In the decision of Woollahra Municipal Council v Secure Parking Pty Ltd [2015] NSWSC 257 the Supreme Court has recently considered when a binding contract comes into existence in the context of a tender process under the Local Government Act 1993.
The decision helps to clarify that, with appropriate conditions of tendering, and other tender documents such as a draft contract, a binding contract will come into existence when the Council resolution accepting a tender is conveyed to the tenderer. Importantly the terms of the contract which is then binding are those contained in the request for tender, the tender submission and any changes agreed prior to the council resolution. There are quite narrow limits as to what changes can be made prior to that resolution, and none can be made after it which the tenderer and the council do not both agree to make.
The Court reasoned as follows:
96. In order to have the Council consider its tender, Secure had to accept the terms of the invitation to tender. When it did so by signing the terms of the Tenderer’s offer it accepted an obligation to complete the Management Agreement in accordance with cl 3.1.1 if its offer was accepted.
97. Following lodgement of the tender, it was open to the parties to negotiate changes to the terms on which Secure’s offer was made. However, any changes could only be made in accordance with reg 176 of the Regulations. The negotiations between the Council and Secure must be understood as negotiations to change the terms of the offer contained in Secure’s tender in accordance with reg 176. They were not a series of offers and counter offers that formed part of the process of negotiating the terms of a contract relating to the car parks. Nor could they be regarded as discussions concerning the terms of the proposed contract that left some matters unresolved and to be dealt with later. If the parties could not reach agreement on particular matters, then the consequence of their failure to agree was that there would be no variation to the tender to be considered by Council in accordance with the conditions of tender and the Regulations. In the absence of that agreement, Secure may have been entitled to withdraw its tender in accordance with the conditions of tender. But absent withdrawal, the offer contained in its tender remained open for acceptance by the Council. The fact that particular issues raised by Secure were unresolved in the sense that the parties did not reach agreement in relation to them was irrelevant to the question whether an offer remained on foot that was capable of acceptance by the Council.
98….
99. In my opinion, the amended Management Agreement did not form part of the Council’s acceptance or purported acceptance of Secure’s offer. The act of acceptance was the resolution by Council. That resolution made no reference to the form of the Management Agreement that was subsequently given to Secure. The fact that Mr Marolia chose to include a copy of the Management Agreement (in response to a request from Secure) in the email in which he communicated the terms of Council’s acceptance does not mean that the Management Agreement became part of the acceptance. If the Management Agreement did not accurately reflect the terms of any agreement that arose from acceptance of Secure’s offer, it was open to Secure to seek amendments to it. It was also open to Secure to renegotiate some of the terms of any agreement that arose on acceptance of its offer, as it sought to do. However, neither of those matters meant that the Council’s acceptance did not correspond to Secure’s offer. Similarly, the fact that the parties were unable to reach agreement on changes to the Management Agreement does not affect the answer to the question whether the Council’s purported acceptance gave rise to a binding contract at the time it was communicated.
There is clear lesson for tenderers in the decision, but also some important points for councils to note. Tenderers which seek to make changes to the contract before executing it, which the council does not agree to make, and who then refuse to sign a formal contract or perform the tenderer’s obligations under the contract, are repudiating the binding contract which came into existence when the council accepted the tender, which entitles the council to elect to seek specific performance of the contract or to terminate the contract and sue for damages. In this case, the damages and interest which the court awarded amounted to some $7m, plus costs.
Of course , the binding contract which comes into effect also binds the council which called for the tenders. The council, if it accepts a tender and communicates that acceptance, must also perform its part of the contract.
Councils should be careful to document negotiations prior to any resolution to accept a tender, which may affect the terms of the contract which comes into existence upon acceptance.
Councils can, if appropriate conditions of tendering were used, be firm with tenderers which seek to change the contract terms after the resolution accepting a tender, in anything but the most minor respects. Any such negotiations will not affect the contract which has already come into existence, unless they result in agreed changes to that contract.
Councils also need to take some care with conditions of tendering to include the kind of provision which assisted Woollahra Municipal Council in securing nearly $7m in damages from the tenderer, some 5 years after calling for tenders.
Note: This information is not to be relied upon as legal advice.