Ethics in Government Procurement1314 2

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Ethics in Government Procurement

Presented by Paul EmanuelliCounsel

Province of Ontario


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Disclaimer(This is Not Official Policy)

This discussion (a) does not reflect the views of any past orpresent employers or clients and (b) is for general informationand reference purposes only.

These materials include a consolidation of independentlywritten original works including content excerpted from theforthcoming book entitled Government Procurement to be

published in 2005 by LexisNexis Butterworths.

Comments can be directed [email protected]

Paul Emanuelli, 2000-2005. All rights reserved.
mailto:[email protected]:[email protected]


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Ethics in Government Procurement

Introduction

The Ethics Revolution

Public Policy OptionsEthics and Current Practices

The Clean Tender Doctrine

Governing Principles in Conflict of Interest

Six Conflict of Interest Case Studies


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Introduction(Ethics Scandal Rocks Prime Ministers Office)

An election was imminent. The opposition wason the verge of seizing key seats in Ontario andQuebec. The government was under threat of

losing its grip on power. It was in desperateneed of campaign funds. A private companymade a generous $360 000.00 contribution tothe campaign war chest that helped bankroll thegovernments successful re-election bid. Afterthe election that company was awarded alucrative government construction contract.


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Introduction(Ethics Scandal Rocks Prime Ministers Office)

A scandal erupted when news of the dealbecame public. With the details appearing in the

opposition-friendly papers, the Prime Ministerwas in damage control mode. He struck a royalcommission to investigate the matter. But itwas too late. The damage was done. The dealfell through and the government was forced to

resign.


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Introduction(The More Things Change)

The government contract in question was therailway construction deal awarded to theCanadian Pacific Railway Company. The year

was 1873. The Prime Minister was John A.Macdonald.

As the Pacific Scandal illustrates, governmentprocurement controversies can bring down the

best of them. Even the Fathers ofConfederation were not immune.

see P.B. Waite, Pacific Scandal, The Canadian Encyclopedia, Year 2000 Edition (1999)


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Introduction(Good Government: A Fundamental Principle)

The paramount importance of good governmentis firmly entrenched in our political fabric.Reactions to spending improprieties run as deepin our political psyche as the memories runlong. Public officials who run on the wrong sideof these rules do so at their peril. Today,computer and advertising contracts may havereplaced railway construction deals as the

subject of controversy, but accountability forproper government spending remains a matterof national importance.


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The Ethics Revolution(Business Scandals and Public Inquiries)

Today its no coincidence that major tradetreaties like the Agreement on Government

Procurement, the North American Free TradeAgreement and the Agreement on InternalTrade all have government procurementchapters aimed at promoting open, ethical andtransparent practices and that statutes like theU.S. Sarbanes-Oxley Actput a new premium on

the accountability of publicly traded companies.The ethics revolution has arrived.


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The Ethics Revolution(SOX A Response to Business Scandals)

The full title of Sarbanes-Oxley is An Act toprotect investors by improving the accuracyand reliability of corporate disclosures made

pursuant to the securities laws, and for otherpurposes. The long title reflects the bigproblem that shook investor confidence as thetechnology boom of the nineties burst into the

business scandals of the new millennium. Thescope of Sarbanes-Oxley is broad. Its

implications are as far reaching as they arecomplex.


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The Ethics Revolution(Ripple Effects in an Interconnected Economy)

Canadian purchasers are feeling the ripple

effects as U.S. suppliers adapt to stringent new

revenue recognition requirements. These rippleeffects are an inevitable result of our

increasingly inter-connected global economy.

In turn, government suppliers may be feeling

the effects of increased concerns over ethics in

government procurement.


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The Ethics Revolution(SOX A Response to Gatekeepers Falling Down on the Job)

Sarbanes-Oxley represents a significant increase inregulation and includes a broad range of rulesregarding corporate oversight boards, auditorindependence, internal corporate governance, publicdisclosure responsibilities and conflict of interest. AsU.S. Securities Exchange Commissioner Cynthia A.Glassman stated in Washington D.C. on April 7,2003 in a speech to the National Economists Club:

Sarbanes-Oxley was enacted last summer in response to financial

frauds at Enron, WorldCom and other corporations and the realizationthat many of the gatekeepers responsible for preventing fraud hadfallen down on the job.Congress recognized that dramatic steps wereneeded to right the system and restore investor confidence.


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The Ethics Revolution(The Naked Truth: Transparency Is Key)

As a means of increasing investor confidenceby promoting the disclosure of more accurateinformation, the Sarbanes-Oxley regime draws

significant attention to how companies reporttheir revenues. As Glassman stated in London,England on February 17, 2004:

clarity and transparency promote better behaviour. People

think twice about what they are doing if the naked truth isstaring themand the rest of the worldin the face.


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The Ethics Revolution(Delivering the Verdict)

Ebbers guilty on all 9 counts

In a decision sure to unnerve other CEOs accused of ignoringcriminal misbehaviour, a jury in Manhattan declared former

WorldCom CEO Bernie Ebbers guilty Tuesday of being part of ahuge accounting fraud at the company now known as MCI.

The guilty verdictson all nine countswere the biggest victoryto date for federal prosecutors since they began cracking down onhigh-level white-collar crime after the collapse of Enron in 2001.

Ebbers will likely get up to 25 years in prison under federalsentencing guidelines, which could effectively turn the penaltyinto a life sentence for the 63-year-old WorldCom founder.

USA Today, March 15, 2005


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The Ethics Revolution(Financing in a Fishbowl)

After Bernie, Whos Next?

Ebbers conviction reflects a new calculus for corner-officeoccupants: that corporate crime may finally equate to lengthy

prison terms.

If shareholders lawsuits arentenough to scare execs straight,they also face a raft of new regulations. Under the Sarbanes-Oxley law, chief executives must now personally sign-off onfinancial statements. Auditors are poking around with greater

impunity, and public companies must certify that theyredocumenting and testing internal accounting procedures,resulting in anunprecedented level of scrutinyfor investors,according to a recent report by Huron Consulting.

Time Magazine, March 28, 2005


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The Ethics Revolution(Laying Down the Law)

Ebbers' sentence a strong deterrent

Last weeks sentencing of former WorldCom boss BernardEbbers to 25 years in prison closes the legal book on the

network industry's most notorious and damaging case ofaccounting fraud, pending the inevitable appeals.

One law professor says recent moves by prosecutors to goafter corporate criminals, as well as legislation such asSarbanes-Oxley, designed to keep public companies' accountingbooks in order, are deterrents to white-collar crime.

Network World, July 18, 2005

http://www.networkworld.com/news/2005/071805-ebbers.html


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The Ethics Revolution(Advanced Studies in Business Ethics)

Ebbers' sentence a strong deterrent

Casesinvolving Enron, WorldCom and Tyco have increased awarenessof corporate governance and business ethics among companies, says

David Balderson, director of Corporate Learning Services, a division ofNew York University's School of Continuing and Professional Studies.Balderson's group developed MCI's ethics training in 2003, which allemployees are required to complete. Since then, Balderson says thenumber of companies that seek such training has grown exponentially.

In fact, NYU says it just got an RFP from a Fortune 100 company with

more than 20,000 employees to create an ethics-training program.

Ebbers is scheduled to report to federal prison Oct. 12.

Network World, July 18, 2005

http://www.networkworld.com/news/2005/071805-ebbers.html


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The Ethics Revolution(Sponsorship Scandal A Big Hit in Quebec)

In Quebec, the sponsorship scandal gave new meaningto studiesin fiscal federalism:

Inquirydrives TV ratings, newspaper sales

Theinquiry has become an unprecedented TV hitRDI, theprovincesFrench-language equivalent to CBC Newsworld, has seen its ratings soarfrom 25,000 to 185,000 a day.

Meanwhile, the commissions clerks are clearly expecting another

blizzard of evidence. They have brought in more bookshelves, to add tothe ever-growing tower of evidence.

Toronto Star, March 26, 2005


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The Ethics Revolution(City Hall Paper Chase)

Shocking city probe wraps up

As documented in the Toronto Sun, initial estimatespredicated that the Toronto Computer Leasing

Inquiry would involve just one filing cabinet ofdocuments and 40 days of hearings.

At the end of the day, hearings lasted 2.5 years,cost $19.2 million, involved 64 lawyers, and saw

124,000 pages of filed documents.

Toronto Sun, January 28, 2005


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The Ethics Revolution(Meanwhile in other news)

While the Toronto Computer Leasing Inquiry andthe Sponsorship Scandal may have received themost media attention, they are far from the only

recent government procurement stories to make thenews.

The following survey of articles provides asampling of other recent stories that illustrate the

increasing scrutiny placed on governmentprocurement by the media.


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The Ethics Revolution(Procurement Rules Too Complex for Taxman)

Taxman breaking own rules: CanadaRevenue Agency found to be ignor ing

purchasing regs

Procurement rulesare seen by many in theorganization as unduly cumbersome and mayfrequently be overlookedManagers complained therules are complexanddifficult to understand.

Barrie Examiner, February 15, 2005


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The Ethics Revolution(Mailman Slips Up On Tender Deadline)

Union urges Canada Post

to clean up procurement

Following a July 2004 audit by Deloitte & Touche, theCanadian Union of Postal Workers called on CanadaPost to deal with its procurement irregularities. As

purchasing b2b reported:

Theauditfound Canada Post failed to comply with policy on 355 outof 599 transactionsIn one case, the winning supplier submitted its bidtwo months after the competition had closed

purchasing b2b, May 2005


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The Ethics Revolution(BC Bid Shopping)

Bid Shopping by ministry held nefariousconduct, basis for $100,000 damages

As reported inLawyers Weekly on August 20, 2004, the BC

government was ordered to pay $100,000 in damages afterengaging in post-close bid shopping. In its July 2004

judgment in Stanco Projects Ltd. v. British Columbia, theBC Supreme Court stated:

A tendering authority ought not to be entitled to contemporaneously purport toadhere to the tendering model and enjoy the benefits flowing from it and, oncethe bids have been revealed and are under consideration, to unilaterallyimplement the contrasting model of free bargaining.


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The Ethics Revolution(A Philadelphia Story)

High-Ranking Philly Official ConvictedPhiladelphias former treasurer [was] convicted inaprobe targeting what U.S. Attorney PatrickMeehancalled a culture of corruption in Philadelphia

city government.Associated Press, May 10, 2005

Judge Suggests New Corruption, Ethics LawDistrict Judge Michael Baylson saidthe trial raised

difficult questions about the policing of governmentofficialsCityand state laws limit the gifts and financialbenefits public employees may receive, but.there isreally no enforcement of those laws whatsoever.

Associated Press, May 10, 2005


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The Ethics Revolution(Procurement Law a Growth Area)

'Bitter bidders' now tending to seek redress

This increasingly litigious environment was recently

noted in the Globe and MailsReport on Business:

Welcome to a phenomenon litigators are calling the rise of the "bitterbidder" -- suppliers who are exercising their legal right to a fair andtransparent tendering process. It's all adding up to brisk business forlitigators experienced in the complex and rapidly evolving field of

procurement legislation.

Globe and Mail, August 24, 2005


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Policy Options(Filling the Credibility Gap)

While isolated incidents should cast no shadowon decades of work performed by the

procurement professionals who have built a top

tier public procurement system in Canada, thereis an increasing dissonance between that hardearned reputation and public perceptions. Thiscredibility gap needs to be addressed andconfidence in public sector spending reinforced.Public institutions have a broad range of options

for bolstering confidence in public sectorprocurement.


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Policy Options(Six Steps to Empowered Procurement)

To build the winning procurement conditions, publicinstitutions should consider the following sixmeasures:

1. create common centralized rules and practices;

2. define clear roles and responsibilities within the organization;

3. establish independent external oversight of procurement activities;

4. promote values-based procurement and internal checks and balances;

5. empower innovation within the organization; and

6. create a broad range of flexible procurement tools.

Paul Emanuelli Practical Considerations, Government Procurement, (Toronto: LexisNexis Butterworths, 2005)


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Policy Options(Proactive Leadership and Transparency)

No procurement team can perform to its full

potential unless its management helps establish

winning conditions. The failure to create andmaintain winning conditions can undermine

prudent spending practices, can have an adverse

impact on the reputation of public institutions and

can undermine public confidence in those

institutions.


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Policy Options(Proactive Leadership and Transparency)

Proper macro-procurement planning calls for proactiveleadership at the senior levels of a public institution.As Jean Au Yeung, Assistant Director of Hong Kongs

Independent Commission Against Corruption statesgovernments determination and support is the firstand foremost factor in the successful fight againstcorruption. In Hong Kong that determination wasreflected by legislative action that placed a statutory

duty on the Commission to proactively examinegovernment departments and weed out any proceduresthat could be conducive to corrupt practices.


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Policy Options(Common Centralized Rules and Practices)

A procurement organization should createconsistency and remove duplication through theimplementation of common centralized governingrules and practices. Striking the delicate balance

between centralization and decentralizationrequires strategic planning and oversight. Whiletotal decentralization can lead to significantinefficiency, duplication, inconsistency and waste,too much centralization can lead to decision-

making gridlock, artificial standardization and theerosion of independent decision-making bysubject matter experts.


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Policy Options(Clear Roles Definition)

A procurement organization should promoteaccountability and clarity by establishing a clearand comprehensive set of roles and

responsibilities within the institution including aclear division of roles between: (i) electedofficials; (ii) senior management officialsresponsible for establishing and enforcingcompliance with procurement rules; and (iii) front-line procurement professionals responsible for

specific procurement processes.


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The Toronto Computer Leasing Inquiry released anine-hundred page multi-volume background

paper (the Toronto Report) that focused onprocurement practices, conflict of interest,lobbying and municipal governance. One of itskey recommendations was the need to clarifyappropriate delegation rules for government

procurement staff and hands-off policies forelected officials.


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The Toronto Report noted that at City Hall thedividing line is blurred from both the politicaland administrative ends of the spectrum and

emphasised the need to establish an appropriatebalance of roles and responsibilities betweengovernors and managers that is accepted in theoryand implemented in practice.

Background Papers Prepared for the Inquiry by the Executive Research Group

http://www.torontoinquiry.ca/gg/index.html


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Policy Options(Independent External Oversight)

A procurement organization should establishtransparent practices which include: (i) external

oversight mechanisms that provide checks-and-balances to guard against inefficiencies andabuses; and (ii) clear rules aimed at protecting theintegrity of the procurement process by addressingissues such as conflict of interest, unfair advantage

and the lobbying of public officials to influencecontract award decisions.


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Policy Options(Independent External OversightSpecial Offices)

As the U.S. Center for Democracy andGovernance states in its Handbook for FightingCorruption, independent government offices such

as inspector generals, ombudsmen and anti-corruption agencies improve accountability byoverseeing government operations. In general,they look into allegations of mismanagement andreview administrative systems to ensure theyadhere to anti-corruption procedures.*

*Center for Democracy and Governance, A Handbook on Fighting Corruption (February 1999)(http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnace070.pdf), p.10.
http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnace070.pdfhttp://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnace070.pdf


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Policy Options(Independent External OversightLegislative Oversight)

In addition to such arms-length oversight bodies,the Center also recognizes the need for legislative

branch oversight of government activities, noting

that such oversight providesa powerful check onexecutive authority, enhancing accountabilitywhere a dominant executive branch mightotherwise operate with impunity.*

* Center for Democracy and Governance,A Handbook on Fighting Corruption (February 1999)(http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnace070.pdf) ,

p.10.
http://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnace070.pdfhttp://www.usaid.gov/our_work/democracy_and_governance/publications/pdfs/pnace070.pdf


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Policy Options(Independent External OversightAuditors Report)

Independent oversight is critical to keeping executivepower in check. By way of example, in its November2003 report, the Auditor General of Canada foundthat from 1997 to August 2001:

the federal government ran the Sponsorship Program in a way thatshowed little regard for Parliament, the Financial Administration Act,contracting rules and regulations, transparency, and value for money:

Parliament was not informed of the program's objectives or the resultsit achieved and was misinformed as to how the program was beingmanaged.


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Policy Options(Independent External OversightAuditors Report)

Documentation was very poor and there was little evidence ofanalysis to support the expenditure of more than $250 million. Over$100 million of that was paid to communications agencies asproduction fees and commissions.

Oversight mechanisms and essential controls at Public Works andGovernment Services Canada failed to detect, prevent, or reportviolations.

Auditor General of Canada,

Government-Wide Audit of Sponsorship, Advertising, and Public Opinion Research (November 2003)(http://www.oag-bvg.gc.ca/domino/reports.nsf/html/20031103ce.html),

The Sponsorship Program, at 3.1.
http://www.oag-bvg.gc.ca/domino/reports.nsf/html/20031103ce.htmlhttp://www.oag-bvg.gc.ca/domino/reports.nsf/html/20031103ce.htmlhttp://www.oag-bvg.gc.ca/domino/reports.nsf/html/20031103ce.htmlhttp://www.oag-bvg.gc.ca/domino/reports.nsf/html/20031103ce.html


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Policy Options(Independent External OversightBroader Implementation)

Making the operations of all public institutionsmore transparent and subject to similar

independent oversight can serve as a deterrentagainst procurement irregularities, can help todetect those irregularities when they are presentand can help bolster public confidence ingovernment procurement practices.


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Policy Options(Values Based Procurement & Internal Checks and Balances)

A procurement organization should encouragevalues-based procurement by promoting a

culture of ethics within the institution whichincludes: (i) mechanisms for internal regulation,reporting and self-governance; and (ii)measures to protect the security of tenure ofemployees responsible for enforcing internalgovernance rules.


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Policy Options(Values Based Procurement & Internal Checks and Balances)

A clear code of conduct is a key component forpromoting a culture of ethics within a procurementorganization. In its Practical Guide to Corruption

Prevention, AustraliasNew South Wales IndependentCommission Against Corruption recognizes that:

a code of conduct is an important management tool which canpositively shape the culture of an organization. Many organizations havefound that adopting a clearly defined approach to ethical issues improves

the organizations reputation, helps to develop pride among staff and isgood for business.


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Policy Options(Empowering Innovation)

A procurement organization shouldempower a culture of innovation andimprovement by ensuring: (i) adequate

staffing and resources to properly manageall phases of the procurement cycle; (ii)adequate training to all levels of

procurement staff; and (iii) sufficientdiscretion to enable procurement staff to

exercise independent judgement indecision-making.


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Policy Options(Empowering InnovationIn the Public Interest)

public money is money held in trustfor the benefit of all Canadians. As aconsequence, the government has an

obligation to ensure that the money ismanaged prudently in support of the general

public interest. It also means that thegovernment must seek to obtain maximumvalue for the dollars spent.

Government Spending Should Be Managed With Probity and Efficiency

2000 Report of the Auditor General of Canada


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Policy Options(Empowering InnovationCalls for Proper Training)

Collectively, public institutions in Canada

spend billions of dollars annually. It should

be a self-evident proposition that thoseresponsible for spending such vast amounts

of public resources should have access to the

necessary training to ensure value-for-money

and the protection of the public interest.

l


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Policy Options(Empowering InnovationCalls for Proper Staffing)

Another critical component of prudentprocurement is the proper allocation of

resources and staff for all phases of theprocurement process. This calls for theallocation of proper resources to the

planning, competition, contract award andcontract management phases of the

procurement cycle.

l O


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Policy Options(Creating a Broad Range of Procurement Tools)

A procurement organization should enable

tactical flexibility by establishing a

diverse and varied framework of

procurement tools and by providing

procurement staff the flexibility to

determine which approach best meets their

specific objectives.

P li O i


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Canadian public sector purchasers tend to use the

formal legally binding tendering process as a

preferred method for procuring a wide range ofgoods and services. However, by doing so,

public institutions may in certain circumstances

be incurring unnecessary legal risks or may be

undermining their value-for-money objectives.

P li O ti


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Purchasers should always assess the suitability

of their procurement format to the particular

situation. Determining the appropriate methodof procurement based on a broad range of

options and an analysis of the specific

circumstances is a crucial step in the proper

planning of a procurement strategy.

P li O ti


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As the Toronto Good Government Report states:

The essential theme here is that nosingle purchasing method suits allsituations. In practical terms, this means that a government that relies

almost exclusively on the formal competitive process (i.e. an open,publicly advertised, sealed bid competitive process) for all purchasesover minimum thresholds will not be achieving value for money.Likewise, a government that relies almost exclusively on legitimate butmore informal approaches such as soliciting three quotes from known,competent suppliers will not be demonstrating the values of fairness,

equity, and openness.

Toronto Computer Leasing Inquiry, Toronto Computer Leasing Inquiry Research Paper(December 2003)(http://www.torontoinquiry.ca/gg/cip.html), Procurement,Volume 1: Common Risk Areas,p. 83.

P li O ti
http://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.htmlhttp://www.torontoinquiry.ca/gg/cip.html


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Empowered procurement calls for a clearunderstanding of the benefits and legal obligationsthat apply to different procurement formats. Becauseof the inherent legal risks and restrictions created in

a formal legally binding bidding process, purchasersshould make informed decisions to assess whetherthat approach best meets their needs in the specificsituation or whether other open competitive formatsare better suited to their specific objectives. Some

of these different procurement formats are discussedin the subsequent slides dealing with Ethics andCurrent Practices.


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Ethics and Current Practices(Current PracticesPublic Policy Principles)

Many ethical procurement norms have alreadybeen entrenched in existing governmentprocurement practices. For example, many publicinstitutions already adhere to the following policy

principles when conducting their procurementprocesses:

o Transparency

o Value-for-money

o Trade liberalization

Ethi d C t P ti


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Ethics and Current Practices(Procurement Treaties)

The following trade treaties reflect these principles

by calling for open, competitive and non-

discriminatory government procurement procedures:

o The international Agreement on Government Procurement

(AGP)

o The continental North American Free Trade Agreement

(NAFTA)

o The domestic Agreement on Internal Trade (AIT)

Ethics and Current Practices


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Ethics and Current Practices(Measuring Up to International Standards)

Given our increasingly interconnected global

economy and the increased international

attention to transparent governmentprocurement, in the years to come we are

likely to see a proliferation of different

procurement formats tailored to the unique

challenges of particular industries.


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Ethi d C t P ti


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Ethics and Current Practices(Three Default RFP Formats)

The UN Model Procurement Law recognizes threeequally acceptable RFP formats:

1. Selection Without Negotiation:the Invitation to Tender

style RFP format commonly used in the Canadian publicsector.

2. Selection With Simultaneous Negotiations:allows thepurchaser to negotiate with all bidders.

3. Selection With Consecutive Negotiations:allows thebidder to negotiate with the highest ranked bidder andproceed down the ranking until an agreement is reached.

Ethi d C t P ti


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Ethics and Current Practices(Recognized Alternative Formats)

The UN Model Procurement Law also recognizes anumber of legitimate alternative methods of procurementthat can be used in appropriate circumstances:

o Supplier Prequalification

o Alternative RFPo Two-Staged Tender Calls

o Competitive Negotiations (BAFO Process)

o Invitational Tendering

o Low-Value Request for Quotation

o Single-Source Procurements (Direct Awards)



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Ethics and Current Practices(Law of Tendering vs. Law of Direct Negotiations)

The formal tendering process can create anumber of implied legal obligations that do nottypically apply to traditional negotiations.These additional duties generally arise when a

bidder submits a compliant tender in responseto an irrevocable tender call. When thishappens, the parties are said to create ContractA, the notional pre-execution contract firstrecognized by the Supreme Court of Canada in

1981 in Ontario v. Ron Engineering (RonEngineering).



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Ethics and Current Practices(Duty of Fairness)

To maintain the integrity of the biddingprocess the courts have also relied on thedoctrine of fairness as a basis for applyingimplied duties to the purchaser:

...in the years since Ron Engineering, the Supreme Courtsmodel has been buttressed by a growing expectation of probityin the pre-award phase of the tendering process. Theunderlying principle has been variously expressed as a standardof good faith, or a duty of fairness or reasonableness...in

whatever form it is cast, the owner is subject to somecommonly acknowledged constraints.

P. Devonshire, Osgoode Hall Law Journal, 1998


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Ethics and Current Practices(Two Paradigms, Two Distinct Types of Rules)

In its 2000 decision in Martel Building Ltd. v.

Canada, the Supreme Court of Canada

recognized the need for fairness in formaltendering and stated that implying an

obligation to treat all bidders fairly and equally

is consistent with the goal of protecting and

promoting the integrity of the bidding process,and benefits all participants involved.



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Ethics and Current Practices(Traditional Negotiation Rules)

However, in that same decision, the Supreme

Court refused to add new duties to parties

negotiating commercial contracts outside of the

formal tendering framework. The reasons cited

by the Supreme Court clearly reflect how the

rules that apply to traditional commercial

negotiations are distinct from those that apply

to a formal binding tendering process.



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Ethics and Current Practices(Avoiding Indeterminate Liability in Negotiations)

The Supreme Court declined to applying a dutyof care to direct commercial negotiations,stating that the scopeof indeterminate liabilityremains a significant concern underlying anyanalysis of whether to extend the sphere ofrecovery for economic loss.* In other words,the Supreme Court was reluctant to expand thescope of potential legal liabilities in situationswhere parties were involved in direct

negotiations.

*Martel Building Ltd. v. Canada(2000-11-30) SCC, para. 57.



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Ethics and Current Practices(Five Ancillary Policy Reasons)

The Supreme Court offered five compellingancillary policy reasons for not applying a dutyof care to negotiations:

#1: Negotiations an Adversarial Zero-Sum Game

#2: Encourage Independent Market Research

#3: Promote Due Diligence

#4: Use Existing Common Law Remedies

#5: Discourage Litigation



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Ethics and Current Practices(Selecting the Appropriate Procurement Paradigm)

As the Supreme Court noted in its 1999 decisionin M.J.B. Enterprises Ltd. v. DefenceConstruction (1951) Ltd., the creation ofContract A depends upon whether the partiesintended to initiate contractual relations by thesubmission of a bid in response to the invitationto tender. The Supreme Court reiterated thisconclusion inMartel where it held that whetherthe tendering process creates a preliminary

contract is dependent upon the terms andconditions of the tender call.



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Ethics and Current Practices(Indicators of Purchasers Intention)

The courts have relied on a number of factors todetermine whether a purchaser intended to createContract A and be bound by the duty of fairness:

the use of traditional tendering terms and phrases

rules with sanctions attached (e.g., late tenders disqualified)

formal compliance standards (e.g., technical compliance)

structured evaluations (e.g., stages, a scoring matrix)

provisions that bind the bidder (e.g., irrevocability period) pre-established performance terms that replace negotiation


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Ethics and Current Practices(Selecting the Appropriate RFP FormatPolicy Decision)

As recognized by the Supreme Court of Canada,not every type of tender call triggers Contract A.At common law purchasers can elect to govern

themselves by the law of traditional negotiations,as long as they avoid the traditional Contract Aindicators. The negotiated RFP formatsrecognized in the UN Model Procurement Laware compatible with such an approach.

Ultimately, it is up to purchasing institutions toutilize the appropriate RFP format as a matter ofprocurement policy and practice.



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Ethics and Current Practices(Transparency in Selection of Procurement Paradigm)

The selection of a procurement format shouldbe a conscious, informed and transparentdecision that clearly indicates to bidderswhether the particular process will beconducted under the binding tendering

paradigm or a negotiated paradigm. Once aparadigm is selected, mid-process paradigmshifts between the binding tendering model and

the negotiated model should generally beavoided.



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The Clean Tender Doctrine(Non-Compliant Tenders Are Out of Play)

Over the last quarter century, the clean tenderdoctrine has been one of the most significant legalfactors impacting government procurement. Theclean tender doctrine is shorthand for the legal

principle that restricts the field of play in formalbinding tendering competitions to compliantbidders. Non-compliant tenders are seen to be outof bounds and ineligible for contract award.Purchasers do not typically owe those non-

compliant bidders any tendering law duties andcannot typically compel those non-compliantbidders to honour their tenders.



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The Clean Tender Doctrine(The Three Heads of Clean Tender Doctrine)

The clean tender doctrine has had a widespread effecton the rights of both purchasers and bidders,manifesting itself in the following ways:

Non-Compliance as Bidder Sword: Unsuccessful bidders launchingsuccessful claims against purchasers on the grounds that the contract wasimproperly awarded to a non-compliant competing bidder.

Non-Compliance as Purchaser Shield: Defendant purchaserssuccessfully shifting the issue by showing that the plaintiff bidderstender was non-compliant and the bidder was therefore ineligible for

tendering law remedies.

Non-Compliance as Bidder Shield: Defendant bidders successfullyrelying on their own non-compliance, asserting that they cannot be liablefor failing to honour a tender that was never legally capable ofacceptance.



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The Clean Tender Doctrine(Counter-Assertions of Non-Compliance)

The March 2005 decision of the Alberta Court ofAppeal in Double N Earthmovers v. Edmonton(City)offers a recent case study. In this case the

plaintiff bidder and defendant purchaser bothinvoked the clean tender doctrine in theirrespective appeal and cross-appeal. The caseinvolved a municipal tender call for heavy refusemoving equipment. The plaintiff bidder claimed

that the contract was awarded to a non-compliantcompetitor.



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The Clean Tender Doctrine(Plaintiff Establishes its Compliance)

In its defence, the purchaser asserted that theplaintiff bidders tender was non-compliant.The purchaser argued that the bidders non-

compliance took it out of play and made itineligible for a legal remedy. However, theCourt found that the plaintiff bidder hadsubmitted a compliant tender. Havingestablished its own compliance, the biddersuccessfully circumvented thepurchasersinitialline of defence.


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The Clean Tender Doctrine(A Telecommunications Case Study)

The July 2004 determination of the Canadian

International Trade Tribunal in Bell Mobility v.

Department of Public Works and GovernmentServices offers another example of the clean tender

doctrines impact on procurement disputes. The

case involved a government RFP for the provision

of mobile wireless devices and services.



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(Tender Comes Unwired on a Clerical Error)

The government rejected the Bell Mobility

bid because of a discrepancy between theservice hours required in the RFP and those

proposed in Bells tender. Bell asserted that

this was a mere clerical error that could be

clarified after close.


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Governing Principles for Conflict of Interest


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To maintain the integrity of the tendering process,

purchasers should avoid any conflict of interest or

unfair advantage. The following eight governingprinciples were distilled from a number of

tendering cases that considered these issues:



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1. In order to preserve the integrity of the biddingprocess, all parties should avoid any conflict ofinterest or unfair advantage.

2. Purchasers should ensure that no bidder has aconflict of interest or unfair advantage during atendering process. Purchasers may be compelled

to disqualify a bidder in order to preserve theintegrity of a bidding process.

l f fl f


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3. To better ensure that a decision to disqualify istransparent and defensible, purchasers shouldclearly define the circumstances that they would

consider to be an unfair advantage or conflict ofinterest.

4. A conflict of interest or unfair advantage can

flow from the purchasers conduct, or from thebiddersconduct, or both.


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5. Unfair advantage includes instances where abidder has an inside advantage on account ofaccess to specific information or decision-makersthat other bidders do not have access to.

6. Purchasers should ensure that their evaluationdecisions are made free from bias.


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7. Conflict of interest can arise within thepurchasing institution where a decision makersability to exercise impartial discretion in the publicinterest is compromised by that decision makers

personal interests.

8.Conflict of interest can arise on the part of thebidder in situations that compromise the bidders

ability to fairly engage in a tendering process or toproperly fulfill its duties if it is awarded a contract.


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Six Conflict of InterestCase Studies

The following cases provide some examples of theabove noted principles:

1. Wind Power Inc. v. Saskatchewan Power Corp

2. New Brunswick v.Wheeler3. Coughlin & Mayo v. Victoria (City)

4. Re Complaint Filed by Dollco Printing

5. Re Complaint Filed by Consortium Genivar-M3E-UniversiteDOttawa

6. Re Complaint Filed by J. Molson & Associates

#1 Wind Power Inc v Sask Power Corp


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#1 Wind Power Inc. v. Sask. Power Corp.(2002-04-10) SKCA

Some of the prevailing public policy principles

regarding ethical government procurement were

illustrated in the May 2002 Wind Power Inc. v.

Saskatchewan Power Corp. decision of theSaskatchewan Court of Appeal:

Theduty to treat all bidders fairly and equally is designed to ensure

that the owner does not extend an unfair advantage to any particular

tenderer in the bidding process. It is said that this policy promotes

economic efficiency and discourages corrupt tendering practices.

#2 New Brunswick v Wheeler


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#2 New Brunswick v.Wheeler(1979-03-30) SCC

In its March 1979 decision, New Brunswick v.Wheeler, the SCC determined that the Mayor ofMoncton should be removed from office onaccount of a conflict of interest. The Court notedthat there had been no attempt to conceal theconflict and that the Mayor had proceeded on theadvice from the City Solicitor and the NewBrunswick Department of Justice and that counsel

before us stated that the Mayor signed somecontracts both as Mayor of the city and as anofficer of the contracting company.

#2 New Brunswick v. Wheeler


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#2 New Brunswick v.Wheeler(1979-03-30) SCC

The SCC found that this conflict of interest could

not be addressed simply through disclosure:

As I have indicated, qualifications for the election to and the

holding of high office in all levels of government are a matter of

considerable importance in the functioning of the democratic

community. The sanctity of these offices and the strict adherence to

the conditions of occupying those offices must be safeguarded if

democratic government is to perform up to design.


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#3 Coughlin & Mayo v. Victoria (City)


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#3 Coughlin & Mayo v. Victoria (City)(1893-08-26) BCSC

Having found that there was a conflict of interest,the Court then concluded that the tendering processhad been tainted with illegality:

Upon every principle of justice, the Council should be prohibitedfrom in any way furthering what was thus illegally done. Not onlythe plaintiffs, but the ratepayers at large, are deeply interested inseeing that all contracts, and especially for those for public works,should be entered into on the fairest principles.


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#5 Re Complaint Filed by Consortium

Genivar M3E Universite DOttawa


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Genivar-M3E-Universite D Ottawa(11 August 2003, PR-2002-074) (CITT)

In it August 2003 determination inRe Complaint Filed byConsortium Genivar-M3E-Universite DOttawa, theCanadian International Trade Tribunal consideredallegations of unfair advantage arising out of a Canadian

International Development Agency procurement. Thecase focused on the association between a consultantretained to advise the government on the procurement andone of the bidders responding to the tender call. TheTribunal found that the consultant, who was associatedwith the bidder in question, had an impact on the

planning of the support project in questionand that theinformation she obtained through that process gave that

bidder an improper advantage.


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