HOW TO AVOID MANDATORY DISASTERS Parallel Session Notes for CPPC Conference Calgary AB

1. HOW TO AVOID MANDATORY DISASTERS Parallel Session Notes for CPPC Conference Calgary AB October 2, 2007 Prepared and Presented by: Maureen Sullivan, B.A, LL.B Director of Educational Services National Education Consulting Inc.

2. Introduction • All competitive solicitation documents contain some mandatory requirements – these requirements must be met, before the bid or proposal will be considered further. • The Supreme Court of Canada has said that most Contract A’s (the Bid Contract) have an implied term that only compliant bids or proposals can be accepted. • Allowing a non-compliant bid to continue in the process violates this implied term. • Must means must – what’s the big deal? Why are there so many cases in this area? What lessons can be learned?

3. In particular… To what lengths must an owner go, to verify that bidders and proponents are providing accurate information re: compliance with mandatory requirements? What if an owner mistakenly accepts a non-compliant response? Will the owner be liable to the compliant respondents? Who makes the decision on whether a mandatory has been met? Is it a subjective test? Is the decision subject to review by the courts? What lessons can be learned from the flurry of litigation around this issue of compliance with mandatories?

4. Four Critical Court Decisions • MJB Enterprises v. D.C. Canada 1999 (SCC)– Contract A can only be formed with a compliant bidder. • Double N Earthmovers Ltd. v Edmonton 2007 (SCC) – an owner is not under any obligation to investigate allegations of non-compliance.

5. Graham Industrial Services Ltd. v Greater Vancouver Water District 2004 (BCCA) – bidders may use their own non-compliance to get out of contract award. • Tercon Contractors Ltd. v British Columbia 2006 (BCSC) – eligibility under pre-qualification processes can become part of Contract A.

6. MJB Enterprises v. Defense Construction Canada (1959) Ltd. 1999 (SCC) • Unanimous decision by the Supreme Court of Canada. • Standard fact pattern – owner awarded to a non-compliant bidder, lowest compliant bidder challenged. • Held: Owner’s discretion under standard privilege clause (‘lowest or any tender not necessarily accepted’) is very limited. • These clauses do NOT mean that an owner can disregard the lowest bid in favour of any other tender, including a non-compliant one.

7. MJB continued… • There is an implied term that the highest scoring proposal from a qualified proponent, or lowest compliant tender in bidding situation, will get the contract. • Unless there is very express language to the contrary, contract award to a non-compliant respondent would be a violation of the implied obligations of Contract A, including the duty of fair and equal treatment. Bottom Line: You must evaluate a response if it meets all mandatory requirements - you must reject or disqualify any proposal or bid that does not. Seems simple, however…

8. Double N Earthmovers Ltd. v City of Edmonton • The City tendered for refuse removal work, with a mandatory requirement that equipment be ‘1980 or newer’. • Sureway Construction offered the lowest price, and confirmed that it’s equipment met all the mandatory requirements. • Prior to closing, another bidder Double N contacted the City to advise that Sureway’s bid was based on equipment that did not comply with the required age requirement. • The City ignored Double N’s comments, and contracted with Sureway.

9. Upon registration of Sureway’s equipment, the City discovered that the machines were non-compliant (one piece of equipment was 1979). • Double N sued, seeking damages as the lowest compliant bidder. Trial Judge: Although Sureway deceitfully misstated the year of manufacture, the City had no legal obligations to Double N to redress the deceit because it was discovered after the contract with Sureway had been formed. Double N appealed to the Court of Queens Bench.

10. Court of Queens Bench: Appeal dismissed • In accepting Sureway’s bid, the City did not knowingly accept a non-compliant bid, or agree to alter the terms of its bid specifications, or treat any bidder inequitably. • The City owed no contractual duty to other bidders, including Double N, arising from Sureways’ deceptive breach of its contract. Double N appealed to the Supreme Court of Canada

11. Supreme Court of Canada: 5/4 majority ruling – appeal dismissed. • City could take the winning bidder’s assertions of compliance at face value without further investigation. • Bidder’s deceit not discovered until after the contract was awarded. By this point, the issue was a matter to be dealt with between the purchaser and the bidder. • However the minority disagreed, finding this undermined the integrity of the tendering process by allowing a deceitful bidder to win a contract based on an inaccurate tender.

12. Lessons Learned • The fact that the City waived the requirement once the contract was awarded begs the question of why it was included as a tender-compliance requirement in the first place. • A 5/4 majority is a very close decision – it could easily have gone the other way. Think about the impact such a ruling would have had on all procurement professionals in Canada… • Fighting a 20 year legal battle to defend a tendering process based on an unnecessary requirement is a far cry from a victory for either the purchaser or the taxpayer.

13. Graham Industrial Services Ltd. v. Greater Vancouver Water District (BC Court Of Appeal) • January 2004 Court of Appeal decision – Supreme Court of Canada refused leave to appeal. • Graham was the lowest bidder, by about $5,000,000, on the Capilano Pumping Station project in North Vancouver. • After the opening of bids, Graham discovered a $2,000,000 arithmetical error and sought to withdraw its bid, based on its own non-compliance.

14. In it’s tender document, GVWD had reserved ‘sole discretion’ to determine if bids were compliant. • GVWD deemed Graham compliant and refused to allow withdrawal. • Graham sued for return of its $1M bid deposit, alleging a number of non-compliance issues with its own tender, eg: the ITT required tender bids to be ‘signed’ – Graham had printed the representative’s name; the ITT required a five page environmental plan – Graham’s bid in essence said ‘if we win, we will provide our environmental plan’.

15. Both the lower court and the Court of Appeal said decisions on compliance must be made “in good faith, and in a manner that can withstand objective scrutiny”. • The Court found no evidence that GVWD was acting other than in good faith, however the Court concluded that on an objective assessment, Graham was substantially non-compliant. • Accordingly, no Contract A arose with Graham, therefore no forfeiture of bid bond for withdrawal. • GVWD returned Graham’s bid bond, with interest, and was liable for two levels of Court Costs.

16. Lessons Learned Sophisticated bidders are beginning to use their own non-compliance as a ‘shield’ against an unprofitable contract award. Therefore the decisions around compliance with mandatory requirements are more critical than ever. Courts may apply an objective test to decisions about whether a bidder is compliant, regardless of wide discretion clauses. (BC Court of Appeal decisions are only binding in BC.)

17. Query How do you feel about respondents using their own non-compliance to get out of contract award? Has this happened to you yet? What will be the impact on your procurement processes?

18. The Supreme Court of Canada in the MJB decision observed that pre-qualification is an increasingly common way of eliminating unrealistic bids, and reducing mandatory requirements. However…

19. Tercon Contractors Ltd. v British Columbia 2006 • BC, as delivery agent for construction of 25 kms of highway, issued RFEI. • Six teams pre-qualified through this process, including Tercon Contractors Ltd. and Brentwood Enterprises Ltd. • Subsequent RFP had mandatory requirement that only the six proponents qualified through the RFEI process were eligible submit proposals. • Between the RFEI and RFP Brentwood changed its team’s structure by forming joint venture with Emil Anderson Construction (EAC).

20. Brentwood informed BC of the change, and was told that the proposal had to be in Brentwood’s name. • Contract B awarded to Brentwood, however: • the construction contract stated that EAC was a key member of Brentwood’s team; • with BC’s encouragement, Brentwood entered into a separate contract with EAC which incorporated each term of the construction contract. • Tercon objected, commenced litigation.

21. BC Supreme Court’s findings: • The Brentwood proposal was from an ineligible proponent – a joint venture between EAC and Brentwood. • BC breached the duty of fairness to Tercon by changing the terms of eligibility to Brentwood’s competitive advantage. • But for this breach, ‘it is almost certain that Tercon would have been awarded this contract’. • $3,293,998 damage award based on the revenue that Tercon would have received had it performed the contract, less its costs of performing the work plus court costs.

22. Lessons Learned • Plan procurement processes, including pre-qualification stages, very carefully. Consider the ‘what ifs?’ • Pick a process and stick with it - do not change requirements part way through! • If pre-qualification is an RFP or ITT requirement, this is one more mandatory that must be wrestled with. • Eligibility criteria can become part of Contract A which if ignored, can lead to huge damage awards.

23. Some Other Litigious Mandatory Requirements • must provide an originally signed submission, plus four copies • must provide three references • must demonstrate experience on a project of similar size • must have been in business for 10 years • must be financially stable Others??

24. What Are the Implications of these Decisions? • Keep mandatory requirements to an absolute, bare bones minimum. If it is not absolutely critical, do not make it a mandatory – move it into the desirable, or weighted criteria. • Educate your users, bosses and other stakeholders about the risks of including too many mandatory requirements. Remember, for each mandatory, there is the potential that all responses will have to be rejected. • Every mandatory should be ‘provable’, and absolutely essential to success of the contract/project.

25. Questions? • Comments? • Concerns? Watch for future cases on this contentious issue – “it’s always better to read a case than be a case!”

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