“Smart Contracts”: Magic, Myth or Misnormer?

September 12, 2017

“Smart Contracts”: Magic, Myth or Misnormer?

by Paul Humbert

The potential to use blockchain technology to create so-called “smart contracts” for a variety of commercial transactions has been much in the news lately. Some see the objective as using the self-executing code of a blockchain to automatically create and implement a transaction, thereby increasing efficiency by avoiding the time, effort, expense, and burdens of negotiating and implementing “paper” contracts.

I am no expert on blockchain technology. My understanding is that a blockchain is essentially a database that keeps records in “blocks”. Each block is timestamped and linked to a previous block and once recorded are designed to be secure. They act as a shared distributed digital ledger (on either a private or public peer-to-peer network) that can record and update transactions chronologically and publicly. It could also be used to trigger transactions automatically, i.e., if some event occurs, then some action is triggered.

Blockchain is the technology underlying cryptocurrencies such as Bitcoin and one of its major attributes is the security of the transaction. As expected, this nascent technology has attracted a lot of attention in many industries seeking to apply blockchain in a variety of contexts including as a means to save time, reduce costs, increase security, and track the ownership of assets.

There is huge potential for the application of this technology including in the fields of finance, manufacturing, and supply chain management. For example, blockchain technology could ensure a chain of custody to guarantee that goods being sold are not counterfeit or that produce is in fact organic. There is also the potential to have machines interact in what might seem like a very contractual manner, e.g., machinery could authorize and pay for its own maintenance, repair or recharging as the need arose. It’s all very new and, like any new application of a developing technology, challenges and uncertainties remain.

Against this background, the term “smart contract” has entered the picture. As Confucius so wisely stated, “The beginning of wisdom is to call things by their proper name.” The term “smart contract” doesn’t help and is the beginning of confusion, not wisdom.

The problem with the term “smart contract” in the context of blockchain technology starts with the word “smart”. To me, being “smart” means applying learning and experience to make good business or personal decisions or choices. For example, I like to think that my students get smart (or at least smarter) about how to structure and manage commercial transactions as a result of taking my course on contract management.

Using blockchain technology to create “smart” contracts, would require a very substantial exercise in putting into code all the nuances of language and the law, including statutes, treaties, conventions and court decisions. There is an old saying among attorneys that “No matter how flat you make the pancake, there are always two sides.” Some people see this as unavoidable ambiguity due to the nature of language. I see it as necessary flexibility given the complex ways in which people need to interact and communicate. And if an ambiguity does present itself or if some scenario occurs that was not anticipated by the parties to a contract, the general intent and objective of the contract can be ascertained by the parties through negotiation (or if need be by the courts or some other dispute resolution mechanism) by applying legal principles and precedent in the context of what is reasonable under the facts and circumstances. Will taking language and the law and translating it into computer code make it easier to address complex issues? Aside from the challenge of doing so, there is the very real risk that “bugs” in the code could yield unintended consequences. I think most would agree that bugs in such a complex coding effort would be inevitable. “Garbage in garbage out” as the saying goes. And what about a scenario where certain information is not provided in the blockchain, i.e. an error of omission? How would code address that?

I have yet to discover a “smart” machine despite the efforts of skilled programmers and code writers. Moreover, despite being called “smart” most machines (e.g. smart TVs, smart cars, smart phones, etc…) are not really “smart” at all. You may be born with a certain level of innate measurable “intelligence”, but you get “smart” as a result of learning, making mistakes, and then adapting your experience to future behavior. Most machines or appliances labeled as “smart” are simply connected to the internet. To me that does not make them smart. Will blockchain technology breathe the ability to think into the code that will create “smart” contracts?

Despite warnings from Bill Gates, Stephen Hawking, and Elon Musk on the dangers of artificial intelligence (“summoning the demon”), we can sleep peacefully secure in the knowledge that for the time at least machines are safely dumb. Perhaps a few machines (smart bombs?) are capable of making adjustments that resemble human decisions, but we are a long way from autonomous machines or technology taking over the world.

Putting the word “contract” after the word “smart” doesn’t help. The definition of a “contract” is deceptively simple, namely: “An agreement between two or more parties creating obligations that are enforceable by law.” Black’s Law Dictionary. This small group of words is simultaneously clear yet complex; obvious but nuanced. In fact, it is simply not possible to completely define the term “contract” in a sentence or two. Any short definition requires further explanation of the underlying principles and facts under which a contract can be created, changed or ended.

So, what is really meant by the term “smart contract”? There is room for both confusion and competing definitions. It would appear that many people use the term “smart contract” to mean essentially blockchain technology that uses code to create and administer a legally enforceable agreement. By the press of a button, could we eliminate the time, treasure and headache of the hard work of negotiating contracts, not to mention putting all those boilerplate scriveners out of work? Seems unlikely. Could some savant make the “smart” contract so “flat” that controversies would never occur? Even if the code operated precisely as intended, yet a party was disappointed, could you envision a scenario whereby the disappointed party would claim not only error, but fraudulent inducement, unjust enrichment, superior undisclosed knowledge, bad faith, violation of public policy, promissory or equitable estoppel and run to the nearest friendly jurisdiction?

The law makes it easy to enter into agreements as long as the elements of offer, acceptance, consideration, indicating a meeting of the minds for some lawful purpose are met. However, there is a huge variety and different types of contracts. In addition, the importance of individual facts and circumstances pertaining to a particular transaction as well as how the parties choose to allocate risks and responsibilities cannot be overstated. That’s not to say that certain simple circumstances could not be coded to be “self-executing”. Certainly, payment could be programmed by code to occur immediately upon delivery and acceptance (after due inspection of course) of goods or services. But, rather than try to translate into code an endless variety of contractual transactions with so many permutations and combinations of outcomes, why not simply combine some simple “black and white” code-driven scenarios (like payment for conforming goods or services) with traditional legal language reflecting the rights, risks, and responsibilities according to each party’s capabilities and risk tolerance.

Moreover, a contract consists of many respective rights and responsibilities as well as the assumption of certain risks. How the parties choose to allocate those risks via the sometimes very complex contractual language used in indemnification clauses, insurance provisions, restrictions on the use of information, limitations of liability or other such language allocating risks and responsibilities between the parties varies. These and other factors may be a limitation to the application of so-called “smart contracts”.

That’s not to say that blockchain technology has no role in facilitating transactions. It can be a real game changer for many industries, including supply chain management. Tracking and recording the quantity, quality, certifications and transfer of goods as well as sharing information about products, together with the greater transparency, scalability and security are among the benefits of using blockchain technology. However, let’s avoid blockchain fever and not let the magic of blockchain trespass into fever and myth.

Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case. For any particular legal problem, seek advice directly from your lawyer or in-house counsel. All dates, contact information and website addresses were current at the time of original publication.

Paul Humbert is president of The Humbert Group, llc and provides consulting services on process improvement and transactional matters. He has co-authored several books for use in contract development and implementation, project management, and process improvement. They include: Playbook for Managing Supply Chain Transactions with Desktop Tools, References and Sample Forms; Contract and Risk Management for Supply Chain Management Professionals; and Model Contract Terms and Conditions with Annotations and Case Summaries. This article originally appeared on the European Financial Review site on December 28, 2015. It has been edited for style and is reprinted by permission of the author.

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What’s a GPO and Why Should You Care?

September 5, 2017

What’s a GPO and Why Should You Care?

A group purchasing organization, or ‘GPO’, is an entity whose fundamental purpose is to allow its members to combine their purchasing power to benefit from volume pricing for goods and services. In addition to reduced prices, buying through a GPO can shorten the procurement cycle, save staff time and help entities avoid the risks associated with a public procurement process.

In Canada, GPOs have become significant players in the health care and education sectors. Beyond these sectors however there appears to be scarce take-up for GPOs and one has to ask why?

Perhaps it’s because of the historical lack of clarity around whether public procurement rules allow public sector entities to use GPOs. The Agreement on Internal Trade (AIT) only addresses GPOs (which it refers to as “buying groups”) in a cursory fashion in the annexes applicable to Crown corporations and MASH sector entities. Beyond the AIT, it’s rare to find references to GPOs in government procurement frameworks, which creates uncertainty as to their legality or acceptability.

The Canada Free Trade Agreement (CFTA) clarifies the rules around using GPOs, making it easier for public sector entities to add GPOs to their menu of sourcing options. The buying group provisions in the CFTA apply to all covered entities; governments, Crown corporations and MASH sector. When purchasing through buying groups, like the AIT, the CFTA requires that covered entities ensure the procurement process is carried out in accordance with the CFTA but the CFTA introduces an exception to this rule where the entity has little or no control over process. Covered entities using GPOs are required to publish a notice of their participation with a GPO at least annually on their tendering website.

With the CFTA explicitly recognizing the acceptability of using buying groups, procurement officers would be remiss not to explore adding GPOs to their menu of sourcing options. Before doing so, however, it’s important to check with legal counsel to ensure the organization’s procurement framework allows the use of GPOs. If the policy framework allows it, before moving ahead it’s equally important to analyze the pros and cons of using a GPO as there is no ‘one size fits all’ for sourcing options in procurement; GPOs may generate significant benefits for some organizations but not for others.

Watch for future articles on this topic, including the next in this series that examines the pros and cons of using GPs in procurement.

Lise Patry, an instructor with NECI, is a lawyer and former business executive with a strong background in technology and more than 20 years of business and legal experience in the public and private sectors. As principal of Patry Law, in addition to general law, she offers virtual counsel services and specialized expertise in contracts, licensing, government procurement and corporate governance. She can be reached in Ottawa at 613-833-7488 or [email protected].

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Clearing Obstacles to Successful Projects: The Importance of Disclosure in Creating Tender Documents

August 21, 2017

North Pacific Roadbuilders Ltd. v Aecom Canada Ltd, 2013 SKQB 148

The duty to provide accurate information to contractors is of paramount importance, as the verdict in this case from Saskatchewan’s Court of Queen’s Bench demonstrates. Failing to do so, whether deliberately or negligently, can cost defendants thousands of dollars and delay important projects. In this case, the plaintiff successfully argued that the defendant failed to provide accurate information, and that relying on the information provided was entirely reasonable for them to have done.

The plaintiff, North Pacific Roadbuilders Ltd. (“North Pacific”), is a company incorporated in British Columbia and owned by Ronald Burek, who had also incorporated a company called Prairie Roadbuilders Ltd. (“Prairie”) in Alberta. North Pacific, which had been created in order to allow Mr. Burek to bid on projects outside of Alberta, relied on Prairie to supply it with roadbuilding machines. North Pacific had done considerable work in British Columbia, but prior to the events detailed in this case had not worked in Saskatchewan. For its first project in the province, North Pacific successfully bid on a road construction tender issued by Cameco Corporation. The bid had been submitted jointly with Tron Power, a northern Saskatchewan contractor, since Cameco had a policy requiring a certain number of northern personnel on any of its contracts and since Tron Power did not have sufficient machinery to perform the contract themselves. Further, roadbuilding was not Tron Power’s area of expertise.

The road North Pacific was supposed to construct was a 57-kilometre ore haul road between Cameco Corporation’s mine and mill at Key Lake and a new mine at McArthur River. The specifications and technical information in the tender documents were prepared by UMA Engineering Ltd. (“UMA”), which was later acquired by the engineering firm AECOM Canada Ltd. Once UMA had become involved in the project, Cameco gave it three reports on the area’s terrain; the reports had been prepared by a firm of engineers (J.D. Mollard and Associates Limited; “Mollard”) specializing in air photogrammetry – that is, making measurements of terrains based on photographs taken from above. The route UMA eventually chose for the road was an approximate of the one the engineering firm had originally chosen.

North Pacific alleged that UMA misrepresented – deliberately and/or negligently – the conditions of the terrain on which the road was supposed to be built, and that these misrepresentations caused them to lose over six thousand dollars. The defendant, UMA, denied that they misrepresented anything, and further denied both that the plaintiff had relied on the soil information in those documents and that the terrain conditions had caused North Pacific’s losses. UMA also alleged, in the alternative, that the plaintiff was contributorily negligent.

In order to determine if the tender documents issued by UMA had accurately represented the terrain, the judge examined the documents alongside the reports from Mollard. The judge also examined the reports UMA had made for Cameco in order for Cameco to get regulatory approval for the project, prior to issuing a request for bids. The judge found, among other facts, that:
• UMA’s reports to Cameco included mentions of boulders in the soil and other soil conditions that were not included in the tender documents;
• UMA’s reports to Cameco also included different terrain mapping information that was not made known to bidders;
• The tender documents did not make it known to the bidders that Mollard’s reports were available for inspection, as Mollard had strongly recommended;
• UMA prepared all of the drawings and technical specifications included in the tender documents;
• UMA had included descriptions of sample soil that stated they contained only sand, despite the sample testholes having actually also contained a certain percentage of rock;
• UMA did not include a description of the Standard Test Procedure it used for testing soil in the tender documents;
• UMA did not note that samples contained cobbles or boulders when they did;

For these and other reasons – including a short visit to the site by Mr. Burek, where he was told that the conditions he saw then would continue throughout the road-construction site – the equipment brought to the site by North Pacific was based on an expectation of primarily sandy soil. Because of delays due to equipment being damaged by boulders, and later needing to demobilize equipment for the winter and then remobilize, Cameco did not accept the road as complete until August 20, 1998; Cameco had intended to use the road as a winter road in December 1997.

A week before the road was accepted as complete, Mr. Burek spoke to a Cameco representative by telephone and let him know that the extra rock North Pacific had encountered – a quantity of which had not been included in the tender documents – had caused delays and damage in the amount of approximately $2 million in additional costs. Mr. Burek was advised to make a written claim to UMA. He did so in a letter dated November 10, 1998; UMA responded and denied the claim.

In order to assess the reasonableness of the claim, along with whether North Pacific had reasonably relied on the information given by UMA in the tender documents, the judge considered testimony from Mr. Burek, from an employee of Prairie (Mr. Burek’s Albertan company), George Mollard (of the engineering firm Mollard), an expert engineer with experience in northern Saskatchewan in both the public and private sectors, UMA’s engineer in charge of the project, UMA’s supervising engineer on the haul road, a junior design engineer employed by UMA, a heavy equipment operator familiar with the region who had been employed by North Pacific for part of the project, a Cameco engineer with expertise in soil mechanics, an engineer employed by neither party but with expertise in preparing bids, and an engineer with expertise in tendering contracts who had worked for the province for many years. Thus the judge examined a considerable amount of evidence in determining the claim.

In order to assess if UMA had negligently misrepresented information to North Pacific, the judge first examined previous case law to determine that UMA did owe a duty of care to bidders to provide accurate information that was not misleading in any way. The judge further determined, based on assessing technical and testimonial evidence, that some – but not all – of the information UMA had provided in the tender documents was in fact misleading, either expressly or by omission. The judge also found that many of Mr. Burek’s assumptions regarding the soil were unreasonable, which is why not all of the information UMA provided was found to be misleading: that is, it would only have been misleading had Mr. Burek’s assumptions based on them been entirely reasonable.

Three further points were made out, thus leading the judge to hold that the misrepresentation was negligent. First, the judge held that, based on evidence, UMA had fallen below the standard of care it owed bidders by failing to disclose the Mollard terrain mapping. Second, the judge found that it was reasonable for the plaintiff to have relied on the information UMA provided that did not disclose an increase in rock further north along the planned route and made no mention of extensive boulders. Third, the judge accepted the evidence that North Pacific incurred costs over and above what it anticipated because of relying on the information. Thus the plaintiff was found to be entitled to damages. While the plaintiff did also allege deliberate misrepresentation, or deceit, the judge did not find this based on evidence.

UMA had claimed that should they be found negligent, the plaintiff should be found to have contributed to that negligence by failing to make its own inquiries into additional geological information. The judge held that North Pacific was not so negligent, in part because none of the bidders had made these types of inquiries, indicating that all assumed they had been supplied with all available terrain information.

North Pacific claimed nearly $5 million in damages. In assessing the plaintiff’s and defendant’s arguments regarding damages, the judge was unable to determine what a correct bid would have been, due to insufficient evidence. However, the judge did note that Mr. Burek had twice – first verbally, to Cameco, and second in writing, to UMA – stated his damages to be $2 million. Thus the judge awarded North Pacific $2 million.

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Is it a good idea to add a “this RFx is non-binding” clause in our RFx template?

August 8, 2017

Is it a good idea to add a “this RFx is non-binding” clause in our RFx template?

by Lise Patry, ba sc (chem eng), llb, icd.d, Patry Law

Owners seeking shelter from the legal risks associated with Contract A are increasingly including a clause reading: “this RFx is non-binding and therefore does not create Contract A” into documents that otherwise have the elements of a binding RFx.

Is this a good idea? It certainly seems to be. At common law, no freestanding duty of fairness is owed to bidders in a non-binding RFx process. Seems like a no brainer – if you want to avoid Contract A, just make the RFx non-binding!

How to design a non-binding RFx

Although this strategy makes sense in many cases, keep in mind that whether an RFx is binding or non-binding is matter of substance and not form. Courts will look at a variety of factors to determine whether the parties intended to enter into a binding contract – Contract A – by the submission of a proposal. A statement that “no Contract A is created,” while important, is just one of the many factors courts examine.

The most comprehensive summary of factors courts consider when determining whether the parties intended the process to be binding is from the trial level decision Tercon Contractors v. BC 2006 BCSC 499, and presented as the following list in Topsail Shipping Company Limited v. Marine Atlantic 2013 NLTD 163 (upheld on appeal):

The irrevocability of bids or proposals submitted;
The formality of the process;
Whether bids or proposals are solicited from selected parties;
Whether the identity of bidders or proponents is confidential;
Whether there is a deadline for the submission of bids or proposals;
Whether a security deposit is required;
Whether bid or proposal selection or evaluation criteria are specified;
Whether there is a right to reject proposals;
Whether there was a statement that this was not a tender call;
Whether the work or service for which proposals are submitted will definitely proceed;
Whether compliance with specifications was a condition of bids or proposals;
Whether there is a duty to award contract ‘B’;
Whether contract ‘B’ had specific conditions not open to negotiation.

Generally, the more formality there is in the process, the more it points to an intention to conduct a binding RFx. As we saw in the case of Topsail, even if many of the above criteria point to a non-binding process, courts will often strain to conclude a process was legally binding in order to hold an owner accountable for unfair conduct. Therefore, to successfully avoid Contract A, owners are advised to design a process that is clearly non-binding having regard to all of the above factors.

Can a “this RFx is Non-Binding” statement, on its own, effectively negate Contract A?

When determining whether an RFx is binding, courts will strive to respect the parties’ intention and will look at the express and implied terms of the RFx in the context of the above list of factors. The insertion of a “this is a non-binding RFx and no Contract A is created” clause, as highlighted above, will help support an argument that the RFx was intended to be non-binding, but is not in itself determinative. As we have seen with privilege and disclaimer clauses, even in the face of clear RFx provisions protecting the owner, courts may refuse to enforce the clauses when to do so would compromise the integrity of the tendering process. Since a non-binding RFx provision is really just another type of disclaimer clause, judges will likely subject them to the same judicial scrutiny and uncertainty, particularly if it’s the only factor pointing to a non-binding process.

Owners seeking to protect themselves by using a ‘non-binding RFx’ clause in an otherwise binding RFx should therefore not derive too much comfort from the protection it can offer as courts may, under certain circumstances, refuse to enforce it.

A good idea but not a perfect solution

Given the above, is it a good idea to include a “this RFx is non-binding” in your standard RFx document to avoid Contract A duties? In our view, yes. Like liability disclaimers and privilege clauses, these provisions could provide strategic leverage in negotiations with disgruntled bidders and may be legally enforceable under certain circumstances. In deciding to use these clauses, however, owners should be aware that, while they may be a good idea, if put to the test in court they may not act as a perfect solution to the Contract A problem.

Rather than simply inserting a ‘non-binding’ clause in your standard RFx template, a more effective approach is to work with your legal and other advisors to create a template that is specifically and thoroughly designed to be non-binding with regard to all of the above factors. You can then decide when and how that instrument is to be used, keeping in mind that in some cases Contract A might be the most efficient way to proceed.

National Education Consulting Inc.

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Canada Free Trade Agreement Implications

August 3, 2017

FREQUENTLY ASKED QUESTIONS

CFTA Implications

by Lise Patry, B.A.Sc., LLB, ICD.D

Will the Canadian Free Trade Agreement that came into effect July 1 impact my ability to engage with GPOs?

Thanks for this interesting question. It will come as good news to many that in fact the CFTA provisions clarify rules around the use of buying groups

Under the AIT, we only see a reference to buying groups in the Annexes applicable to Crown corporations and MASH sector entities. Covered entities wishing to purchase through buying groups must ensure the activities of the buying groups are carried out in a “manner consistent with this Annex”.

In the CFTA, the buying group provisions apply to all covered entities and additional rules have been added. Covered entities purchasing through buying groups:

no longer have to ensure the procurement is consistent with the CFTA if they have little or no control over the procurement process; and
must publish a notice of participation with the buying group at least annually on their tendering website. The notice must direct potential suppliers to the buying group tender notices website if it is different than the tendering website used by the covered entity.

National Education Consulting Inc.

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BC AGLG Flags Management of Vendor Performance

July 27, 2017

The Auditor General for Local Government in BC has published a series of booklets designed to help improve government performance and complement its performance audit reports. Although specifically targeted to local government in BC, these booklets provide a wealth of information, templates and suggestions that can help guide any Canadian public sector organization.

In a January 2016 publication the AGLG highlights vendor performance management as one of three topics to improve achieving value for money in operational procurement. It discusses key elements of a vendor performance management framework, best practices in managing vendor performance and includes a number of templates that can be adapted for use by any organization. The full document can be accessed at https://www.aglg.ca/app/uploads/sites/26/2017/04/Perspectives-T1-T1-PDF.pdf.

This important report complements PSPP 203 – Managing and Evaluating Contract Performance – and augments many of the examples and templates we cover in that course. As an organization that works with public sector right across the country, we see repeated examples of major procurement and contract mishaps related to incomplete or inadequate vendor performance evaluation. Users and business clients become frustrated when the procurement department ‘continues to engage the poor performers’. Yet the procurement department is not provided with enough (or any) information about performance issues to solve this problem. Outstanding vendors see the less than stellar performers continue to be awarded contracts, so they are de-motivated to keep up their own performance standards. All contract performance then slips to the lowest common denominator, further frustrating the users and eroding value for money from government spending. And as we know, terminating a contractor without adequate performance documentation can lead to expensive and protracted lawsuits, unwanted publicity and consumption of valuable resources that could best be directed elsewhere.

If any of this is starting to sound familiar, you or your staff may want to join us online, starting June 26, for a cross-country cohort in <PSPP 203>. (link to 203 reg for june 26 session) Spanning four weeks, this course takes approximately 3 hours of time per week, and delves into many detailed examples, illustrations and best practices related to this important aspect of the procurement and contract management cycle. The analogy that we often use is that if the RFX process is the ‘wedding’, then the contract management process is the ‘marriage’ – that’s where the hard work really takes place! Determining how performance will be measured and managed must be thought about in the planning stage, carefully described in the RFX and resulting contract, and then implemented as contract performance unfolds.

Pump Procurement Prompts Protest – You Be the Judge

July 18, 2017

On March 15, 2015, PWGS issued a solicitation for multiple frigate pumps on behalf of the Department of National Defence, with a closing date of May 15, 2015. Springcrest Inc. submitted its bid by the deadline and was informed in August that the bid was responsive, but that PWGS had decided to cancel the solicitation and re-issue it with modifications.

On May 17, 2016, PWGS again issued a solicitation on behalf of the DND for the pumps, and included a modification requiring that the pumps be shock tested prior to bid submissions. The original deadline was set for June 27, but was eventually amended to September 30, 2016. On May 26, Springcrest submitted an objection to PWGS asking that the modified requirement be removed, since it was impossible for any manufacturer to meet that requirement. Upon the next extension of the deadline, that requirement was not removed.

In July, Springcrest then asked PWGS if the original equipment manufacturer (“OEM”) was also required to provide certification of shock testing on its pumps. Four days later, the PWGS issued an amendment to the solicitation stating that if the OEM offered a motor different from the original pump, then the OEM must provide shock testing certification; if the motor was the same, the OEM did not have to meet this requirement.

On that same day, Springcrest made a formal complaint to the CITT on two issues: (1) the terms of the RFP were biased in favour of the original equipment manufacturer; and (2) the timing of events in the solicitation process made it impossible for suppliers of equivalent products to meet the process’ requirements. Specifically, there was insufficient time given to bidders to obtain a shock testing certification, meaning that only OEM suppliers with prior certification could apply. Springcrest further submitted that standard industry practice is to perform a shock test on the first pump a manufacturer produces, meaning that it would take a manufacturer approximately a year to be in a position to provide this certificate. When Springcrest filed its complaint, there were only 62 days between bid issuance and the deadline.

Springcrest further argued that if OEM suppliers were not required to provide shock testing certification, the terms of the solicitation were discriminatory as they precluded, in effect, non-OEM suppliers from bidding. The requirement, according to Springcrest, was also contrary to industry standard and previous DND practice: generally, shock testing is done after contracts are awarded rather than before a bid deadline date. Springcrest also submitted that no pumps were currently available that could meet the specification, as the manufacturer of the motors used in the original pump assemblies was no longer in business, and that no company currently owns the rights to make them.

PWGS submitted that requiring shock testing certification at bid closing was not discriminatory because it was part of the government’s legitimate operation. Further, the pumps were urgently needed by the DND in order to service the Halifax class frigates of the Royal Canadian Navy, which does not currently have sufficient working spare pumps in order to fill their demand. Thus the certification was required in order to procure pumps without further delay, as allowing bidders to get the certification after would delay the Navy getting the pumps by several months. PWGS also submitted that generally governments do require this certification at bid closing, despite what Springcrest had submitted. PWGS did submit evidence agreeing with Springcrest’s assertion that it could take a company a year to get shock testing certification.

This agreement was governed by the Agreement on Internal Trade (AIT) and by the Canadian International Trade Tribunal Procurement Inquiry Regulations (Regulations). The Tribunal also consulted Article 1007 of NAFTA and Article X of the AGP, which provide that technical specifications should not be drafted in certain prescribed ways that favour a particular supplier or suppliers. Do you think Springcrest’s complaints are valid? If yes, what remedy would you grant, with reference to subsection 30.15(3) of the CITT Act?

Answer

In Springcrest Inc v Department of PWGSC PR-2016-021 the CITT ruled the complaint was valid, recommended that the DPWGS cancel the existing solicitation and issue a new one, and awarded Springcrest its costs.

First, the Tribunal considered whether Springcrest’s assertion that the amended solicitation was discriminatory, and accepted that the DND had legitimate operational requirements leading to them seeking the pumps without further delay, such as that caused by shock testing certification. Moreover, Springcrest’s evidence did not indicate that PWGS deliberately sought to be discriminatory in excluding suppliers of equivalent products, or of favouring the OEM supplier. Rather, the evidence suggests this was inadvertent. Thus the CITT ruled that this ground of complaint was invalid.

The Tribunal next considered Springcrest’s second complaint, which was that the timing of the events in the process made it impossible for non–OEM suppliers to meet the amended bid’s requirements. Both parties agreed that it could take up to a year to manufacture pumps and have them be shock tested. Thus the CITT found that the timing did have the effect of discriminating against non–OEM manufacturers and that PWGS should have allowed for more time, in the interests of fair competition. Accordingly, this ground of complaint was found to be valid.

Springcrest requested a remedy either of amending the solicitation to remove the shock testing certification requirement, or of re-issuing the solicitation without that requirement. Since the bid period had closed by the time of the CITT ruling, Springcrest’s first suggestion for a remedy was not feasible. The CITT thus ruled that PWGS must cancel the existing solicitation and issue a new one which either removes the contested requirement or allow suppliers sufficient time to provide shock testing certificates before bid closing. Springcrest was also awarded its costs.

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COURSE CALENDAR

Dodging Defensible Documents Decried

June 30, 2017

While Canadian procurement is rooted in our unique legal structure, we are among many jurisdictions in the world that ascribe to fair, open and transparent competitive procurement processes. As we know, organizations that follow these guidelines tend to get better value and attract more sophisticated respondents while fully demonstrating the unbiased nature of their contract award decisions. In the public sector this translates into demonstrating effective stewardship of public funds, which in turn bolsters taxpayer confidence.

A recent decision out of the UK highlights the international attention to fairness in procurement. Energysolutions EU Ltd. v Nuclear Decommissioning Authority [2016] EWHC 1988 (TCC) outlines a myriad of fairness complaints lodged by an unsuccessful bidder to a procurement for the decommissioning of 12 different nuclear facilities in the UK. Among other arguments, the claimant Energysolutions (‘ES’) alleged:

Acceptance of a non-compliant bid from Cavendish Fluor Partnership (‘CPF’), the entity who was ultimately awarded the contract;
Manipulation of the evaluation process to ensure CPF success;
Seeking clarification differently with respect to some bidders;
Providing inaccurate or incomplete information to ES during debriefing; and
Deliberately limiting the permanent records of the evaluation process to thwart any potential challengers to the process.

The complaint was not filed within the time limit for suspending the contract award decision, which meant that ES was limited to only a claim for damages. They estimated their losses to be £100 million (roughly CDN$165 million).

As one of the largest contracts ever tendered by the UK government with a procurement process spanning nearly two years, the final decision by the High Court understandably includes a long and complex analysis. For the purposes of this article, we will focus on the final challenge, which related to the government’s insufficient record-keeping.

The evidence presented at the lengthy trial shows that the government was acutely aware that an unsuccessful bidder might initiate a challenge to the contract award decision, and pro-actively and deliberately directed staff to limit or destroy documentation that might be detrimental to its case. This defensive approach included restricting evaluators’ note-taking, possibly destroying contemporaneous notes, and issuing directives to “consider shredding documents” that could damage their position should the matter proceed to litigation.

The credibility of the government became an issue early on in the proceedings, as they failed to produce witnesses to provide evidence on key points, and, in the words of the judge, the witnesses that did appear “suffered from what, on occasion, bordered on an almost obstinate refusal to accept that any mistakes or errors had been made at all.” Pivotal to the Court’s finding of liability against the government was evidence of deliberate attempts to avoid scrutiny by unsuccessful bidders and to subvert the procurement rules that required an open and transparent process.

Damages payable to ES will be assessed in a separate proceeding, but we can assume they will be in the range of several hundreds of millions of dollars – certainly not an effective use of tax dollars.

While this is a particularly egregious example of deliberately sabotaging principles of transparency, it serves as a cautionary tale for all procurement professionals. Had the UK government spent as much time and energy ensuring the process was conducted fairly – rather than redirecting those resources to limiting documentation that could support a potential challenge – the outcome would have likely been entirely different. A well-designed process with skilled and highly trained evaluators, coupled with rigor and discipline throughout the evaluation documentation process, would have provided a complete defence to any potential challenge. Instead, the UK government has taken a huge hit to its credibility, wasted potentially millions of taxpayer dollars and become embroiled in highly contentious and public litigation.

This case serves as a stark reminder of one of the key principles of our Canadian legal system: ‘justice must not only be done, it must be seen to be done.’ As we have seen in other, less egregious cases, it is not enough that the evaluators acted fairly and transparently: the procuring entity must be able to prove such conduct through proper and complete documentation of its process. We often receive questions about how much documentation should be retained through the procurement evaluation process, and our answer is always more rather than less. Retaining the absolute minimum required by legislation and/or policy is not always an effective approach to risk mitigation when it comes to procurement challenges in this litigious era.

National Education Consulting Inc.

Phone: (250) 370-0041 Toll Free: (888) 990-7267

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Senior Executives Must Know Risks of Sole Sourcing

April 24, 2017

Under pressure to produce results, senior executives in government or private-sector organizations are often seduced by the apparent speed of sole-source contracting.

In limited situations, sole-source contracts can indeed provide results. But that attitude can be dangerous, especially with complex deals and multiple parties.

Bond Development Corporation v. Esquimalt (Township) [2006], B.C.J. No. 1101 (B.C. Court of Appeal) is a cautionary tale for senior executives: don’t give up the serious benefits of competitive contracting without clearly understanding the risk/reward trade-off.

Decision to Use Sole Source

In March 2001, Esquimalt wanted to develop a town centre to include a new city hall and public library. It also wanted to encourage the construction of commercial retail premises in the area. Instead of a public tender, the Chief Administrative Officer invited an experienced real estate developer, Bond Development Corporation to develop a proposal. Over an eight-month period, the parties had meetings to settle the design and quality of the building to be constructed, and the compensation to be paid to Bond. To assist in these discussions, Bond hired an architect who provided design drawings, a building contractor who prepared cost estimates, and a structural engineering firm that provided advice.

In October 2001, the two parties signed a formal contract. Esquimalt agreed to pay a maximum of $4.06 million for a town centre building of 20,000 square feet. Esquimalt would pay part of the price in cash, and the balance paid by Bond’s receipt of the title to the land where the old city hall was located (known as the “CRB site”).

Tips for Senior Executives: Don’t confuse meetings with making progress – especially for complex projects. Getting the sole-source contractor in early (the development proposal) is NOT always faster and more efficient than public tendering. It took eight months of discussions before Esquimalt and Bond signed their initial agreement. In contrast, eight months should deliver real progress on most public tenders.

What about the cost? Since Bond was paying the fees for the architect, contractor and engineering consultants, the development process initially seemed to be low cost. It wasn’t. Ultimately, Esquimalt paid a far higher price.

Negotiating Price and Quality

The October 2001 agreement did not settle the terms of price and quality. Clause 3.8 dealt with quality by saying that the town centre would be built “… substantially to the performance standards of the British Columbia Buildings Corporation for government offices … ” To assist the parties, Clause 3.8 identified two local buildings as “illustrations of the quality and finish” that was intended. Since the parties could not agree on the value of the CRB site, they decided to engage separate appraisers to estimate the value of the site, and then to average the two appraisals to fix the value of the property.

The parties spent another seven months trying to reach agreement on extent and quality of the work to be done, and the value of the CRB site. After 15 months of negotiations, the end result was that the parties walked away from the contract.

Tips for Senior Executives: Competitive bidding imposes a discipline on your organization, and provides a familiar process for most players. For example, the tendering method forces your organization to deal with the design and quality of the building to be constructed, and the price to be paid. Normally, your organization will hire its own architect and/or consulting engineer to prepare the detailed plans for the building. Then, the tendering process will distribute these plans to the contracting community, and tender bids will provide you with competitive pricing.

Collapse of Contract Discussions

After the talks broke off with Bond, Esquimalt contacted the architect and the contractor previously hired by Bond, and built the town centre without Bond’s participation (at a higher price than $4.06 million). But this created a serious legal problem. In Bond’s view, Esquimalt had benefitted from the development services that Bond had provided, from the design its architect had provided, and from the cost estimates its contractor had provided. Bond sued to recover the value of those services.

In April 2004, the B.C. Supreme Court found that Bond had done valuable work for Esquimalt, and that the work went beyond the usual level of preparation to make a tender bid or proposal. The trial Judge awarded Bond $222,658 plus court costs, based on the legal doctrine of quantum meruit – essentially “reasonable value for services.”

In January 2006, the B.C. Court of Appeal not only upheld the damage award, but increased it. The Court of Appeal directed the trial Judge to compensate Bond for its efforts during an earlier stage of the “development proposal” process.

Tips for Senior Executives: Sole sourcing means that your organization has given up huge negotiation leverage. In effect, the invited contractor has been given a favoured position – before you reach agreement on quality and price. Even worse, you are dependent upon the invited contractor; you don’t have a backup contractor who is ready and willing to do the job at a fixed price. A competitive bidding process (i.e., tendering or an RFP) maintains your negotiation leverage. If discussions with the preferred bidder break down, then you can go to the second-ranked bidder, and probably get your deal at his price.

Reprinted from The Legal Edge Issue 69, November 2006

Procurement Governance 101 – Mind the Gaps!

April 17, 2017

by Lise Patry, ba sc (chem eng), llb, icd.d, Patry Law

I recently spoke at a legal seminar on “Mastering Public Procurement,” a session organized by lawyers for lawyers. A lot of information was presented on the state of the law in public procurement, along with discussions on new and not-so-new topics of interest.

I took a different approach to the discussion.

Having led the transformation of a public procurement function from an arm’s-length transactional model to a client-focused, integrated model in my previous role as head of a procurement department, my interest has primarily been on setting up structures to manage procurement risk rather than react to procurement case law on a case-by-case basis. Less time spent analyzing case law, more time spent on avoiding becoming case law.

Public-sector buyers in breach of their procurement obligations face a firing squad of attacks. Aggrieved bidders have a candy store of options available to them to challenge the government buyer. Bidders suing federal public-sector buyers can file concurrent claims in provincial court, the Federal Court of Canada, and the Canadian International Trade Tribunal. There are at least four types of claims that can be brought against a federal public-sector buyer.

A bidder can:

seek an interlocutory injunction to stop the process or award of contract in its tracks,
claim remedies for breach of a trade agreement,
seek remedies via a judicial review application, and
claim monetary damages for breach of common-law duties.It doesn’t end there.
A strong procurement governance framework helps avoid these problems before they arise. Every in-house lawyer and procurement officer should understand how their governance framework measures against best practices and relentlessly strive to ensure that it is as strong as it can be.
Apart from being highly visible and public, this negative media attention, legal claims and outsider questions can be expensive and time-consuming to manage and will definitely affect corporate reputation. In addition, and most importantly, bidder claims can delay the purchase of goods and services essential for meeting operational objectives.
Bidder legal claims are often accompanied by lobbying efforts designed to create public pressure on the organization and senior management. A kitchen-sink approach is not uncommon. An aggressive bidder armed with their version of events will approach journalists looking for a story, politicians who want to embarrass the current government, an auditor-general who may want to conduct a review, a board chairperson who may want to take directive action over management, and anyone else who might have an interest in following up on the bidder’s allegations of wrongdoing

Minding the gaps of procurement governance

How can you tell if your organization’s procurement governance framework is strong? Perform a gap analysis. Measure your existing framework against a benchmark. To do this, you need to find a good benchmark or develop your own benchmark.

There are many off-the-shelf procurement governance models that can be used for benchmarking purposes. However, these are usually too detailed to be used as a quick gap analysis and doing so may make your initial gap analysis feel daunting.

The benchmark used for our procurement transformation project was developed after careful study of current procurement governance best practices and supplemented with a group session during which we ultimately defined our own benchmark for the procurement function.

The study considered a number of things, including the Office of the Auditor General of Canada’s 2007 report on Crown corporate governance, the 2005 Bellamy inquiry report, reports of the Office of the Procurement Ombudsman, practices of peer Crown corporations, and various procurement law texts and publications.

In simplified form, this article refines the benchmark created by my team into 10 areas of focus.

Procurement Policy and Procedures

This is your accountability framework. Every organization should be governed by a policy that’s supported by procedures and other administrative documents such as guidelines, instructions or directives. They should define roles, responsibilities, and accountabilities of all involved and include approval thresholds for procurements and contracts.

The accountability framework should also cover ethical considerations and address how conflicts of interest should be managed. Procedures should allow for flexibility in decision making, which normally means allowing for risk-based decisions. Significant risk-based decisions should require senior executive or Board involvement.

The final package of policy and procedures should be organized into a single contracting manual that is published internally and accessible to all.

The benefit: Clarity of roles and responsibilities helps avoid internal conflicts among staff involved in procurement (which is often present among internal clients and procurement officers) and ensures that accountability for decisions is placed on the right people and at the right level.

Templates

Procurement templates are legal documents, but it’s important to keep in mind that they are mostly used by non-lawyers such as procurement staff, internal clients, and vendors. Because non-lawyers are working with these documents, it’s very important that they be user-friendly and consistent.

Draft them in plain English and maximize the use of a fill-in-the-blanks approach. This makes information easier to find, the documents are easier to read, and it minimizes problems associated with non-lawyers drafting legal documents. The documents should have a consistent look and feel and use the same terminology across the suite of templates, to promote clarity and ease of reading.

Consider adopting a tiered set of templates, with one tier comprised of simplified templates to be used for low-value, low-risk purchases. The longer, more comprehensive templates would be used for high-value, high-risk procurements.

The benefit: A strong suite of templates will make procurement easier for everyone, and should lower both transaction costs and procurement risks.

Procurement Planning Process

Ensure that an explicit annual procurement planning process is in place and aligned with the corporate/budget planning cycle.

As part of the annual planning exercise, managers should list what goods and services they will need to procure in the upcoming fiscal year and consult with the procurement team on the estimated amount of time each procurement will take.

The benefit: Planning helps avoid time pressures in the solicitation process, which are often at the root of legal problems

Trained Procurement Staff

All procurement staff should possess a solid understanding of procurement law, but technical knowledge of procurement is not enough. Procurement staff also need to be skilled communicators and negotiators.

As the organization’s custodians of the fundamental aim to be “open, fair and transparent” in all procurements, procurement officers’ goals are often perceived to run counter to the internal client’s goal of meeting operational objectives. This provides fertile ground for internal conflict and mistrust between the two groups. Procurement officers need to be able to effectively manage this perceived conflict and stand their ground with tact – but they should also not be afraid to escalate matters as, appropriate.

Onboarding all new procurement staff is also critical. No matter how technically strong or tactful the procurement officer, if they do not understand the organization’s governance framework and approach to risk, they will not be effective.

The benefit: Strong procurement staff equipped with the right knowledge, technical skills, and ‘soft’ skills promotes the right balance between operational objectives and procurement risks.

Trained Internal Clients

All managers should receive basic training on the principles, processes, procurement timelines, and their own accountabilities when procuring goods and services. Otherwise, there’s a risk that managers will prioritize operational objectives over the proper balancing of procurement risks, which can spell disaster for an organization.

Without a good understanding of procurement, managers (and the employees who report to them) may grow to resent the procurement staff for insisting on following what may be perceived as bureaucratic steps in the procurement process. This type of misalignment between procurement and internal clients can significantly raise the risk of problems in any solicitation.

The benefit: Creating an effective balance between the pursuit of operational objectives and respect for the inherent risks of procurement.

The Three-Party Negotiation Team, A.K.A., the “TNT”

“TNT” stands for the “three-party negotiation team,” which is a team consisting of:

the internal business client,
the procurement officer, and
legal counsel.

During our transformation project, TNT came to be the code word for the cross-functional project team that is assigned to each solicitation. This team is responsible for developing the documents, ensuring that the project plan for the solicitation is adhered to, supporting corporate decision-making, and minimizing procurement risks.

The procedures should contemplate the appointment of a TNT to support procurement initiatives, as well as a protocol for escalating issues that can not be resolved by the team.

The benefit: When the TNT is working well, the procurement is completed on time, and the right balance is struck between meeting operational objectives and managing procurement risks.

Performance Management Program

The procurement team should establish KPIs – Key Performance Indicators. This could take many forms and include client satisfaction metrics, or the number of supplier objections. It depends how a particular procurement department defines success.

Performance results should be measured and reported every year, and annual plans should address deficiencies.

The benefit: A focus on sustained high performance of the entire procurement team ensures that the team is working together toward common goals. This should increase overall team performance and internal client satisfaction, with the side benefit of reducing risk.

Commitment to Continuous Improvement

Procurement is in a constant state of evolution.

This statement gets raised eyebrows, but it’s true for some entities, as shown in the reports of the federal Office of the Procurement Ombudsman every year. There is always something new to keep in mind as you consider your next steps in enhancing procurement governance.

Your procurement governance framework should incorporate an annual review process that considers environmental changes in procurement law, as well as best practices. An annual update ensures that the organization remains aware of any new gaps in its governance framework, and helps pinpoint higher-risk gaps – which in turn helps prioritize ongoing work on the framework. An annual review shouldn’t take long and will pay big dividends in the long run.

The benefit: A formal commitment to continuous improvement ensures that the governance framework is current, and that resources are being invested to address the highest-priority gaps.

Change Management Procedures

Maintaining a performance management program and a commitment to continuous improvement will require an adaptability to changes in the governance framework.

Effectively implementing a change in your governance framework is not to be taken lightly. If a change affects people beyond the procurement team, involve those people in your discussions early, to avoid the risk of resistance and wasted efforts.

Changes should be planned over a period of time, rather than made all at once or in an ad hoc, unpredictable manner. Establish a regular schedule for changes, such as the first week of each month or quarter. Communicate the schedule of changes widely in the appropriate channels for your organization.

Document the process so that it is done consistently and internal stakeholders know what to expect. For important changes, train internal clients in one-on-one, group or video training modules.

The benefit: An effective change management procedure ensures buy-in, enhances compliance and supports the goal of minimizing procurement risks.

Executive Leader Accountable for Procurement

The manager cares about meeting corporate objectives, and the procurement officer cares about following the process and managing risk. These goals sometimes clash and lead to internal conflict and escalation – of stress levels and, ultimately, issues brought to the senior management table.

If there isn’t an executive at the senior management table who is accountable for managing procurement risk, it is likely that operational interests will play a greater role in decision-making, which could increase procurement risks and problems.

The benefit: Having a balance between operational and procurement considerations at the senior management table is critical to ensure that procurement risks are managed appropriately and effectively.

The above areas of focus for a high-level gap analysis are generic enough to be used by any organization. Once the analysis is done, major gaps in the procurement governance framework can be identified, and the bigger areas of risk should be apparent. This increased understanding of the critical gaps should pave the way toward a stronger procurement governance framework and decrease risks of bidder claims and all that entails.

Lise Patry is a lawyer and former business executive with a strong background in technology and more than 20 years of business and legal experience in the public and private sectors. As principal of Patry Law, in addition to general law, she offers virtual counsel services and specialized expertise in contracts, licensing, government procurement and corporate governance. She can be reached in Ottawa at (613) 730-5959 or [email protected]. This article originally appeared May 9, 2016 at patrylaw.ca in Government Procurement/Bidding and Tendering. It has been edited for style and is used by permission.

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