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Forfeiture of Bid Security — An Answer in Contract Law
by M. Dhyan Chinnappa†
Cite as : (2004) 4 SCC (Jour) 58
In National Highways Authority of India v. Ganga Enterprises1 (hereinafter “NHAI case”), the Supreme Court considered an interesting issue relating to invocation of bid security.2 The tender conditions required furnishing of bid security and forbid withdrawal of any bid for a specified period. A bidder, who had tendered for a contract, withdrew his bid prior to the period fixed under the tender and sought return of the bank guarantee submitted as bid security, on the principle that under the Indian Contract Act, 1872, he could withdraw an offer prior to acceptance without any punitive consequences — in this case invocation of the bank guarantee. The Supreme Court while reversing the judgment of the High Court that a person could withdraw the offer prior to acceptance without penal consequences, held as under: (SCC p. 416, para 9)
“9. … The Indian Contract Act merely provides that a person can withdraw his offer before its acceptance. But withdrawal of an offer, before it is accepted, is a completely different aspect from forfeiture of earnest/security money which has been given for a particular purpose. A person may have a right to withdraw his offer but if he has made his offer on a condition that some earnest money will be forfeited for not entering into contract or if some act is not performed, then even though he may have a right to withdraw his offer, he has no right to claim that the earnest/security be returned to him. Forfeiture of such earnest/security, in no way, affects any statutory right under the Indian Contract Act. … It would be an anomalous situation that a person who, by his own conduct, precludes the coming into existence of the contract is then given advantage or benefit of his own wrong by not allowing forfeiture. … The whole purpose of such a clause i.e. to see that only genuine bids are received would be lost if forfeiture was not permitted.”
It is obvious that the Supreme Court was concerned with the public interest element of the issue in coming to the conclusion that the bank guarantee could not be injuncted. The Court held that no statutory right is violated by forfeiture of the bid security. It is submitted that the ultimate conclusion of the Supreme Court in permitting forfeiture was correct. It is however respectfully submitted that the reasoning leading to the conclusion could have been dealt with from a contract law point of view, as has been done by courts in other common law countries such as England, New Zealand, Canada and Australia, while dealing with issues similar to the one under consideration by the Supreme Court. The Supreme Court did not identify the character of the rights of the parties in a tender scenario. The purpose of this article is to analyse the issue from the point of view of the law of contracts, and to demonstrate that the issue has a solution in contract law.
The principle that a person can withdraw an offer before acceptance by the other party is so well established that little needs to be said about it. So did the Supreme Court when it said: “[I]t is always open to a party to withdraw its offer before its acceptance. To this proposition there can be no quarrel.”3
The Supreme Court has in a catena of cases held that both the parties, namely, the tendering authority and the bidder, are bound by the terms of the tender documents and cannot violate or breach the same.4 It is important to note that there ought to be some justification in law for that right. It is submitted that the genesis of the right lies in contract, not public law.
The proposition that is canvassed in this article is that a collateral contract is created between the tendering authority and the tenderer, both of whom are bound by the terms of the tendering conditions. In other words, though the tenders invited are for the main contract, the manner in which the bids are considered form part of a collateral contract between the parties. This collateral contract is restricted in terms of scope to consideration of tenders. Cases of some of the common law countries which take this point of view are presented below.
Canadian approach
The Supreme Court of Canada was confronted with an almost identical situation as NHAI case1 in Ontario v. Ron Engg. & Construction Eastern Ltd.5 The Government of Ontario called for bids in respect of a project and issued general conditions of contract along with the tender. One of the stipulations was that the bid security that was furnished by the bidders would stand forfeited if the bidder withdrew his bid prior to the deadline or a formal agreement was not executed. Upon opening the bids, Ron Engineering discovered a pricing error and requested the Government to permit withdrawal of the bid. The position taken by Ron Engineering was that owing to the notice of pricing error having been given, its tender was not capable of acceptance in law, and that its bid security should be returned. The Government took the view that the bid security could not be returned, though the bid stood withdrawn. Ron Engineering claimed refund of the deposit. The Supreme Court of Canada, endorsing the view of the Ontario Court of Appeal held as under:
“The tender submitted by Ron Engineering brought contract A (tendering contract) into life. This is sometimes described in law as a unilateral contract (or perhaps better termed a collateral contract), that is to say, a contract which results from an act made in response to an offer, as for example in the simplest terms, ‘I will pay you a dollar if you will cut my lawn.’ No obligation to cut the lawn exists in law and the obligation to pay the dollar comes into being upon the performance of the invited act. Here the call for tenders created no obligation in Ron Engineering or in anyone else in or out of the construction world. When a member of the construction industry responds to the call for tenders, as Ron Engineering has done here, that response takes the form of the submission of a tender, or a bid as it is sometimes called. The significance of the bid in law is that it at once becomes irrevocable if filed in conformity with the terms and conditions under which the call for tenders was made and if such terms so provide. There is no disagreement between the parties here about the form and procedure in which the tender was submitted by Ron Engineering and that it complied with the terms and conditions of the call for tenders. Consequently, contract A came into being. The principal term of contract A (in this case) is the irrevocability of the bid, and the corollary term is the obligation in both parties to enter into a (construction) contract (contract B) upon the acceptance of the tender.”
While Ron Engineering did lay down the proposition that the first contract has come into existence, upon the submission of the bid, some authors did raise questions on the presence of consideration in such a contract. According to Professor Percy, “the court’s explanation that consideration can be found in the ‘qualified obligation of the owner to accept the lowest or any tender’ is specious”.6 By express or implied qualification an owner is not normally obliged to accept any tender, not even the lowest (or highest). Professor Percy suggests that “the only real benefit received by the contractor is the implied promise that the owner will consider its tender”. The decision of the Supreme Court of Canada in City of Calgary v. Northern Construction Co.7 has affirmed the judgment in Ron Engg.5
English approach
The English courts were also confronted with a similar situation in Blackpool & Fylde Aero Club v. Blackpool Borough Council8 though not involving a bid security. In terms of the tender documents, the Council had affirmed that it would consider all tenders that it received by the last date fixed for tenders. The tenderer had in fact submitted its bid by dropping it in the Council postbox well before the deadline, which position was in fact accepted after inquiry. However, the postbox was opened only after the last date for submission and the tender was stamped as “late” and not considered. The tender was awarded to another bidder. This action was challenged by the tenderer who claimed damages on the basis that there was a breach of warranty. The Council argued that an invitation to tender in this form was an invitation to treat, and no contract of any kind would come into existence unless or until, if ever, the Council chose to accept any tender or other offer. The court held that, provided a tender is submitted prior to the deadline, the tenderer is entitled as a matter of contractual right to have its tender opened and considered together with other conforming tenders, if other tenders are considered. Bingham, J. held as follows: (All ER pp. 30h-31a)
“But where, as here, tenders are solicited from selected parties, all of them known to the inviter, and where a local authority’s invitation prescribes a clear, orderly and familiar procedure (draft contract conditions available for inspection and plainly not open to negotiation, a prescribed common form of tender, the supply of envelopes designed to preserve the absolute anonymity of tenderers and clearly to identify the tender in question and an absolute deadline) the invitee is in my judgment protected at least to this extent: if he submits a conforming tender before the deadline he is entitled, not as a matter of mere expectation but of contractual right, to be sure that his tender will after the deadline be opened and considered in conjunction with all other conforming tenders or at least that his tender will be considered if others are. Had the club, before tendering, inquired of the council whether it could rely on any timely and conforming tender being considered along with others, I feel quite sure that the answer would have been ‘of course’. The law would, I think, be defective if it did not give effect to that.”
Though the Court of Appeal did not go into the two contracts or unilateral contract analysis as in Ron Engg.9 it is obvious that Bingham, J. did not ever doubt the existence of contractual rights between the parties. If there is no doubt that the tendering authority is bound as a matter of contract to consider all conforming bids, then in such contract, the tenderer is equally bound by the terms upon which he submits his tender. This is squarely applicable in NHAI case1.
New Zealand approach
In New Zealand the High Court considered a similar issue relating to the arising of contractual rights between the parties in Pratt Contractors Ltd. v. Palmerston North City Council10. The High Court recognised that there were several authorities which made it clear that a simple request for bids will generally be no more than an invitation to treat, not giving rise to contractual obligations, although such a request might give rise to obligations to act fairly. The court, however, held that there were several circumstances where it could be said that a preliminary contract was entered into on the expectation that it could lead to a second or principal contract. There were several factors pointing towards a contractual relationship. This was not a situation where there was a mere calling for tenders and nothing more. Interested contractors had to register the interest and pay a non-refundable deposit before they received tender documents for consideration. Actual submission of tenders was the second step following the payment of non-refundable deposit. Detailed specifications regarding the project were given; the terms on which the tender would be selected were also specifically stated.
The court held that in a commercial setting such as the tendering process, by far the most convenient framework within which obligations could be said to arise and within which they could be considered, was a contractual one. The court was satisfied that here a contract was created by the act of submitting a tender in accordance with the Council’s requirements.
Australian approach
In Hughes Aircraft Systems International v. Air Services Australia11 the Australian court was confronted with a complicated set of facts involving tender negotiations between various parties for over four years. For the present purposes, the facts in the case may not be relevant. Suffice to say, that the Australian court recognised the principle laid down by the Canadian5, English8 and New Zealand10 courts. The court held that the circumstances were redolent of contractual intent. The parties had created a contract to protect the integrity of the bidding system. The mandatory language used was consistent with the imposition of binding obligations: that if a selection was made, it must follow the procedure and apply the criteria specified.
Needless to mention, most tenders for projects in India by the Government or governmental agencies are detailed documents with extensive plans and data. Tendering conditions commonly have terms describing the manner of selection, the terms and methods to be employed. The Supreme Court has in a catena of cases held that both parties are bound by the terms of the tender documents and cannot violate the same.12 Such statement of law does not proceed by analysing the principles of the law of contract.
In every notice inviting tenders, where detailed tender conditions are prescribed, the manner in which tenderers will be selected is laid down, and the bidder submits the bid in terms of the tender conditions, a contract is created between the parties. The consideration for the contract is the promise that the tenderers will be considered in terms of the tender documents.13 In such a situation a tenderer who submits his bid is contractually entitled to claim that he should be treated in the manner described in the tender conditions. Similarly the tendering authority is entitled to claim that the bidder also acts in terms of the tender conditions.
The Supreme Court in NHAI case1 held that forfeiture of earnest money deposit does not affect any statutory right under the Indian Contract Act. It is submitted that though forfeiture does not affect any statutory right, yet the issue can be resolved by applying contract law principles. It is submitted that the analysis above demonstrates the position that the terms of the tender documents create a contract between the parties concerned which is collateral to the main contract, and though in respect of the main contract, a tenderer may withdraw his bid (despite usual conditions forbidding withdrawal), he would be contractually bound by the terms of the tender conditions for forfeiture of the bid security or earnest money deposit upon the happening of that condition.
Such stand has an added advantage. The losing tenderer will then have a right, if wronged, to sue for breach of contract — the breach being the failure on the part of the tendering authority to consider the tenderer in terms of the tender documents.
Had NHAI failed to consider the tender in terms of the tender conditions, the bidders could have legitimately challenged any award as being in violation of the tender conditions and there is ample case-law to support that view. Similarly, NHAI would be able to insist that all tenderers act in conformity with the tender documents. Viewed either way, the right of either party can only be legally recognised as a contractual right. Being a part of the game, everyone must play by the rules.
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