Ipsofactoj.com: International Cases [2003] Part 3 Case 5 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Transit New Zealand

- vs -

Pratt Contractors Ltd

KEITH J

BLANCHARD J

McGRATH J

12 FEBRUARY 2002


Judgment

McGrath J

INTRODUCTION

  1. This appeal concerns an engineering contractor who twice submitted the lowest tender bid but did not get the contract. It addresses the tension inherent in the relationships between those who call for tenders for construction contracts and those who submit them. The former generally seek to retain the fullest freedom to decide whether or not to accept any tender, and if so which. The latter, who must commit time and expense to preparation of tenders, have the expectation that the competition for the contract will be conducted, and a contract awarded, in a principled way. That is especially so if they are dealing with a public agency.

  2. Traditionally the law of contract treated the tendering process as one of preliminary communication prior to contractual commitment. Since 1980 in a number of cases in Commonwealth jurisdictions, including New Zealand, there has been a fresh analysis of the nature of duties owed to each other by invitors and tenderers during the period prior to letting of construction and engineering contracts. The trend in these decisions has been towards a greater readiness by the courts to recognise that parties may become bound by a preliminary contract to the processes that will be followed. The scope of the terms of such process contracts, express and implied, itself however can give rise to difficulties. At their heart lies the differing interests of the parties in tender situations and the practical problems they can give rise to. This appeal demonstrates these matters.

  3. Following a trial in the High Court Goddard J held that Transit New Zealand (Transit) was in breach of the terms of a tender process contract it had entered into with Pratt Contractors Ltd (Pratt), including an implied term that Transit would act fairly in considering Prattís tender (CP221/97, Wellington, 6 September 2000). Transit now appeals against the High Courtís judgment.

    BACKGROUND FACTS

  4. Early in December 1996 engineering consultants, Payne Royds, acting on behalf of Transit, the appellant, advertised for contractors to register their interest in tendering for a contract with Transit for the re-alignment of State Highway 1 at Vinegar Hill near Wanganui. Transit is a statutory body responsible for the safe and efficient operation of the New Zealand highway system. Pratt is a civil engineering contractor and the respondent in this appeal. Pratt registered its interest in the Vinegar Hill tender and soon after received a set of tender documents comprising a Request for Tender form, engineering plans and a geotechnical report.

  5. The request for tenders in relation to the Vinegar Hill State Highway No 1 contract stated that tenders should be submitted in two sealed envelopes. One of these envelopes was to contain the tender price. The other was to contain information concerning the tendererís proposal but excluding, and without disclosing, the price. The two envelopes were to be submitted in a single larger envelope. The request for tender also stipulated certain information which was to be submitted with the tender form. This included schedules of personnel, resources and sub-contractors, the tendererís construction programme and source of gravel.

  6. The request for tender document provided that all tenders would be evaluated on behalf of Transit in accordance with the "Weighted Attributes Method" provided for in Transitís Competitive Pricing Procedures manual. Under the first stage of this method of evaluation specified attributes of each tender were to be given a grade reflecting at one end of the scale complete inadequacy and the other excellence. At the second stage each attribute grade was converted to an index in accordance with the weighting for that attribute stipulated for the particular tender.

  7. The final index for each tender was not just a qualitative assessment, as after opening of the separate envelope containing the tender price it was treated as an attribute with its own specified weighting and was converted to a grade in accordance with a contractual formula. Provided the gradings had overcome the 35% fail threshold for each attribute the indices for the attributes were then totalled, to provide the overall outcome of the evaluation. The purpose of the method was to introduce into Transitís tender evaluation processes a structured form of assessment of tenders incorporating qualitative evaluation as well as price competition. It was expressed in this way in the introductory paragraph of the specification of the method in the competitive pricing procedures manual:

    There may be instances when the tendering authority does not have a fixed view on the quality of end result it desires; it may be prepared to pay a little more to get a contractor with more than the minimum necessary experience, or a contractor who is able to undertake the job with technology that results in much less disruption to the public than that proposed by the other contractors. The weighted attribute evaluation method may be more appropriate for such cases.

  8. The request for tender stipulated attributes with weightings as follows:

    Relevant Experience 

    Track Record 

    Technical Skills (Personnel) 

    Resources 

    Management Skills 

    Methodology 

    Price 

    :

    :

    :

    :

    :

    :

    :

    (4%)

    (10%)

    (4%)

    (4%)

    (4%)

    (4%)

    (70%)

  9. The request for tenders incorporated conditions for tendering included in the Standard Conditions of Contract for Building and Civil Engineering Construction NZS3910: 1987. These were amended by special conditions set out in the request for tenders. Those provisions of particular importance to the appeal were:

    107.

    Acceptance of tender

    107.1

    The lowest or any tender will not necessarily be accepted. [The Principal reserves the right to reject all tenders.]

    107.2

    The successful tenderer shall be notified in writing by the Principal or his agent that his tender has been accepted.

    [107.3

    Tenders shall conform and be evaluated in accordance with the current issues of TNZís:

    (a)

    Manual of Competitive Pricing Procedures, Volume 1: Physical Works and Professional Services.

    Tenders will be evaluated by the Weighted Attributes Tender Method.]

    108.

    Notification of Acceptance

    108.1

    If no tender has been accepted within [two months] after the closing of tenders, each tenderer shall be notified in writing by the Principal or his agent whether his tender is or is not still under consideration. [Tender rates and prices shall remain fixed and valid for acceptance for two calendar months unless otherwise stated in the tender documentation].

    108.2

    Unsuccessful tenderers who have submitted bona fide tenders complying with tender documents shall be notified by the Principal or his agent of the name and tender price of the successful tenderer and the other tender prices within ten Working Days of acceptance of the successful tender.

    (Amendments incorporated by special conditions are in parentheses)

  10. Pratt submitted its tender for the project to Transit by the closing date of 18 March 1997. Its price was $4,507,444 which was the lowest by nearly $1,000,000 of the eight tenders submitted. The next lowest price was $5,446,642. The secretary of Transitís tenders board prepared a schedule of the tenders received, recording the name of each tenderer and information on respective attributes other than the tender prices submitted. This schedule was sent to the team appointed by Transit to evaluate tenders.

  11. The tender evaluation team consisted of three persons. Two were from Payne Royds, Transitís consultants for the project. They had designed the project and prepared the geotechnic report on which it was based. The evaluators from Payne Royds were Mr Young, who was also the project engineer, and Mr Timpany, an employee of the firm. The other member of the tender evaluation team was Mr Jones an engineer in Transitís Wanganui office. Mr Jones had been added to the team following an expression of concern to Transit, prior to submission of tenders by Mr Pratt, the managing director of Pratt. Mr Prattís concern was that Mr Young had been the project engineer on an earlier roading contract at Pipiriki for the Ruapehu District Council, which had been undertaken by Pratt, whose performance was the subject of an unresolved contractual dispute over payments due to it. In response to his concerns Mr Pratt was given assurances by Transit that all tenders would be fairly and properly evaluated including any tender from Pratt.

  12. On 18 March 1997 the evaluation of information concerning tenderersí attributes, submitted with their tenders, commenced. Team members initially made their own preliminary assessments of each tender and ranked them. Following discussion of these views Mr Young and Mr Timpany closely examined each tender. Draft marks were given which were then discussed with Mr Jones. These preliminary assessments were re-examined if Mr Jones was not happy with the other membersí explanations for them. It appears that these assessments were completed without knowledge of tender prices.

  13. As indicated, the request for tender had specified each attribute to be evaluated and the weighting it would carry in the evaluation. The tender evaluation team, in the course of its work, further sub-categorised the attributes and gave each of the subcategories their own weightings. For example the attribute "management skills" was sub-categorised into "programming" and "management style" and these respectively given sub-weightings by the team of 30% and 70% of the 4% weighting specified for the "management skills" attribute.

  14. In accordance with this approach, which was not referred to in the request for tender, or otherwise disclosed, the team initially provided for a sub-category of "financial viability" with a sub-weighting of 50% within the attribute "resources". The other sub-categories were "aggregate" and "workload". There were statements, however, in Transitís State Highway Manual which stipulated that financial resources were not to be taken into account in the attribute weighing process, requiring that factor to be addressed, where appropriate, separately. Pratt was given a low rating on its "financial viability" during the initial tender evaluation. This impacted on its grading for the "Resources" attribute which as a result was below the fail threshold. This aspect of the evaluation, and the way Transit addressed it, became major issues at the trial in the High Court and in the argument of the present appeal.

  15. In the course of the evaluation the team, through Transit, sought further information or clarification from tenderers on a number of matters. On 24 March 1997, a request was made of Pratt for a certificate that a surety it nominated would provide a bond if Prattís tender was accepted. This request was of concern to Pratt which regarded it as unusual at this stage. It felt its tender price would effectively be revealed to the evaluators if such a certificate were given at that time.

  16. The tender evaluation team reported to Transit on 7 April 1997. The report itemised twelve "key issues" and stated that tenders had been evaluated in terms of those issues and in accordance with the weighted attributes method. Most of the key issues reflected the teamís sub-categorisation of the attributes, each of which they had evaluated. The key issues treated as being of most significance in the argument of the appeal were:

    8.

    The financial viability of the tenderer - in part the quantum of bond sought and the ability to fund a $6m project.

    11.

    The contract is a major one, being the largest undertaken in the Wanganui region of Transit NZ for some time.

    12.

    Selection of a contractor who has a consistent record of completing contracts without undue delays or substantial cost overruns or a history of costly litigation procedures.

  17. The evaluation teamís report set out the results of its weighted attributes method evaluation. Pratt had scored attribute grades of less than the 35% fail threshold on the attribute of technical skills as well as that of resources. As a result its tender was disqualified from consideration and was not given an overall index evaluation. The report also indicated the tender was marginal on the management skills attribute within which the team had created a sub-category of management style.

  18. The report included a section discussing Prattís tender. It referred to the experience of Mr Young and Mr Timpany with Pratt during the Pipiriki roading contract which had been terminated by the Ruapehu District Council and had been taken to arbitration. The report was critical of Prattís performance on that contract and linked Prattís pursuit of extra payment at arbitration to the evaluation teamís assessment of the management style of Pratt. Pratt was said to have admitted having a policy of tendering low and then aggressively pursuing extra payments. Under the heading "technical skills" the report was critical of the experience of Prattís key personnel, emphasising the importance of depth in management supervision for a contract of two years duration. Under resources the report indicated aggregate supply, work commitments and finances were issues. It questioned Prattís source of aggregate supply which was unproven. It also questioned Prattís ability to complete in the fifteen months it proposed and what it termed the non-committal response of Prattís nominated sureties in relation to provision of the necessary bond. It suggested Pratt would face difficulty in obtaining the bond and queried Prattís solvency. The possibility of the bond for the Pipiriki roading contract being called up was also raised. The report, which was signed by Mr Young, concluded its discussion of Prattís tender by saying:

    Overall it is our view that Transit New Zealand would be unwise to consider the tender of Pratt Contractors Ltd for this important contract.

    The report recommended acceptance of a tender of $5,572,871 by Hurlstone Earthmoving Ltd (Hurlstone) whose price was third lowest but whose tender had received the highest overall index figure in the teamís evaluation.

  19. Transit was not however prepared to accept the evaluation teamís recommendation, without further inquiry into the evaluation of Pratt. On concerns over "resources" Transit sought clarification that Pratt had an alternative proven source of gravel as a back-up if necessary. This aspect seems to have been quickly resolved. It also questioned Prattís assessment in its tender of the performance efficiency and adequacy of its earthworks plant and sought confirmation Prattís tender price allowed for completion if an alternative proposed methodology were to be adopted. This was followed on 18 April with a query concerning Prattís very high assessment of its productivity rate. Pratt responded to these queries. It said its production rates were optimal rates at 100% efficiency and that it accepted there would be down-time due to rain and possible major break-downs.

  20. On 30 April 1997 Mr Young wrote to Transit reporting on a review that he had undertaken of Prattís assessment of the earthworks portion of the contract as clarified since the report of 7 April. Prattís programme had provided for completion of earthworks in one construction season. Mr Young reported that Pratt had confirmed it had assessed its productivity at optimal rates with 100% efficiency. That productivity assessment, Mr Young reported, did not take into account wet material, any major breakdowns, lost time due to wet weather, drying fill material with consequent double handling, and varying haul lengths in movement of material to fill and waste areas. The programme made no allowance for wet weather at all. Mr Young thought that this factor, and other potential delays listed, could add another 60 days to the earthworks programme taking the operation into a second summer with resultant claims for extra work. An option involving completion of the works over two seasons without motorscrapers was seen by Mr Young as impracticable. In short, his concerns were not at this stage satisfied. It appears that he was speaking for the evaluation team as well as himself.

  21. Mr Youngís report concluded by stating that Pratt had under-estimated the earthworksí phase of the contract and asserted this cast further doubt on its management and technical skills. Transit would carry the risk of further claims from Pratt if its productivity was affected by material significantly different to that logged. He reminded Transit that Pratt had failed in terms of resources and technical skills during the evaluation process and reiterated his belief that it would be unwise for Transit to accept Prattís tender.

  22. On 5 May Mr Trounce of Transitís head office met Mr Pratt in Wellington and discussed Prattís tender with him. Mr Trounce emphasised that Mr Pratt needed to understand the successful contractorís methods and be convinced that due consideration had been given to the tender. He also said Transit was concerned Pratt may have under-estimated the project and "would recover costs through claimsmanship." Mr Pratt responded that he knew the job and wished to complete it in the shortest possible time. He discussed his methodology in some detail. Mr Trounce said that Mr Pratt should have a further meeting with Mr Taylor in Wanganui. Mr Taylor was Transitís state highway manager for the region.

  23. As the Capital Projects Manager Mr Trounce had the responsibility for recommending which tender should be accepted. He had become concerned during the meeting that the basis on which Pratt had priced its tender might indicate Pratt had a view of the volumes of different soil types that would be encountered which was contrary to that of the consultants. If so, and Pratt was right, that would be costly to Transit. On the other hand, if the consultants were right, Transit would get the advantage of Prattís low price. That raised the question of the failed rating on technical skills and resources which unless overcome precluded accepting Prattís tender. Mr Trounce accordingly faxed Mr Taylor the same day saying:

    I would suggest that if we are serious about Mr Pratt, at a saving of $1,000,000 then we need to discuss with the Consultant the reasons for the low rating and if possible get the rating to 36.

    Alternatively, ask for an independent review of the contract rating.

    I would not want to throw out $1,000,000 because of a process or because the Consultant was unduly harsh.

  24. There was a meeting between Mr Pratt and Mr Taylor the next day following which Mr Taylor wrote to Pratt confirming that Transit had assessed that Pratt could lose over $750,000 on the contract if its differing assessment of the quantities of different types of material turned out to be wrong. He urged Pratt to get professional advice. He also sought a certificate from a surety that it would provide a bond if Pratt was awarded the contract. Confirmation on both points was sought by 9 May 1997.

  25. Mr Pratt then sought advice from a consultant, Mr Dean. Mr Dean reported back that in his view Pratt had tendered a low price for type ĎAí material generally capable of excavation by conventional plant. A different and "much more realistic" rate was, however, stipulated if productivity was reduced by at least 50% due to properties of groinsize, water content or organic content of material. Objectively, Pratt had taken a risk, reflected in its offer of a lower overall price than those offered by other contractors, presumably because of its own assessment of the amount of the added value material that would be encountered. Mr Dean said Pratt would derive substantial extra payments if its assessment proved correct. But if the assessment proved wrong it would lose money on the contract, although not as much as the $750,000 indicated by Transit. Pratt then confirmed on 9 May all aspects of its tender, including the price, on the basis of the schedule of rates.

  26. There was then a delay in getting confirmation from Pratt that a bond would be available from an approved company but following further correspondence this issue was resolved on 28 May when Lumley General Insurance (NZ) Ltd approved the issue of a bond.

  27. On 29 May Mr Pratt met with Messrs Taylor, Jones, Young and Timpany in Wanganui. This meeting first addressed Prattís technical skills. Mr Young expressed concern over Prattís technical and managerial staff levels and the meeting sought details of the back-up support that would be available. This issue of course went back to the attribute of "Technical skills" on which Pratt had been failed by the tender evaluation team. Pratt was asked to respond in writing to this issue.

  28. The other major matter addressed at the 29 May meeting was productivity. Concern was expressed by Transit about the productivity rate in relation to what Transit saw as an under-estimate of haul distances. Pratt accepted haul distances could affect its productivity. Transit also spelt out the basis on which added value material rates for excavation would be allowed - that is when material was excessively wet during dry weather conditions. On the basis of geotechnical testing little variation in the volume of added value material stated in the schedule was expected. It was emphasised to Pratt that loss of productivity due to delays caused by drying operations or any site mismanagement would not elicit extra payment. Finally Pratt was asked to confirm that its tendered price held and that there would be no claims for delays in starting up. It was reiterated that the works were to be completed over a 15 month period. No extra payment would be sought if the work took a full two years.

  29. By this time Mr Pratt had become concerned that Mr Taylor did not want Pratt to get the contract. He sensed that the consultants were concerned they had underestimated the quantity of wet material on the site and if that eventuated there would be a cost over-run if Pratt were awarded the contract, because of the basis of Prattís bid for added value material. Mr Pratt came to see Transitís pressure over the bond and the requirements made of Pratt at the 29 May meeting in that light.

  30. His immediate response, nevertheless, was to address Transitís expressed concerns by advising that Ian A Martin Ltd, an engineering contractor, had been engaged to support Prattís management team. On 3 June, however, frustrated by the continuing delays and questions from Transit and its consultant, Mr Pratt wrote withdrawing his tender. He was persuaded by Mr Taylor on 5 June to withdraw that letter and was given an indication the tender would be awarded by midday on 10 June 1997. Mr Pratt was also told that Prattís tender was the lowest and the most preferred tender. Mr Pratt understood Mr Taylor would recommend acceptance of Prattís tender. However Mr Taylor had added that he would also first have to confirm other tenders.

  31. At this point Mr Taylor was of the view Pratt should now have a (low) pass mark on technical expertise and management skills as a result of additional information and especially the involvement of Ian A. Martin Ltd. Mr Taylor had asked that the tender evaluation teamís attribute gradings be reviewed with the expectation that the fail threshold would be met for all attributes . It seems clear that Mr Taylor anticipated that he would recommend acceptance of Prattís tender. Transit, as a precaution, then asked other tenderers to confirm their tenders.

  32. That outcome did not, however, eventuate. Other tenderers protested at the letting of the tender after expiry of the two month period for which tender rates were to remain fixed and valid for acceptance. After taking legal advice Transit decided to relet the tender with fresh bids to be in by 16 June 1997. Advice of that decision was sent out on 10 June. Mr Pratt was advised by telephone. His concerns about the process were enhanced by this unexpected turn of events. He immediately drove to Wanganui and, it seems, was able to see Mr Taylor later that day or shortly thereafter. There was a dispute whether or not at that meeting Mr Taylor told Mr Pratt to lift his bid by $500,000. Mr Pratt gave evidence he had done so. Mr Taylorís position was that he did not tell Pratt to lift its bid in the second round. Pratt in his view had made the grade as a tenderer once Ian A. Martin Ltd was on board. Transit had fully satisfied itself it carried no risk if it accepted Prattís $4,507,444 bid.

  33. The second tender round proceeded quickly. It was confined to the previous tenderers who could confirm what they had previously submitted, or provide additional information and notify specific amendments. Substantially the same conditions of tender applied. Pratt submitted two tenders in the second round. The first confirmed its earlier tender at $4,500,000. The second tender was at a price of $5,000,000. It was supported by different establishment costs and rates for the two soil types. Mr Pratt wrote on the same day as he submitted the tenders to Transitís head office expressing his concern about the process and the failure to accept Prattís first tender by 10 June. The tenders received in the second round were opened at 4pm on 16 June. All envelopes received were opened including those containing tender prices. The High Court Judge held that Hayes Earthmoving Ltd (Hayes), whose tender ultimately was successful, had submitted its entire tender in one envelope, contrary to the terms of the request for tender which required that the price be submitted separately.

  34. On 18 June Mr Taylor asked Mr Pratt which of its two tenders Pratt wanted considered. The request was confirmed in writing and an answer sought by 2pm on 20 June. At this time there were discussions between Mr Taylor and Mr Pratt during which Mr Pratt was told for the first time of the fail grades on two non price attributes in the evaluation of its first tender. He was also told of Transitís concern that Prattís low price in the first round might preclude its completion of the project. On 20 June 1997 Pratt advised that its tender at the higher price of $5,000,000 should be considered.

  35. The fresh tenders were then evaluated in the same manner as those submitted in the first round. Mr Young and Mr Jones were members of the evaluation team but Mr Timpany was unavailable. He was replaced by Mr Gifford, who was another employee of Payne Royds. This was not known to Mr Pratt.

  36. In the evaluation of attributes in the second tender round the sub-category "financial viability" was deleted from the attribute "resources" in accordance with the State highway manual requirements. Hayes received a significantly higher grade for its tender overall than it did in the first round. It moved from 15.6 to 19.2, an increase of 22.8%. Pratt also received a higher grade, moving from 13.8 to 14.3, an increase of 3.6%. The reasons for these movements and the appropriateness of the assessments leading to them were in issue both before Goddard J and in this Court. It is sufficient, at this stage, to say that while Pratt and Hayes each had rises and falls in their individual attribute grades, in comparison with those achieved in the first tender round, Hayes significantly improved its overall position in relation to Pratt. While Pratt had increased its price by $500,000 to $5,000,000, Hayes reduced its price to $5,299,134. Hayesí higher grades on non price attributes were then enough to give it the highest overall index in the evaluation. Pratt ended up with the third highest index behind Hayes and Hurlstone. Hayesí tender was accepted and that of Pratt rejected on 25 June 1997. Pratt thereafter brought these proceedings in which it challenged Transitís conduct of both tender rounds.

    THE PLEADINGS

  37. Pratt sued Transit for breach of contract and misleading and deceptive conduct in breach of the Fair Trading Act. In its contractual causes of action Pratt pleaded and Transit accepted that Transitís December 1996 request for tender was an offer which Pratt had accepted by submitting its tender. That acceptance gave rise to a preliminary contract between them which bound Transit to follow the process specified in its request for tender in the administration of the tender round.

  38. Pratt pleaded that the terms of the preliminary contract included the manner in which competing tenders would be evaluated, that is in accordance with the weighted attribute method. It also included specified general form conditions of contract and the provisions of Transitís competitive pricing procedures manual as well as those of Transitís state highway manual and contract administration manual. Pratt also pleaded there were a number of contractual terms which were implied in the request for tender. These included obligations on Transit to act in good faith, fairly and reasonably in the course of the tender process.

  39. In its first cause of action Pratt pleaded that the evaluation of Prattís first tender by Transitís evaluation team was biased and unfair. In particular Pratt referred to the views taken of Prattís performance on and its subsequent claims for extra payment for the Pipiriki roading contract. A number of aspects of the teamís criticisms of Prattís perceived approach to tendering and litigation and its view and assessment of Prattís attributes were also relied on to support the allegation that the teamís report of 7 April 1997 was biased, unfair and in breach of the implied terms of the preliminary contract. Transit denied all of these allegations. Pratt also alleged that by taking into account these matters, and by failing to take into account responses by Pratt, the evaluation of Prattís tender was in breach of contractual terms set out in the manuals. Finally Pratt pleaded there had been provision of information concerning individual tender prices in the course of the tender evaluation process which was said to be in breach of the process contract.

  40. The second cause of action concerned alleged breaches of a second preliminary contract with terms which substantially mirrored those of the first, formed when Pratt submitted tenders in the second round. Transit accepted there was also such a contract. The allegations of breach were largely the same as those pleaded in relation to the administration of the first tender round. It was also alleged that Mr Taylor of Transit had given misleading information concerning relative pricing to Pratt by representing that it was unlikely to be awarded the contract unless it increased its tender price to $5,000,000 in the second round. Pratt of course had submitted two tenders and when called on to do so made an election, confirming that its $5,000,000 higher priced tender should be considered. Pratt had also alleged there had been disclosures of price information to Transitís evaluation team prior to completion of tender evaluation in breach of the second contract. Transit denied all these allegations.

  41. The third cause of action pleaded that the conduct of Transit in administering the tenders and in representing they were being properly administered was misleading and deceptive in terms of the Fair Trading Act. These allegations were also denied. Under each cause of action Transit sought an inquiry into the damage it had suffered.

    HIGH COURT JUDGMENT

    Preliminary

  42. In the judgment delivered in the High Court (CP221/97, Wellington, 6 September 2000) Goddard J commenced consideration of the partiesí submissions by emphasising the public nature of Transitís functions and processes. She also referred to the considerable time and cost involved in the preparation and submission of a tender for works such as those in the Vinegar Hill project. The Judge indicated that these factors required that the tender processes be conducted by Transit with utmost integrity.

    First tender round

  43. Having submitted a conforming tender in response to the request for tenders in the first tender round, Pratt had entered into a contract with Transit governing the process Transit would follow. The Judge observed that the concept of a process contract was one protective of the integrity of the bidding system. Her Honour traced the development of the legal principles founding such a contract to R v Ron Engineering & Construction Ltd (1981) 119 DLR (3d) 267; Canamerican Auto Lease & Rental Ltd v Canada (Ministry of Transport) (1987) 37 DLR (4th) 591; Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 3 All ER 25 CA; Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 (Federal Court), MJB Enterprises Ltd v Defence Construction (1951) Ltd (1999) 170 DLR (4th) 577 (Supreme Court of Canada) and Harmon CFEM Facades (UK) Ltd v Corporate Officer of House of Commons (1999) 67 Conv LR 1.

  44. The Judge found that the terms of the contract in the present case included obligations of Transit appearing in the provisions of the competitive pricing procedures manual and of the state highways manual and contracts administration manual. The Judge observed:

    I am satisfied they constitute a regulatory code requiring scrupulousness, consistency and adherence to all of the relevant protocols.

  45. Applying these legal principles to the facts, Goddard J held that Transit had failed to discharge its contractual duty to evaluate Prattís tender fairly and impartially. This was largely because of the history of the relationship between Payne Royds and Pratt involving litigation with the Palmerston North City Council and the dispute over the Pipiriki contract. The outcome of the litigation with the City Council, in which Pratt was successful, is reported as Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469. Transit had failed to address directly with the consultants the possibility of the past relationship affecting their tender administration and to orient the consultantsí thinking appropriately in the course of evaluation of the tenders.

  46. Overall Goddard J held that the evidence established "the real risk of bias of the evaluation team" during the first tender round. This finding was based on four factors. The first was the inclusion of the financial viability sub-weight "which was in breach of the contract terms". The Judge had the clear impression this was aimed at Pratt. It had resulted in Pratt failing on the resources attribute. The second was the evaluation teamís reference to selecting a contractor with a consistent record of timely completion, without substantial cost overruns, and without a history of costly litigation. This of course concerned one of the key issues in the evaluation teamís report of 7 April 1997. The third factor was the critical and, in the Judgeís view, inaccurate commentary on Prattís tender and on Mr Pratt himself in that report. This included the evaluation teamís explanation for the failure of Pratt on technical skills and resources attributes including the teamís doubts about Prattís ability to secure a bond. The Judge expressed disagreement with the decision to fail Pratt on the attribute of technical skills in the evaluation and in particular the view of lack of experience of key personnel. The fourth factor was what the Judge found to be a misdescription by Mr Young of Prattís clarification of its methodology in his letter of 30 April in which Mr Young had reported adversely on Prattís responses to questions concerning pricing and programming of the earthworks in its tender.

  47. In relation to the weighted attributesí method Goddard J held that no attributes other than those specified in the contract could be included in the evaluation and those specified could not be redefined in a way that created new attributes. Introduction of financial viability as an aspect of tender evaluation in the first tender round was therefore in breach of the contractual process requirements. The Judge was concerned that it may have been introduced to ensure Prattís tender was unsuccessful. The Judge also considered the attribute sub-categories, and subweights that they carried, should have been notified to tenderers as part of the duty to conduct a fair process.

  48. Goddard J was also of the view that Transit had not been assiduous in bringing its administration of the first tender round to a timely conclusion. This was also seen as in breach of the process contract. Had matters not been allowed to drift, the Judge held, Pratt would have been awarded the contract at the conclusion of that round, provided of course it had not been wrongly failed on the two attributes.

  49. In summary, in relation to the first tender round, the Judge held that had Pratt not been failed on technical skills and resources and had that round been administered in a timely way as the process contract required, Pratt would have been awarded the Vinegar Hill contract. Its failure on the two attributes was not the result of a proper assessment of the merits of the tender but due to breaches of contract which went to the integrity of the process. The evaluation process was furthermore so tainted by bias that the Court could not safely allow the ultimate evaluation to remain in place.

    Second tender round

  50. In relation to the second tender round Goddard J found Pratt made its second and higher bid in response to an indication from Mr Taylor that it should lift its tender price. Her Honour did not find, as Mr Pratt had maintained, that Mr Taylor had directly told him he should lift his bid. Mr Taylorís indication was oblique rather than explicit on the point.

  51. The Judge went on to find fault in the evaluation of the second tender round, holding that there was no logical reason given in evidence for Pratt being marked down from its earlier grades and even less for Hayes to be marked up. The Judge saw this outcome as the result of introducing Mr Gifford into the evaluation process because Mr Timpany was unavailable. Mr Gifford had direct involvement with both Pratt and Hayes as contractors during the Pipiriki project. The Judge was not satisfied with the explanation that a change of subcontractor was the reason for reducing Prattís grades for "relevant experience" and "management skills". Nor in her view was a reduction in Prattís grades for methodology adequately explained.

  52. Her Honour also found that Hayesí tender had probably not conformed with the contractual conditions because price information had been contained in the same envelope as the submission concerning the attributes. This also was in breach of Prattís contract as a result of which Hayesí tender should have been rejected.

    Fair Trading Act

  53. Finally, the Judge found Transit in breach of s9 of the Fair Trading Act in that Mr Taylor and another manager had represented to Pratt that tenders would be, and later were being, fairly evaluated. The judgment concluded with orders for an inquiry into damages for breach of contract and compensation under s43(2) of the Fair Trading Act.

    SUBMISSIONS ON APPEAL

  54. Transit appealed. Its senior counsel in this Court, Mr Miller, took issue with Goddard Jís formulation of Transitís obligations to Pratt. He submitted that as the conditions of the request for tender did not explicitly incorporate internal documents such as Transitís state highway manual and contract administration manual their contents had no contractual significance. He also argued that the judge had wrongly imported procedural requirements into the contract on the basis of administrative law principles, said by the Judge to be applicable as part of the duty of fairness in considering Prattís tender.

  55. In relation to the first tender round Mr Miller argued that whatever the position in relation to concerns over the work of its evaluation team, Transit had fairly considered Prattís tender by the time it decided to reject all tenders. Transit was not bound to reach a decision by any particular time and was entitled under its contract with Pratt to reject all tenders when it did.

  56. During the second tender round Transit was not, Mr Miller argued, confined in its evaluation of tenders to consideration of new information. Transit was entitled also to change its evaluation team as it did. There was no basis in the evidence for the Court to conclude Pratt should have received a higher grade and that was to assume the statutory role of Transit. Transitís submission overall was that there was no breach of contract in the way it administered Prattís tenders and tendering overall.

  57. Senior counsel for Pratt, Mr Fardell, emphasised that the trial judge had made findings of fact adverse to Transit having heard its witnesses give evidence. He submitted that the sum of these findings was that Transit, through its consultants, had engineered a process to exclude Pratt from the contract for the works or had conducted the evaluation process so ineptly that this was the effect. Three features of the assessment of Prattís tender in the first tender round established the hidden agenda and the bias on the part of those considering the tender. The first was use of undisclosed sub-weightings for the assessment of tender attributes. The second was the introduction of a financial viability criterion as one of the sub-weights. The third was the identification, as a key issue in selection of a contractor, of a tenderer with a consistent record of completing contracts without undue delays, substantial cost overruns or resort to litigation. This, Mr Fardell said, was done to target Pratt. This agenda was demonstrated by the reports of 7 April and 30 April 1997, and of a cost schedule forming the basis of the evidence of Mr Jones. Delays in completing assessment of the tender were also relied on, in that, had there been a proper and timely evaluation, Prattís tender would have been accepted.

  58. In relation to the second tender round counselís submissions emphasised the Judgeís findings of lack of logical reason for changes in evaluation of Prattís tender attributes. These were inconsistent with developments during discussions with Pratt prior to the termination of the first round. The involvement of a new member of the evaluation team was also pointed to, as were technical breaches in Hayesí tender. On these points Pratt had the benefit of favourable findings in the High Court.

  59. Pratt argued that the Judge was correct to find that the provisions of the various manuals indicated standards Transit had set for itself. It had accepted at trial that they were part of the process contract. Whether by way of incorporation, implication, or as an aspect of the implied duty of fairness and good faith they formed part of Transitís contract obligations.

    THE STATUTORY CONTEXT

  60. The Transit New Zealand Act 1989, as substantially amended in 1995, provides the institutional framework within which public works in relation to roading are to be undertaken in New Zealand. In its present form the Act provides for two statutory bodies to perform functions in relation to roading and associated works. There is a split between funding and operational functions. Transfund New Zealand (Transfund), which was established in 1996, is a Board the principal objective of which is stated to be "to allocate resources to achieve a safe and efficient roading system" (s3B - inserted by s14 of the 1995 amendment). Transfundís functions include approval of a National Roading Programme and approval of services and capital projects as qualifying for payment from the National Roads Account of Transfund under the Act (s3C(1)). Transfund also approves competitive pricing procedures for contracts entered into, in particular, by Transit and local authorities and it audits the performance of those bodies (s3C(1)(e) and (f)). Transit is established as "an Authority" by the Act. Its principal objective is to operate a safe and efficient highway system (s5).

  61. In the context of this appeal Transit has the functions of control of the state highway system, including its planning, design, supervision, construction, and maintenance (s6(c)). Its other functions include preparation of the state highways programme in accordance with the Act and making of payments from the state highways account as authorised by the Act. The Act envisages that Transit is to discharge its operational responsibilities through contractual arrangements with service providers and it is required by the Act to let its contracts in accordance with competitive pricing procedures which, as indicated, Transfund must approve. The desirability of encouraging competition amongst suppliers of engineering contract services, and the undesirability of excluding any suppliers from competing for particular contracts are mandatory considerations in setting such procedures (s26(3)(c) and (d)). Furthermore, the capacity of Transit to make payments for such services or projects is dependent on the price having been determined by those procedures (s27).

  62. Transfundís monitoring of Transitís contractual procedures is accordingly in the context of a statutory expectation that its competitive pricing procedures will by and large determine who provides the particular services Transit requires in its operations and the price of those services. Transit has the operational responsibility within the terms of the accountability mechanisms administered by Transfund as provided for by the Act. Overall the purpose of the Act is achievement and operation of safe and efficient roads through these market and supervisory mechanisms. The terms of Transitís two requests for tenders, by which it sought to procure tenders for the Vinegar Hill contract, and the scope of the legal relationships, created by Prattís submission of tenders in both tender rounds, are to be ascertained in this statutory context.

    THE PROCESS CONTRACT: FORMATION

  63. Historically the process of procuring tenders was not treated by the courts as contractual in nature. The freedom of the invitor to accept or reject any tender was regarded as fundamental to the tender concept. Invitations to submit tenders were almost invariably treated as preliminary communications which took place before any contractual offer was made. While tenderers might be involved in considerable work and expense in tender preparation they were understood to assume the full risk that no contractual entitlement would eventuate from their efforts. The position differed if there were a particular stipulation in the invitation to tender, such as one binding the invitor to accept the lowest (or, as the case might be, highest) offer, but otherwise the invitor was not regarded as having an intention to become contractually bound in any way prior to its acceptance of a particular tender.

  64. In recent years a number of jurisdictions have recognised wider scope for an invitation to tender to have contractual force. In Ontario v Ron Engineering & Construction Eastern Ltd (1981) 119 DLR (3d) 267 the Supreme Court of Canada considered whether a contractor was able to withdraw what was the lowest in price of the tenders that had been submitted without forfeiting its tender deposit. The tenderer had discovered a substantial error in its pricing after submitting its tender but prior to any step by the invitor indicating acceptance. Under the tender conditions a bid could not be revoked once tenders had closed for a stipulated period and on acceptance of the tender both parties would become bound to enter into a construction contract for the works. If the tenderer had refused to sign the contract or had withdrawn its tender contrary to tender terms the invitor could retain the deposit. The Supreme Court of Canada saw the contractual issue in policy terms. In delivering the judgment of the Court Estey J said:

    I share the view expressed by (the Ontario Court of Appeal) that integrity of the bidding system must be protected under the law of contracts if it is possible to do so....

  65. Applying this approach the Court concluded there was an initial contract, distinct from the construction contract that was to arise on acceptance of the tender. It rejected the conclusion of the lower court that on proof of mistake by the tenderer the recipient was unable to accept it. As Estey J put it:

    The tender submitted by the respondent brought contract A into life.....Here the call for tenders created no obligation in the respondent or in anyone else in or out of the construction world. When a member of the construction industry responds to the call for tenders, as the respondent has done here, that response takes the form of the submission of a tender, or a bid as it is sometimes called. The significance of the bid in law is that it at once becomes irrevocable if filed in conformity with the terms and conditions under which the call for tenders was made and if such terms so provide. There is no disagreement between the parties here about the form and procedure in which the tender was submitted by the respondent and that it complied with the terms and conditions of the call for tenders. Consequently, contract A came into being. The principal term of contract A is the irrevocability of the bid, and the corollary term is the obligation in both parties to enter into a contract (contract B) upon the acceptance of the tender.

    In terms of that contract the Court held the deposit was properly made forfeit.

  66. In MJB Enterprises Ltd v Defence Construction (1951) Ltd (1999) 170 DLR (4th) 577 the Supreme Court , in its judgment delivered by Iaccobucci J, affirmed the place of R v Don Engineering & Construction as the leading Canadian case on the law of tenders. MJB Enterprises was concerned with the imposition of obligations on an invitor by a tender process contract. The Court emphasised, first, that whether an initial contract arose on submission of a particular tender turned on the terms and conditions of the call for tenders and, secondly, that the terms of any such contract were "governed by the terms and conditions of the tender call" (paras 17 and 19). The Supreme Court did however imply a term that only compliant bids would be accepted, reasoning that no contractors would have submitted tenders unless it was understood by all involved that only a compliant tender would be accepted. It refused to imply a term that the lowest compliant bid must be accepted (paras 30-32).

  67. In England in 1990, the Court of Appeal, in Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 independently, and on a somewhat narrower basis, also reached the position that an invitation to tender might give rise to contractual obligations. The Council had sought tenders for a concession to operate pleasure flights at its airport. The conditions of tender stated that the Council did not bind itself to accept all or any part of any tender and that no tender received after a specified date would be considered. The conditions then proceeded to spell out detailed instructions as to the procedure, time and place for lodging tenders. The respondent aero club submitted a tender within the stipulated time, which was wrongly marked by a Council officer as submitted late. Before appreciating there had been an administrative error the council had accepted a tender for the concession at a price lower than that of the appellant.

  68. The Court of Appeal held that the terms of the request for tender gave rise to a process contract with a party who submitted a tender, conforming with those terms, before the deadline. As to the terms of that contract, the tenderer was entitled, not as a matter of expectation but of contractual right, to have its tender opened and considered along with all other conforming tenders, or at least considered if others were. There was in the Courtís view a clear implication in the terms of tender to that effect. The aero club was entitled to damages for breach of that contract.

  69. In the leading judgment Bingham LJ accepted that contracts were not lightly to be implied. The Court had to be able to conclude, with confidence, both that the parties intended to create contractual relations and that they had agreed on the terms contended for. The circumstances of particular significance indicating this was the case were the soliciting of tenders from a small group all members of which were known to the local authority, its clear, orderly and familiar procedure, and the prescribed common form of tender and the supply of envelopes to ensure anonymity and certainty of identity of the tenderer concerned. The Court of Appeal appears to have regarded the case as an exception to the general rule that requests for tenders are not intended to give rise to contractual relations. Indeed it was described in the concurring judgment of Stocker LJ as one of the fairly rare exceptions. (p1204)

  70. The formulation by the Court of the invitorís contractual obligation as being simply to give consideration to the tender if others were considered is narrow but the scope of the duties of the parties must always reflect the terms and conditions expressed or implied in the particular invitation to tender.

  71. In New Zealand the High Court had accepted in 1984 that a person contemplating a contract in a commercial endeavour might enter into a process contract concerning the process it would follow. In Markholm Construction Co Ltd v Wellington City Council [1985] 2 NZLR 520 Jeffries J held that advertisements by a local authority offering to sell sections at stipulated prices and other terms by ballot were offers that might be accepted by each person who completed and submitted to the Council by the stipulated time the forms referred to in the advertisements. The High Court applied Ron Engineering & Construction and took the view the parties had the necessary intention to enter into a contract.

  72. Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469 was a decision of Gallen J in the High Court. Comprehensive terms of the request for tender provided that the Council would select the successful tenderer by an evaluation method described as the "lowest price conforming method". Under this method the Council would assess information provided by each tenderer relevant to six specified attributes and grade the tenderer as either passing or failing each attribute. A pass grade was required on each specified attribute or the tender itself would fail. The qualifying tenderer with the lowest price would be the successful tenderer.

  73. There were four qualifying tenders including that of Pratt, which tendered the lowest price. Its tender was not accepted. The Court held however that the Council had departed from the terms of the tender by awarding a construction contract, following negotiation, to a tenderer who had submitted with its qualifying tender an alternative design for the project. This design offered the Council savings. Gallen J followed Markholm Construction Co Ltd v Wellington City Council and adopted the two contract approach in Ron Engineering & Construction.

  74. Applying the approach of Bingham LJ in Blackpool & Fylde Aero Club, Gallen J saw the crucial question as whether the parties had intended to create contractual relations with respect to submission of a tender. The considerations in Pratt Contractors Ltd that persuaded Gallen J that was so were, first, that there had not been a mere calling for tenders for the works, as in order to tender contractors had first to register their interest and pay a non refundable deposit of $100. Secondly, the tender documents were extensive, detailed and substantial in relation to description of the contract works and conditions of the construction contract, if one were entered into. Most significantly they specified that tenders would be evaluated in terms of the lowest price conforming method described above. These circumstances indicated the Council was assuming obligations to tenderers and this in turn suggested it had intended to do so in a contractual framework.

  75. Gallen J saw the terms of the contract as being those which the Council had imposed on itself in the call for tenders "as well as the requirements of fairness and equity which may well have an application" (p481). It was conceded by the Council that it was obliged to proceed in a manner that met the general requirements of fairness. The offer that was accepted was not an alternative tender within the terms provided for by the process contract. It was not expressed in sufficiently precise terms to allow acceptance. Nor had it been submitted in accordance with requirements spelt out in precise detail. Acceptance of the alternative design offer was accordingly in breach of the process contract. While that was the principal basis of the Courtís finding of breach, Gallen J went on to observe [p 483]:

    There is also an aspect of fairness. It was conceded by counsel for the defendant, that the Council was obliged to proceed in a manner which met the general requirements of that rather indefinable term "fairness". To accept as an alternative tender and thus deprive the lowest conforming tenderer of such opportunity as that qualification gave it, a document which is indefinite in terms of price, which required elucidation and confirmation, was I think unfair. That comes close to negotiating with one of the tenderers within the tender process, but not on terms which apply to other tenderers.

  76. Pratt Contracting Ltd has subsequently been applied in a number of decisions of courts in New Zealand and overseas. One of assistance in the present context is Fuller Cruises Northland Ltd v Auckland Regional Council (CP438/96, Auckland, 4 June 1999, Paterson J). The case concerned a tender for a passenger transport service. As in the present appeal, the Transit New Zealand Act 1989 provided the statutory context within which the parties called for and submitted tenders for the works involved. Paterson J saw the framework of the Act as relevant to the question of intention to create legal relations. In particular he referred to the requirement, now appearing in s26 of the Act, that Transit have regard to the undesirability of excluding from competition for the project any party who might otherwise be willing and able to compete. Paterson J took the view that the involvement in that case of Transit, as funder of the process, and the requirements of the Act generally indicated the tender process involved far more than a simple invitation to tender. He considered this statutory backing, coupled with the detailed requirements of tenderers, the work required in submission of any tender and the requirements as to consideration of tenders imposed on the Regional Council in the documents, to lead to the conclusion, that, while the Council was not bound to accept any tender, it had bound itself to the procedure it would follow and the criteria it would apply in considering all the tenders. The Judge found there was a process contract in that case.

  77. Whether a request for tenders gives rise to a process contract, once a conforming tender is submitted, is in all cases a question of whether all the elements of contractual formation are made out at that point. Analysis of the terms of the invitation to tender is the starting point. Where the request makes no express commitment concerning the manner in which tenders received will be addressed, that may indicate the invitation was no more than an offer to receive them. On the other hand, as Blackpool & Fylde Aero Club indicates, the rigorous and comprehensive expression of requirements to be complied with by tenderers may give rise to an implied promise by the invitor to consider a conforming tender if others are considered. The law does not, however, have a policy which inclines towards enforcement of implied promises by invitors, even if they are public bodies, and whether there has been a binding promise as to process is to be ascertained by applying general principles of contract law concerning contract creation and implied terms.

  78. The present case is an instance in which the terms of the successive requests for tender, and the documents they incorporated, expressed in mandatory terms a commitment to abide by a certain process which included criteria for tender evaluation. Transit plainly undertook to apply a particular approach to evaluation of tenders received, and not to accept a tender other than that obtaining the highest index under that approach. This aspect of the request for tenders further indicates that Transit, and those submitting tenders, would have understood Transit to be binding itself to follow the specified process - a strong indication of the contractual element of mutual intention to create legal relations. The fact that the request also reserved the right for Transit to reject all tenders does not displace that indication.

  79. As well, the statutory context in which Transit exercises its functions supports the conclusion it intended to be bound. Transit is required by the Act to let contracts in accordance with competitive pricing procedures approved by its performance auditor. In setting such procedures regard must be had to the desirability of encouraging competition among providers of services in the industry sector concerned. Transitís stipulation of the standards and procedures according to which it would assess the tenders that were submitted was no doubt intended to enhance tenderersí confidence in its procedures and in the overall integrity and competitive nature of its process, as required by the Act. Transitís assertion of its commitments in this statutory context strengthens the implication in the terms of the tender that both Transit, and those who tendered in response to its request, intended that Transit would be contractually bound by its statements about how tenders would be assessed.

  80. In these circumstances the two contract analysis spelt out in Ron Engineering & Construction applies. Transitís request for tenders was the offer and Prattís tender the acceptance. Consideration was given by both Transit and Pratt in the form of their mutual promises. It follows that Transit and Pratt entered into a process contract when Pratt submitted its first tender on 18 March 1997. The position is the same in relation to the second tender. The express terms of the process contract are those stated in the request for tender and the documents it incorporates. Any implied terms must be identified in accordance with contractual principles.

    EXPRESS TERMS: THE MANUALS

  81. One issue in the appeal concerns the extent to which provisions in Transitís competitive pricing procedures manual, state highway manual and contract administration manual also form part of Transitís contractual obligations. There is an express provision in the request for tenders in relation to a section of the competitive pricing procedures manual. Clause 107.3 was included as a special condition of the tender. It required Transit to evaluate tenders in accordance with the current competitive pricing manual provisions concerning Physical Works and Services and in particular by the weighted attributes tender method. The provisions for conduct of the evaluation in the competitive pricing procedures manual, which are incorporated in the request for tender and thus given contractual force by clause 107.3, are accordingly confined to those appearing in paragraph 2.7 under the heading "Tender Evaluation - Weighted Attributed Method". They are summarised in paras [6] to [8] of this judgment. Mr Fardell, supporting the findings of the Judge, argued on behalf of Pratt that other provisions of this manual were also incorporated, including a definition of "non-conforming tender" and a provision stipulating that non-conforming tenders should not give rise to contracts. This, however, goes well beyond what clause 107.3 says.

  82. Likewise there is no basis for this Court to hold that provisions in Transitís state highways manual and contract management manual (which state in mandatory terms certain administrative procedures to be applied by tendering authorities including Transit in the tender letting process) have been incorporated in the request for tender. It makes no direct reference to them and such provisions cannot, of course, be self-incorporating. The significance of this finding is that, unless provisions in the state highway manual indicating Transit should not accept tenders if price information is not lodged in a separate envelope are implied contractual terms, they do not have contractual force. This brings us to the question of what were implied terms of the process contract.

    IMPLIED TERMS: GENERAL

  83. Pratt pleaded that compliance by Transit with the provisions in the manuals concerning tender procedures which were not expressly incorporated in the process contract by the terms of the request for tender, were covered by an implied term that Transit would act in good faith generally in relation to the tender process. It was a key aspect of Prattís argument that there was an implied duty of good faith of this scope. Transit accepted in this Court that it was bound to evaluate and administer tenders it received fairly and equally, but submitted there was no general duty of good faith which would enable the Court to import fresh requirements to the contract, such as an obligation to complete the process in two months.

  84. In Canada the Supreme Courtís dictum in Ron Engineering & Construction, concerning the need to protect tendering systems through the law of contract, gave rise to extensive consideration of the content of an implied term of good faith in tender process contracts. For instance, in Martselos Services Ltd v Arctic College (1994) 111 DLR (4th) 65 a majority of the Northwest Territories Court of Appeal referred to "a duty to treat all bidders equally but still with due regard for the contractual terms incorporated into the tender call" (p71 per Vertes J.A.). In Martel Building Ltd v Canada [2000] SCR 860 the Supreme Court of Canada reviewed earlier authorities and found there was a duty to treat all bidders fairly and equally, consistent with the goal of protecting and promoting the integrity of the bidding process (pp894-895). The Supreme Court saw this duty as benefiting all parties. As to the reasons for implying the term and its relationship with express terms of the process contracts the Court said:

    Without the 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.

    A privilege clause reserving the right not to accept the lowest or any bids does not exclude the obligation to treat all bidders fairly. 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 partiesí 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 to reserve privileges to itself in the tender documents" .... (p895, judgment of the Court delivered by Iacobucci and Major JJ).

  85. In England in a concurring judgment delivered in Blackpool & Fylde Aero Club Stocker LJ said he did not regard the contractual duty to give consideration to a conforming tender as precluding or inhibiting the local authority invitor from deciding not to accept any tender or to award the concession "provided the decision was bona fide and honest." In New Zealand, we have already mentioned Gallen Jís dictum that the requirements of fairness and equity may well have application in such contracts.

    IMPLIED TERMS: EQUAL TREATMENT

  86. Transit plainly has an implied contractual duty to treat tenders equally in the performance of its contractual obligations. It must also comply scrupulously with the contractual provisions for evaluation of tenders. Such duties, however, do not depend on an implied term to act fairly and reasonably in the administration of the tenders received. The issue in this case is whether there is a wider general obligation, arising from the implied term contended for by Pratt.

  87. In Hughes Aircraft Systems International v Airservices Australia (1997) 46 ALR 1, a decision of the Federal Court of Australia, Finn J took the view that fair dealing was a proper presupposition of a competitive tender process and a duty to deal fairly with tenderers in the performance of tender process contracts arose when the party whose performance was relied on was a public body (p42). Finn J had earlier observed that there is much to be said for the view that, having no legitimate private interest in the performance of its functions, a public body should be required as of course to act fairly toward those with whom it deals, at least insofar as this is consistent with its obligation to serve the public interest for which it was created. He added however that he had no need to and did not rely on such a stand in that case (pp40-41).

  88. Finn J qualified the scope of the implied duty of fair dealing which he had identified [p103]:

    It is only conduct which is shown actually to constitute unfair dealing by the CAA with a tenderer in the performance of the RFT contract that can amount to a breach of the implied term. Conduct etc that merely gives rise to an apprehension (however reasonable) that such might occur is not enough. Furthermore, whether or not even some level of demonstrated partial conduct will constitute a breach will depend on whether, in the circumstances, it occasions unfair dealing with a tenderer - although proof of such conduct would itself arouse real suspicion that such had occurred.

  89. In Canada an implied term to be fair and consistent in assessment of tender bids has been recognised as necessary to give business efficacy to the tendering process. An obligation to treat all bidders fairly and equally was seen as consistent with promoting the integrity of the bidding process (Martel Building Ltd, para 88).

  90. In requiring Transit to act within a commercial model, Parliament no doubt had in mind that Transit would have to deal with tenderers whose private commercial interests would conflict, at times markedly, with Transitís responsibilities and interests. The motivations and strategies behind a particular bid for a contract would not always be apparent. Tenderers at times pursue unorthodox strategies, including submitting very low bids for contracts in the expectation or hope that by invoking provisions for extra payments the contracts will be made profitable. There is no finding by the Judge that this had been done in the present case but it is a practice which those procuring construction and engineering contracts need to be alert to and to manage. Concern that there might be such a tender may require Transit to scrutinise bids, and in particular very low bids, closely and critically to ensure that acceptance of them is in accordance with the overall public interest as Transit sees it. The statutory standard of competitive pricing procedures allows scope for qualitative judgments to be made on aspects of tenders other than price, as Parliament no doubt recognised. The contractual model accordingly allows Transit to make choices on the terms on which contracts are let and to protect its freedom to decide whether to accept particular or any tenders. In doing so Transit may also legitimately protect its interests against unforeseen future developments in relation to its need to have contract works performed. Provisions such as a privilege clause, entitling an invitor to reject all tenders, which are intended to give Transit protection of this kind should not readily be eroded by an expansive approach to judicial recognition of implied terms..

  91. In this context the implied duty of equal treatment, that is, even-handedness, should not be expanded by further implication to found obligations in relation to Transitís administration of tenders over and above those actually stipulated in the conditions of tender unless they meet the general requirements for implied contractual terms, including necessity for business efficacy, as expressed in such decisions as Devonport Borough Council v Robbins [1979] 1 NZLR 1 and BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363. The concept of fair dealing is more often likely to be of importance in considering whether there has been compliance with contractual terms in tender process administration, rather than as a source of new terms.

  92. It follows that there is no implied duty of good faith in the process contract in this case of a kind that would require Transit to comply with obligations expressed in manual provisions which have not been expressly incorporated in the request for tender so as to give them contractual force. This does not diminish the significance that may attach to those provisions in terms of the accountability regime under the Act or the importance Transit may attach to them in terms of its own internal administration. These, however, as we have already said, are separate matters from obligations Transit agrees to assume to tenderers in its process contracts.

    IMPLIED TERMS: OTHER OBLIGATIONS OF TRANSIT

  93. We now apply these principles to determine the remaining issues in the appeal concerning the existence of implied contractual terms. The request for tender incorporated the key competitive pricing procedure manual provisions concerning tender evaluation. This required Transit to work within the specified attributes, assigning grades to reflect a genuine assessment of their quality in the tender and giving them weightings specified in the request for tender. It is unnecessary to outline these provisions further than we already have in this judgment. While the attributes were intended to be comprehensive, and accordingly cannot be added to, there is flexibility in the process contract concerning how Transit applies them. The contract did not exclude the practice of setting up an evaluation committee which could identify sub-categories within attributes for the purposes of assessing attributes. We do not regard the consideration of financial viability as a sub-category of the resources attribute as precluded by the process contract. It is an element of "resources." The desirability of making the detail of the process more transparent is not a question we have to address. The Judge of course took a different view of financial viability reflecting an erroneous view of the binding status of the provisions in the state highway manual. These indicated that financial viability was a factor that should be separately addressed, if necessary outside of the attribute evaluation. The departure from the manual provision did not however breach the process contract.

  94. There was no express term in the contract requiring Transit to complete its evaluation within a reasonable or any particular time. A date was of course specified for the closing of tenders. Goddard J pointed to the incorporation of a timeframe in the notification of acceptance provisions. These imposed a contractual duty to notify a tenderer whether its tender was still under consideration if it had not been accepted within two months of closing of tenders. Tender rates and prices were also fixed and open for acceptance at any time within that period. The Judge appears to have concluded that this gave rise to an implication that tender evaluation would be completed within that timeframe. We disagree and hold there is no obligation as to timeliness of tender evaluation under the process contract. Such a term would be inconsistent with the contractual right of Transit to decide not to accept any tender (Chitty on Contracts, 28ed, 1999, para 47-051).

  95. Goddard Jís judgment that Transit was in breach of its contractual obligations concerning how it would evaluate Prattís tender in the first round rests in part on the inclusion of a financial viability sub-weight in the evaluation, and the failure to bring that round to a timely conclusion. For reasons already outlined these findings cannot be sustained.

  96. There was however an implied term that in conducting the evaluation by applying the stipulated procedures Transit would deal even-handedly with each tender. It would adhere scrupulously to the agreed evaluation method This implied term is relevant to the issue of apparent bias of the tender evaluation team. The principal basis of the Judgeís finding of breach of contract was that there was "a real risk of bias of the evaluation team" during the first tender round. This was based on what the Judge regarded as apparent unfair targeting of Pratt as an unsuitable contractor in the evaluation teamís report of 7 April 1997. This derived from past differences between Transitís consulting engineer, Mr Young, and Mr Pratt, particularly concerning the Pipiriki contract which had not been formally resolved but concerning which Mr Young, as the Judge saw the position, had very strong views. The Judge was concerned that this may well have been reflected in the failure of Pratt, in the 7 April report, on the attributes of technical skills and resources, the latter of course being partly based on the view taken of Prattís financial viability. Mr Youngís continuing involvement, including his report of 30 April, reinforced these concerns.

    PUBLIC LAW STANDARDS

  97. There are two observations we wish to make concerning this aspect of the High Court judgment. The first is that, as the Judge fully recognised, within the relatively small group of specialist contractors and professional consultants who operate in the area of roading construction and engineering projects in New Zealand it is inevitable that past experiences will give rise to settled views on the competence and judgment of those principally involved. As the Judge said, reliance on such historical experience is a desirable factor provided it does not get in the way of proper exercise of judgments as required by the terms of subsequent process contracts. It certainly would not be in the public interest for those involved to feel inhibited from the exercise of genuine judgment in those situations. As we say, this was also the view taken by Goddard J.

  98. There is also danger in judicial scrutiny of judgments made in this area if the Court applies standards akin to those required in judicial review proceedings involving exercise of statutory powers. This concern was recognised by Finn J in Hughes Aircraft Systems International (at p42). Goddard J in this case found against Transit because of her finding of apparent bias of members of the first evaluation team, which is of course on the basis of a judicial review concept. We do not consider there is a contractual obligation on Transit to avoid conducting its evaluation in a way which would leave a statutory officer open to judicial review for apparent bias. It is only such conduct as demonstrates there was actual unfair dealing in the application of its contractual obligations which can amount to a breach of contract. Because of the public law perspective with which Goddard J approached these issues, it is not clear whether the findings go that far. Mr Fardell advanced an argument that the Judgeís expression of the conduct in terms of apparent bias was simply demonstrating sensitivity to the professional reputations of those involved. He reminded us of the advantage the Judge had in hearing the members of the tender evaluation team give oral evidence before her. He also invoked the terms of the engagement of the consultants by Transit which were discovered during the course of the trial.

  99. It is not however necessary for us to explore these difficult issues further. Nor indeed did Mr Miller for Transit ask us to do so. We are satisfied that the present appeal can ultimately be resolved independently of them, for reasons to which we now outline.

    OUTCOME OF THE APPEAL

    First tender round

  100. When the tender evaluation team reported to Transit on 7 April 1997 Transit did not immediately accept its recommendations. Indeed Transit responded by investigating further for itself the areas of weakness that had been identified in failing Prattís tender. Pratt had failed on resources and technical skills. An issue of an alternative source of gravel was quickly resolved. Prattís assessment of its performance efficiency in its tender and concerns over its pricing were more substantive matters. These raised the question of whether Pratt might have tendered low to ensure it got the contract, intending to make it profitable through the claims process. Doubts also arose in Transit over whether Pratt might not have assessed ground conditions correctly, in which case the consultants would not have reliably identified the extent of added value material. Transit looked into these concerns. They were raised with Pratt, as were productivity concerns in relation to haul distances. Transit also pressed Pratt on its requirement for a bond certificate. Transit was of course entitled under the terms of the request for tender to do so. The evidence confirmed this was in accordance with Transitís normal practice. It no doubt also gave Transit reassurance concerning the risk that Pratt might become financially stretched and be unable to complete.

  101. Transitís attitude throughout this period was clearly driven by its desire to get the commercial saving of $1,000,000 over the next lowest tender if accepting Prattís tender was commercially prudent. Its officers appear to have been reasonably open with Pratt (albeit without initially disclosing other tender prices). Mr Prattís suspicions were, however, aroused by the time the process was taking which was understandable in the circumstances. The important point, however, is that Transit fully reappraised the concerns of the evaluation team and by 5 June 1997 had reached the stage where it satisfied itself it should not fail Pratt on any attribute and that acceptance of the tender should be proposed.

  102. The process contract required of Transit that it evaluate Prattís tender by the weighted attributes method. It was not however required to follow a particular procedure in applying the contractual method. As we have already indicated, the contract allowed Transit some flexibility in the way it reached required judgments on attributes other than price, although substitution of fresh attributes was not authorised. Compliance with Transitís obligations in relation to the evaluation has to be assessed at the time it was completed. This was not 7 April 1997 when the evaluation team reported but at the point thereafter when Transit had finalised its own judgments. Early in June 1997 Transit had resolved in favour of Pratt concerns arising during the evaluation over whether it should be failed on two particular attributes. It is true that the 7 April report delayed by some two months completion of the evaluation but, in the absence of any term requiring completion by any particular time, no breach of contract has resulted from that.

  103. Mr Trounceís facsimile of 5 May makes it reasonably plain that Transit was alert to the possibility that the evaluation team, and in particular Mr Young, had been unduly harsh. It is also plain Transit was motivated in pursuing aspects of Prattís tender with Mr Pratt by the saving Prattís tender apparently offered. The critical point however is that, by doing so, Transit dispelled the negative impact of the 7 April evaluation. In the end it does not matter whether the High Court found actual or apparent bias at that point. Even if there had been bias it did not impact on Transitís final decision.

  104. In the end all tenders were refused. That step was taken under the privilege clause in the contract entitling Transit to refuse all tenders. It was not done because of any desire to avoid accepting the lowest tender. Transit was given legal advice, which it sought following complaints by tenderers asked to confirm their prices outside of the two month notification period, to the effect that the tender round should be collapsed and the project re-tendered. The legal advice that Transit was required to do this was found by this Court in an interlocutory appeal to be incorrect Pratt Contractors Ltd v Transit New Zealand (CA53/98, 8 June 1998). The genuineness, however, of Transitís view based on that advice, that it should terminate the first tender round, has not been questioned. Transit may not have been required to take this step but the process contract reserved its right to do so and in the circumstances there is no basis for saying that right was not properly exercised. We hold accordingly that Transit acted lawfully when it exercised its power to reject Prattís first tender.

    Second tender round

  105. The second request for tenders was sent only to those who had tendered in the first round. We can deal shortly with the issues concerning this part of the process. The first issue is whether Hayesí submitted a non-conforming tender which should have been rejected. Goddard J found Hayes had included both price information and information concerning attributes other than price in one envelope, contrary to the instructions to tenderers in the request for tender. The Judge drew an inference from evidence of date stamping of documents as envelopes were opened. The inference was that, had Hayesí documents been in separate envelopes, as required, each would have been stamped. The absence of a stamp on Hayesí non price information was the basis for the Judgeís inference that it was included, wrongly, in the same envelope as the stipulation as to price. The Judge in our view has here put more weight on the evidence concerning date stamping of documents than it can properly bear. The evidence given would equally support an inference that the document concerned was submitted in a separate envelope, but not stamped due to pure oversight. It seems that the lower of Prattís tenders also only received one stamp. In any event there is nothing in the terms of the request for tender that required Transit to reject any tender which was not submitted in two envelopes in accordance with the instructions. A provision to that effect in one of the manuals in our view is not a term of the contract. No prejudice was caused to Pratt as there is no evidence that Prattís tender price (or that of any other tenderer) was known to the evaluation committee when it assessed the tenders in the second round. We accordingly disagree with the Judgeís finding that the technical breach in the manner of submission of Hayesí tender should have resulted in Hayesí tender being rejected as non-conforming.

  106. The outcome of the evaluation of the second tender round was that Hayes was marked up and Pratt down. Indeed, Pratt ended up in third place behind both Hayes and Hurlstone.

  107. In relation to the evaluation process Mr Gifford, who was the new member of the evaluation team, was entitled to bring his own assessments to the grading exercise. He substituted for Mr Timpany who was unavailable in circumstances where it was clearly desirable that the evaluation proceed as soon as possible. There was no contractual obligation to advise Pratt of this change of membership of the evaluation team nor to treat the evaluation as a continuation of that undertaken during the earlier round, departing from previous gradings only if good reason for doing so were shown.

  108. The Judge found that there was no logical basis for departure from the judgments made during the first tender round. Once it is accepted, however, that the differently composed evaluation team was entitled to reach its own fresh views, this argument falls away. Pratt was marked down in the second round on "relevant experience", management skills and "methodology". The Judge was critical of the substitution of Ian A Martin Ltd for the previous earthworks subcontractor leading to this difference. It did not however follow that the new subcontractorís contribution, under other attribute headings, would be seen in the same light under the heading of "relevant experience". We see no basis for criticism of the view that the new subcontractorís experience was not as great as that of the company it replaced. Similarly we see no basis for criticism of the assessment concerning management skills in that there was to be a differently composed management group from that in the first tender. There was also ample information obtained after the first tender assessment to warrant a different grade for methodology. We are also of the view that the evidence given concerning the reasons for the different grades for Hayesí tender was sufficient to establish that a genuine assessment was made.

  109. Finally the Judge found that Mr Taylor of Transit had obliquely indicated to Mr Pratt that he should lift his price in the second round. There is nothing in that finding which indicates that Transit acted in breach of its second process contract with Pratt, which in any event only came into existence when the subsequent tenders were lodged. Pratt must have realised that it risked losing in the second tender evaluation by increasing its price and weighed that against the increased profitability (or lower loss) it would derive from increasing its price.

  110. The reasons for Prattís tender in the second round being unsuccessful have no relation to its complaints concerning the evaluation of its first tender. In the end, we are satisfied that there is no basis remaining on which the Court could uphold the finding of breach in the second tender round. We are satisfied that the acceptance of Hayesí tender was not in breach of any obligation to Pratt.

    Fair Trading Act

  111. Goddard J found there had been misleading and deceptive conduct by Transit in relation to the assurances given prior to submission of tenders that the process would be fair, and later, on 30 April 1997, that it was correctly applied up to that time. There was a failure, in particular, adequately to follow up on those assurances and indications of apparent bias were ignored. The indication that Pratt should lift its price was found not to be misleading or deceptive. Pratt did not challenge that finding.

  112. Our view is that the assurances given prior to submission of any tenders, and on 30 April, were clearly not misleading and deceptive at the time they were made. That is the time at which breach of the Actís provisions is to be assessed. Transit took the step of adding one of its own engineers to the two from Payne Royds to address this issue, which demonstrated its genuineness at the time. To avoid any misunderstanding, however, we reiterate that, for reasons outlined in relation to the other causes of action, that by the time the first tender round was terminated, Transit had complied with its preliminary assurances, as indeed it had with its procedural obligations under the contract.

  113. For these reasons the findings in Prattís favour on the Fair Trading cause of action cannot stand.

    RESULT

  114. We allow Transitís appeal against the High Court judgment and in its place substitute judgment dismissing Prattís claim.[a] Transit is entitled to costs in this Court in the sum of $10,000 together with reasonable disbursements to be settled by agreement or failing agreement determined by the Registrar. Transit is also entitled to costs in the High Court which are to be fixed by that Court.


Cases

R v Ron Engineering & Construction Ltd (1981) 119 DLR (3d) 267; Canamerican Auto Lease & Rental Ltd v Canada (Ministry of Transport) (1987) 37 DLR (4th) 591; Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 3 All ER 25 CA; Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 (Federal Court), MJB Enterprises Ltd v Defence Construction (1951) Ltd (1999) 170 DLR (4th) 577 (Supreme Court of Canada) and Harmon CFEM Facades (UK) Ltd v Corporate Officer of House of Commons (1999) 67 Conv LR 1; Ontario v Ron Engineering & Construction Eastern Ltd (1981) 119 DLR (3d) 267; Markholm Construction Co Ltd v Wellington City Council [1985] 2 NZLR 520; Fuller Cruises Northland Ltd v Auckland Regional Council (CP438/96, Auckland, 4 June 1999, Paterson J); Martselos Services Ltd v Arctic College (1994) 111 DLR (4th) 65; Martel Building Ltd v Canada [2000] SCR 860; Devonport Borough Council v Robbins [1979] 1 NZLR 1; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363

Authors and other references

Standard Conditions of Contract for Building and Civil Engineering Construction NZS3910: 1987

Chitty on Contracts, 28ed, 1999

Representations

F Miller & L Theron for the Appellant (instructed by Chapman Tripp, Wellington)

J R F Fardell and J Long for the Respondent (instructed by Russell McVeagh, Auckland)

Notes:-

Pratt appealed against this decision. The Privy Council (Lord Nicholls of Birkenhead, Lord Slynn of Hadley, Lord Hoffmann, Lord Hope of Craighead & Lord Walker of Gestingthorpe) on 1 December 2003 dismissed the appeal. See Pratt Contractors Ltd v Transit New Zealand @www.ipsofactoJ.com/international/index.htm [2004] Part 6 Case 3 [PC]


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