Unfair tender processes – will tenderers have a remedy if there's no process contract?

First published 16 March 2017

Australian courts will start using the doctrine of estoppel to provide a legal remedy to tenderers that can prove the tender process was not conducted fairly, or in accordance with in the RFT.

It is common for government agencies to competitively tender contracts that government enters into with the private sector. When private sector entities respond to a Request for Tenders (RFT) issued by a government agency, they expect the government agency will:

• evaluate the tenders received in accordance with the process described in the RFT;

• otherwise do what the government agency has said it will do; and

• treat all tenderers fairly.

Unfortunately, this expectation is not always met. When it isn't, disgruntled tenderers sometimes look to the courts for a legal remedy.

Courts in Australia and other countries have struggled to provide effective legal remedies. The usual approach taken by Australian courts is to try to impose these obligations on the government agency pursuant to a contract. They do this by saying:

• the RFT issued by the government agency is an offer by the agency to conduct the tender process in accordance with the terms of the RFT; and

• the offer is accepted by each tenderer, so as to create a contract between the government agency and the tenderer, when the tenderer submits its tender.

This contract is referred to as a "process contract". It is separate to the contract that the government ultimately enters into with the successful tenderer. By finding a process contract, the court is then able to imply a term into the process contract requiring the government agency to treat all tenderers fairly, and award a disgruntled tenderer damages for breach of contract if the government agency fails to conduct the tender process fairly or in accordance with the terms of the RFT.

The problem with this approach is that it is easy for government agencies to avoid a process contract being created, by stating in the RFT that no process contract will arise.

For a contract to arise, each party must intend to create it. If the government agency expressly states that it doesn't intend for the RFT to create contractual obligations in relation to the tender process, it becomes very difficult for a court to find that the government agency actually did intend create a process contract. Consequently, it has become routine practice for government RFTs to expressly exclude the creation of a process contract.

Accordingly, courts wishing to give legal effect to expectations that government agencies will conduct tenderer processes fairly and in accordance with the RFT, need to find an alternative legal basis for doing so. We think the legal doctrine of estoppel will allow the courts to do so.

What is estoppel?

The legal doctrine of estoppel enables a court to protect a person against a loss suffered as a result of reliance on a promise or representation. To obtain relief under the doctrine, a claimant must demonstrate that:

• he or she has acted to his or her detriment on the basis of an assumption or expectation that has been induced by the wrongdoer;

• in circumstances where the wrongdoer's role in inducing or encouraging the assumption or expectation is such that it would be unjust or unfair for the wrongdoer to depart from the assumption or expectation.

The court grants relief by preventing the wrongdoer from departing from the assumption or expectation, or by requiring the wrongdoer to pay compensation.

When a government agency issues an RFT that explains how a tender process will be conducted and implies that the process will be conducted fairly, this causes tenderers to assume or expect that the government agency will conduct the tender process fairly and in accordance with the RFT. A tenderer acts to his or her detriment, by investing time and resources to prepare a tender, in reliance on this assumption or expectation, and the government agency intends for the tenderer to do so.

Estoppel and a tender process

So, will a court prevent a government agency from departing from the evaluation process set out in the RFP, or require it to compensate tenderers that suffer loss as a result of the departure?

As a general rule, Australian courts will not allow estoppel to operate to prevent or hinder the performance of a positive statutory duty, or the exercise of a statutory discretion which is intended to be performed or exercised for the benefit of the public or a section of the public. This is because it would be contrary to public policy to allow an estoppel to frustrate the performance of a duty, or the exercise of a discretion, that the legislature has imposed or given in the public interest. It is for similar reasons that contractual undertakings by government agency that fetter the future exercise of statutory discretions are unenforceable.

But just as public authorities that enter into contracts are bound by ordinary private law rules dealing with contracts, the legal doctrine of estoppel can also apply to public authorities when engaging in certain activities. Courts in the United States distinguish between the "proprietary" and "governmental" capacities of public authorities, with the result that if a public body is acting within its proprietary capacity, and if its representative has been acting within the scope of his or her authority, then an estoppel can arise. Australian courts have used different terminology by distinguishing between the "planning or policy" level of government decision-making (where statutory discretions are exercised), and "operational" decisions that implement policy decisions.

If a government agency is making an operational decision, as opposed to a policy decision, then an estoppel can arise to prevent the government agency from making a decision that departs from an assumption or expectation that the government agency has induced, and on which the claimant has relied to its detriment.

I consider a decision by a government agency to depart from representations made by it in an RFT to be an operational decision as it does not require the exercise of any statutory discretion at a policy or planning level.

Accordingly, given the exclusion of process contracts has become commonplace in government RFTs, I expect Australian courts will start using the doctrine of estoppel to provide a legal remedy to tenderers that can prove the tender process was not conducted fairly, or in accordance with in the RFT.

Thanks to Esther Dwyer for her assistance with this article.