at least registration prior to access);
Access to the system must be through a user name and password
The bidder is obliged to maintain security of access user name and password; and
Excluding the principal’s liability for misuse of username and password, and possibly appropriate indemnities from the bidders.
In this more advanced e-tendering system, certain communications between the principal and the tenderer may need to be authenticated and non-repudiation for each message provided as they are part of the contract formation process. Electronic or digital signatures need to be addressed (see s 22, ETA)
Provisions specifying the determination of the time of receipt of particular e-documents or communications should be included in the conditions of tender;
The terms of tender should contain a clause whereby the tenderer consents to the use of electronic communication and agrees to designate an information system (email address) for receipt of electronic communications. This ensures compliance with provisions of the ETA/Model Law and can alert the bidder to the fact that all communication with the principal will be electronic.
This Background Paper by its nature cannot be comprehensive and cannot be relied on by clients as advice. This Background Paper is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Clendons for advice specific to your situation.
PO Box 1305, Auckland, New Zealand
Phone: +64 9 306 8000
 Discussed further below, the phrase “bid shopping” refers broadly to objectionable conduct through manipulation of bid information by the principal e.g. where some parties are permitted to rebid with knowledge of the original lowest bid.
 R v Ron Engineering and Construction (Eastern) Ltd  1 SCR 111
 Prime Commercial Limited v Wool Board Disestablishment Company Limited CA110/05, 18 October 2006, at paras 15 – 16 per William Young P.
 Ron Engineering; March Construction v Christchurch City Council (unrep), HC Chch, 20 Feb (1995)
 Double N Earthmovers Limited v Edmonton (City) 2007 SCC 3.
 Pratt v Transit (CA) at paras 63 – 77; Prime Commercial (CA) at para 16. See too Fullers Cruises Northland Ltd v Auckland Regional Council and ors (unrep, HC Auckland, CP438/96)
 For example, Tercon Contractors (Canada); Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1..
 The Maori Trustee v The Proprietors of Taharoa C Block (1 December 1993, CA 238/93); Markholm Construction Company Limited v Wellington City Council  2 NZLR 520.
 Maintec v Porirua CC (HC Wellington, CP 189/95; Gregory v Rangitikei DC  2 NZLR 208.
 Onyx Group v Auckland CC (2003) 11 TCLR 40
 Blackpool & Fylde Aero Club v Blackpool Borough Council  3 All ER 25, at p 30 per Bingham LJ.
  NZHC1284
 Chinook Aggregates Ltd v District of Abbotsford  1 WWR 624.