| Date | 7 January 2004 |
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| Judgment | Pratt Contractors Ltd v Transit New Zealand, PC 1 December 2003 |
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| The Issue | Duties of good faith and procedural obligations in tender evaluation. |
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| Implication |
A request for tenders will give rise to a preliminary contract with tenderers by which the client body will be obliged to comply with any tender evaluation procedures set out in the request. There will also be implied duties to exercise good faith and fair dealing in the evaluation of tenders. |
printThe Privy Council is the highest UK court of appeal for countries in the Commonwealth. On 1 December, five law lords of the judicial committee of the Privy Council gave judgment on an appeal from the Court of Appeal in New Zealand concerning the competitive tendering procedures adopted for a state highway contract in New Zealand. The appeal arose out of a claim for damages by Pratt Contractors. In 1997, it had submitted two unsuccessful tenders to Transit New Zealand for a contract for major highway works. Having failed to win the contract Pratt commenced proceedings against Transit, alleging that the terms of the request for tenders gave rise to a preliminary contract which contained express and implied terms as to the method by which Transit would select the successful tenderer. Pratt alleged that Transit had acted in breach of those terms. Transit accepted, and the court agreed, that its request for tenders did indeed give rise to a preliminary contract with tenderers, which required it to comply with certain procedural obligations. The issuing of a request for tender was not a mere invitation to treat. Transit also accepted that the contract included an implied duty to act fairly and in good faith, but the parties differed over exactly what these procedural obligations were and what counted as acting fairly and in good faith. Lord Hoffman, sitting in the Privy Council, noted that at the centre of the dispute lay the question of the extent to which the procedure for competitive tendering should be judicialised. He recognised that tenderers naturally wanted to be judged independently on their merits by an impartial selector. However, parties who invite tenders, even if they are public authorities like Transit, want to be able to choose in what they consider to be their best commercial interests, and not be hobbled by, as Lord Hoffman described it, "quasi judicial procedural rules". The initial trial judge held that the preliminary contract between the parties required Transit to comply not only with the method of selection described in the request for tenders, but also with its own internal procedural rules. In certain respects, Transit had failed to do so. Accordingly, judgment was given for Pratt. This meant that they would be entitled to recover all their losses arising from the failure to win the contract. The matter then proceeded to the Court of Appeal in New Zealand, who overturned that decision and dismissed the action raised by Pratt. From that point the matter then proceeded to the Privy Council. In his judgment, Lord Hoffman reviewed some of the background to the case. He noted that Pratt was a well-known road building contractor in New Zealand and that it had earlier brought a successful action for damages in a case in which its tender had been rejected. He also noted that Pratt's reputation in the New Zealand road building industry was "not uncontroversial". Apparently, Pratt was known to practice what was called "low balling", that is to say tendering a low price to obtain the contract in the expectation of being able to make a profit by aggressive claims for additional payments. In common with public authorities in the UK, Transit was obliged to employ approved competitive tendering procedures. These were drawn up in a 'Manual of Competitive Pricing Procedures' which provided that tenders could be evaluated in two ways; the lowest price conforming tender or the 'weighted attribute method' which adopted a formula by which marks were given for quality attributes as well as price. It was this latter procedure that the tender evaluation team appointed by Transit was to adopt in evaluating tenders for the contract in question. Pratt's tender was the lowest by over $1 million. When the tender evaluation team concluded its assessment however, no doubt influenced by Pratt's reputation, it recommended that Pratt should be excluded from consideration, since in its opinion Pratt had failed on two of the quality attributes. The evaluation team produced a report giving detailed reasons for Pratt's failure, and listed what it described as key issues for Transit to consider, including "selection of a contractor who has consistent record of completing contracts without undue delays or substantial cost overruns or history of costly litigation procedures". Transit were initially reluctant to accept this advice. A potential saving of $1 million was tempting and it was willing, if some of the matters which had troubled the tender evaluation team could be sorted out, to take a risk on Pratt. Accordingly, Transit decided to exercise its power to reject all tenders and re-advertise. A second tender round followed, and despite the fact that this time Pratt passed on the quality attributes, its overall score was beaten by another tenderer and the contract was awarded to that party. In reviewing these matters, the Privy Council made certain observations about the extent of the duties owed by Transit. Transit was obliged to comply with any procedures set out in the request for tenders. Any other internal procedures which Transit had followed in evaluating tenders were not terms that the tenderer could rely upon. Significantly, the duties of good faith and fair dealing required no more than that the evaluation team should express the views honestly held by its members. Transit was not obliged to give tenderers the same mark if it honestly thought that their attributes were different. Nor did the duty of fairness mean that Transit was obliged to appoint people who came to the task of evaluation without any views about the tenderers. It would have been impossible to have a tender evaluation team competent to perform its function, unless it consisted of people with enough experience to have already formed opinions about the merits and demerits of road contractors. In consequence, the Privy Council agreed with the Court of Appeal and dismissed the claim.
CJ-0401
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