Under pressure to produce results, senior executives in government or private-sector organizations are often seduced by the apparent speed of sole-source contracting.              

In limited situations, sole-source contracts can indeed provide results. But that attitude can be dangerous, especially with complex deals and multiple parties.

Bond Development Corporation v. Esquimalt (Township) [2006], B.C.J. No. 1101 (B.C. Court of Appeal) is a cautionary tale for senior executives: don’t give up the serious benefits of competitive contracting without clearly understanding the risk/reward trade-off. 

Decision to Use Sole Source

In March 2001, Esquimalt wanted to develop a town centre to include a new city hall and public library. It also wanted to encourage the construction of commercial retail premises in the area. Instead of a public tender, the Chief Administrative Officer invited an experienced real estate developer, Bond Development Corporation to develop a proposal. Over an eight-month period, the parties had meetings to settle the design and quality of the building to be constructed, and the compensation to be paid to Bond. To assist in these discussions, Bond hired an architect who provided design drawings, a building contractor who prepared cost estimates, and a structural engineering firm that provided advice.             

In October 2001, the two parties signed a formal contract. Esquimalt agreed to pay a maximum of $4.06 million for a town centre building of 20,000 square feet. Esquimalt would pay part of the price in cash, and the balance paid by Bond’s receipt of the title to the land where the old city hall was located (known as the “CRB site”). 

Tips for Senior Executives: Don’t confuse meetings with making progress – especially for complex projects. Getting the sole-source contractor in early (the development proposal) is NOT always faster and more efficient than public tendering. It took eight months of discussions before Esquimalt and Bond signed their initial agreement. In contrast, eight months should deliver real progress on most public tenders.              

What about the cost? Since Bond was paying the fees for the architect, contractor and engineering consultants, the development process initially seemed to be low cost. It wasn’t. Ultimately, Esquimalt paid a far higher price.  

Negotiating Price and Quality

The October 2001 agreement did not settle the terms of price and quality. Clause 3.8 dealt with quality by saying that the town centre would be built “… substantially to the performance standards of the British Columbia Buildings Corporation for government offices … ” To assist the parties, Clause 3.8 identified two local buildings as “illustrations of the quality and finish” that was intended. Since the parties could not agree on the value of the CRB site, they decided to engage separate appraisers to estimate the value of the site, and then to average the two appraisals to fix the value of the property.             

The parties spent another seven months trying to reach agreement on extent and quality of the work to be done, and the value of the CRB site. After 15 months of negotiations, the end result was that the parties walked away from the contract. 

Tips for Senior Executives: Competitive bidding imposes a discipline on your organization, and provides a familiar process for most players. For example, the tendering method forces your organization to deal with the design and quality of the building to be constructed, and the price to be paid. Normally, your organization will hire its own architect and/or consulting engineer to prepare the detailed plans for the building. Then, the tendering process will distribute these plans to the contracting community, and tender bids will provide you with competitive pricing.  

Collapse of Contract Discussions

After the talks broke off with Bond, Esquimalt contacted the architect and the contractor previously hired by Bond, and built the town centre without Bond’s participation (at a higher price than $4.06 million). But this created a serious legal problem. In Bond’s view, Esquimalt had benefitted from the development services that Bond had provided, from the design its architect had provided, and from the cost estimates its contractor had provided. Bond sued to recover the value of those services.             

In April 2004, the B.C. Supreme Court found that Bond had done valuable work for Esquimalt, and that the work went beyond the usual level of preparation to make a tender bid or proposal. The trial Judge awarded Bond $222,658 plus court costs, based on the legal doctrine of quantum meruit – essentially “reasonable value for services.”             

In January 2006, the B.C. Court of Appeal not only upheld the damage award, but increased it. The Court of Appeal directed the trial Judge to compensate Bond for its efforts during an earlier stage of the “development proposal” process. 

Tips for Senior Executives: Sole sourcing means that your organization has given up huge negotiation leverage. In effect, the invited contractor has been given a favoured position – before you reach agreement on quality and price. Even worse, you are dependent upon the invited contractor; you don’t have a backup contractor who is ready and willing to do the job at a fixed price. A competitive bidding process (i.e., tendering or an RFP) maintains your negotiation leverage. If discussions with the preferred bidder break down, then you can go to the second-ranked bidder, and probably get your deal at his price.

Reprinted from The Legal Edge Issue 69, November 2006

Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case. For any particular legal problem, seek advice directly from your lawyer or in-house counsel. All dates, contact information and website addresses were current at the time of original publication.