TOPIC 5

CONTRACTS AND TENDERS

Topic 5 Contracts and Tenders

TOPIC OUTCOMES

At the end of this topic you will be able to:

 explain what a tender is and its importance to the engineer;

 discuss the tendering process;

 explain that tenders are invitations to treat;

 identify situations where tenders will be considered offers and not invitations to
treat;

 explain when a contract may be varied by the parties; and

 briefly discuss the importance of ‘time’ in engineering contracts.

1. INTRODUCTION

In Topics 3 and 4 we discussed the basic principles of contract law. Apart from
general principles, there are some specific areas of contract law which may be
most beneficial to engineers and thus warrant further discussion in this
course. We discuss some contract situations that engineers would experience
as understanding of these areas will help you to avoid many of the common
problems involved in contractual disputes in the engineering industry. In this
topic we will focus on role and legal status of tenders. The tendering process
and the effect on the contract itself are regulated by contract law, some
legislation (e.g. Competition and Consumer Law Act 2010 (Cth) and
commercial conventions.

2. TENDERING

Most engineering or construction contracts are concluded after a tender

process.

The process of tendering is often complex, costly and is an aspect of an

engineer’s profession that cannot easily be escaped. The process is
complicated because the requirements for submitting a tender can be
technically complex, not to mention the legalities involved. Having to meet
technical requirements often means that the engineer must spend money on

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research, costing analysis, ensuring that legal requirements will be met and
more. On top of all of this, there is, of course, the chance that the tender will
not be accepted. This means that although engineers may delegate the
process of tendering, a basic understanding of the law involved will be useful.

Note that some industries and government bodies publish tendering codes,
(such as the Code of Tendering AS 4120-1994 for the construction industry).
These codes cover common practices, requirements and sets out ethical
standards and obligations that should be observe would also fall under the
scope of the Competition and Consumer Act 2010 (Cth) which deals with all
manner of company conduct such as collusion, price fixing and misleading or
deceptive conduct.

Suffice it to say that this area of law is potentially enormous and is an

interesting subject and certainly valuable knowledge to the engineer, but all
that is required for this course is a basic understanding of tenders.

A. TENDERS

Tenders are where a party advertises that they have a job that needs doing or
a product to sell or a service that they require. This is known as ‘calling for
tenders’. Other parties then provide quotes (‘tenders’) to do this and the
person who called for the tenders will accept one (or none) of the tenders –
either the cheapest or the best quality etc.

There are two classes of tender:

(a) A firm may advertise for the supply of a specified amount of goods or for
certain services to be supplied. In this class the trader who submits
tender offers to supply the goods or services for a certain sum of
money. This tender is an offer and, if the firm accepts it, a binding
contract comes into operation. If the trader fails to supply the goods or
services he is in breach of contract. If the firm fails to accept or pay for
the goods, it is in breach.

(b) A firm may advertise for supplies for a certain period not exceeding a
certain amount to be delivered as and when required. A trader who
submits a successful tender has made a standing offer which is different
from the offer in the first class of tender illustrated above.

The acceptance of a standing offer does not convert the offer into a binding
contract because the firm has not agreed to accept the maximum quantity of
goods. The legal effect of a standing offer is that it is accepted whenever a
specified amount of goods are ordered.

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Once an order is placed the standing offer is accepted for that particular order
and a binding contract exists for that particular quantity of goods. Between
specific orders the standing offer may be revoked at any time.

The importance of appropriate participation by engineers and other

professionals such as architects in the tender process should not be
underestimated. In Bains Harding Construction & Roofing (Aust) Pty Ltd v
McCredie Richmond & Partners Pty Ltd (1988) 13 NSWLR 437 a quantity
surveyor supplied an incomplete schedule of quantities to be used by the
plaintiff in submitting a bid for works at an aluminium smelter. As the plaintiff
effectively underbid for the works (and was successful in being awarded the
work) compensation was sought from the surveyor which was granted by the
courts.

B. TENDERS AND INVITATIONS TO TREAT

Calling for tenders is considered to be an invitation to treat and not an offer

(see Topic 4). This means that a call for tenders is merely an invitation to
others to submit tenders (offers), and then the recipient of the tenders will
usually accept one of the tenders (Bailey, 2011).

The caller for tenders is generally not obliged to accept any tender unless
under certain circumstances which we will examine later.

Case Study: Tenders and invitations to treat

Spencer v Harding (1870) LR 5 CP 561.

The defendants placed an advertisement which stated: “We are instructed to

offer for sale by tender the stock in trade of ...” The plaintiff submitted the
highest tender and when he was not awarded the tender he sued for breach
of contract. The issue was whether or not the call for tenders was an offer and
thus the highest tender the acceptance.

The court held that the call for tenders was an invitation to treat even though
it used the word ‘offer’. Furthermore, the advertisement had not stated that
the highest tender would be accepted. Therefore there was only an offer from
the plaintiff which had been rejected.

C. TENDERS AND OFFERS

There may be occasions where the wording of the tender is more specific or
promissory which may make the call for tenders an offer rather than an
invitation to treat. For example, calling for a tender where it is stated that the
caller, ‘will accept the lowest bid’ or ‘the best price’, may create an offer. This

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means that whoever submits the lowest bid or best price has accepted the
offer and a binding contract has been made. From an engineering point of
view you may need to tender but you may also call for tenders from
subcontractors and so you can appreciate that the wording of a call for
tenders is very important especially if you do not want to create binding
obligations on yourself unintentionally.

Case Study: Tenders and offers

Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1986] 1 All E.R 261

RT telexed HI inviting them to submit a tender to buy some shares. They

stated:

“We confirm that if any offer made by you is the highest offer received by us
we bind ourselves to such offer…” H submitted the higher tender but was
refused. The issue was whether or not such a call for tenders was an
invitation to treat or an offer.

The court held that it was a firm offer capable of immediate acceptance by
one (i.e. the highest) bidder and therefore RT had to accept H’s tender.

D. TENDER DOCUMENTS

The documents that are usually issued for calling tenders consist of: Notices
to Tenderers; Conditions of Tendering; the Tender Forms and Schedules, the
applicable General Conditions of Contract, Drawings, specifications and
additional information (Bailey, 2011).

Tenders that are submitted should comply strictly with the form and detail
requirements of the conditions of tendering. A minor failure to comply with
strict requirements can lead to an exclusion of a tender. In Smith & Wilson v
British Columbia Hydro Authority (1997) 33 C.L.R (2nd) 64 a tender that was
submitted one minute late was found to be unacceptable because, to consider
the late tender would have been a breach of the “bid contract” (Bailey, 2011).

E. WITHDRAWAL OF A TENDER

A tenderer can withdraw or revoke a tender at any time prior to acceptance,

provided consideration has not been given to maintain the offer. The
withdrawal is only effective when it has been communicated to the proprietor.
Various restrictions can be placed on the tenderer’s capacity to withdraw. The
conditions of tendering may require a security deposit to be submitted with a
tender, which may be forfeited if the tender is withdrawn within a specified
period (Bailey, 2011:103).

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F. ACCEPTANCE OF A TENDER

An acceptance of a tender must be unqualified. Any conditions that the

proprietor seeks to impose may cause the acceptance to be considered as a
counter-offer (see Topic 4). Acceptance that is made “subject to contract” is
not binding where the parties have not reached agreement on essential
terms. Where mail is used, the general rule is that the acceptance is effective
from when posted, that is, when it is out of the hands of the proprietor.

G. PRE-CONTRACTUAL PROCESSES

Sometimes a call for tenders can require that tenders be submitted in a

certain way or format. These pre-contractual processes may also involve
significant cost to the tenderer such as drawing up plans, costing, getting
advice etc. If a firm calls for such tenders and also says that it will judge the
tenders according to set requirements then this sets up a pre-contractual
process known as a separate or ‘collateral’ contract.

In other words, apart from the call for tenders, there is a promise that if
tenders are submitted in a specific or required way, in return it is promised
that the tenders will then be judged according to set or agreed criteria. We
can view this as a separate, albeit implied, agreement. The firm does not
have to accept the tender itself, but it must judge them as they agreed. If it
does not judge the tenders according to those requirements – after the
tenderers have gone to considerable expense – then the firm will be in breach
of this ‘collateral’ contract and the tenderer may be reimbursed for the
expense of preparing the tenders. Note that the tenderers cannot force the
firm to accept the tender as the tender is only an invitation to treat and not
an offer.

Case Studies: Pre-contractual processes

Blackpool and Flyde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR
1195

Potential tenders were called for by Blackpool BC requiring a set format and
stating the process by which they would judge the tenders. BF Aero Club
tendered according to requirements but their tender was not considered thru
oversight on the part of Blackpool BC. Another firm, X’s, tender was accepted
instead.

Blackpool BC then declared their intention of repeating the tendering process.

However, X sued to enforce their contract and BF Aero Club sued for not
being considered.

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The court held that if a call for tenders contains stipulations about processes
to be followed – the process stipulations are an offer concerning the process,
(not the outcome). As long as the correct process was followed, Blackpool BC
could accept any tender (offer) it wished. As a result, X was entitled to
enforcement of their contract with Blackpool BC, but the correct process was
not followed and BF Aero Club was entitled to damages for breach of contract
– not entitled to have the contract awarded.

Similarly, in Hughes Aircraft Systems v Airservices Australia (1997) 146 ALR 1

AA’s call for tender outlined contractual processes that would be carried out.
These processes were not followed by AA and Hughes (an unsuccessful
tenderer) successfully sued for breach of preliminary contract as the court
considered that Hughes along with other tenderers were induced into
participate in the tender process and were reassured of the integrity of the
process. The undertakings by AA were contractually binding and Hughes was
entitled to judgement.

Ipex ITG Pty Ltd (in Liq) v Victoria [2010] VSC 480

In May 2002 the Victorian Government advertised a Request for Tenders for
the so-called Parleynet 2002 Project which centred around the implementation
of a new information technology system for the Victorian Parliament at all 132
electorate offices. The wording of the tender documents made mention of the
‘a detailed set of evaluation criteria’ which was claimed ‘will’ or ‘must’ be
applied. The court held that a promissory obligation did in fact arise.

G. PRIOR DEALINGS AND FORMAL CONTRACT AGREEMENT

On occasion, tender conditions may necessitate parties to enter formal

agreements that are often commenced subsequent to the commencement of
works. This can lead to a dispute for example when one of the parties refuses
to complete the formal agreement. Courts have, in situations like this relied
upon previous dealings between parties to suggest either that a preliminary
agreement defining the nature of contractual obligations exists or alternately
that no agreement can be established. An example of the latter is Abigroup
Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181 a case centred
around the calling of a tender for the construction of the indoor Olympic
Stadium at Homebush Bay for the Sydney 2000 Olympic Games.

H. RISK VERSUS REWARD IN THE TENDERING

ENVIRONMENT

Much of an engineering company’s energy will be spent on negotiating,

tendering for and securing contracts. If this aspect of a company’s operations
are neglected work cannot be secured or alternately work will be secured that
cannot be competently completed leading to failure. The risk versus reward

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equation therefore remains an extremely important consideration for the

professional engineer. For example, if tenders are not competitively pursued
projects will not be forthcoming. Alternately, if tenders are won by an
engineering business that lacks the necessary resources and wherewithal to
adequately complete the works, heavy financial and other penalties will likely
result along with damage to a company’s reputation and standing in the
engineering community. As outlined earlier, financial and non-financial
expenditure is needed to submit a tender that may not result in award of the
project.

3. CONTRACT VARIATIONS

Many engineering projects will invariably require additional work to be done or

changes to be made. It may be that the parties will need to change the
contract, the costs or even the amount or quality of work.

Variations will usually be of two types:

 additions or omissions to work or the quality thereof; and

 deficiencies in the work or incompletion of the work.

These changes can either be accommodated for in the original contract, for
example by having clauses in the contract that allow for variations in the most
common or likely areas of the project. For unforeseen events, changes may
have to be negotiated on an ad hoc basis and will involve renegotiating the
contract.

Because variations are likely in most projects, most standard engineering

contracts provide for situations where the client can order variations as well
as the basis for valuing such variations. Where the contract does not provide
for this then there is no obligation on the engineer to vary the terms of the
contract or the amount or quality of work unless they agree.

A. POWER TO ORDER VARIATIONS

Some standard variation clauses may be very broad for example allowing
variations which are ‘within the general scope of the contract’. Often these are
accompanied by a monetary limit though to restrict major variations but
which thus allows minor variations to take place without costly and time-
wasting negotiations. With such clauses, it must still be shown that the
variations ‘within the general scope’ are reasonable otherwise they may not
be allowed.

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Case Study: Unreasonable variations

Wegan Constructions Pty Ltd v Wodonga Sewage Authority [1978] VR 67

The contract allowed for variations ‘within the general scope of the contract’.
Additional works were ordered that increased the overall extent of the work
by 40%. It was held that this was unreasonable and would thus not constitute
a variation under the contract.

B. RECOVERY WITHOUT WRITTEN ORDERS

Where variations of any type are made, it is common (unless already provided
for in the contract) to record the variation in writing, (‘written order’) showing
that the parties have agreed to this and authorising the variation. Where the
engineer makes variations such as the amount work, for example, and does
not obtain a written order, he is generally not entitled to payment of this
additional work unless he can do one of the following:

 Prove that other written documents together constitute a written

authority.

 Prove that there was an implied authority or promise to pay for said
variations.

 Show that the client had waived the requirement for a written order -
‘waiver and estoppel’.

 Make a claim in equity that it would be unfair to allow the client to benefit
unjustly from having extra work done and not pay for it – ‘unjust
enrichment’.

4. TIME AND PERFORMANCE

In most contracts, time - e.g. time for completion or delivery, is considered to

be a warranty. In other words, while it is considered to be part of the
contract, a delay in time is considered serious enough to warrant damages
being paid (warranty), but not serious enough (condition), to allow the
contract to be terminated (See Topic 4 breach of condition and breach of
warranty).

Sometimes though, time can be a condition if it is vital to the contract. In

engineering projects time would usually be considered ‘of the essence’
especially in areas such as software engineering (meeting global launch dates,
for example).

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It is not surprising then that time is often a major part of the engineering
contract. This includes provisions in the contract that:

 the project will be completed by a certain date;

 phases of the project must be completed at a certain date or in specific

order;

 the pace of work is to be of a ‘regular and diligent’ manner;

 there be a pre-agreed and adhered to schedule or timetable of work;

 delays will necessitate variations to be made;

 delays will allow for pre-agreed damages to be paid for example a

reduction in the contract cost or a pre agreed amount per day, week,
month etc;

 under certain conditions extensions of time will be granted; and

 there are guidelines as to what constitutes completion or at lease

‘substantial completion’.

Clauses in contracts addressing issues as seen above may still not make time
a condition. They may merely be to assist in these problematic areas.
However in circumstances where time is considered to be absolutely of the
essence, it may be treated as a condition allowing the contract to be
terminated and damages sought. The engineer should be careful when
entering contracts such as these since unforeseen or unavoidable delays even
though not your fault may terminate the project leaving you out of pocket.

A. TIME AS AN INNOMINATE TERM

It is common (and often more sensible) to treat time as an innominate term

of the contract. This means that we do not classify it as a condition or
warranty. Rather, we wait until a breach occurs and then classify it. For
example a delay of a day or a week may be seen as a warranty but a delay of
a month is more serious and can then be classed as a condition. Naturally this
classification will depend on the circumstances of the individual contract.

LIQUIDATED DAMAGES

Liquidated damages are an important aspect of resolving time delay

disputes and are triggered when an undesirable event that was
contemplated by the contracting parties arises. Essentially, parties pre-
agree to an amount and calculation of damages for possible breach of
contract or a category of breach. As these amounts are pre agreed they
are classified as liquidated as opposed to non-liquidated or un liquidated

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damages. An example would be a pre-agreed sum per day after a deadline

has passed such as for the construction of a shopping centre or bridge for
example. It is important to note that liquidated damages are not designed
to punish but simply compensate the injured party and as a consequence
should not be excessive.

Case Study: Liquidated Damages

In Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 the High Court
examined whether a liquidated damages contractual clause was valid
following a claim by the contractor that it was excessive and therefore
void. This clause concerned an automatic option to buy back a service
station if the owner purchased fuel from a supplier other than the
distributor as was required under a collateral agreement between Ringrow
and BP. It was considered that the clause was unfair and excessive by
Ringrow. This argument was not however supported by the High Court
who upheld the right to buy back the service station.

5. SUMMARY

Contracts form a vital part of business and part of the pre-contractual stage is
the tendering process. In this topic we briefly discussed the nature of tenders
and the tendering process. This is a critical stage in the contract process as it
forms the basis of negotiation and the contract.

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TUTORIAL QUESTIONS

1. What are the two classes of tenders?

2. Refer to the following article and discuss in light of your understanding of the
tendering process:

http://www.theage.com.au/victoria/leighton-to-be-reimbursed-up-to-12m-
for-failed-east-west-link-bid-20140623-zsj2m.html

3. What are pre-contractual processes? Use examples to support your findings?

4. INTERNAL MEMO

TO: Engineering Student

FROM: Gabriele J

Protect Manager

DATE: 1/2017

MATTER: TENDER GUIDELINES

As you are aware the company is expanding its operations and is planning to
tender for engineering and construction projects throughout Australia and
possibly even Asia. Although the company has tendered for a few minor
projects in the past, the company does not have any policy or guidelines on
tendering. I am in the process of compiling a document on tender guidelines
for our company and require you to assist with this task.

I understand that the Australian Constructors Association

(http://www.constructors.com.au/) has a set of guidelines for tendering.
Please locate this document and, using any other sources, prepare notes on
the following aspects for inclusion in the tender guidelines document.

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 Purpose of tenders

 Ethical principles

 Tender process (include a diagram)

 Checklist for tender documents

 Criteria for tender selection

We will meet next week to discuss what you have prepared.

5. Georgia May advertises that he ‘requires the supply and installation of

boundary fencing to her Riding Academy. The successful bidder will also be
required to renovate the stables and outhouse. The tenders will be received
and opened at the Riding Academy. Lucas faxes though his tender that
happens to be the cheapest but Georgia May refuses to engage with Lucas.
Does Lucas have any grounds on which to challenge the decision? Use case
law to support your findings

6. Gabrielle James Engineering was one of a number of tenderers that submitted

bids to supply and install land reclaiming driving equipment systems for the
State Government to use in the Monarchy Quay waterside project on the
foreshore. The equipment will be utilised to construct land foundations for the
many buildings to be constructed on the site. The tender process was long
and expensive. The State Government had provided potential tenderer’s with
a detailed package of information with defined procedures and evaluation
criteria. It is now accepted that the State Government did not honour these
undertaking and in fact ran the tender process in a haphazard and
unprofessional manner. Gabrielle James Engineering was unsuccessful in the
tender and subsequently sued the State Government who argued that the call
for the tender was nothing more than an invitation to treat and as a
consequence Gabrielle James Engineering have no grounds to sue.

Using your knowledge of tendering processes and the 4 step process advise
on the likely outcome of this action. Don’t forget to use case law in your
answer.

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