There are few things more frustrating than going through a procurement process and selecting the preferred tenderer only to find that the preferred tenderer seeks to renegotiate or back out of the deal. The preferred tenderer may have (deliberately or by miscalculation) put in a very attractive tender to nudge out its competitors with a view to hopefully being able to clawback some value in negotiations before the formal contract is signed.
A recent decision of the Supreme Court of New South Wales highlights that whilst there is always scope to negotiate, a legally enforceable contract can readily arise before formal contracts are signed.
Who needs to know?
People who manage procurement processes. Executives and corporate advisers involved with bidding processes in mergers & acquisitions also need to know because the same legal principles apply.
Background
The decision of the Supreme Court of New South Wales in Woollahra Municipal Council v Secure Parking Pty Ltd [2015] NSWSC 257 involved a dispute about whether a legally binding contract had arisen as a result of the Council’s acceptance of a tender submitted by Secure to manage the Council’s car parks in Double Bay and Bondi Junction.
Following submission of the tender and some subsequent discussions, the Council resolved to accept Secure’s tender. Secure was promptly notified of this decision and, thinking it had a deal, the Council asked Secure to sign the formal management agreement (a copy of which was included in the tender documents).
To the Council’s surprise, instead of promptly signing the management agreement, Secure replied to the effect that it would send the agreement off to its lawyers for review. The Council responded by basically saying it was too late for changes to be raised at this stage. Nevertheless, Secure’s lawyers proposed 91 changes to the management agreement. The Council was willing to accommodate many of the changes, but several of the changes were not agreed. Secure refused to sign or perform the agreement. The Council alleged that Secure had repudiated the agreement. The Council used this as grounds to terminate. Secure disputed that any binding agreement had ever arisen. The Council eventually entered into an 8 year management agreement with Care Park. The guaranteed annual income under this agreement was approximately $5.3 million less than the guaranteed income under the management agreement with Secure. The Council sued Secure for the shortfall as damages.
Key Features of the Tender Process
The Council conducted the tender under local government regulations which were relatively restrictive about the extent to which the Council could allow variations to tenders after they had been submitted.
Another crucial piece of context was the “invitation to tender” document issued to interested tenderers. It contained the following key features:
- the successful tenderer “will be required to enter into a management agreement with the Council … commencing on a date as agreed between the Council and the successful Tenderer … upon the terms and conditions of the attached Management Agreement”;
- the Management Agreement contained several blanks. However, the invitation to tender contained schedules for tenderers to complete on the basis that this information would then be used to fill in the blanks in the Management Agreement. An attachment to the invitation to tender expressly stated that the Council would do this and then send the completed management agreement to the successful tenderer for signing;
- all tenderers were required to “hold their total offer open for acceptance by the Council” for a minimum period of 90 days. Notification of acceptance of any tender would be given by a formal letter from the Council;
- within 14 days of being notified that the Council had accepted the tender, the successful tenderer was required “to agree on a commencement date for the Management Agreement, sign the Management Agreement and deliver to the Council the signed Management Agreement together with evidence of the insurances and the initial Bank Guarantee required under the Management Agreement”; and
- the “Tenderer acknowledges that by responding to the Invitation for Tender, the Tenderer understand[s] and accept[s] all relevant terms and conditions pertaining to this Tender”.
Basic Legal Principles
A legally binding agreement will only arise if the contract law criteria are satisfied. These include:
- Completeness – have the parties agreed on all of the essential terms? If not, the ‘agreement’ will be incomplete and it won’t be legally enforceable;
- Mutual agreement – have the parties actually reached agreement or consensus? Sometimes this is clear e.g. an offer is made and accepted. However, if the parties are still negotiating or have “agreed to agree”, then there won’t be a legally enforceable contract;
- Intention – do the parties intend to be legally bound? This is often obvious (e.g. formal documents are signed), but the parties may intend to be bound at an earlier stage, with the legal documents to be prepared later as a means of just restating in more formal words that which has already been agreed; and
- Uncertainty – is the ‘agreement’ clear? If the terms of the agreement are too vague, then the courts won’t be able to enforce it and hence it won’t be legally binding.
The courts apply an objective approach to these matters. In other words, it does not matter whether or not one of the parties subjectively intended to be bound or what one of the parties understood things to mean in its own mind. Rather, the courts will examine the outward manifestations (i.e. letters, emails, words and conduct between the parties) to determine what a reasonable person in the position of the parties would have believed or understood.
In this case, Secure argued that the contract formation criteria had not been satisfied. It essentially argued that the tender process was a series of negotiations that never led to a concluded agreement. It focused on two key issues.
The Bank Guarantee
The Management Agreement (as attached to the invitation to tender) required the successful tenderer to provide the Council with a bank guarantee for 3 months guaranteed income. The bank guarantee had to be irrevocable, unconditional and issued by a bank under the Banking Act 1959 (Cth). After its tender was submitted, Secure told the Council that “Secure does not provide a bank guarantee. It is a direction from our board of directors. All we can offer is a performance bond”. It appears that Secure did have a facility with ANZ for the issue of bank guarantees, however, this facility was almost fully drawn. Secure had another arrangement with Hannover Re through which it was able to offer “performance bonds”. The Council made it clear that it would only accept a bank guarantee.
In subsequent communications, the Council always referred to the “bank guarantee” whereas Secure referred to it as the “performance guarantee bond”. Nevertheless, the final communication on this issue was to the effect that Secure’s tender would be put forward for approval on the basis that there would be a bank guarantee (not a performance bond), albeit the guarantee amount would be reduced from 3 to 2 months. Secure did not raise any objection to its tender being put forward for approval on this basis. Therefore, whilst Secure (in its own mind) may have not been willing to provide a bank guarantee, looked at objectively, it appeared willing to proceed on this basis.
In Court, Secure argued that the parties never reached agreement on whether a bank guarantee would be provided. Secure argued that this was an “essential” term of the agreement and accordingly the agreement was incomplete and not binding. The Court disagreed. It concluded that the parties agreed to vary Secure’s tender so that the security was for the reduced period of 2 months, but the security had to be a bank guarantee. As varied, it was this tender (i.e. an offer) which the Council accepted.
Commencement Date
One of the blanks to be completed in the management agreement was the commencement date. In the management agreement sent to Secure for signing, the Council inserted 1 June 2011 as the commencement date.
At a meeting between the parties after the tender had been submitted, the issue of the commencement date was raised. The discussion was generally to the effect that the agreement would commence from the date on which Secure finished installing some new equipment at the car parks. The Council circulated minutes of the meeting confirming this, albeit an actual date was not stated. Secure did not take issue with the minutes.
At trial, Secure argued that no agreement had ever been reached on the commencement date. The Court disagreed. It held that the parties had agreed on the commencement date (i.e. the date on which the new equipment was installed). It did not matter that they had not fixed an actual date.
By inserting 1 June 2011 into the management agreement, the Council was “proposing” this as the actual date. It was open for Secure to propose a different date which better reflected what had been agreed, but Secure did not do so. Ultimately, the Court held that even if the parties could not reach commercial agreement on the actual date, the Court would have determined a reasonable commencement date consistent with what had been agreed. Accordingly, the agreement was not uncertain or incomplete on this basis.
It is interesting to note that the outcome may have been different if the parties had not reached general consensus about the commencement date being when the new equipment was installed. If that consensus had not been reached, the court probably would have been reluctant to impose its own view of what should have been the commencement date. If the commencement date was truly an “essential” term, this would have resulted in the ‘agreement’ being incomplete and therefore not legally binding. However, if the commencement date was not essential, then the court could fill the gap by implying a reasonable commencement date.
Practical Points to Take Away
- Take minutes of your meetings with tenderers. Consider typing them up and circulating them afterwards as a clear record of what was said or agreed. If you don’t agree with what’s in the minutes you should make your position clear, otherwise you may be viewed as accepting of the position stated in the minutes.
- Ensure your tender / sale process documents are very clear about when a legally binding contract will arise. In this instance, it appears the Council’s invitation to tender did not expressly deal with this, although it did use the well known “offer and acceptance” framework which can give rise to legally binding contracts. Likewise for bidders, if you submit a tender you should be clear about whether it is a legally binding offer. In this case, if Secure wished to make a non-binding offer, then it should have done so expressly, although this would have made the tender “non-conforming” and given rise to other consequences.
- If you are ‘accepting’ an offer, make sure your acceptance matches the offer. If you want the agreement to be different from the terms of the offer, then either reject the offer and make a counter-offer or accept the offer and propose the additional or different terms. The latter approach to ‘acceptance’ would only be recommended if the offer was a good deal that you immediately wanted to lock-in and the proposed additional or different terms were not essential from your perspective. The difference between the two approaches is subtle. Most communications proposing different or additional terms will be treated as counter-offers, but this won’t always be the case. This was recognised by the Court in this instance and it’s also noted by the authors of Contract Law In Australia where they state: “[A] reference [in the acceptance] to an additional term should be read as a proposal for the modification of the agreement, but that the maker of the statement intends to be immediately bound whether or not the modification is agreed to be the other party”.