Tender documents require careful drafting: The implications of IPEX v the State of Victoria

The importance of how to draft and respond to tender documentation has been reviewed recently in the decision of IPEX ITG Pty Ltd v State of Victoria [2010] VSC 480.

The decision raises two key issues which are particularly important for government to consider in calling for tenders and for contractors to be aware of when responding:

• to what extent is government obliged to disclose the details of its tender evaluation process to bidders; and
• to what extent is government obliged to comply with the tender evaluation process set out in its request for tenders?

The IPEX case also illustrates that courts are more willing to find that a tender process contract exists where a detailed evaluation process, including evaluation criteria, is set out in the tender documentation and states that the principal "will" or "must" follow that process.

The RFT and Tender Evaluation Plan

In May 2002 the Victorian Government issued a Request for Tenders (RFT) for the Parleynet 2002 Project, which involved the implementation of a new computer system for the Victorian Parliament at each of its 132 electorate offices.

The RFT included:

• an overview of the tender process and evaluation criteria to be applied to the tenders (but not the scoring points or weighting applicable to each criteria) and statements to the effect that this tender process would be followed;
• the terms and conditions of the tender process, including the State's rights to enter into further negotiations with specific tenderers, change the conditions of tendering and reject any tender;
• a description of the Victorian Parliament's existing computer system; and
• the State's requirements for the new computer system, which required tenderers to take an innovative approach to the design and implementation of a new computer system and the provision of new equipment.

In addition to the RFT, the State prepared a Tender Evaluation Plan which set out the process to be followed by the State in evaluating the tenders. The Plan provided for each tender to be evaluated on the basis of criteria set out in the RFT, which was then scored and weighted in accordance with the Plan. The resulting scores were then combined with an analysis of costs to arrive at a "value for money" view of each tender. Following evaluation of the tenders, the Plan provided for the steering committee to shortlist two tenderers and, following negotiations with those tenderers, select the successful tenderer. The Plan was not made available to the tenderers.

IPEX was one of several tenderers who submitted a tender in response to the RFT. IPEX's tender focused on providing new computer equipment at a low cost rather than the design and implementation of a new computer system. Despite submitting the cheapest tender, IPEX's tender was unsuccessful.

Was there a process contract?

A binding contract (often referred to as a "process contract") may arise between the government calling for tenders and a tenderer where the parties' intention (assessed objectively in light of the request for tenders issued by the government and government's other communications to the tenderers) is that the government will be bound to conduct the tender evaluation process in a particular way. The terms of the process contract will depend on the representations made by the government in its request for tenders and other communications, and the government may be in breach of the process contract if it fails to comply with these representations.

IPEX claimed that by submitting its tender in accordance with the RFT a process contract arose between IPEX and the State on the terms set out in the RFT, and that the government breached the process contract by:

• evaluating the financial aspects of the tenders incorrectly and attaching insufficient importance to the cost of the tenders;
• failing to use value for money as the primary criteria in assessing the tenders;
• failing to inform IPEX of the evaluation criteria weighting and the State's requirements; and
• failing to score specific aspects of the tenders by reference to the evaluation criteria identified in the RFT.

The State disputed the existence of a process contract and argued that, if a process contract did exist, it had not breached its terms.

The Victorian Supreme Court's decision on the tender process contract

The court agreed that the RFT (particularly the detailed evaluation criteria set out in the RFT) was intended to be a legally binding process contract. This conclusion was not affected by the State expressly reserving certain rights under the RFT, including the right to amend the evaluation process.

In this case, the finding that a process contract existed rested (in a large part) on the detailed evaluation process, including evaluation criteria set out in the tender documentation together with a statement that the State "will" or "must" follow that process.

However, although IPEX successfully demonstrated the existence of a process contract, IPEX's claim was ultimately dismissed and the court held that:

• the State had evaluated and weighted the "financial" criteria of the tenders, but this evaluation did not relate to the actual cost of the tenders. Rather, it related to cost transparency, the financial assumptions on which the tender was based and the penalty and bonus regimes proposed by the tenderers. An analysis of costs and pricing was undertaken separately and incorporated in the final "value for money" analysis of the tenders. This process was in accordance with the RFT, which provided for the "financial (not costs)" aspects of the tenders to be evaluated and weighted.
• the State's obligation under the RFT to assess tenders on the basis of value for money did not compel the State to select the cheapest compliant tender. As the State was seeking the design and implementation of a new computer system, rather than the simple supply of new equipment, and the State had expressly reserved the right not to accept the lowest quotation in the RFT, the State was free to determine that IPEX's tender did not represent the best value for money, provided that it evaluated IPEX's tender in accordance with the criteria set out in the RFT.
• the State was not obliged to disclose the weighting to be accorded to each of the criteria in the RFT to the tenderers. Furthermore, while the State had not indicated exactly what services it required and the method by which they should be delivered in the RFT, the RFT clearly required the tenderers to propose an innovative solution to the delivery of a new computer system, rather than the simple supply of new equipment proposed by IPEX.
• While the State failed to score the tenders in accordance with certain evaluation criteria, all of the tenders were judged by equivalent criteria and the decision not to take the relevant criteria into account did not affect the outcome of the process. Furthermore, the RFT expressly reserved the State's right to change the RFT and the conditions of tendering at any time.

The practical implications of the IPEX decision for principals

There are a number of key messages for preparing tender documents arising from the IPEX case:

• A process contract will generally arise if a request for tenders sets out requirements to be complied with by tenderers in submitting their tenders, and by the principal in evaluating the tenders.
• Careful drafting of tender documentation is required to maximise the likelihood that a process contract is not created by tender documentation. In particular words of obligation should be carefully scrutinised before releasing a tender to market.
• To minimise the risk of breaching this process contract, the principal should ensure that its request for tenders clearly reserves a principal's rights in respect of the tender process.
• Rights which principals should consider reserving in clear and express terms, include the right to change the tender evaluation process, to reject any (and all) tenders and to enter into further negotiations with any tenderer.
• While the principal is not obliged to disclose the method by which tenders will be evaluated to tenderers, it must ensure that this method is not inconsistent with the representations made in its request for tenders and during briefings and negotiations with tenderers.
• If the principal proposes to depart from the evaluation process set out in its RFT, it will need to ensure that it has the right to do so under the RFT, that the departure will not affect the equal treatment of the tenderers, and that the outcome of the evaluation process will not be materially affected. Any such departure should be documented carefully as a formal addendum to the tender documentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.