In the 6th article in our series on the procurement and tendering process, we examine how bidders can conduct efficient and effective due diligence prior to responding to an RFP.
Prior to responding to the RFP, a prospective bidder will want to ensure it has had all access to all relevant information. It will want, in other words, to have conducted its own due diligence regarding procurement. The goal of the bidder’s due diligence it to enable it to decide whether to bid on the procurement opportunity, on what terms and at what price. This process will assist the bidder in determining the value of the proposed transaction, identifying the issues that needs to be addressed in the negotiation of the definitive agreement, and developing positions, if appropriate, for negotiation of the definitive agreement. IN the absence of any contractual terms, the burden on the owner will be to provide relevant information and take steps to be satisfied that the information which is made available in the data room is generally accurate. However, many procurements will impose a due diligence process on the bidder, at least in respect of aspects of the procurement, including issues such as design, site conditions, and so forth. This thereby imposes a burden on the bidder to “satisfy itself” in respect of the information.
Representations and Warranties
Permitting a bidder to satisfy itself is to be contrasted with relying on owner representations and warranties in the procurement agreement. A representation and warranty is a statement made by a party to a contract that a certain fact, circumstance, or even it accurately represented in the contract. If the owner is giving the representation and warranty (as in, making the statement on the basis that it is true and can be relied upon as being true), the onus shifts to the owner to ensure its accuracy and truth.
It is common for the owner to attempt to limit the extent to which it will give representations and warranties. From the owner’s perspective, this has the desired objective of “shifting the risk” to the bidder, but it may come at a cost. The additional risk being transferred to the bidders may result in bidders factoring into their pricing a contingency for the “unknown” part of the risk they are taking on. This risk can be reduced through due diligence but cannot be eliminated.
In considering the extent to which the owner should give representations and warranties, a distinction should be made between representations and warranties of a factual nature and those of a qualitative nature. For example, it is usually not onerous for the owner to represent and warrant that:
- The assets to be transferred to the bidder are as set out in the list appended to the RFP;
- The employees to be transferred to the bidder are as set out in the list appended to the RFP; or
- The contracts to be assumed by the bidder are as set out in the list appended to the RFP.
It is more difficult for the owner to give representations and warranties that require an evaluation or judgment:
- All of the contract being transferred are in good standing and neither party thereto is in default, and there is no event or circumstance that has occurred which would result in such contracts being in default,
- The assets are in good operating condition and fit for the purpose for which they are intended to be used, reasonable wear and tear excepted; or
- The employees being transferred are the only employees the bidder will need to perform the contract.
These representation and warranties are typically negotiated in that the party giving the representation will try to qualify them or limit them and the party who is the recipient of the representation will try to keep them as broad and unqualified as reasonably possible.
The more judgment or evaluation that goes into the representation, the greater the risk of liability if the judgment or evaluation is wrong. Parties will mitigate this risk, for example, by making any judgment representations subject to qualifications such as “to the best of the owner’s knowledge” or, limiting the period of time that the owner would be at risk of a claim in the event such representation proved to be untrue.
In the construction context, this issue arises in respect of such things as subsurface site conditions, any environmental concerns, existing building materials, or in a renovation or tenant improvement. While some of these concerns are addressed in the CCDC documents, not all of them are. Therefore, it is on owners and contractors to carefully review contractual language with their counsel to ensure the optimal risk allocation is accurately reflected.
Next time, we will look at the timing and extent of due diligence, and best practices for organizing your due diligence for a bid.
Written by Jeremy Power, a lawyer in our Toronto office.