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Australian Government Solicitor

 

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Legal Briefing

Number 33

2 July 1997

MAJOR CHANGES IN TENDERING LAW - THE HUGHES CASE

On 30 June 1997, Justice Finn of the Federal Court of Australia handed down his decision in Hughes Aircraft Systems International v Airservices Australia.(1) Hughes, the applicant in that case, was the unsuccessful tenderer in a two party tender process conducted by the then Civil Aviation Authority (`the CAA'), now Airservices Australia.

Findings

The Federal Court found(2) that:

  • the tender processes were governed by two contracts. The first contract was evidenced in the `9 March letter' (discussed below) and was superseded by the second later contract ('the RFT Contract'). The principal terms of the RFT contract were contained in the Request for Tender ('RFT')
  • there were terms implied into the RFT Contract both as matter of fact and as a matter of law, that the CAA would conduct its tender evaluation fairly, and deal fairly with a tenderer in the performance of that contract
  • the CAA breached the RFT Contract by:
    • failing to evaluate the tenders in accordance with the priorities and methodology specified in the RFT
    • failing to ensure that measures designed to maintain strict confidentiality of tenderers' information were maintained and
    • accepting a late change to the successful tenderer's tender, and
  • the CAA had, by certain actions described above and in the course of its tender debriefing to Hughes, also contravened s.52 Trade Practices Act 1974 by engaging in misleading and deceptive conduct.

The Claim

Hughes was an unsuccessful tenderer in a two party tender process for the acquisition of an Air Traffic Control System. The tender process related to a project known as The Australian Advanced Air Traffic System (`TAAATS'). An earlier tender process for the same project had been found `in significant respects unsound and unfair'(3) by the Macphee Report.(4)

In order to reassure the two tenderers that the second tender process would not be so flawed, the CAA, by way of formal meetings and correspondence, sought formal acceptance and agreement of (among other things) the proposed tender evaluation criteria and processes from both Hughes and the other tenderer, Thomson. Both tenderers gave that formal acceptance by signing a CAA letter dated 9 March 1993 (`the 9 March letter'). Subsequently the RFT was issued to the tenderers, seeking tenders by a certain date.

A summary of the following events is that the tender submitted by Hughes was approximately $37M lower in price than the competing tender, submitted by Thomson. The Tender Evaluation Committee recommended that the Hughes tender be accepted by the CAA.

However, after considering the Australian Industry Involvement (`AII') submissions by both tenderers the Board of the CAA rejected the Tender Evaluation Committee's recommendation and selected the Thomson tender. In selecting that tender the Board also took into account an offer submitted by Thomson after tenders had closed.

The 9 March letter and the RFT had set out the evaluation criteria to be applied and had weighted the priority to be given in considering price and AII aspects of the tenders as 2 and 4 respectively.

In debriefing the tenderers, the CAA informed Hughes that the price differential was only `a few percentage points'.

Hughes commenced proceedings against the CAA in December 1994.

Implications for Clients

Other Tenders

The decision has implications for the conduct of all tender processes, and in particular where the contract to be let involves the expenditure of `publicly owned' funds. There are also implications for individuals who are evaluating tenders, as in some cases the decision to award a contract to a tenderer will be taken in discharge of a contractual obligation to each tenderer.

Although the circumstances of the Hughes tender process were rather unique and Finn J indicated that his findings of tender process contracts in that case were `ordained by the distinctive circumstances of...[that] procurement'(5) careful consideration and drafting of tender documents will be required to avoid the interpretation that a contract exists in relation to the tender process.

What Hughes underlines is that more than ever before, there is a need for Departments and other Commonwealth bodies to arrange and conduct their tender processes with maximum care and supervision, bearing in mind that the tender process might be treated by a court as contractual in nature.

Finn J has applied to the law in Australia relating to tender processes, the principle put forward by Gallen J in Pratt Contractors Ltd v Palmerston North City Council (1995) 1 NZLR 469 that:

  • a simple uncomplicated request for bids will generally be no more than an invitation to treat, not giving rise to contractual obligations, although it may give rise to obligations to act fairly
  • on the other hand, it is open to persons to enter into a preliminary contract with the expectation that it will lead in defined circumstances to a second or principal contract, and
  • whether or not the particular case falls into one category or the other will depend upon a consideration of the circumstances and the obligations expressly or impliedly accepted.

Fair Dealing

Finn J also held that the RFT Contract between Hughes and the CAA contained an implied term that the CAA would conduct its evaluation fairly. That implication was held to arise as a matter of fact.(6) Further, the RFT Contract was held to contain an implied term that the CAA would deal with tenderers fairly in the performance of that contract. That implication was held to arise as a matter of law.(7)

Importantly, in relation to that point, Hughes may support the proposition that contracts with public bodies are of a special nature which carry a term implied by law that the public body must deal fairly in performing its obligations under that contract.(8) If so, then practical issues arise for the Commonwealth's management of every contract to which it is a party.

In terms of the content of the duty to deal fairly which was implied in Hughes, Finn J stated that it prescribed an objective standard of conduct to be adhered to by the CAA in relation to the RFT.(9) Further, it was held that:

`only conduct which is shown actually to constitute unfair dealing...can amount to a breach of the implied term. Conduct etc that merely gives rise to an apprehension (however reasonable) that such might occur is not enough'.(10)

Trade Practices

Finn J also held that the CAA contravened s.52 of the Trade Practices Act 1974 by engaging in false and misleading conduct.

The offending conduct included:

  • the CAA's conduct in the course of its tender debriefing to Hughes
  • the CAA's failure to act in accordance with its representations as to how the tender process would operate, and
  • the CAA's failure to disclose to the tenderers that the CAA no longer intended to implement the tender process in accordance with its earlier representations.(11)

In terms of the wider application of this finding, readers should note there will always be a threshold question of whether that Act applies to the particular Commonwealth Department or other body.

Confidentiality

It was also found by Finn J that the CAA breached the confidentiality provisions of its RFT Contract with Hughes by disclosing certain information to the Minister responsible for the CAA and an officer of a Commonwealth Department.

In relation to the disclosure to the Minister, Finn J noted the differing rights and obligations of public servants as opposed to government business enterprises.(12)

Although Finn J was prepared to find that the Minister responsible for the CAA had an entitlement to the information by way of request, he held that a CAA Board member, in volunteering that information at a critical time during tender evaluation, had breached the CAA's obligation to Hughes.(13)

There was, however, recognition that the confidentiality rights of tenderers are subject to lawful rights of access within Government for various Government accountability procedures.(14)

The finding in relation to the disclosure to the officer of a Commonwealth Department seems to be based on:

  • the CAA's status as a separate legal entity to the Commonwealth
  • the wording of the RFT Contract, and
  • the failure by the CAA to reserve the right in the RFT Contract to disclose information to a Commonwealth Department for the purposes for which it was disclosed.(15)

Political Interference

Although the decision in Hughes did not rely on a finding of political interference,(16) there is some criticism made of Ministerial communication that occurred in this case.(17)

In any event the judgment contains a useful discussion of the considerations to be taken into account when assessing an allegation of political interference and we would be happy to discuss them with interested clients.

Notes

  1. Unreported, No. ACT G86 of 1995, 30 June 1997. References in this paper to page numbers are those of the unreported judgment. Full text available through http://scaleplus.gov.au. At the time this paper was prepared, the Federal Court had received no notice of appeal.
  2. See pp.337-340.
  3. See p.14.
  4. A Report entitled Independent Review of the Civil Aviation Authority's Tender Evaluation Process for the Australian Advanced Air Traffic System, 11 December 1992.
  5. See Hughes p.77, and similar indications at pp.71ff, 87, 89-90, 130.
  6. See pp.88, 337.
  7. See pp.108, 337.
  8. See discussion at pp.102-9.
  9. See p.294.
  10. See p.296.
  11. See pp.338-9.
  12. See pp.274-276.
  13. See pp.252, 254, 258.
  14. See discussion at pp.249-251.
  15. See, for example, p.232.
  16. See p.214.
  17. See, for example, p.211.

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

The material in this briefing is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this briefing.

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