The Judicial Committee of the Privy Council Decisions

 


Pratt Contractors Ltd v. Transit New Zealand (New Zealand) [2003] UKPC 83 (01 December 2003)

ADVANCE COPY

Privy Council Appeal No. 84 of 2002

Pratt Contractors Limited Appellant

v.

Transit New Zealand Respondent

FROM

THE COURT OF APPEAL OF NEW ZEALAND

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 1st December 2003

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Present at the hearing:-

Lord Nicholls of Birkenhead

Lord Slynn of Hadley

Lord Hoffmann

Lord Hope of Craighead

Lord Walker of Gestingthorpe

[Delivered by Lord Hoffmann]

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Summary

1. This appeal arises out of a claim for damages by Pratt Contractors Ltd ("Pratt"), which in 1997 submitted unsuccessful tenders to Transit New Zealand ("Transit") in two successive tender rounds for a contract to realign State Highway 1 at Vinegar Hill. Pratt alleges that the terms of the request for tenders ("RFT") gave rise, immediately upon submission of the tender, to a preliminary contract which contained express and implied terms as to the method by which Transit would select the successful tenderer and that Transit acted in breach of these terms.
2. Transit accepts, in the light of modern authority, that the request for tenders was not a mere invitation to treat and did give rise to a preliminary contract requiring it to comply with certain procedural obligations. It also accepts that the contract included an implied duty to act fairly and in good faith. But the parties differ over exactly what these procedural obligations were and over what counts as acting fairly and in good faith.
3. At the centre of the dispute lies the question of the extent to which the procedure for competitive tendering should be judicialised. Tenderers naturally want to be judged independently on their merits by an impartial selector and given the opportunity to rebut any suggestions of demerit which they regard as unfair. The parties who invite tenders, even if they are public authorities like Transit, want to be able to choose in what they consider to be their best commercial interests and not be hobbled by quasi-judicial procedural rules.
4. The trial judge (Goddard J) held that the preliminary contract required Transit to comply not only with the method of selection described in the RFT but also with its own internal procedural rules. In certain respects it had failed to do so. She also held that Transit was in breach of the implied obligation to deal fairly and in good faith because the selection procedure was vitiated by a real risk of bias. She therefore gave judgment for Pratt.
5. The Court of Appeal construed Transit's obligations more restrictively. It held that internal rules were not incorporated into the contract and that Transit did not have to organise the selection procedures to eliminate a risk of bias. As there had been no breach of the method of selection described in the RFT, the appeal was allowed and the action dismissed. Pratt appeals to Her Majesty in Council.

The parties

6. Pratt was a company controlled by Mr Russell Pratt. During the period 1985-1997 it has carried out a number of road building contracts. It also brought a successful action for damages in a case in which its tender had been rejected: Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469.
7. Pratt's reputation in the New Zealand road building industry (in which there are relatively few players) was not uncontroversial. It was thought by some to practise lowballing, that is to say, tendering a low price to obtain the contract in the expectation of being able to make a profit by aggressive claims for additional payments. At the time of the tenders for the Vinegar Hill contract, it was in serious dispute with Ruapehu District Council over a roading contract in Pipiriki for which it had tendered $769,340. The Council dismissed Pratt on grounds of delay and an arbitration followed in which Pratt claimed $2.5 million of extras said to have arisen during its partial completion of the contract. Pratt and the Council blamed each other for the delay. The contract engineer, Mr Graeme Young of the engineering partnership Payne Sewell, formed an unfavourable view of Pratt's business methods and engineering competence. But the arbitration was stayed because Pratt was unable to provide security for costs and did not proceed any further.
8. Transit is a Crown entity constituted by the Transit New Zealand Act 1989. It has responsibility for the maintenance and improvement of the state highway and motorway system and supervisory powers over other highway authorities.

Competitive pricing procedures

9. The 1989 Act imposes upon Transit and other highway authorities a statutory obligation to employ approved competitive pricing procedures. These have been drawn up by Transit and approved by Transfund, the Crown entity which funds road construction. They are contained in Transit's Manual of Competitive Pricing Procedures ("CPP"). The mandatory requirements in the CPP are accompanied by guidelines as to their practical application.
10. The introduction to the CPP says that it is not intended to provide "detailed and comprehensive procedures". Individual tendering authorities such as Transit or local highway authorities were meant to formulate their own procedural rules in conformity with the CPP. Transit has two such sets of internal rules relevant to state highway contracts such as Vinegar Hill. The first is the State Highway Tender Evaluation Manual ("SHM"), which lays down detailed procedures for evaluating tenders for state highway projects. The introduction says that it is intended to supplement the CPP, which in case of conflict should prevail. It also says that Head Office may override its provisions in individual cases. The second set of procedures is the Contract Administration Manual ("CAM") which deals, among other things, with the mechanics of tendering: how tenders should be submitted, whether the documents should be in one envelope or two, where the tender box should be sited (near the enquiry counter) and so on.
11. The CPP provides that tenders may be evaluated in one of two ways. The "lowest price conforming tender" method requires the successful tender to satisfy certain minimum qualitative criteria but obliges the tendering authority not to accept any conforming tender other than the lowest price. The "weighted attribute method" uses a formula by which marks or grades are given for certain qualitative attributes as well as price and the tendering authority may not accept a tender other than that which scores the best overall mark. Clause 2.4.1 of the CPP contains an exhaustive list (in bullet point style) of the non-price attributes which may be taken into account: relevant experience, track record, technical skills, resources, management skills and methodology. Appendix E contains some discussion about what these terms mean but the guidelines say that they may be interpreted flexibly.
12. Section 2.7.1 of the CPP provides a formula for calculating the outcome of a weighted attributes evaluation. Each attribute is given a grade out of 100 and a contractor who scores less than 35 on any non-price attribute is excluded from consideration. The grade for price is based upon degree of deviation from the median conforming tender price. Each grade (marked out of 100) is then converted to an "index" by reference to its weighting. Clause 2.7.2 then provides that the tendering authority (if it decides to accept any of the tenders) may accept only the one which scores the highest overall index.
13. Thus a contractor who tenders the lowest price may not necessarily succeed under the weighted attribute method if someone else scores better marks on the qualitative ("non-price") attributes. This method is used when the tendering authority is particularly concerned about the quality of the work and is willing if necessary to pay more to be confident that the job will be well done.

The Vinegar Hill Contract

14. Vinegar Hill was a large and important contract, estimated to take two years. Transit decided to use the weighted attribute method of evaluation. The RFT stated that the contract would incorporate certain standard general conditions used in New Zealand for civil engineering works in general (NZS 3910:1987) and roading contracts in particular (NZS 3911:1992), subject to a list of amendments. Clause 107 (as amended) was headed Acceptance of Tender:

"107.1 The lowest or any tender will not necessarily be accepted. The Principal reserves the right to reject all tenders.

…

107.3 Tenders shall conform and be evaluated in accordance with the current issue of [Transit's]:

(a) Manual of Competitive Pricing Procedures

Volume 1: Physical Works and Professional Services. Tenders will be evaluated by the Weighted Attributes Tender Method."

15. Clause 108.1 (as amended) limited the time for acceptance of a tender:

"If no tender has been accepted within two months after the closing of tenders, each tenderer shall be notified in writing by the Principal or his agent whether his tender is or is not still under consideration. Tender rates and prices shall remain fixed and valid for acceptance for two calendar months unless otherwise stated in the tender documentation."

16. The form of tender contained a clause which enabled Transit, before awarding the contract, to satisfy itself that the tenderer would be able to provide a performance bond:

"5. The tenderer nominates the following as surety for the due performance of the contract and upon request shall furnish a certificate signed by the nominated surety that it will execute the bond should the tenderer be awarded the contract."

17. The way in which the weighted attributes tender method would be applied was elaborated in the Instructions to Tenderers. It reproduced the formula in clause 2.7.1 of the CPP and specified the weights which would be given to each attribute:

Relevant Experience (4%)

Track Record (10%)

Technical Skills (Personnel) (4%)

Resources (4%)

Management Skills (4%)

Methodology (4%)

Price (70%)

The tender evaluation team

18. The Vinegar Hill contract was the responsibility of the Regional State Highway Manager at Wanganui, Mr Graham Taylor. He appointed an independent tender evaluation team ("TET") to advise him upon the evaluation of the tenders. There is nothing in any of the procedural documents which requires a TET: the SHM says that tender evaluators should be competent to do their job; but that is all. In the case of a large and important project, however, it appears to have been normal practice to appoint a TET. In the case of the Payne Royds consortium, it was a term of their conditions of employment as consultants (clause 7.2.1) that they would evaluate tenders and make a Tender Recommendation.
19. The first two persons whom Mr Taylor asked to act as members of the TET were Mr Graeme Young and Mr Robert Timpany. Mr Young was project engineer, as he had been on the Pipiriki contract. Mr Timpany, like Mr Young, was a member of Payne Sewell, which had also been involved in the Pipiriki contract as part of a consortium (called Payne Royds) which had designed and supervised the project. Payne Royds had won the contract for the same services at Vinegar Hill.
20. Mr Pratt was concerned that Mr Young and the Payne Royds consortium in general would come to the TET with prejudices formed at Pipiriki and not evaluate his tender with an open mind. Before submitting his tender, he went to see the National State Highway Manager, Mr van Barneveld, and Mr Taylor. He asked for and was given assurances that he would be fairly dealt with. Mr Taylor attempted to allay Mr Pratt's concern by appointing Mr Jones, the in-house Transit engineer responsible for the project, as a third member of the TET.

The tender evaluation

21. Pratt submitted its tender on 18 March 1997. Its price was $4.5m. There were seven other tenders but Pratt's was the lowest by over $1m. For the purposes of evaluating the non-price attributes, the TET divided the six non-price attributes into sub-categories, each with its own sub-weighting. Thus the 4% weighting for technical skills was divided into "experience" (three-fifths) and "back-up staff" (two fifths). "Resources" had three sub-weightings, one of which was "financial viability", carrying half of the 4% weighting. Pratt failed (i.e. scored less than 35) on technical skills and resources. On technical skills it scored 31 because although it passed on experience (three fifths of 45) it did badly on back-up staff (two fifths of 10). It scored 30 on resources, mainly because its financial viability was considered weak (one half of 20).
22. One of the reasons why the TET gave Pratt a low mark on financial viability was that on 24 March 1997 Transit wrote (at the request of the TET) and asked for a bond certificate in accordance with clause 5 of the form of tender. Pratt was unable to produce the certificate before the TET tendered its advice. All it could do was produce a non-committal letter from its bank saying that it would consider an application. The TET regarded this as indicating that Pratt would have difficulty in obtaining a bond.
23. In considering financial viability as part of the "resources" attribute, the TET departed from the practice prescribed for state highway contracts by clause 2.4(d) of the SHM. The clause defines resources as "the equipment, including facilities and intellectual property, which the tenderer proposes to use …" and went on:

"(i) Do not include financial resources in any weighting of attributes.

(ii) Where there is doubt that the tenderer has sufficient financial resources to complete the contract, a recommendation shall be made to the TNZ Land Transport Manager on a pass/fail basis …

(iii) An additional performance bond may be considered in cases of doubt."

24. The TET told Mr Taylor that in its opinion Pratt failed on the two non-price attributes and should be excluded from consideration. It produced a report giving detailed reasons for Pratt's failure. It also listed what it described as "key issues" for Transit to consider. They included the current and future commitments of the contractor and its financial viability over the two year period of the contract, ending with an issue which was plainly formulated with Pratt in mind:

"12. Selection of a contractor who has a consistent record of completing contracts without undue delays or substantial cost overruns or a history of involving costly litigation procedures."

25. The TET report concluded its section on Pratt by saying:

"Overall it is our view that Transit New Zealand would be unwise to consider the tender of Pratt Contractors Ltd for this important contract."

26. Mr Taylor was reluctant to accept this advice. A potential saving of $1m was tempting and he was willing, if some of the matters which had troubled the TET could be sorted out, to take a risk on Pratt. He spoke to Mr Pratt about three matters: the lack of back up staff, the financial weakness of the company. and the methodology implied in the low tender.
27. Mr Pratt offered to deal with the first problem by engaging the assistance of a firm called Ian Martin Ltd. Mr Taylor regarded this as satisfactory. He was also satisfied on financial viability when, on 28 May 1997, Mr Pratt succeeded in obtaining a letter of intent to issue a bond from an approved insurance company.
28. The methodology question was more difficult. Mr Taylor and his advisers were anxious because Pratt's low price seemed to be based upon highly optimistic productivity estimates. At first sight that might seem to be a matter for Pratt; if it had overestimated productivity, it would stand to lose money on the contract. But the contract provided for additional payments if the contractor had to deal with wet soil which reduced productivity below 50% of the estimated rate. Pratt's reputation for lowballing made Mr Taylor and his advisers concerned that if that Pratt fell well below its estimated productivity rates (particularly since it planned to start work in winter) Transit would be faced with a claim for additional payments.
29. By the time these discussions had reached a point at which Mr Taylor was willing to take his chance on Pratt and award it the contract, the two month period for acceptance of tenders (under clause 108.1 of the general conditions) had passed. Mr Taylor sought legal advice and was told (wrongly, as the Court of Appeal subsequently held in summary judgment proceedings: see Pratt Contractors Ltd v Transit New Zealand (8 June 1998) (unreported)) that he could not accept Pratt's tender unless all the tenderers were willing to confirm that their tenders were still open to acceptance. Two would not, so Mr Taylor decided to exercise Transit's power under condition 107 to reject all tenders and re-advertise.

The second tender round

30. When tenders were re-advertised, Pratt submitted two tenders for the same work; one at the original figure of $4.5m and one at $5m. The latter appears to have been submitted as a result of Mr Taylor's criticism of the first tender as too low because it was based upon optimistic productivity rates. When the matter came back to the TET, Mr Young asked Transit to inquire of Mr Pratt which tender he wanted to be considered. On 20 June 1997 Mr Pratt said that it should be the $5m tender.
31. By the time of the second tender round, Mr Timpany was otherwise engaged and was replaced by another Payne Sewell man, Mr Gifford. He came with recent experience of working on the ill-starred Pipiriki contract with contractors called Hayes Earthmoving Services Ltd ("Hayes"), who had succeeded Pratt on that contract. Mr Gifford was favourably impressed with their performance. Hayes had tendered in the first round and did so again, at a lower price, on the second. The judge subsequently found that Hayes had submitted its second round tender in a single envelope, instead of putting the non-price attribute information in one envelope and the price in another, as the RFT stipulated. (This may have been because the second RFT did not require a resubmission of non-price attribute information. Tenderers were allowed to say that they stood by the information previously provided.) The SHM says that if two envelopes are required by the RFT, tenders in one envelope shall be rejected. Nevertheless, Transit accepted the Hayes tender as a valid tender. Mr Taylor achieved the object of the two-envelope procedure (which is to ensure that the TET evaluates non-price attributes without being influenced by knowledge of the tender price) by not disclosing the price to the TET.
32. On the evaluation of the second round of tenders, the TET advised that Pratt passed on all the non-price attributes. This time, the TET was instructed that financial viability should be excluded from the resources attribute in accordance with clause 2.4 (d) of the SHM. That gave Pratt a better score. It also passed on technical skills because of the back up staff available from Ian Martin Ltd. On the other hand, it did worse on relevant experience (reduced from 62.5 to 50) management skills (41.5 to 36.5) and methodology (80 to 60) on the second round. Hayes, on the other hand, improved its score because of the information supplied by Mr Gifford. That, together with the reduction in its price and the increase in the Pratt price, was sufficient to give Hayes the highest overall score. It was awarded the contract and soon afterwards Pratt went out of business.

The trial

33. Goddard J gave a detailed reserved judgment. Transit, as their Lordships have already noted, accepted from the outset that the RFT and submission of tenders gave rise to a preliminary procedural contract which required them to evaluate tenders in accordance with the method stipulated in the RFT. The judge considered that the RFT incorporated by reference not only the relevant mandatory provisions of the CPP but also the SHM and CAM. The basis for this finding was that the requirements of the latter manuals were mandatory as well as guideline and that they together constituted a regulatory code.
34. The judge's view that the provisions of the SHM had been incorporated in the preliminary procedural contract led to the conclusion that the TET had not been entitled to consider financial viability as a sub-attribute of resources in the first round. Indeed, Goddard J considered that the formulation of sub-attributes was in principle a breach of contract unless they had been notified to the tenderers.
35. The judge said that the professional services consultants on the TET were obliged to take a "fair, impartial and assiduous approach". She considered that this duty had not been discharged because the involvement of Mr Young and Payne Sewell in the Pipiriki contract gave rise to a "real risk of bias" on their part. This was in her view confirmed by such matters as the inclusion of financial viability in the first round evaluation and issue 12 in the TET report, both of which seemed "aimed at" Pratt, as well as what she saw as factual inaccuracies about Pratt in the report. The risk of bias also extended to Mr Jones, who had had nothing to do with Pipiriki, because he had produced a schedule as part of his evidence at the trial to demonstrate that there had been cost overruns on previous Pratt contracts. The judge regarded the schedule as based upon selective information and as evidence that Mr Jones was and had been biased against Pratt.
36. The judge therefore concluded that, in respect of the first tender round, Transit had been in breach of both the procedural rules laid down by the RFT or the manuals which it had incorporated and also its general obligation to act fairly and in good faith.
37. The next question was the consequences of these breaches of contract. Transit had not awarded the contract to another tenderer. The first round had been aborted by Transit's exercise of its right not to accept any tender. But the judge found that but for the breaches of contract, Pratt would have been awarded the contract by 1 April 1997 or shortly thereafter. She held that Transit had an obligation to bring the process to a timely conclusion and had failed to do so. It was therefore irrelevant that Transit was entitled to reject all tenders.
38. On the second round, Pratt had passed on all non-price attributes. But the judge said she could find no logical reason for Pratt being marked down on some attributes and even less reason for Hayes being marked up. The only explanation was the presence of Mr Gifford. The judge thought he should not have been included in the second round TET – at any rate, without notice to Pratt. There was in her opinion a real risk of bias in the second round also. In addition, awarding the contract to Hayes was in breach of the SHM which said that tenders in one envelope should be rejected. So Pratt had a separate cause of action for breach of contract on the second round.

The Court of Appeal

39. The Court of Appeal [2002] 2 NZLR 313, in a judgment delivered by McGrath J, did not accept that the SHM and CAM were incorporated into the terms of the preliminary procedural contract. The manuals were mandatory as between Transit and its employees but that did not make them terms of the contract with the tenderer. The RFT made no reference to them and they could not be, as McGrath J said, "self-incorporating". That disposed of the complaints that taking financial viability into account in the first round and accepting a tender in one envelope in the second round were breaches of the SHM.
40. The Court of Appeal said that if one confined attention to the express terms actually stipulated in the RFT, it could not be said that Transit had contravened them. There was nothing wrong in the TET arriving at its evaluation of attributes by a process which involved the use of sub-attributes. That was an internal methodology it was entitled to employ. Nor was it wrong to construe "resources" as including financial resources. The SHT preferred to deal with financial resources separately but as a matter of language financial viability was an element of resources. The Court of Appeal also did not accept that Transit had an implied obligation to complete its evaluation within any particular time. That would be inconsistent with its right not to accept any tender.
41. Finally, the Court of Appeal rejected the judge's finding of an implied term which obliged Transit to conduct the evaluation in a way which did not create a risk of bias. This was a public law concept inappropriate for adoption in commercial dealings between parties who were each entitled to act in their own interests. The only implied term was that Transit would not actually act contrary to good faith and fair dealing
42. The Court of Appeal did not however express a concluded view on whether it should treat the judge as having made findings of actual as well as apparent bias because it considered that whatever bias there may have been in the TET, it did not impact upon Transit's decision. Mr Taylor did not accept the recommendation of the TET but formed his own view on whether Pratt should be awarded the contract. By early June 1997 the TET had been provided with updated information which enabled it to declare Pratt as having passed all non-price attributes and Mr Taylor was ready to award it the contract. The only reason why Pratt did not obtain the contract was that Mr Taylor was advised that he was too late to accept the tender. He was entitled to reject it and the other tenders on this ground.
43. On the second round, the Court of Appeal said that there was no contractual obligation to notify Pratt that Mr Gifford had been included in the TET. He was entitled to bring his own views and experience to bear on the evaluation process. It was therefore not surprising that marks given by the second TET differed in some respects from those of the first TET. Transit did not have to justify departures from the marks given in the first round. It was a new process.

The contractual terms

44. Their Lordships agree with the Court of Appeal that the RFT did not incorporate the terms of the SHM or CAM. The RFT said only that tenders would be evaluated in accordance with the weighted attributes method prescribed by the CPP. The detailed procedures prescribed by the other manuals are no doubt intended in part to ensure that Transit does comply with the terms of the CPP and in part for its own administrative convenience. But they are not something upon which an outsider can rely. The claim based on the single envelope procedure must therefore fail. Their Lordships also agree that the adoption of the sub-attribute methodology does not mean that the TET were assessing attributes other than those specified in the RFT. As a matter of construction the sub-attributes, including financial viability, could legitimately be regarded as aspects of the principal specified attribute.
45. The nature of the implied duty to act fairly and in good faith has been the subject of a good deal of discussion in Commonwealth authorities. In Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469, 483, Gallen J said that fairness was a "rather indefinable term". In Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1, 36-37, Finn J said that the duty in cases of preliminary procedural contracts for dealing with tenders is a manifestation of a more general obligation to perform any contract fairly and in good faith. That is a somewhat controversial question into which it is unnecessary for their Lordships to enter because it is accepted that, in general terms, such a duty existed in this case. The issue is rather as to its specific content in relation to the particular acts required to be performed by Transit in evaluating the tenders.
46. In relation to this question, Finn J (at p 42) emphasised that such an implied term —

"does not as such impose on [the employer] under the guise of contract law, the obligation to avoid making its decision or otherwise conducting itself in ways which would render it amenable to judicial review of administrative action."

47. This observation was adopted by McGrath J in the Court of Appeal at p 338, para 98, and their Lordships agree with it. The judge's findings of apparent bias were therefore no ground for holding Transit to have been in breach of contract. It is nevertheless necessary to identify exactly what standard of conduct was required of the TET in making its assessment. In their Lordships' opinion, the duty of good faith and fair dealing as applied to that particular function required that the evaluation ought to express the views honestly held by the members of the TET. The duty to act fairly meant that all the tenderers had to be treated equally. One tenderer could not be given a higher mark than another if their attributes were the same. But Transit was not obliged to give tenderers the same mark if it honestly thought that their attributes were different. Nor did the duty of fairness mean that Transit were obliged to appoint people who came to the task without any views about the tenderers, whether favourable or adverse. It would have been impossible to have a TET competent to perform its function unless it consisted of people with enough experience to have already formed opinions about the merits and demerits of roading contractors. The obligation of good faith and fair dealing also did not mean that the TET had to act judicially. It did not have to accord Mr Pratt a hearing or enter into debate with him about the rights and wrongs of, for example, the Pipiriki contract. It would no doubt have been bad faith for a member of the TET to take steps to avoid receiving information because he strongly suspected that it might show that his opinion on some point was wrong. But that is all.
48. Their Lordships do not consider that the judge made any finding of bad faith on the part of Mr Taylor or any member of the two TETs. There is no doubt that Mr Young was strongly of the view that Pratt's business methods and lack of competence made it unwise for Transit to engage it as a contractor. But that was no reason for him to disqualify himself from the TET. Transit had paid for his expert opinion and were entitled to pay attention to it. Nor is there anything to show that the marks on which he and his colleagues agreed did not reflect a true consensus of their honestly held opinions.
49. It follows that their Lordships do not think that the findings of fact justify a conclusion that there was a breach of the express or implied terms of the preliminary procedural contract at either of the tender rounds. They also agree with the Court of Appeal that even if there was such a breach in the first round, it would have had no causative effect on Pratt's failure to obtain the contract. They will therefore humbly advise Her Majesty that the appeal should be dismissed. The appellants must pay the costs before their Lordships' Board.