B. Commercial Arrangements

AuthorJohn D. McCamus
ProfessionProfessor of Law. Osgoode Hall Law School, York University
Pages113-129

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Although it is generally presumed that the intention to create commercial relations is present in the making of commercial arrangements,7 two different kinds of situations arise where the requisite intention may not be present. First, there are situations in which the parties wish to be bound in honour only. If the parties so express themselves, the absence of intent may be established. The more interesting cases, such as those arising recently in the tendering context, are those in which the parties have not explicitly so provided. Second, parties negotiating an agreement may achieve and record in writing a preliminary version of their agreement. In such cases, the question arises as to whether the preliminary arrangements are themselves intended to constitute a binding and enforceable agreement.

1) Explicit Agreements Not to Be Bound

Where commercial parties have entered into arrangements that they explicitly agree should not constitute legally enforceable agreements, there would appear to be little reason not to give effect to those intentions. The leading case relates to an informal agency agreement entered into between an English supplier of paper products and its American distributor. In Rose and Frank Company v. J.R. Crompton and Brothers Ltd.8the parties had entered into a series of binding arrangements concerning their agency relationship. In 1913, however, they entered into a new agreement that involved a third party in their arrangements and provided as follows:

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This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each partly pledge themselves with the fullest confidence, based upon past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.9At trial, Bailhache J. held that the agreement was enforceable, notwithstanding the presence of the honourable pledge clause, on two grounds. First, in his view, the other provisions of the memorandum of agreement set out what appeared to be a binding agreement and the honourable pledge clause, which followed these provisions, was repugnant to them and should therefore be rejected.10Second, it was his view that the clause was unenforceable on the basis that it was contrary to public policy as an improper attempt to oust the jurisdiction of the courts.

In the Court of Appeal, however, the decision at trial was reversed. In a much-quoted passage, Scrutton L.J. observed as follows:

Now it is quite possible for parties to come to an agreement by accepting a proposal with the result that the agreement concluded does not give rise to legal relations. The reason of this is that the parties do not intend their agreement shall give rise to legal relations. This intention may be implied from the subject matter of the agreement but it may also be expressed by the parties. In social and family relations such an intention is readily implied, however in business matters the opposite result would ordinarily follow. But I can see no reason why, even in business matters, the parties should not intend to rely on each other’s good faith and honour, and to exclude all idea of settling disputes by any outside intervention, with the accompanying necessity of expressing themselves so precisely that outsiders may have no difficulty in understanding what they mean. If they clearly express such an intention, I can see no reason in public policy why effect should not be given to their intention.

When the document was regarded in its entirety, in Scrutton L.J.’s view, it was plain that such an intention had been expressed. That clear intent could not be suppressed by the prior portions of the document. A number of orders for paper products had already been placed by the

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plaintiff pursuant to the agreement. The Court of Appeal also held that the individual orders were unenforceable as well. The decision of the Court of Appeal was affirmed on the main point but reversed on the latter, with the result that the individual orders were held to be binding.

In retrospect, the decision at trial may appear surprising to the modern reader. It must be remembered, however, that the courts have traditionally jealously guarded their jurisdiction.11This approach, insofar as it also discouraged the use of arbitration clauses, has been eclipsed by modern attitudes concerning the value of arbitration12and alternative dispute resolution more generally.13Nonetheless, there remains some basis for careful judicial scrutiny of honourable pledge clauses of this kind, especially in cases where there exists an imbalance in bargaining power between the parties. Where such a clause has been inserted by the more powerful party in order to take advantage of the weaker party in the event of a dispute, courts may be and, arguably, should be, willing to continue to exercise a discretion to strike such clauses down on grounds of public policy. In the absence of such concerns, however, there appears little reason to prevent commercial parties from adopting non-enforceable arrangements of the kind at issue in this case and that is, indeed, the applicable doctrine.

2) Tendering Processes

Under traditional doctrine, a tender call followed by the submission of a bid did not create a contractual relationship. Under applicable principles of offer and acceptance, the submission of the bid was treated as an offer that would be accepted when selected by the person issuing the tender call as the winning bid. As we have seen,14the Supreme Court of Canada, in its decision in Ron Engineering and Construction Eastern Ltd. v.Ontario,15dramatically reformed the law of tendering and held that the tender call itself constitutes an offer that is accepted by the submission of a bid, thereby creating a contract, referred to by the Court as Contract A, relating to the bidding process itself. Under Contract A, the bidder would typically be required to enter into the building contract, referred to as Contract B, if selected by the party issuing the tender call

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and, upon its refusal to do so, would be required to forfeit a deposit of some kind. In later cases,16it has been held that Contract A requires both the issuer of the call and the bidder to follow the procedures set out in the call and, moreover, contains an implied term imposing an obligation on the issuer to treat all bidders "fairly and equally."17Thus, a bidder who considers that it has been unfairly treated or prejudiced through the processing of the bids or the evaluation of its tender may be able to bring an action for damages for breach of the duty of fair and equal treatment. This doctrine has been a source of frequent claims concerning tendering processes and, accordingly, it is not uncommon for parties issuing tender calls to expressly stipulate that the issuing of the tender call and the submission of a bid in response do not constitute a contractual relationship between the parties. In principle, such a stipulation should be effective on the basis of the reasoning in Rose and Frank Company v. J.R. Crompton and Brothers Ltd.18The more difficult question is whether, in the absence of such a stipulation, it may be concluded, under current law, that the parties lacked an intention to create legal relations with respect to the conduct of a particular tendering process. In M.J.B Enterprises Ltd. v. De-fence Construction (1951) Ltd.,19Iacobucci J. observed: "whether or not Contract A arose depends on whether the parties intended to initiate contractual relations by the submission of a bid in response to the invitation to tender."20In holding that such intention was present in the circumstances of that case, Iacobucci J. placed emphasis on the fact that the submission of a bid was of value to the issuer, that bids were prepared at significant cost to the bidder and were accompanied by a substantial and forfeitable deposit. Such circumstances would normally be present in any tender call for a large project and, accordingly, it appears that Contract A would normally arise in such a setting.

In a recent case, however, the Manitoba Court of Appeal, in Mellco Developments Ltd. v. Portage La Prairie (City)21refrained from applying the Ron Engineering analysis to a tendering process involving a so-called request for proposal or RFP. The tendering process in this case involved the development of a parcel of 31.2 acres of city-owned land.

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Unlike a more traditional call for tenders, the RFP required bidders to develop a conceptual subdivision design for the subject property, the merits of which would have a major influence on whether the particular proposal was accepted by the city. The RFP further provided that the city would merely "negotiate" with the bidder "submitting the most attractive proposal" for a sale of the land and, in the event of the failure of negotiations, would then negotiate with the proponent of the next most attractive proposal. The RFP further provided: "[t]his is an invitation for proposals and not a tender call."22Like a traditional tendering situation, however, the RFP required the preparation of a rather expensive proposal and the payment of a security deposit. Nonetheless, the Court of Appeal held that the RFP was distinguishable from a call for tenders and, accordingly, was not subject to the Ron Engineering analysis. In the court’s view, the Contract A of Ron Engineering appears to apply only where the final terms of Contract B are set out in the bid or...

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