Tender Ties: How Canada and the Republic of Korea Approach Public Procurement

Joe Cho, SJD Candidate at Seoul National University School of Law


In the intricate world of public procurement, the dynamics between bidders and project owners play a pivotal role in shaping the industry's landscape. With its nuanced approach to bidding and tendering, the Canadian legal framework offers a unique perspective on this relationship. Through a dual-contract system, it seeks to balance the interests of germane stakeholders, including contracting parties, to ensure fairness, transparency, and adherence to the rule of law. This blog delves into the intricacies of this system, its historical evolution, and its implications in the modern construction industry, with a particular focus on the landmark Ron Engineering decision. Furthermore, this blog will explore how similar principles are applied in the Republic of Korea, shedding light on the global nuances of public procurement. Below, I will argue that an inherent theme of fairness permeates the public procurement tendering processes of both nations, albeit manifested through distinct systems and modalities. This difference is succinctly communicated through the contrasting priorities of each country: Canada emphasizes the duty of the owner, while the Republic of Korea (RoK) focuses on safeguarding the rights of the tenderer.

 

The Case of Canada

In the realm of Canadian law, the process of bidding and tendering is intricately structured around two distinct contracts: Contract A and Contract B.

Contract A, often referred to as the "Bid Contract," emerges during the initial bidding phase. This contract is separate from Contract B, which is the primary construction contract that bidders are vying for. Contract A comprises the complete invitation to bid. It is formed when a party submits a bid in response to the invitation. The essence of Contract A lies in the mutual obligations it establishes between the bidder and the owner.

According to Canadian law, Contract A is characterized as a unilateral contract. This classification is crucial in understanding its formation and the obligations it entails. The essence of a unilateral contract is that it becomes binding only upon the performance of a specific action. In the context of Contract A, this action is the submission of a bid in response to an invitation for tender. If no bid is submitted by the tenderer, then no contract is formed.

Furthermore, the party issuing the tender is obligated to accept compliant bids, which reinforces Contract A's unilateral character. The submission of a bid triggers the formation of Contract A, binding both the bidder and the owner to the terms outlined in the invitation to tender. This unilateral framework ensures that once a bid is submitted, it remains irrevocable for a specified duration, providing a measure of security and predictability in the tendering process.

The overarching purpose of Contract A is thus to uphold the integrity of the bidding system, ensuring that both the party inviting tenders and the party responding are held to the terms and conditions set forth.

Meanwhile, Contract B is the primary construction contract. It is entered into by the successful bidder who has fulfilled the requirements of Contract A. This agreement is established with the entity issuing the invitation to tender.

A pivotal case that has significantly shaped the understanding and application of these contracts is the Supreme Court of Canada (SCC) decision of R v Ron Engineering & Construction (Eastern) Ltd, [1981] 1 SCR 111, 1981 CanLII 17 (Ron Engineering). After being declared the winning tender, Ron Engineering realized they had mistakenly submitted a bid lower than they had intended. When they declined to honour the bid due to this error, the Province of Ontario retained the deposit as a penalty. Underscoring the nuance of Contract A and Contract B, the SCC emphasized that despite the error in the bid, the submission was still bound by the terms of the tendering contract A. Therefore, as a result of Contract A, Ron Engineering was obligated to forfeit its deposit of $150,000 to the Province of Ontario. This decision underscored the paramount importance of maintaining the integrity and trustworthiness of the bidding system.

 

Post-Ron Engineering Erosion of Bidding Industry Protections

In Canadian procurement law, the Ron Engineering Contract A tendering format has been a focal point for legal disputes. The SCC has since held that the format emphasizes "integrity," advocating fairness and equality among bidders to uphold the bidding process's integrity, as highlighted in Martel Building Ltd v Canada, 2000 SCC 60 (CanLII) at paras 85–88 (Martel).

In this regard, a key question remains whether fairness can be overridden by liability disclaimers in tender documentation. In Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII) at paras 122–23 (Tercon), the SCC provided a framework for enforcing such clauses, comprising three steps: interpreting the exclusion clause's applicability, assessing its unconscionability at the contract's formation, and considering overriding public policy.

The complexity of Contract A and liability waivers was further demonstrated in Mega Reporting Inc v Yukon (Government of), 2018 YKCA 10 (CanLII) (Mega Reporting). This case dealt with the Yukon Government's procurement for court transcription services, including a clause to waive liability for procurement unfairness. Initially, Mega Reporting Inc's lawsuit for alleged unfair treatment succeeded, but the Yukon Court of Appeal upheld the waiver, citing Tercon and emphasizing contract freedom unless countered by substantial public policy or bad faith evidence (Mega Reporting at paras 26–30, 38–40). This ruling and the broader legal landscape highlight the tension in Canadian procurement law between fairness and contract freedom in government procurement.

 

The Case of the Republic of Korea

Public procurement significantly influences businesses and the broader socio-economic context. Ensuring fair competition in public contracts is vital. In the RoK, public procurement contracts (PPCs) involve agreements between government and private entities for essential government functions consisting of related goods and services. Guggaleul dangsajalo haneun gyeyag-e gwanhan beoblyul [Act on Contracts to which the State is a Party] (Government Contract Act) provides a legislative scheme that covers contracts involving the RoK government, including those from international tenders and contracts with Korean nationals.

Article 7 of the Government Contract Act outlines the contracting process for central agencies, requiring open tenders. However, officers can limit or specify participants based on a Presidential Decree, which considers the contract's purpose, nature, and size. Competitive tenders involve a pre-qualification process assessing potential bidders on various criteria. Only those meeting these criteria can bid.

As in Canada, transparency and fairness are significant considerations in public procurement bids within the RoK. And, like Canada, the aim is to ensure a competitive and non-discriminatory environment. In line with these principles, the procurement procedures place a strong emphasis on an open and objective pre-qualification process, underlining its importance in achieving equitable competition.

 

Relevant jurisprudence on Bidding Process and Constraints on Freedom of Contract

The Supreme Court of Korea (Daebeobwon) noted Decision of Sept. 16, 2001, 2000Ma5084 (Korean Supreme Court) that the provisions of laws and regulations related to PPCs are intended to ensure the public nature of competitive bidding conducted by the central or local governments and to guarantee fairness in bidding procedures. Such provisions may ultimately impose certain constraints on private autonomy so that contracts concluded by the governments can be aligned with public interests. If the government's competitive bidding evaluation has defects that seriously violate laws and undermine the public nature and fairness of the bidding to the point of compromising the integrity of the bidding, the winning bid may be deemed invalid.

In Decision of Dec. 11, 2001, 2001Da33604 (Korean Supreme Court), it was held that Article 7 of the Government Contract Act mandates competitive bidding when the state enters into a contract. Article 10 of the Government Contract Act also directs the state to select the bidder offering the most advantageous terms based on specified evaluation criteria, especially when the national treasury is impacted. The enforcement regulation further details these criteria, as determined by the Minister of Economy and Finance. These include the bidder's track record, technical capability, financial health, past performance, material and labour costs, contract compliance, quality of previous work, and bid price.

However, these stipulations are internal state guidelines, ensuring public officials manage state contracts fairly and efficiently. Under this framework, therefore, even if a public official improperly evaluates a tender in violation of related laws or criteria, it does not automatically nullify the contract award. Meanwhile, if such violations severely compromise the bidding's fairness and public nature or the contract is clearly contrary to societal norms, it can be invalidated. This would only apply in rare cases where the underlying circumstances undermine the law's intended procedure.

Such rarity is demonstrated by the case study discussed below, involving a significant defence project in the RoK. In this case, the RoK government initially conducted a tender process and declared a winning bidder. However, in an unprecedented turn of events, the government reversed this decision following a re-evaluation initiated by a rival company of the winning bidder. This re-evaluation was apparently conducted in a manner that prejudiced the original winner, leading to grievances from the aggrieved private defence contractor. Consequently, the contractor sought judicial review and intervention, specifically in the form of an injunctive remedy. This case marked a first in the Korean defence industry, with no similar precedents prior to this incident.

 

Tender outcome and contract formation

The Supreme Court of Korea determined in Decision of Jan. 15, 2015, 2013Da215133 (Korean Supreme Court) that under Article 11 of the Government Contract Act, when entering into a PPC following the selection of the winning bidder and a contract negotiation process, a written agreement is mandatory. This requirement parallels Contract B in the Canadian context in that Contract B involves awarding the contract to the successful bidder consistent with the invitation to tender. The written agreement should clearly define the contract's purpose, amount, duration, guarantees, liquidated damages, and other essential details. The contract becomes legally binding once signed, sealed, or marked by the responsible government officials and the other party, as mandated by law.

Meanwhile, the concept of unilateral reservation (편무 예약) in contract law is specific to agreements with a Korean government entity. According to relevant RoK case law, this concept becomes pertinent in determining whether a successful bidder can insist on contract completion with the procurement agency, should the bidder refuse to accept contract terms that deviate from those initially announced, after the contract has been awarded. In such a context, it grants the winning bidder in public procurement the right to insist the government finalize a contract with them. Interestingly, this concept of unilateral reservation in the RoK serves as a conceptual counterpoint to certain principles found in Canadian law. In Canada, by contrast, when dealing with contracts arising from a call for tenders, there is an established principle concerning the relationship between Contract A (the process contract) and Contract B (the substantive contract of the work to be done). According to MJB Enterprises Ltd v Defence Construction (1951) Ltd, 1999 CanLII 677 (SCC) (MJB Enterprises), the owner—the party issuing the tender—has an obligation to adhere to the terms of Contract A. This means that they cannot award Contract B to any non-compliant bid that contradicts the express or implied terms laid out in Contract A.

Meanwhile, by the time a local government of the RoK designates a winning bidder, key contract details, such as the subject, amount, and duration, have already been established. Consequently, local governments cannot make significant alterations to these core details, barring minor adjustments or additional terms. Any major changes would breach their obligation to uphold the established reservation. While the Supreme Court of Korea recognized in the Decision of June 29, 2006, 2005Da41603 (Korean Supreme Court) that a winning bidder's right to unilateral reservation may not be recognized in highly special circumstances, there has been no judicial precedent identifying and applying such exception. Accordingly, unilateral reservations primarily ensure fairness and transparency in local government procurements and safeguard the winning bidder's rights.

Additionally, during post-tender contract negotiations, situations may arise where one party assures the other of a contract's conclusion, only to renege on that promise. This is especially prevalent in large contracts, where there is a significant gap between the bid announcement and the main contract's finalization. Trust is heavily built up during this period, making its protection paramount. In line with this, the Decision of July 14, 2022, 2021Da216773 (Korean Supreme Court) highlights that if one party creates an expectation of a contract's conclusion during negotiations and the other relies on this expectation, any unjustifiable refusal to finalize the contract by the party who created the expectation is unlawful. Such refusal goes beyond the principle of contract freedom while not conforming with the principle of good faith and trust.

In this regard, as Justice Kwon Young-joon of the Supreme Court of Korea pointed out, the concept of culpa in contrahendo in the pre-contractual phase is essential for protecting reliance. This protection of reliance contributes to both efficiency and equity. However, defining the limits of this protection remains crucial. Addressing the criteria for protecting reliance, Justice Kwon suggests that a party who reasonably causes another party to rely on them should either maintain that reliance or provide compensation. However, as these criteria can sometimes be abstract, determining the appropriate level of reliance protection requires a case-by-case approach, weighing the relevant factors involved. Meanwhile, in the context of construction subcontracts, the Decision of June 15, 2001, 99Da40418 (Korean Supreme Court) held that the absence of an agreement reached on essential terms––including specific construction methods, preparations, payment methods for construction costs, and other related terms and conditions––entitles the contractor to refuse to finalize the contract.

The focus in the RoK on upholding good faith and trust resonates with the Canadian tendering process, which mandates an implicit obligation of fairness under Contract A. This obligation requires issuers to assess bids impartially and honestly. Such a duty underscored in Canadian legal precedents such as MJB Enterprises and Martel, necessitates that issuers only entertain bids that comply with the established criteria, ensuring equitable treatment of all bidders and safeguarding the integrity of the bidding process (Martel at paras 85–88).

Nonetheless, exculpatory clauses within the tendering contract can circumvent this obligation of fairness. As Tercon exemplifies, the duty of fairness can be contracted out, particularly in public procurement contracts, provided the clause is unambiguous and explicit (at para 71).

 

The injunctive relief of provisional disposition (가처분)

In the RoK, provisional disposition safeguards participants' trust in the bidding process. Precedents from the Supreme Court of Korea, Decision May 12, 2000, 2000Da2429 and Decision of Sept. 13, 2004, 2002Da50057, highlight that when the state conducts or oversees bidding procedures, the bidding agency's actions, including procedural measures, are expected to conform to relevant laws and regulations. Consequently, bidders are entitled to expect that trust is a legally protected interest in alignment with applicable laws, ethical codes, and other germane tender-related standards. Should such trust be breached, the aggrieved bidder may approach a competent court for a provisional disposition. A provisional disposition is a temporary measure issued by a court to provide immediate, interim relief in a situation where the delay could cause irreparable harm or significantly affect the creditor, aiming to challenge the award's validity and ascertain the status of the chosen bidder.

The Minsajiphaengbeop, the Civil Execution Act, 2016, regulates the remedy of provisional disposition (가처분). Relevant provisions are as follows:

Article 300 (Purpose of Provisional Measures)

1.    Provisional measures concerning the subject of a dispute are permissible when there is a concern that a change in the current situation might prevent a party from exercising their rights or make the realization of such rights significantly difficult.

2.    Provisional measures can also be issued to temporarily determine the status of a disputed legal relationship. In this context, such measures are especially necessary to prevent significant disadvantages, avert imminent threats, or for other pressing reasons, particularly in cases involving ongoing legal relationships.

Under the Civil Execution Act, a "right to be preserved" and a "necessity for preservation" must exist for the court to grant a provisional disposition. Provisional dispositions address temporary statuses in disputes between a creditor (usually a bidder) and the debtor (a government entity). Should the temporary status remain unsettled until a final judgment, the creditor may be at risk of considerable harm or face the immediate threat of coercion or aggression. These threats could jeopardize the creditor's existing obligatory rights. In response, a provisional disposition serves to preserve the current state of rights as a protective measure against such immediate dangers. However, monetary compensation alone may not resolve all disputes. Yet securing remedies through extended litigation in these instances is inefficient. Therefore, requests for provisional disposition are rising in the Korean tender context.

In the Canadian context, as the SCC held in MJB Enterprises, the general measure of damages for breach of Contract A is expectation damages (at para 55). To successfully obtain an injunction to stop a tendering process, an applicant must demonstrate to the court that the breach would cause irreparable harm and that financial remedy would be insufficient. In this regard, the availability of monetary compensation as a legal remedy for Contract A breaches means that Canadian courts are generally reluctant to grant injunctions against tendering processes, as they typically resolve commercial disputes involving Contract A through monetary compensation. Accordingly, there is comparatively little need for the Canadian judiciary to entertain or otherwise dispense any injunctive relief in Contract A.

 

RoK Case Study

Building a case for provisional disposition in the RoK is challenging, as the threshold for success is exceptionally high. This is particularly pertinent when a disgruntled bidder seeks to stop the bidding process, alleging unconscionable conduct by the government.

As noted, a PPC bid does not automatically become invalid merely because it conflicts with a related law or regulation. Moreover, the burden is on the applicant to demonstrate that the bidding process or its outcome egregiously breaches legal or procedural norms, thereby undermining public integrity and fairness. In such cases, justice might necessitate the invalidation of the bid. Additionally, the applicant must show that the underlying conduct of the tendering process was socially unacceptable.

The case study presented here is an instance where the applicant, a private defence contractor, successfully met this high threshold. As a result, the court granted an injunction in favour of the applicant, halting the project from progressing.

The Tactical Information Communication Network (TICN) project, valued at $5.4 trillion KRW (approximately $5.9 billion CAD) as of Oct., 2019, aims to upgrade the military's communication system for the Army, Navy, and Air Force. It will replace the current digital military communication network with a high-speed, long-range, wireless relay system using WiBro technology. The Agency for Defense Development (ADD) has collaborated with private defence industries in six areas of the TICN project and aimed for completion by 2025. This $4.8 trillion KRW project was the largest defence initiative ever undertaken in the RoK at the time of the project initiation.

In August 2009, the Defense Acquisition Program Administration (DAPA), responsible for the project, opened the bidding process to private defence companies. The Tactical Multi-band Multi-function Radio (TMMR) was the most competitive sector, with an investment of $1.2 trillion KWR. Two major companies, Samsung Thales and LIG Nex1, vied for this contract, drawing significant industry attention.

By late October 2009, after a two-month evaluation, DAPA named Samsung Thales as the preferred bidder for the TMMR sector. Their bid was $300 billion KRW less than LIG Nex1's and promised a construction timeline about a year shorter. However, LIG Nex1 challenged the validity of Samsung Thales' documents, particularly their CMMI certification. Three bidding companies, including LIG Nex1, lodged a complaint with DAPA, leading to a re-evaluation. Samsung Thales responded by seeking a court injunction to halt the TICN bidding process. On April 6, 2010, the Seoul Central District Court approved the injunction, citing the validity of Samsung Thales' claims made in court.

In ruling in favour of Samsung Thales, the adjudicating court in Seoul Joongangjibangbeobwon in Decision of Apr. 5, 2010, 2010Kahab336 specifically noted that when the owner is a public agency and operates under the Government Contract Law and other relevant standards, there is an inherent expectation of substantive legality and procedural transparency. Accordingly, bidding companies trust that procedures will be conducted according to these standards. This trust should be protected as a legitimate legal interest under related laws and the principle of good faith. That said, if a bidder incurs damages due to the owner's flawed procedures in selecting a preferred bidder, they have the right to seek invalidation of that procedure or to estop further actions based on it through an injunction. In this case, the adjudicating court observed that the re-evaluation process conducted by DAPA and ADD was flawed to the point of invalidating the entire tender, primarily because it relied heavily on criteria proposed by LIG. Consequently, DAPA excessively interfered with the scope of the re-evaluation process, unduly favouring LIG.

 

Analysis: Comparing and Contrasting the Canadian and Korean Public Procurement Systems

As has been surveyed, Canada and the RoK have developed distinct legal frameworks for public procurement, each with unique features and challenges. Canada's system is built around the dual-contract framework of Contract A (the bidding contract) and Contract B (the construction contract), as established by the Ron Engineering decision. Meanwhile, the RoK, though not explicitly using this terminology, also emphasizes an approach focused on legality and procedural transparency. This approach culminates in Article 5.1 of the Government Contract Act, under which a PPC is concluded by agreement of the parties to the contract on equal footing, and the parties shall perform the terms and conditions of the contract in good faith. In addition, the RoK emphasizes the conditions under which a court may invalidate a PPC bidding process and its outcome, specifically if violations significantly undermine the fairness and public integrity of the bidding or if such process is against societal norms.

While Korean and Canadian legal frameworks aim to establish fairness and predictability in public procurement, they approach these objectives from different angles. In the tender phase, the Korean concept of unilateral reservation focuses on the rights of the winning bidder, ensuring their expectation to enter into a contract is honoured. In contrast, concerning Contract A, Canadian law emphasizes the duty of the tender issuer to maintain the integrity and consistency of the tendering process itself. As the SCC noted in Double N Earthmovers Ltd v Edmonton (City), 2007 SCC 3 (CanLII) (Earthmovers), what underlies the tendering process is "the expectation of bidders that if they undertook the significant time and expense involved in preparing a bid, their bids would each receive fair and equal consideration by owners during the evaluation of bids and the award of Contract B" (at para 70). This holding underscores the importance of integrity and fairness in the bidding process, which benefits both the owners and the bidders by fostering a competitive, trustworthy and efficient procurement environment.

Therefore, courts in Canada generally award damages for a breach by the owner of Contract A, typically in the form of the bidder's estimated lost profits. In the RoK, deviations from established standards in the PPC tender setting have led to legal disputes, as exemplified by the TICN case. In such a PPC bid contest, the Korean system offers the remedy of provisional disposition (가처분) to safeguard trust in the bidding process, dispensed at the court's discretion when there's a breach of trust or deviation from procedures.

In conclusion, while Canadian and Korean public procurement systems have unique approaches, they share common goals of ensuring fairness and transparency in the bidding process. In Canada, the emphasis is on balancing the implied obligation of fairness with the ability of contract owners to include exclusion clauses. This reflects a legal framework that values contract terms' sanctity while recognizing the need for equitable treatment of all bidding parties. In the RoK, the focus is on the integrity of the bidding process and its outcomes. The system demands that bidders prove a significant breach of legal or procedural norms to challenge a bid. This approach prioritizes legal compliance and procedural integrity, ensuring fairness and public integrity are not compromised, even if it means upholding bids that technically conflict with laws or regulations. These differences in approach illustrate varied national priorities and legal philosophies in government procurement. While Canada leans towards balancing contractual freedom and fairness, the RoK emphasizes strict adherence to procedural integrity and the overarching public interest. However, both systems converge on the fundamental goal of ensuring soundness in public procurement.