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The perils of tendering for real estate are not always appreciated

By Roy Nieuwenburg                                     July 5, 2006 

The power of competitive bidding processes for the sale of real estate seems to be well appreciated. From what I see, often the perils are not so well appreciated by those initiating the processes.

A recent headline in the Vancouver Sun illustrates the power of competitive bidding processes: "$193 million bid blows away competition" . Vancouver city council accepted a local development company's $193-million bid to buy the southeast False Creek land where the Olympic athletes' village will be built. The price was "far in excess of anything the city had anticipated for the 2.6-hectare site" . The winning bidder, the Millennium Group, will develop the land into 800-plus market housing units that will be sold after the 2010 Olympics.

Tendering for the sale of real estate is nothing new. The hot real estate market has magnified the attractiveness of this format for owners. It also increases what is at stake for disgruntled bidders.

In my practice I do a lot of competitive tendering on the "revenue" side (for concession operations and the sale and leasing of real estate) and also on the "expense" side (e.g. construction tendering), acting for owners. The former tends to follow less formal processes. The latter tends to be more formal (giving rise to, it seems, an unending stream of court cases and litigation). About once a week I receive a sales brochure e-mailed by a real estate firm promoting the sale of a commercial property through an informal bidding process (e.g. "bids will be accepted until 3:00 p.m. on a specified date, and you have to use our form of contract" ). I observe that many of these informal processes amount to competitive bidding, but don't build in the safeguards that are commonplace in construction tendering. They typically contain a statement to the effect that the owner does not have to award to the highest bidder, and reserve the right to waive irregularities. But these safeguards do not go nearly as far as needed to match the vigour that the courts appear willing to assert for the benefit of bidders it perceives to be aggrieved.

A recent case demonstrates this vigour. In Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), Tercon was second bidder on a $35-million highway construction project. Tercon claimed that the Ministry wrongfully awarded the project to an ineligible bidder. The case could have gone either way, in my opinion. Ultimately, the court sided with the plaintiff Tercon, and awarded damages of $3,293,998 for lost profits, plus costs. What I find striking is that in doing so the court swept aside strong language purporting to give the owner flexibility, including a limitation clause stating:

"[...] no Proponent shall have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a proposal each proponent shall be deemed to have agreed that it has no claim."

In setting this aside, the court reasoned that:

"A party should not be allowed to commit a fundamental breach sure in the knowledge that no liability can attend to it and the court should not be used to enforce a bargain that a party has repudiated [...] In the circumstances here, it is neither fair nor reasonable to enforce the exclusion clause. Although both parties are sophisticated, it could not have been contemplated that there would be no recourse if the Ministry accepted a non-compliant bid ... These circumstances do not lead this court to give aid to the defendant by holding the plaintiff to this clause."

To me, this is fictional reasoning. I would say "actually, yes, it was contemplated that there would be no recourse - that's why the owner put this clause in the document. There it is, in black and white, for all to see. Tercon is a sophisticated party, and agreed to it." How can the court award damages against the owner for a supposed breach of the contract on the basis that the owner repudiated the contract by relying on an express provision of it (i.e. the exclusion clause)? Basically, the court is saying "we don't care what you put in your documents, if you transgress our sense of fairness, we will ignore it".

My perspective is that because it was laid out in black and white, it's fair. But, because the courts are willing to engage in this fictional reasoning, well, that's the law. That doesn't reduce litigation - it fosters litigation. Tercon, having been successful against the Ministry in a similar (but much clearer, in my opinion) landmark case a decade or so earlier [see Tercon Contractors Ltd. v. B.C.], wasn't shy about testing the waters again.

In 2002, the Manitoba Court of Appeal delivered its judgment in Mellco Developments Ltd. v. Portage la Prairie (City). In Mellco, the city issued a request for proposals for the sale of land for residential development, and awarded the contract to Lions Park Housing Inc. Mellco Developments, the unsuccessful bidder, sued and lost. That case could have gone either way too, in my opinion. Leave to appeal to the Supreme Court of Canada was refused.

In both Tercon and Mellco, the court wrestled with the question of what factors govern whether the law of competitive bidding or tendering (referred to in Tercon as "the M.J.B./Ron Engineering paradigm" ) is invoked. It is clear that what the process is called (i.e. a "call for tender" , or a "request for proposals" ) is not definitive. The irrevocability of bids is a factor. Having a fixed date for submission of bids is another. Stipulating a prescribed form of contract is another.

I foresee that with the strong real estate market, and greater use of informal competitive processes, there could be a stream of court cases and litigation on the "revenue" side too.

If as an owner, or a real estate firm acting as agent for an owner, you want to avoid the spectre of court cases and litigation, then, among other things, the approach adopted for your competitive processes should be responsive to the vigour shown by the court in Tercon.

This article originally appeared in the June 30,2006 edition of The Lawyers Weekly.

- Roy Nieuwenburg  


 

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