The Process Contract

This post is not intended to provide legal advice, nor be specific to your individual situation.  It is to provide a broad view of process contracts within a procurement framework.

What are Process Contracts?

With regards to the procurement process it has been a long held belief that there is a single contract; one that is formed through the acceptance of a bid.  The ‘final’ contract is the deliverable of the procurement process and is often seen as the final milestone of procurement; essentially, procurement’s version of practical completion.

Whilst this view may be correct, there are cases which present an underlying contract within the procurement process; possibly unintended but none the less implied.  This is referred to as a process contract. A process contract is a contract that binds the parties, specifically the principal to the terms of the process outlined to bidders.  Essentially it is a contract that ‘process’ will be followed.

To understand the concept, we need to explore the foundations of the law of contracts.

What makes a contract?

Simply put; contracts are promises willingly exchanged by two or more people by which they are legally bound.  Further to this there are a set of requirements that a valid contract must include;

• Agreement (Offer and Acceptance)
• Intention to create legal relations
• Consideration
• Legal Capacity

Contracts are entered into on a daily basis, most of the time without the active consideration that you are entering into a contract; purchasing your morning coffee, getting your car serviced, buying a train ticket, a round of drinks.  Considered closely each of these activities comes with a promise; which if required, could legally bind the parties into fulfilling their promise.

High-level procurement commercial contacts are no different, whilst the contract instrument may change from a verbal exchange to a set of volumous documents, at the heart of the matter lies a legally enforceable promise.

Establishing the existence of a process contract can be identified through the applications of the requirements of contract formation to the procurement process; whilst the intention to create legal relations, consideration and capacity are fairly straight forward it is the part of agreement which provides the greatest confusion.

Agreement (Offer and Acceptance)

What is the offer?

In most cases the actual offer, as discussed within the majority of procurement cases; is established through and within the submission of a bid by a potential supplier.  However the offer with regards to the process contract is most often presented within the request document (RFT etc.).  Within this ‘offer’ the principal may state the process by which the tenders are to be received, will be reviewed and in some cases awarded.  This is an offer to potential bidders; in essence creating a unilateral offer similar to that of the seminal case: Carbolic Smoke Ball (Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1).

What is acceptance?

Within a procurement context the term ‘acceptance’ is reserved and used interchangeably with award: this occurs after the evaluation process has yielded a preferred supplier and conventionally notified through a letter of award- acceptance.  However, the acceptance of a process contract generally occurs bid by bid; as each bid is submitted they are ‘accepting’ that their response will be considered and treated by process and terms communicated within the request document.

‘Agreement’ in the context of a process contract is typically reached through the ‘offer’ contained within the request document and ‘accepted’ through the act of submitting the response.

It is important to note that the legal dictionary’s definition of a contract is one of a legally enforceable agreement.  By that reasoning; if a process contract can be established, it can be inferred that the agreement made is subject to legal enforcement.

Are process contracts new?

Subsets of private law; such as contract law constantly evolve through decisions of judges.  Whilst there is not a large amount of established case law on the topic of process contracts, there is sufficient precedence to denote that the courts will consider a process contracts in decision making.

Arguably the case that changed the Australian courts consideration of process contracts was Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558.  Prior to this case (1997) it was held that there was no contract between the principal and bidder until a formal award was reached; i.e. the courts did not consider the existence of a process contract.

Key rationale behind the decisions handed down in the Hughes case and subsequently adopted in future cases were that;

• there is a legally binding process between principal and each tenderer to follow process
• principals must follow the process and act in good faith; a fair and equal process
• process contracts will be presumed in public procurement endeavours

Legal Implications

The legal implications of process contracts can be severe. This can be amplified by the potential lack of understanding of the procuring agency as to the existence of process contracts and the importance of following the conditions set as part of their tender.

Once a process contract has been established by the courts, the courts will seek to determine if and to what degree the contract was breached. The remedies in law for breach of contract include both damages as well as equitable remedies.

The most common remedy sought by an unsuccessful tenderer would be to sue for damages; these damages would typically be based upon the cost of preparing the tender document.  In many industries, this cost can be substantial as it allows for the inclusion of any cost which the tenderer can apply to the activities of ‘preparing’ their response.

Further to this the tenderer could apply for a court injunction which would restrain the principal from engaging into the contract with another provider and or to recommence the tendering process.  The principal could even be estopped from departing from their statements.  Whilst these remedies can be applied they have not proved as successful given their practicalities; for example, if the contract has already been awarded and or work have already commenced.

There are also statutory remedies which can be sought; the Australian Consumer Law provides heavy penalties for entities found to be in trade or commerce engaging in misleading or deceptive practices (Section 18).  In the case of the Port Macquarie-Hastings Council v Woolworths (discussed below) the council was found to have been engaged in misleading and deceptive conduct and was penalised under the legislation.

Legal Precedents

Whilst process contracts are a growing part of the body of law, there have been significant cases which have shaped the way by which the courts are interpreting and dealing with process contracts.

Hughes Aircraft

In the case of Hughes Aircraft Systems International Inc v Airservices Australia, the Australian courts established the notion of a process contract.  This was a contract which preceded the award of tender; one that was established in order to maintain the integrity of the tender process.

The case showed that Air services Australia did not follow the criteria which they established and communicated to tenderers and as such were in breach of their own processes. The courts passed that this was unfair for Hughes Aircraft who relied upon the guidelines which further expressed that there would be “fairness between tenderers”.  As such Hughes Aircraft was awarded damages and the tendering landscape was changed.

Port Macquarie-Hastings Council

This case not only showed the importance of following procedural fairness and abiding by the process contract in fear of common law damages, but also the statutory provisions which can be applied for the relief of unsuccessful bidders.

In 2011 the Council underwent an Expression of Interest (EOI) for the purchase and development of a supermarket site.  The council had elected to and were for a year in exclusive negotiations with Woolworths in drafting the contract for sale.  The process had been held up by a couple of points and the council felt at stalemate.

Fearing the negotiations may fail, the council commenced concurrent negotiations in secrecy with Coles; as a fall-back plan.  The council then informed Woolworths that they were unsuccessful and awarded the sale of land to Coles.

Woolworths successfully sued and further to the claimed damages sought relief on the grounds of misleading and deceptive conduct.

Cubic Transportation Systems

This case was interesting as it showed the principals attempts in the use of avoiding such a process contract through exclusion clauses.  In this case Cubic Transportation was a bidder in a state tender for the provisions of a ticketing system; after being shortlisted they were asked to submit a revised proposal, as this was not part of the communicated process an injunction was sought to prevent the award of contract.

This brought the matter to the courts where the NSW Government provided evidence which showed that they had clearly stated that the procurement process did not establish any contractual relations with any of the bidders- in effect trying to exclude any form of process contract.  In consideration, the courts decided not to allow the exclusion clause as it was contradicted by promises congruent parties involved in a contract; confidentiality and procedural fairness.

Whilst the court did find that the departures of government were not sufficient to cause a breach of the process contract, they did in fact lay a precedence that the default position was that a process contract does exist and it may not be so easily excluded.

What should procurement professionals consider?

Whilst process contracts are often seen as burdensome and not in the interest of the principal, there are some actions which a department can take to use these to their advantage.

Construct effective documents

Many actions taken by principals to deviate from their established processes are due to failings within their own systems.  Too often tender documents are poorly drafted in a rush to get to market and reach an outcome. This occurs readily in a project environment as the pressures of time quickly surpass the need for a well drafted document.

The irony is that a strong but inverse correlation exists between the planning costs and the failure costs, hence the time spent in the development of an effective document; one which identifies and correctly translates the needs of stakeholders, the background and context of the procurement as well as the development of suitable selection criterion and weighting actually reduces the time spent dealing with the issues and the failings of the exercise.

Rather than rush the procurement process, especially the pre-RFT issue, procurement professionals should ensure that appropriate measures are taken to ensure that the document submitted to market will be fit for purpose.

Clearly outline the process

Whilst a clearly outlined process actually increases the chances that a court will determine that a process contract exists, it is a good strategy to employ as it limits market as well as internal confusion.  Many of the cases brought before the court have had some degree of uncertainty with regards to the procurement process itself; by having a very clear process the principal would not face the risk of having the courts to construe the contract.

Reserve their rights

Principals should also consider reserving their rights to allow for flexibly and departures from the process.  Exclusion clauses will be discussed later in the paper; however, principals should be aware that on face value they may able to reserve their rights to deviate from the process.

Reserving their rights can in effect be construed by the markets and sometimes the courts as an admission of guilt.  By stating that the principal has the right not to follow their own process, the market may feel uneasy in tendering.  It is important that whilst the principal does limit risk by reserving its rights, it does not create a perception that it is intending to intentionally mislead the market by stating one set of processes and reverting to another as it sees fit.

Appropriate training

The understanding of process contracts is limited amongst procurement professionals; whilst most understand that process should be followed, the reasons why are often unclear.  The evolving number of cases where process contracts are argued, should warrant further training for those involved in the procurement process.

This should extend to anyone involved in the procurement process, including those who interact with the market.  The issues associated with breach of contract go much further than the immediate damages; they can tarnish the reputation of private companies, limiting the amount of potential future bidders, or in the case of public procurement it can serve as an embarrassment to the government in power fuelling bad press affecting election chances.

Express the terms

A process contract is an implied contract, with that many of the terms of a process contract are also implied.  By way of limiting risk to the principal, it could be through the use of express language, appropriately located within the first request document (to show clear intent) that the parties do not intend to through participation in the process to be legally bound.  In effect it is creating an exclusion clause.

This has been tested with varying outcomes through previous cases and where it hasn’t worked the court has determined inconstancies or technical issues with relation to the legal drafting.

It is important to note that express terms take precedence and effectively override implied terms. By stating the terms you are limiting the scope that can be implied by the courts.

How to avoid process contracts?

Taking lessons from failed attempts is a good start the case of Cubic Transportation Systems v State of New South Wales [2002] NSWSC demonstrated that an exclusion clause may not be sufficient to exclude the existence of a process contract.  Whilst an exclusion clause is a worthy starting point, it is only that and may not offer full protection.

Secondly and importantly is that the language found within the tender must be consistent with the exclusion clause.  This is important as in order to avoid a process contract it must be clear that all the parties are in agreement that there is no legal intention or relations established by simply taking part in the procurement process; i.e responding to a request for tender.

If the exclusion clause states that there will be formal legal relations, but the tender document speaks of terms such as confidentiality, process, legal recourse etc. then that language may be interpreted as the language used in the existence of a legal relationship and by that it may create one.

As this area of law evolves; in both the development of case law and applicable statute, there will be greater need for care in drafting request documents and following due process and as such, perhaps the process contract should be, not sought to be avoided, but embraced to convey that the procurement landscape is one of fairness and equity.