The perils of the tendering process: lessons for developers and contractors

The process of tendering for a development contract may be essential, but it can raise legal issues for both developers and prospective contractors alike. Moreover, it can be costly in terms of time and funds invested, which are usually borne by the tendering parties, successful or otherwise, as a ‘cost of doing business’. But what if the tendering party had been seduced into incurring further costs, believing an agreement existed, because of the misleading and deceptive conduct of the developer?

In the illustrated case discussed below, a constructor sued a developer on the grounds of breach of contract, or alternatively, that the developer’s conduct amounted to misleading or deceptive conduct.

Misleading or deceptive conduct

Misleading or deceptive conduct is a potential ‘cause of action’ which arises from Australian Consumer Law (ACL).

Section 18 ACL

This section states that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive. In making a claim, it is necessary to show that the claimant relied upon the conduct of another, which caused their loss. A person includes individuals and corporations.

The type of conduct that is caught by the legislation includes false statements or representations made about a future matter, including doing or refusing to do something, if the person making the representation had no reasonable grounds for doing so.

The Court will examine all the alleged misleading and deceptive conduct in the context of the whole course of conduct between the parties.

Section 236 ACL

This section provides that where a person suffers loss or damage because of the conduct of another party that is misleading or deceptive, then the ‘claimant may recover the amount of the loss or damage by action against that other person involved in the contravention’.

It is necessary to prove that the conduct was relied upon and particular acts were done or not done as a result as the case may be. There also needs to be a link between this reliance and the loss or damage suffered.

There are a number of options for relief from misleading and deceptive conduct. These include damages commensurate to any loss a claimant has suffered or compensatory orders for contravening persons to compensate a claimant. Contravening persons can include directors and employees of companies who have engaged in inappropriate conduct.

If a Court concludes that the loss or damage was caused partly by the claimant failing to take reasonable care the Court may reduce the damages payable.

Illustrated Case: Dyna Constructions Pty Ltd v Bocco Developments Pty Ltd (2021)

In this case, the developer Bocco Developments was looking to construct a residential apartment complex at Narrabeen in Sydney’s Northern Beaches’ suburb. Five building firms submitted an expression of interest in tendering for the contract. Dyna was one of these companies and was subsequently issued with a formal Invitation to Tender.  Dyna was subsequently identified as having submitted the preferred tender and there was an exchange of correspondence between Dyna and Bocco’s project manager advising, among other matters, that Dyna had been successful in its bid. The parties started negotiating the construction contract. However, Bocco’s original financier pulled out and the replacement financier required Bocco to use one of its preferred building contractors.

Dyna, stood down from the project, commenced proceedings to recover its tender costs and damages on the grounds of breach of contract or, alternatively, Bocco’s conduct which amounted to being misleading or deceptive conduct:

Dyna and Bocco - was there a contract breach?

Dyna argued a contract existed between the parties which Bocco had breached. This was evidenced by the exchange of communications between the parties and the representations of the project manager. By not engaging Dyna, the company were entitled to claim the costs of preparing the tender and damages for the lost profits it would have made had it been allowed to fulfil the contract.

The Court, however, did not agree that a contract to fulfil the project had been formed. A key reason for this conclusion was that the contract documentation had not been vetted by the solicitors representing each party which was an express requirement for a tender to be accepted.

Misleading and deceptive conduct

Dyna also argued that Bocco’s conduct was misleading or deceptive because of the representations made to Dyna and, in particular, the fact that they had been told that they had been successful. Accordingly, Dyna was entitled to recover losses under ss18 and 236 of the ACL.

The Court did not accept there was misleading or deceptive conduct on the part of Bocco. Rather, it was reasonable behaviour ‘for the purpose of inviting tenders for the construction of the project’. It was clear from the terms of the invitation that the successful tender would have to be acceptable to Bocco’s financier and, indeed, Bocco was not obliged to accept any particular tender at all.

The Court found that each tender was considered on its merits and Bocco had reasonable grounds of ensuring they had adequate financing before engaging a particular contractor.

What does it mean?

This case is a warning signal to organisations procuring the services of a contractor by way of tender, including government bodies and local councils.

Although the Court found for the developer in this instance, the case is a reminder to the procurement departments of various types of organisation. There is a need to be mindful of their conduct when communicating with businesses tendering for contracts before a contract is actually signed as this can give rise to a cause of action which may be pursued.

The tender documentation should ensure it contains the sole discretion to select a contractor without there being any suggestion that a contract has been formed or representations made.

For contractors, the case demonstrates the difficulties that may be faced in trying to recover the costs incurred while participating in a tendering process.  It will be important to assess the terms of an invitation to tender based on the work, cost and the risks that might be involved.

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