Legal Briefing No. 33

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    (discussed below) and was superseded by the second later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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