procurement tips and traps risk management … tips and traps – risk management options for...

Procurement Tips and Traps – Risk Management Options for In-House Counsel Association of Corporate Counsel -

Ontario Chapter Program

Osler, Hoskin & Harcourt LLP 333 Bay Street, Suite 2900 Toronto, ON

October 23, 2013

Overview & Introduction

1. Options in Seeking Tenders

Tenders v. Requests for Proposals (RFPs)

Pros, cons, and the middle-ground

2. Legal and Business Risks

3. Risk Management

Express terms of Tender or RFP Documents

During the bid process to entry into Contract B

4. Case Study: Envoy Relocation Services Inc.

Options in Seeking Tenders

Many options: classic choice is Tender vs. RFP

Tender: fixed contract and price/bids

RFP: flexible contract/negotiate terms

Simply calling a procurement document an RFP or a Tender is not determinative of legal duties

Courts have held it depends on characteristics of the procurement

“True” “Traditional”

RFP Tendering

Procurement Process Continuum

Hybrid Procurement Process

Procurement Timeline (Major Construction Work)

T2 T3 T4 T5 T6 T0 T1

Award/ Negotiation Contract Execution

Contract Completion

Bid/Proposal Solicitation

Project Definition

Contract Close-out

Phase 1 Project Definition

Phase 2 Procurement Management

Phase 3 Contract Management

Bid/Proposal Evaluation

Features of a “Traditional” Tendering Process

Defined Scope of Work

Certainty of contract terms

Binding process

No negotiation with bidders

Criteria for selecting successful bidder are clearly defined

Full legal consequences of Contract A

Features of a “True” RFP Process

Scope of work may not be well-defined

Contract terms not certain

Negotiation required

Non-binding process

Flexible selection criteria

Fewer legal consequences

Tender and RFP Documents

Tender Documents

Cover Letter, Instructions to Tenderers, Tender Form

Instructions to Tenderers contain administrative procedures, selection criteria, privilege clause

Draft contract

Technical Specifications and Drawings

RFP Documents

May have similar administrative procedures

May have draft contract attached or just owner requirements

Expressly states “non-binding/no Contract A”

Pros and Cons of Tender Process

Pros of a Tender Process:

Bid Prices are binding

Competition among Bidders may reduce price

Process usually simpler, faster and less expensive

Usually objective selection criteria

Potentially less expensive for bidders, thereby increasing number of bidders

Pros and Cons of Tender Process

Cons of a Tender Process:

Contract A legal paradigm is not flexible Owner cannot accept non-compliant preferred/low bid

Consequences of a breach of Contract A potentially significant

Owner may realize another factor after bids submitted, but be unable to consider it, because not in stated Selection Criteria

Owner may be exposed to considerable risks due to facts created by bidders and incumbents

Pros and Cons of RFP Process

Pros of RFPs:

Non-binding process does not expose owner to breach of Contract A claims by angry bidders

More flexible process (strict compliance analysis not required)

No Contract A

Promotes creativity, ingenuity and value engineering

Pros and Cons of RFP Process

Cons of RFPs:

Bid Prices not binding

Process usually more complex, slower and more expensive for owner

Preparing bids may be more expensive for bidders

Could be more subjectivity in evaluation process (which can be good or bad)

Hybrid Process: Pros and Cons

One option: RFP, with Definite Scope of Work/Draft Contract, Prices Required, but clear statement “Not a Tender”

PROS:

Owner can negotiate Contract B with bidders

Although bid prices not binding, bidders usually honour them

Relatively fast, because scope of work/draft contract attached

Avoids lack of flexibility of Contract A

CON: Must accept that it’s a non-binding process

Legal and Business Risks at Different Stages

T2 T3 T4 T5 T6 T0 T1

Award/ Negotiation Contract Execution

Contract Completion

Bid/Proposal Solicitation

Project Definition

Contract Close-out

Phase 1 Project Definition

Phase 2 Procurement Management

Phase 3 Contract Management

Bid/Proposal Evaluation

Two Examples of Legal Risk

1) Typical Allegation: Non-Compliance

Owner awards to low bidder, then other bidders allege non-compliance of low bid

Legal test is compliance with selection criteria

Disputes arise in application of criteria during evaluation and selection process

Degree of compliance required

Bid repair vs. clarification

Need for bid verification

Two Examples of Legal Risk

2) Typical Allegation: Mistakes in Bids

Bidder claims mistake in bid/seeks to withdraw bid

Mistake must be on face of tender

E.g. TTC v Gottardo

Owner recourse to bidder who refuses to enter into Contract B is bid security

Management of Potential Risks

1. Strong Contract Documents are Key

Use intensive and competitive interaction and dialogue with prospective bidders to develop the specifications

Ensures specifications are industry-friendly, and attracts the right people without unnecessarily high prices

Eliminate duplication of terms in drafting

Avoid ambiguous language


1. Privilege Clause

Basic clause: “the lowest or any bid will not necessarily be accepted”

Much more complex/protective clauses exist

Spell out known risks to avoid use of basket clause


1. Setting Evaluation Criteria

Clear selection criteria/process

Factors other than price may influence decision

Internal controls to separate technical review from price

E.g. Two envelope system


1. Exclusion of liability clause

“Owner not liable to bidders for damages, bid preparation costs, or lost profits”

Very complex drafting

See Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4


1. Substantial compliance

Clause allowing owner to accept “substantially compliant” bid

Minimize risk of claims alleging “the bid you selected was non-compliant”

Waiver of minor irregularities in bid


1. Simplifying Bid Bond Section of the Bid Form

Keep it simple

The dollar value of the bid bond does not need to be included in tender

Leaving out requirement in tender eliminates a requirement likely to introduce unwanted errors into the bids

City of Ottawa Non-Profit Housing Corp. v. Canvar (ONCA, 2000)

22


1. Separate Prices in Bid Form

Keep the process simple and foolproof

The more blanks to be filled in, particularly blanks requiring numbers, the greater the possibility for errors

Frecon Construction v. Digirolamo (HCJ, 1997)

23


1. Drafting GST and other Tax Provisions

Bid Form should clearly state whether the bid price

includes GST, PST, and other applicable taxes, permit

fees, and so on

Pro Star Mechanical Contractors v. Ladysmith and

District Hospital Assn. (BCCA, 1997)

Bradscot (MCL) v. Hamilton-Wentworth Catholic

District School Board (ONCA, 1999)


1. Avoid Two-Step Tender Process

A two-step tender process created enhanced opportunity for a bidder to claim an error

Exception: a two-step tender where both envelopes are submitted at the same time

Bidder cannot intentionally introduce or attempt to correct an error in step two

TTC v. Gottardo case (ONCA 2005)


1. Specific Requirements

Avoid unnecessary requirements

Increased detail increases the scope for bidders to have “errors” in their bids

If a particular standard or qualification is important, then reserve the right to investigate and confirm

Double N Earthmovers v. Edmonton (City) (SCC 2007)


1. Running the Process

Avoid tight timelines

Employees must understand the legal nature and implications of procurement

Before publishing tender documents, Owners must address:

any possible issues of bias, undisclosed preferences, or conflicts

any issues of hidden advantages


1. Running the Process (cont’d)

Establish clear communication lines with bidders

Single point of contact in pre-bid submission period, as well as bid evaluation stage

Use economic consultants to set up the financial evaluation model (if complex)

Use legal and fairness consultants or fairness monitor for fairness and compliance evaluation

Tender or RFP?

Whether Tender or RFP will be best depends upon Owner’s objectives

Careful drafting and administration of the process are critical to manage risk

CASE STUDY

Envoy Relocation Services Inc. v. Canada (Attorney General)

Annis J., ON SCJ judgment in Apr ‘13

Case heard over 15 months (Sept ‘11 to Dec ’12)

320 pages (plus appendix)

1809 paragraphs

Facts

Public Works Government Services Canada (Crown)

2004 RFP for relocation program for several depts.

Program included Property Management Services (“PMS”)

RFP estimated number of homes that would require PMS services

Crown’s answers during RFP caused bidders to conclude that these estimated numbers would be used to assess value of bids

Facts cont’d

2002 Incumbent,

Royal Lepage Realty

Services (RLRS)

Knew estimated

volume of PMS

services in RFP was

substantially too high

Bid $0 for PMS in

2002 and 2004

In fact charged for

PMS services in 2002

Contract B

Disputed a

termination by the

Crown of its 2002

Contract B and sued

the Crown while the

Crown was preparing

the 2004 RFP

Envoy bid $42 million

(’02) and $48 million

(’04) for PMS

Facts cont’d

Numerous findings of fact, many based on adverse inferences against the Crown and its witnesses:

Tender terms inherently unfair because they included undisclosed preferences

Evaluation based on unfair tender terms also unfair

Crown conflict of interest (could mitigate RLRS damages claim by awarding 2004 Contract B)

Crown therefore preferred RLRS by drafting unfair terms

Crown intentionally turned a blind eye to RLRS’s intention to breach Contract B

Crown did not act in transparent and truthful manner with other bidders when changed weighting of technical and pricing criteria

Summary of Judgement

Three key findings by Court:

Bidders directed to use estimates

RLRS possessed more complete information than Envoy

Inclusion of 2002 formula in 2004 tender constituted a hidden preference for RLRS that was not disclosed to Envoy

Summary of Judgment cont’d

Court finds breach of the Crown's implied contractual duty of fair and equal treatment of tendering parties

Court held that it can look to any relevant evidence, including conduct before or after the bids are submitted, in determining whether the conduct of the Crown in awarding Contract B was fair

Duty of Fairness

Court’s discussion of the duty of fairness:

Clarified the duties implied by Contract A

Clarified what evidence may be used to find breaches of the duty of fairness

Terms of Contract A

Dictated by Tender documents

BUT include irrevocability of bid and obligation to enter into Contract B on the basis of the terms of the RFP, if the bid is accepted

Duty of Fairness cont’d

Other implied terms of Contract A

Fair and equal treatment (Martel)

Imposition of implied term depends on obviousness, materiality and consistency with the goal of protecting/promoting integrity of procurement process (Double N)

Avoidance of a conflict of interest

Judgment

Court declares Envoy successful tendering party in the 2004 procurement process

Awards damages of $29,166,507 for lost profits

Impact of Decision

Pre-Envoy, courts recognized that concealed unfair preferences in tender documents violate the duty of fairness

Envoy confirms potential relevance of Owner’s conduct pre-tender in evaluating duty of fairness

We expect more scrutiny by plaintiffs of evaluation criteria, including weighting, in cases alleging undisclosed preferences or involving incumbent bidders

Case Study Take-Aways

Incumbents and sequential RFPs pose unique factual challenges and opportunities:

Owners need to be highly sensitized to possible hidden means of giving an incumbent an unfair or any advantage

Tenderers have more legal ammunition to demand accountability from owners if there is an incumbent

Conclusion

The many risks of engaging in procurement processes can be mitigated through a thoughtful, careful

approach

Roger Gillott [email protected] 416.862.6818 Mary Paterson [email protected] 416.862.4924