PurchasingB2B

Checking the legal landscape

What trends should procurement professionals keep their eyes on in 2011?


March 18, 2011
by Michael Power

PURCHASINGB2B MAGAZINE, JANUARY/FEBRUARY 2011:

While last year proved eventful for procurement law, 2011 is shaping up to be just as interesting. We’ve revisited some of the issues that made news last year and asked several legal experts about the hot-button issues that lie ahead over the next 12 months.

A complicated read
“I think the major thing that’s going to affect a good part of the sector—particularly in Ontario—is going to be the Supply Chain Guideline,” says Denis Chamberland, a partner with Baker & McKenzie LLP in Toronto.

The guideline—compiled by the Ontario government and designed to bring more accountability to public procurement—went through a review process in 2010.

“The guideline has gone in all kinds of different directions over the course of the past year,” Chamberland says. Among the developments affecting the guideline’s direction was Ontario auditor general Jim McCarter’s special report issued last October. In the 32-page document, called Consultant Use in Selected Health Organizations, McCarter said while Ontario’s healthcare sector makes extensive use of consultants, that use doesn’t always follow sound business practices in selection and oversight.

Then the Broader Public Sector Accountability Act received royal assent on December 8. The act is designed to provide greater openness to public sector institutions like hospitals, Local Health Integration Networks (LHINs) and universities.

The Ontario government now plans to release a directive to consolidate and formalize the recommendations the auditor general made in his report, Chamberland says. The directive will also likely highlight 25 mandatory requirements spelled out in the guideline.

“Notice that it’s called directive and not guideline, so therefore it will presumably have more teeth than the guideline itself,” he adds. “It will turn the entire guideline into a kind of operational document.”

Also to be included within that package is a bid protest mechanism organizations must have in place to allow suppliers to submit protests over any aspect of the procurement process. The guideline applies to healthcare institutions, universities and colleges, as well as school boards, while the bid protest procedure will presumably apply to the entire public sector, Chamberland notes.

“That enhances transparency in a major way,” he says. “That will almost certainly have a major impact on the sector. That’s something I expect to see in 2011, and that entire package is going to be very big.”

The bid protest procedure will likely take place through arbitration and having a procedure in place will have an enormous impact on those obligated to follow it, Chamberland says.

“There’s going to be costs associated with it, there’ll be some interesting questions, such as what impact is that going to have on the ongoing procurement process—the one that’s being challenged—is it going to be frozen pending resolution of the dispute? Does it keep going?” he says. “If the complainant is successful, what do they get? Those are the questions that are going to come up when the bid protest procedure is activated. That’s probably the single-most important thing we’ll see in the province in 2011: how the supply chain guideline is repositioned and what the directive is going to say, because the directive itself will go beyond the Supply Chain Guideline.”

For Paul Emanuelli, a Toronto-based procurement lawyer, the guidelines are “exhibit A” of a trend towards more written codes—statutes and regulations—procurement professionals must consider when doing business.

“They’re a complicated read,” Emanuelli says of the guideline. “They set out a lot of detailed rules. My copy is very worn out and post-it noted and underlined. When we were trying to create tendering templates for our clients who are subject to those guidelines, it took a team of lawyers to go through them with a fine-tooth comb to figure out how we take the rules being imposed on organizations and implement them.”

And while some of the 25 mandatory requirements within the guideline dictate general rules, such as how an organization should arrange its approval process flow, others are more specific, like the need to have a “tie-breaker” rule in tender documents.

That level of complexity means the guideline requires organizations to review their existing practices to ensure they’re compliant. That equals more work as organizations devote time and effort to ensuring they’ve stuck to the rules, Emanuelli says. It may prove challenging since many organizations subject to the guidelines are small and have few resources.

“I talk to the broader public sector—I have many clients in that sector—and they say this is all fine and well, we’re happy to comply, but are they going to give us the resources to be able to do so?” he says. “Where are the resources coming from? We can’t afford to hire a lawyer every time we have a $5,000 spend.”
To deal with that shortage, some organizations, such as regional governments and lower-tier municipalities, band together in “purchasing pools” and divide up the work. For example, one municipality runs the procurement for a particular product, such as road salt, while another handles the snow removal contract on behalf of several municipalities.

“It’s an ongoing challenge, and it’s not something we’re going to be able to solve in a day,” Emanuelli says. “But the flipside of it—because we don’t just want to be negative and say all the drawbacks as to why we do this—is that we need accountability because we have to restore public confidence in the propriety of procurement.”

eHealth fallout
That confidence had been shaken, Emanuelli notes, by issues such as the eHealth scandal and its fallout. In another report from 2009, the auditor general criticized the way governments have allowed eHealth and its predecessor, Smart Systems for Health, to let spending get out of control with few safeguards to protect tax dollars.

The eHealth scandal “set the alarm off” in Ontario, says Chamberland. “The attention that was brought because of eHealth Ontario hasn’t stopped. The pressure is consistent, and the bar is rising consistently. And therefore the directive that’s coming shortly is going to be a turning point, for sure, in the way procurement is done in this province.”

Because of the charged political environment surrounding the scandal, it’s difficult to know the degree to which money was actually wasted as a result of eHealth, says Bill Pigott, a partner with Toronto-based law firm Miller Thomson LLP.

“Was there some over-expenditure? Probably. Did they waste all the money they spent? No. Things were done, equipment was bought, and it’s there and it’s not been tossed away,” Pigott asserts.

But the guideline should help procurement professionals understand the rules surrounding procurement and put everyone on the same page, he says.
“One purpose—and it should be the primary purpose—is to help broader public sector organizations around the province be better at procuring by having a standard way of doing things so everybody understands how it will work,” Pigott says. “The vendors will understand how it will work, the hospitals will understand how it will work, and everybody has got the same way of doing stuff—this is really good.”

Clarity on Tercon?
Last January, the Supreme Court was in the midst of deliberating on the Tercon case. In the case of Tercon Contractors Ltd vs BC Ministry of Transportation and Highways, the BC ministry included a “limitation of liability clause” in its RFP, claiming the clause protected it from any legal action arising from the tendering process.

Tercon, the losing bidder, sued and won $3.3 million from the BC government. But the decision was reversed on appeal and landed before the Supreme Court of Canada. Last February, the court ruled 5-4 that the BC ministry breached the provisions of its tender contract with Tercon when it accepted and awarded a contract to an ineligible bidder.

But while the BC government lost that decision, the ruling also upheld the right of public agencies to include a limitation of liability clause in tender documents. Rather than providing clarity on the issue, the split decision did “just the opposite,” says Emanuelli.

“The bottom line on Tercon is that, in my view, our Contract A bidding process—the operating system—has crashed. We’ve lost any certainty in the system with respect to being able to protect public institutions from legal liability.”

In a 1981 case called R vs Ron Engineering, the Supreme Court of Canada ruled Contract A is formed when a bidder responds to a request for proposal, at which point a buyer must deal fairly with all bidders without showing favouritism.

There is a balance in the Contract A bidding process between implied duties such as fairness and good faith, Emanuelli says, and the ability to include items such as a limitation of liability clause in tendering documents to protect an organization.

On paper, such clauses look good but can amount to “false comfort” clauses because, with the final outcome of Tercon, courts can still strike down the clause entirely.

“My clients will ask now, ‘should we put in a limitation of liability clause to protect us?’” Emanuelli says. “I say, ‘well I guess you could put it in, but I wouldn’t count on it.’”

The court has added three additional steps to analyzing whether such a clause should be applied, Emanuelli notes. “The bottom line is that it leaves the courts with a lot of discretion on a case-by-case basis to decide yes, here we’ll allow you to shield yourself by this clause, but here we will find you liable. In the Tercon case, that’s $3.3 million in real taxpayer funds.”

The decision has resulted in more and more companies opting out of the Contract A bidding process entirely.

“There’s nothing in it for them, since it’s so litigious,” he said. “They’re going for the flexible, non-binding tendering process. The contract is still binding once it’s awarded but courts no longer referee. People don’t have to ante up with bid security.”

Marvin Huberman, a Toronto lawyer and specialist in commercial litigation and dispute resolution, takes a different view. Those additional steps help to clarify when the clause can be used, Huberman says.

While no two cases are exactly alike, the Tercon ruling helps organizations predict the outcome of litigation and therefore avoid it, Huberman says.
Companies will cover their bases by working into their documents the three requirements set out by the Tercon ruling, as well as taking greater care to use clearer language within their tendering documents.

“This decision has put to bed many issues that caused grief and replaced uncertainty with greater clarity in terms of what the law is,” he notes. “We can now turn to Tercon and say, let’s plug in our facts to Tercon’s three-part test.”

Although the BC government lost the Supreme Court decision in the Tercon case, the ruling still allows organizations to include such a clause in their RFPs, according to Pigott.

“Somebody will issue an RFP that includes an exclusion of liability clause that a court will enforce,” he says.

The role of fairness
The implementation of the Supply Chain Guideline could also see the rise of more people charged with monitoring, providing oversight or otherwise tracking the fairness of procurement practices, says Chamberland.

The role of “fairness commissioner” began in the late 1990s to address disillusionment over procurement practices and a lack of trust with the government surrounding the procurement process, Chamberland explains. A way to maintain transparency and accountability in the process was to retain an objective third party.

Fairness commissioners helped confirm that the process followed the rules laid out in the RFP. The commissioner would then issue a report on the process to confirm its integrity.

Since then, other related roles have developed. A fairness advisor offers advice on how to run the process and perhaps even how to draft an RFP.
Not as heavily involved in the process is the fairness monitor, who watches over the procurement process and issues a report at the end, spelling out any procedural unfairness and what steps were taken to relieve that unfairness.

Even less engaged is the rarely used fairness auditor, who comes in during (or even at the end) of the process and looks at whether the rules were followed before issuing a report.

Some organizations now decline to issue those reports publicly, likely because the process is never perfect and people don’t want to broadcast deficiencies, Chamberland says.

“Which tends to defeat the purpose of paying someone to vet the process and review it,” he adds.

Rather, organizations sometimes rely on the fact they hired someone to audit or monitor the process as the evidence they are concerned with the fairness of the process.

“The single-most important thing that’s happened in that field has happened in the last couple of years with the Supply Chain Guideline,” he says. “There’s been a proliferation of fairness people coming out of the woodwork. And some of them may know procurement from an operational perspective because they’ve been doing it for some years.”

But that knowledge doesn’t necessarily lead to fairness, Chamberland notes. And since the role isn’t regulated, it can be difficult to define.
“It’s a pretty messy role, actually.”

Mediation a must
Following a change to Ontario’s Rules of Civil Procedure, 2011 will see more commercial disputes solved through a mediation process, says Huberman.
“So basically we’re now under a regime in Ontario that has mandatory mediation of these kinds of cases. All civil actions, particularly in the Superior Court of Ontario must be mediated at some point before trial,” Huberman says. “That’s a good thing. I think you’re going to see a lot more cases resolving themselves—faster, cheaper, better—because of that.”

Also, 2011 will see more organizations taking a hard look at arbitration as an alternative to court. One of the main drivers of that trend, Huberman notes, is that arbitration tends to be less expensive.

“I’d say for the vast majority of commercial cases, arbitration—particularly tailored arbitration—still holds great promise to achieve a durable and fair resolution without all the costs and stresses and wastes of time and other resources that traditional court litigation involves.”