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31 May 2022

Director, Murray Thornhill, and Lawyer, Julia McCullagh, in our Dispute Resolution team has outlined tendering & contractual liability for local governments.

Tendering & contractual liability for local governments

When it comes to tenders, local government officers working in procurement are well aware of their regulatory obligations under Part 4 of the Local Government (Functions and General) Regulations 1996 (WA).  However, one aspect of putting out a request for tender (RFT) which can be overlooked is the risk of a claim being brought by an unsuccessful tenderer. It is not uncommon for a tenderer to become disenchanted with the process when the work is awarded to someone else and to bring a claim (typically for a breach of a process contract) against the government entity.

What is a process contract?

The courts have held that there may exist a preliminary process contract governing the conduct of the tender process before the awarding of the final contract.  A process contract can be formed between the government authority and the tenderer through the tender invitation and the tenderer’s submission in response.  The process contract is a separate contract to the final contract awarded at the end of the tender process. 

Under this analysis “Contract A” covers the pre award period and the terms and conditions of how the tender assessment process will be conducted.  “Contract B” is the final contract awarded to the successful tenderer and governs the contract itself. Whether or not there is a Contract A (the process contract) and what is required by the government authority to comply with it will depend on the terms of the RFT.

Hughes Aircraft Systems v Civil Aviation Authority

While the concept of a process contract had existed for many years in other jurisdictions (most notably Canada) Hughes Aircraft Systems v Civil Aviation Authority   [1997] 146 ALR 1 was the first case in Australia to recognise the existence of a process contract.

In Hughes, the Court found that the Civil Aviation Authority was bound to follow the process set out in the RFT (the express terms of the process contract). It also found that there is an implied term of the process contract that a public body will deal fairly with a tenderer. Whether or not a process contract exists will depend on the circumstances of the case and the parties’ intentions 

The  Civil Aviation Authority’s representations and conduct also breached the misleading and deceptive conduct provisions under section 52 of the Trade Practices Act (now section 18 of the Australian Consumer Law).

Breach of process contract remedies

A breach of a process contract allows the aggrieved party to recover damages for the loss in preparing the tender application. There is also the potential (although little to no Australian case law in this area) to claim for damages for loss of profit or even theoretically specific performance.

Other possible claims

Possible claims from disgruntled unsuccessful tenderers are not limited to claims based on a breach of a process contract.

It is possible for a claim to be brought based in promissory estoppel or on the basis of a contract being “void for illegality” in circumstances where the government authority fails to comply with the  relevant legislative requirements.

The decision to grant a tender is also potentially a decision subject to judicial review.  However, courts have been reluctant to introduce administrative law concepts such as natural justice into the commercial decision making of government bodies.

These alternative causes of action have different remedies (including the possibility of an  injunction in the case of a claim based in promissory estoppel or an application for judicial review) and will be the subject of a further article to be published soon by HHG Legal Group’s Local Government Team.   

Key Takeaways

  • Ensure when drafting a request for tender (RFT) that it sufficiently meets the criteria set out in the Local Government Regulations
  • Pay as much attention to drafting the RFTs methodology, timetable, evaluation framework and evaluation criteria as the final contract
  • Ensure tenderers are fully informed by the RFT of what is required with respect to the goods or services the subject of the tender invitation
  • Obtain legal advice on the pre-contractual stage, especially for significant tenders

How HHG Legal Group can help

HHG Legal Group has a local government team highly experienced in drafting and reviewing commercial documents for a wide variety of clients and industries and specific and unique experience advising Local Government bodies on RFTs as well as procurement policies, procedures, and codes of conduct.  Our dispute resolution team is also on hand to provide advice and assistance in the event that problems do occur with the tender process.

If you would like HHG to assist with this process, please contact one of please contact our Dispute Resolution lawyers on (08) 9322 1966 or email reception@hhg.com.au

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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