Ethics in Government Procurement

Presented by Paul Emanuelli Counsel Province of Ontario

Disclaimer
(This is Not Official Policy)

This discussion (a) does not reflect the views of any past or present employers or clients and (b) is for general information and reference purposes only. These materials include a consolidation of independently written original works including content excerpted from the forthcoming book entitled Government Procurement to be published in 2005 by LexisNexis Butterworths. Comments can be directed to paul.emanuelli@sympatico.ca
Paul Emanuelli, 2000-2005. All rights reserved.

Paul Emanuelli

Ethics in Government Procurement

Introduction The Ethics Revolution Public Policy Options Ethics and Current Practices The Clean Tender Doctrine Governing Principles in Conflict of Interest Six Conflict of Interest Case Studies

Paul Emanuelli

Introduction
(Ethics Scandal Rocks Prime Ministers Office)

An election was imminent. The opposition was on the verge of seizing key seats in Ontario and Quebec. The government was under threat of losing its grip on power. It was in desperate need of campaign funds. A private company made a generous $360 000.00 contribution to the campaign war chest that helped bankroll the governments successful re-election bid. After the election that company was awarded a lucrative government construction contract.

Paul Emanuelli

Introduction
(Ethics Scandal Rocks Prime Ministers Office)

A scandal erupted when news of the deal became public. With the details appearing in the opposition-friendly papers, the Prime Minister was in damage control mode. He struck a royal commission to investigate the matter. But it was too late. The damage was done. The deal fell through and the government was forced to resign.

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Introduction
(The More Things Change)

The government contract in question was the railway construction deal awarded to the Canadian Pacific Railway Company. The year was 1873. The Prime Minister was John A. Macdonald.
As the Pacific Scandal illustrates, government procurement controversies can bring down the best of them. Even the Fathers of Confederation were not immune.
see P.B. Waite, Pacific Scandal, The Canadian Encyclopedia, Year 2000 Edition (1999)

Paul Emanuelli

Introduction
(Good Government: A Fundamental Principle)

The paramount importance of good government is firmly entrenched in our political fabric. Reactions to spending improprieties run as deep in our political psyche as the memories run long. Public officials who run on the wrong side of these rules do so at their peril. Today, computer and advertising contracts may have replaced railway construction deals as the subject of controversy, but accountability for proper government spending remains a matter of national importance.

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The Ethics Revolution

(Business Scandals and Public Inquiries)

Today its no coincidence that major trade treaties like the Agreement on Government Procurement, the North American Free Trade Agreement and the Agreement on Internal Trade all have government procurement chapters aimed at promoting open, ethical and transparent practices and that statutes like the U.S. Sarbanes-Oxley Act put 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 to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. The long title reflects the big problem that shook investor confidence as the technology boom of the nineties burst into the business scandals of the new millennium. The scope of Sarbanes-Oxley is broad. Its implications are as far reaching as they are complex.

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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 ripple effects 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 in regulation and includes a broad range of rules regarding corporate oversight boards, auditor independence, internal corporate governance, public disclosure responsibilities and conflict of interest. As U.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 realization that many of the gatekeepers responsible for preventing fraud had fallen down on the job. Congress recognized that dramatic steps were needed 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 confidence by promoting the disclosure of more accurate information, the Sarbanes-Oxley regime draws significant attention to how companies report their 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 is staring them and the rest of the world in the face.

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The Ethics Revolution

(More Accurate Revenue Reporting)

These transparency requirements have translated into stricter rules for reporting revenues, shining a light on any dissonance between what companies are reporting and what they are actually doing. To better ensure that they are accurately reflecting revenues, companies are required to scrutinize their contractual commitments with a high degree of rigour to ensure their reported revenues reflect reality.
Failing to provide accurate information in this regard can bring about significant consequences.

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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 ignoring criminal misbehaviour, a jury in Manhattan declared former WorldCom CEO Bernie Ebbers guilty Tuesday of being part of a huge accounting fraud at the company now known as MCI. The guilty verdicts on all nine counts were the biggest victory to date for federal prosecutors since they began cracking down on high-level white-collar crime after the collapse of Enron in 2001. Ebbers will likely get up to 25 years in prison under federal sentencing guidelines, which could effectively turn the penalty into 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-office

occupants: that corporate crime may finally equate to lengthy prison terms. If shareholders lawsuits arent enough to scare execs straight, they also face a raft of new regulations. Under the SarbanesOxley law, chief executives must now personally sign-off on financial statements. Auditors are poking around with greater impunity, and public companies must certify that theyre documenting and testing internal accounting procedures, resulting in an unprecedented level of scrutiny for 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 Bernard Ebbers to 25 years in prison closes the legal book on the network industry's most notorious and damaging case of accounting fraud, pending the inevitable appeals. One law professor says recent moves by prosecutors to go after corporate criminals, as well as legislation such as Sarbanes-Oxley, designed to keep public companies' accounting books 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

Cases involving Enron, WorldCom and Tyco have increased awareness of corporate governance and business ethics among companies, says David Balderson, director of Corporate Learning Services, a division of New York University's School of Continuing and Professional Studies. Balderson's group developed MCI's ethics training in 2003, which all employees are required to complete. Since then, Balderson says the number 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

(Government Procurement Goes Prime Time) Meanwhile, as reflected in a recent purchasing b2b cover story entitled Eye of the Storm: Targeting Ethics in Procurement, in Canada government procurement is also receiving increasing scrutiny:
Events are replayed in reverse slow motion under the white-hot glare of media scrutiny as the public spectacle of second-guessing and finger pointing begins. Its enough to make the professionals who operate Canadas high-stakes multi-billion dollar government procurement industry feel a bit like open targets on the shooting range of a new reality show. In the wake of the federal governments sponsorship scandal and the City of Torontos computer leasing inquiry, the new reality is that the once sleepy subject of government procurement has gone front-page, prime-time and mainstream.
See Paul Emanuellis cover story online at: http://www.bizlink.com/purchasingfiles/issue-5-4.html

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The Ethics Revolution

(Sponsorship Scandal A Big Hit in Quebec) In Quebec, the sponsorship scandal gave new meaning to studies in fiscal federalism:

Inquiry drives TV ratings, newspaper sales

The inquiry has become an unprecedented TV hitRDI, the provinces French-language equivalent to CBC Newsworld, has seen its ratings soar from 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 to the 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 estimates predicated that the Toronto Computer Leasing Inquiry would involve just one filing cabinet of documents 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 and the Sponsorship Scandal may have received the most media attention, they are far from the only recent government procurement stories to make the news. The following survey of articles provides a sampling of other recent stories that illustrate the increasing scrutiny placed on government procurement by the media.

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The Ethics Revolution

(Procurement Rules Too Complex for Taxman)

Taxman breaking own rules: Canada Revenue Agency found to be ignoring purchasing regs Procurement rulesare seen by many in the
organization as unduly cumbersome and may frequently be overlookedManagers complained the rules are complex anddifficult 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, the Canadian Union of Postal Workers called on Canada Post to deal with its procurement irregularities. As purchasing b2b reported:
The auditfound Canada Post failed to comply with policy on 355 out of 599 transactionsIn one case, the winning supplier submitted its bid two 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 nefarious conduct, basis for $100,000 damages
As reported in Lawyers Weekly on August 20, 2004, the BC government was ordered to pay $100,000 in damages after engaging in post-close bid shopping. In its July 2004 judgment in Stanco Projects Ltd. v. British Columbia, the BC Supreme Court stated:
A tendering authority ought not to be entitled to contemporaneously purport to adhere to the tendering model and enjoy the benefits flowing from it and, once the bids have been revealed and are under consideration, to unilaterally implement the contrasting model of free bargaining.

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The Ethics Revolution

(City Pays for Empty Rooms)

City paid $850,000 for empty rooms

As reported in the Toronto Star, between 2001 and 2003, the City of Toronto spent $850,000 on empty motel rooms because it failed to accurately predict user demand by homeless persons.
Toronto Star, November 16, 2004

Ugly tidbits from auditors report

The Star further reported that an additional $270,000 was wasted due to duplicate bookings.
Toronto Star, November 17, 2004

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The Ethics Revolution

(A Philadelphia Story)

High-Ranking Philly Official Convicted

Philadelphias former treasurer [was] convicted in aprobe targeting what U.S. Attorney Patrick Meehancalled a culture of corruption in Philadelphia city government.
Associated Press, May 10, 2005

Judge Suggests New Corruption, Ethics Law

District Judge Michael Baylson saidthe trial raised difficult questions about the policing of government officialsCity and state laws limit the gifts and financial benefits public employees may receive, but.there is really no enforcement of those laws whatsoever.
Associated Press, May 10, 2005
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The Ethics Revolution

(Alternative Perspectives in Ethics)

Convicted ex-Mounty lecturing on ethics: Admitted fraud, now instructs civil service on procurement
A former RCMP contracts manager who pleaded guilty to fraud in 2002 is now teaching ethics tobureaucrats at the Canada School of Public ServiceGilles Paquet, a professorat the University of Ottawas political studies department said the use of [the former RCMP head] as a[n] instructor was an unforgivable error in judgmentClearly, theyre not screening instructors carefully.It seems to be a case of the left hand not knowing what the right is doing.
Toronto Star, June 22, 2004

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The Ethics Revolution

(Procurement Law a Growth Area)

Procurement lawyers: experiencing extraordinary growth

As reported in Lawyers Weekly, all this attention has increased the demand for legal services:
Today, procurement law is one of the fastest-growing practices in the country and many firms have beefed up their roster of lawyers in order to tackle the ever-increasing workload arising from tenders, bids and ensuing litigation.
Lawyers Weekly, March 25, 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 Mails Report on Business:
Welcome to a phenomenon litigators are calling the rise of the "bitter bidder" -- suppliers who are exercising their legal right to a fair and transparent tendering process. It's all adding up to brisk business for litigators 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 shadow on decades of work performed by the procurement professionals who have built a top tier public procurement system in Canada, there is an increasing dissonance between that hard earned reputation and public perceptions. This credibility gap needs to be addressed and confidence in public sector spending reinforced. Public institutions have a broad range of options for bolstering confidence in public sector procurement.

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Policy Options
(Six Steps to Empowered Procurement)

To build the winning procurement conditions, public institutions should consider the following six measures:
1.

2.
3. 4. 5. 6.

create common centralized rules and practices; define clear roles and responsibilities within the organization; establish independent external oversight of procurement activities; promote values-based procurement and internal checks and balances; empower innovation within the organization; and 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 and maintain 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 proactive leadership at the senior levels of a public institution. As Jean Au Yeung, Assistant Director of Hong Kongs Independent Commission Against Corruption states governments determination and support is the first and foremost factor in the successful fight against corruption. In Hong Kong that determination was reflected by legislative action that placed a statutory duty on the Commission to proactively examine government departments and weed out any procedures that could be conducive to corrupt practices.

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Policy Options
(Proactive Leadership and Transparency) The October 2004 decision of the Federal Court of Canada in Aventis Pasteur Ltd. v. Canada (Attorney General), which dealt with a public access request for the details of a $50 million federal government contract for influenza virus vaccines, illustrates the increasing expectation of transparent government procurement practices:
The current so called "Qubec Sponsorship Scandal" underlines the importance that government contracts should be made public and transparent unless it is contrary to the public interestIf Public Works determines that some of the terms should remain confidential, it should also clearly set out how the public benefit is fostered by maintaining confidentiality.

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Policy Options
(Common Centralized Rules and Practices)

A procurement organization should create consistency and remove duplication through the implementation of common centralized governing rules and practices. Striking the delicate balance between centralization and decentralization requires strategic planning and oversight. While total decentralization can lead to significant inefficiency, duplication, inconsistency and waste, too much centralization can lead to decisionmaking gridlock, artificial standardization and the erosion of independent decision-making by subject matter experts.

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Policy Options
(Common Centralized Rules and Practices) The key to striking the right balance is recognizing the functions that are most conducive to standardization and centralization and building a flexible common operating framework that preserves decentralized case-specific decisionmaking. Public institutions should implement the appropriate rules and tools to support front line staff, subject matter experts and government departments in the tactical exercise of case-specific decision-making.

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Policy Options
(Clear Roles Definition)

A procurement organization should promote accountability and clarity by establishing a clear and comprehensive set of roles and responsibilities within the institution including a clear division of roles between: (i) elected officials; (ii) senior management officials responsible for establishing and enforcing compliance with procurement rules; and (iii) frontline procurement professionals responsible for specific procurement processes.

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Policy Options
(Clear Roles Definition)

The Toronto Computer Leasing Inquiry released a nine-hundred page multi-volume background paper (the Toronto Report) that focused on procurement practices, conflict of interest, lobbying and municipal governance. One of its key recommendations was the need to clarify appropriate delegation rules for government procurement staff and hands-off policies for elected officials.

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Policy Options
(Clear Roles Definition)

The Toronto Report noted that at City Hall the dividing line is blurred from both the political and administrative ends of the spectrum and emphasised the need to establish an appropriate balance of roles and responsibilities between governors and managers that is accepted in theory and 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 establish transparent practices which include: (i) external oversight mechanisms that provide checks-andbalances to guard against inefficiencies and abuses; and (ii) clear rules aimed at protecting the integrity of the procurement process by addressing issues such as conflict of interest, unfair advantage and the lobbying of public officials to influence contract award decisions.

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Policy Options
(Independent External Oversight)

While lobbying activities are recognized as a legitimate and crucial component of the democratic process, such activities tend to undermine public confidence when they are aimed at influencing the award of government contracts. This has given rise to calls for the implementation of independent oversight functions beyond those traditionally fulfilled by courts and tribunals.

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Policy Options
(Independent External Oversight Special Offices)

As the U.S. Center for Democracy and Governance states in its Handbook for Fighting Corruption, independent government offices such as inspector generals, ombudsmen and anticorruption agencies improve accountability by overseeing government operations. In general, they look into allegations of mismanagement and review administrative systems to ensure they adhere 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.

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Policy Options
(Independent External Oversight Legislative 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 provides a powerful check on executive authority, enhancing accountability where a dominant executive branch might otherwise 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.

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Policy Options
(Independent External Oversight Auditors Report) Independent oversight is critical to keeping executive power in check. By way of example, in its November 2003 report, the Auditor General of Canada found that from 1997 to August 2001:
the federal government ran the Sponsorship Program in a way that showed 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 results it achieved and was misinformed as to how the program was being managed.

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Policy Options
(Independent External Oversight Auditors Report)

Those responsible for managing the program broke the government's own rules in the way they selected communications agencies and awarded contracts to them. Partnership arrangements between government entities are not unusual in programs of mutual benefit. However, some sponsorship funds were transferred to Crown corporations using unusual methods that appear designed to provide significant commissions to communications agencies, while hiding the source of funds and the true nature of the transactions.

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Policy Options
(Independent External Oversight Auditors Report)

Documentation was very poor and there was little evidence of analysis to support the expenditure of more than $250 million. Over $100 million of that was paid to communications agencies as production fees and commissions.
Oversight mechanisms and essential controls at Public Works and Government Services Canada failed to detect, prevent, or report violations.
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.

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Policy Options
(Independent External Oversight Uncovering Abuses)

The Auditor Generals findings, coupled with a Parliamentary committee investigation, led to the Commission of Inquiry into the Sponsorship Program and Advertising Activities.* This is an example of how independent oversight and checksand-balances can be effectively applied to government procurement. In this instance, the independent oversight was able to detect and deal with improprieties.
*a.k.a. The Gomery Inquiry, see http://www.gomery.ca/en/index.asp

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Policy Options
(Independent External Oversight Broader Implementation)

Making the operations of all public institutions more transparent and subject to similar independent oversight can serve as a deterrent against procurement irregularities, can help to detect those irregularities when they are present and can help bolster public confidence in government procurement practices.

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

A procurement organization should encourage values-based procurement by promoting a culture of ethics within the institution which includes: (i) mechanisms for internal regulation, reporting and self-governance; and (ii) measures to protect the security of tenure of employees responsible for enforcing internal governance rules.

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

The Toronto Report stressed the importance of creating a culture of ethics within public institutions, noting that it is widely recognized that public officials have a greater responsibility to uphold ethical standards to protect the public interest.
Background Papers Prepared for the Inquiry by the Executive Research Group http://www.torontoinquiry.ca/gg/index.html

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

A clear code of conduct is a key component for promoting a culture of ethics within a procurement organization. In its Practical Guide to Corruption Prevention, Australias New South Wales Independent Commission Against Corruption recognizes that:
a code of conduct is an important management tool which can positively shape the culture of an organization. Many organizations have found that adopting a clearly defined approach to ethical issues improves the organizations reputation, helps to develop pride among staff and is good for business.

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

However, adequate protections need to be put in place to empower these policies. While the guide notes that internal reporting systems account for a significant proportion of detected improprieties, it cautions that corruption in the public sector is significantly underreported. There are a number of reasons for this, one of which is a widespread fear of reprisals among public sector employees.* Public institutions need to foster a culture that encourages staff to uphold values-based procurement without such fear of reprisal.
New South Wales Independent Commission Against Corruption, Practical Guide to Corruption Prevention (October 1997), Module 7 Internal Reporting Systems p.1.

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Policy Options
(Empowering Innovation)

A procurement organization should empower a culture of innovation and improvement by ensuring: (i) adequate staffing and resources to properly manage all phases of the procurement cycle; (ii) adequate training to all levels of procurement staff; and (iii) sufficient discretion to enable procurement staff to exercise independent judgement in decision-making.

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Policy Options
(Empowering Innovation Multi-Billion Dollar Undertaking)

government spending remains at historically high levels - roughly $175 billion a year. How well this money is spent is clearly of great interest to the taxpayers, who bear the cost, and to the public at large, on whose behalf the spending takes place.
Improving Performance in Government Spending 2000 Report of the Auditor General of Canada

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Policy Options
(Empowering Innovation In the Public Interest)

public money is money held in trust for the benefit of all Canadians. As a consequence, the government has an obligation to ensure that the money is managed prudently in support of the general public interest. It also means that the government must seek to obtain maximum value 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 Innovation Calls for Proper Training)

Collectively, public institutions in Canada spend billions of dollars annually. It should be a self-evident proposition that those responsible 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.

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Policy Options
(Empowering Innovation Calls for Proper Staffing)

Another critical component of prudent procurement is the proper allocation of resources and staff for all phases of the procurement process. This calls for the allocation of proper resources to the planning, competition, contract award and contract management phases of the procurement cycle.

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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.

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Policy Options
(Creating a Broad Range of Procurement Tools)

Canadian public sector purchasers tend to use the formal legally binding tendering process as a preferred method for procuring a wide range of goods 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.

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Policy Options
(Creating a Broad Range of Procurement Tools)

Purchasers should always assess the suitability of their procurement format to the particular situation. Determining the appropriate method of 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.

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Policy Options
(Creating a Broad Range of Procurement Tools)

As the Toronto Good Government Report states:

The essential theme here is that no single purchasing method suits all situations. 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 purchases over minimum thresholds will not be achieving value for money. Likewise, a government that relies almost exclusively on legitimate but more 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.

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Policy Options
(Creating a Broad Range of Procurement Tools)

Empowered procurement calls for a clear understanding of the benefits and legal obligations that apply to different procurement formats. Because of the inherent legal risks and restrictions created in a formal legally binding bidding process, purchasers should make informed decisions to assess whether that approach best meets their needs in the specific situation or whether other open competitive formats are better suited to their specific objectives. Some of these different procurement formats are discussed in the subsequent slides dealing with Ethics and Current Practices.
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Ethics and Current Practices

(Current Practices Public Policy Principles)

Many ethical procurement norms have already been entrenched in existing government procurement practices. For example, many public institutions already adhere to the following policy principles when conducting their procurement processes:
o o

Transparency Value-for-money Trade liberalization

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Ethics and Current Practices

(Procurement Treaties)

The following trade treaties reflect these principles by calling for open, competitive and nondiscriminatory government procurement procedures:

The international Agreement on Government Procurement (AGP) The continental North American Free Trade Agreement (NAFTA) The domestic Agreement on Internal Trade (AIT)

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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 government procurement, 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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Ethics and Current Practices

(UN Model Procurement Law)

In 1994, the United Nations Commission on International Trade Law adopted the Model Law on Procurement of Goods, Construction and Services (the UN Model Procurement Law).
The UN Model Procurement Law, which is intended to enhance public confidence in government procurement by encouraging the international adoption of open and transparent procurement practices, recognizes a number of legitimate government procurement formats.
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Ethics and Current Practices

(Default Formats ITT for Goods)

The UN Model Procurement Law recognizes the Invitation to Tender as the appropriate default format for the procurement of goods and construction and the RFP as the appropriate default format for the procurement of services.

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Ethics and Current Practices

(Three Default RFP Formats) The UN Model Procurement Law recognizes three equally acceptable RFP formats:
1.

Selection Without Negotiation: the Invitation to Tender style RFP format commonly used in the Canadian public sector. Selection With Simultaneous Negotiations: allows the purchaser to negotiate with all bidders.

2.

3.

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

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Ethics and Current Practices

(Recognized Alternative Formats)
The UN Model Procurement Law also recognizes a number of legitimate alternative methods of procurement that can be used in appropriate circumstances:
o o o o o

o
o

Supplier Prequalification Alternative RFP Two-Staged Tender Calls Competitive Negotiations (BAFO Process) Invitational Tendering Low-Value Request for Quotation 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 a number of implied legal obligations that do not typically apply to traditional negotiations. These additional duties generally arise when a bidder submits a compliant tender in response to an irrevocable tender call. When this happens, the parties are said to create Contract A, the notional pre-execution contract first recognized by the Supreme Court of Canada in 1981 in Ontario v. Ron Engineering (Ron Engineering).

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Ethics and Current Practices

(Duty of Fairness)

To maintain the integrity of the bidding process the courts have also relied on the doctrine of fairness as a basis for applying implied duties to the purchaser:
...in the years since Ron Engineering, the Supreme Courts model has been buttressed by a growing expectation of probity in the pre-award phase of the tendering process. The underlying principle has been variously expressed as a standard of good faith, or a duty of fairness or reasonableness...in whatever form it is cast, the owner is subject to some commonly acknowledged constraints.
P. Devonshire, Osgoode Hall Law Journal, 1998

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Ethics and Current Practices

(Law of Tendering: Five General Duties)

The tendering law duty of fairness tends to divide into five general implied duties:
the duty to provide proper disclosure*; the duty to reject unqualified tenders; the duty to conduct a fair evaluation process; the duty to award to the winning bidder; and the duty to award the contract as tendered.
*Can also apply outside of Contract A as a tort duty (e.g. negligent misrepresentation)

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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 formal tendering 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 duty of care to direct commercial negotiations, stating that the scope of indeterminate liability remains a significant concern underlying any analysis of whether to extend the sphere of recovery for economic loss.* In other words, the Supreme Court was reluctant to expand the scope of potential legal liabilities in situations where 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 compelling ancillary policy reasons for not applying a duty of 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 decision in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., the creation of Contract A depends upon whether the parties intended to initiate contractual relations by the submission of a bid in response to the invitation to tender. The Supreme Court reiterated this conclusion in Martel where it held that whether the tendering process creates a preliminary contract is dependent upon the terms and conditions 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 to determine whether a purchaser intended to create Contract 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

(The RFP Drift into the Contract A Paradigm)

The case law shows that in some industries RFPs were originally an alternative to a binding Invitation to Tender Contract A bidding process. They contemplated the submission of unique proposals and the use of direct negotiations to formalize a contract with a selected proponent. Over time many RFPs have become increasingly formal, prescriptive and structured and have drifted into the Contract A paradigm.

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Ethics and Current Practices

(Selecting the Appropriate RFP Format Policy 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 A indicators. The negotiated RFP formats recognized in the UN Model Procurement Law are compatible with such an approach. Ultimately, it is up to purchasing institutions to utilize the appropriate RFP format as a matter of procurement policy and practice.

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Ethics and Current Practices

(Transparency in Selection of Procurement Paradigm)

The selection of a procurement format should be a conscious, informed and transparent decision that clearly indicates to bidders whether the particular process will be conducted under the binding tendering paradigm or a negotiated paradigm. Once a paradigm is selected, mid-process paradigm shifts between the binding tendering model and the negotiated model should generally be avoided.

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The Clean Tender Doctrine

(Non-Compliant Tenders Are Out of Play)

Over the last quarter century, the clean tender doctrine has been one of the most significant legal factors impacting government procurement. The clean tender doctrine is shorthand for the legal principle that restricts the field of play in formal binding tendering competitions to compliant bidders. Non-compliant tenders are seen to be out of bounds and ineligible for contract award. Purchasers do not typically owe those noncompliant bidders any tendering law duties and cannot typically compel those non-compliant bidders 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 effect on the rights of both purchasers and bidders, manifesting itself in the following ways:
Non-Compliance as Bidder Sword: Unsuccessful bidders launching successful claims against purchasers on the grounds that the contract was improperly awarded to a non-compliant competing bidder. Non-Compliance as Purchaser Shield: Defendant purchasers successfully shifting the issue by showing that the plaintiff bidders tender was non-compliant and the bidder was therefore ineligible for tendering law remedies. Non-Compliance as Bidder Shield: Defendant bidders successfully relying on their own non-compliance, asserting that they cannot be liable for failing to honour a tender that was never legally capable of acceptance.
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The Clean Tender Doctrine

(Counter-Assertions of Non-Compliance)

The March 2005 decision of the Alberta Court of Appeal in Double N Earthmovers v. Edmonton (City) offers a recent case study. In this case the plaintiff bidder and defendant purchaser both invoked the clean tender doctrine in their respective appeal and cross-appeal. The case involved a municipal tender call for heavy refuse moving equipment. The plaintiff bidder claimed that the contract was awarded to a non-compliant competitor.

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The Clean Tender Doctrine

(Plaintiff Establishes its Compliance)

In its defence, the purchaser asserted that the plaintiff bidders tender was non-compliant. The purchaser argued that the bidders noncompliance took it out of play and made it ineligible for a legal remedy. However, the Court found that the plaintiff bidder had submitted a compliant tender. Having established its own compliance, the bidder successfully circumvented the purchasers initial line of defence.

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The Clean Tender Doctrine

(No Duty to Look Behind Bidder Assurances)

However, the Court ultimately rejected the plaintiff bidders claim. While the evidence showed that the successful bidders tender contained inaccuracies, on its face that tender was compliant. The Court found that the purchaser was under no duty to look behind the successful bidders assurances when assessing the tender. The purchaser was therefore not liable to competing bidders for any latent noncompliance discovered after contract award.

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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 Government Services 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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The Clean Tender Doctrine

(Tender Comes Unwired on a Clerical Error)

The government rejected the Bell Mobility bid because of a discrepancy between the service 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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The Clean Tender Doctrine

(No Post-Close Compliance Cures)

However, the Tribunal held that the tender was non-compliant and that the government was not permitted to accept post-close rectifications to cure that non-compliance:
In IBM, the Tribunal stated that "procuring entities must evaluate bidders' conformance with mandatory requirements thoroughly and strictlythe Tribunal is of the view that the circumstances of this case do not warrant any departure from the rule set down in IBM. The Tribunal is not convinced that this is a matter of form over substance. The changes to Bell's bid, had they been allowed, would have been of a substantive nature and, had PWGSC accepted them as part of the bid, this would have been contrary to the wording of the RFP and a violation of the AIT.

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The Clean Tender Doctrine

(Future Considerations)

The application of the clean tender doctrine proved fatal to Bells bid and served to support the governments decision to reject the tender. As this case illustrates, seemingly minor errors can have a major impact on the outcome of contract awards.

Since lawsuits can turn on the application of the clean tender doctrine, purchasers conducting a formal binding bidding process should ensure that their compliance standards are clear, transparent and properly evaluated.

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Governing Principles for Conflict of Interest

To maintain the integrity of the tendering process, purchasers should avoid any conflict of interest or unfair advantage. The following eight governing principles were distilled from a number of tendering cases that considered these issues:

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Governing Principles for Conflict of Interest

1. In order to preserve the integrity of the bidding process, all parties should avoid any conflict of interest or unfair advantage. 2. Purchasers should ensure that no bidder has a conflict of interest or unfair advantage during a tendering process. Purchasers may be compelled to disqualify a bidder in order to preserve the integrity of a bidding process.

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Governing Principles for Conflict of Interest

3. To better ensure that a decision to disqualify is transparent and defensible, purchasers should clearly define the circumstances that they would consider to be an unfair advantage or conflict of interest. 4. A conflict of interest or unfair advantage can flow from the purchasers conduct, or from the bidders conduct, or both.

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Governing Principles for Conflict of Interest

5. Unfair advantage includes instances where a bidder has an inside advantage on account of access to specific information or decision-makers that other bidders do not have access to. 6. Purchasers should ensure that their evaluation decisions are made free from bias.

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Governing Principles for Conflict of Interest

7. Conflict of interest can arise within the purchasing institution where a decision makers ability to exercise impartial discretion in the public interest is compromised by that decision makers personal interests.
8. Conflict of interest can arise on the part of the bidder in situations that compromise the bidders ability to fairly engage in a tendering process or to properly fulfill its duties if it is awarded a contract.

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Six Conflict of Interest Case Studies

The following cases provide some examples of the above noted principles:
1. 2. 3. 4. 5. 6.

Wind Power Inc. v. Saskatchewan Power Corp New Brunswick v. Wheeler Coughlin & Mayo v. Victoria (City) Re Complaint Filed by Dollco Printing Re Complaint Filed by Consortium Genivar-M3E-Universite DOttawa Re Complaint Filed by J. Molson & Associates

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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 the Saskatchewan Court of Appeal:
The duty 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.

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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 of Moncton should be removed from office on account of a conflict of interest. The Court noted that there had been no attempt to conceal the conflict and that the Mayor had proceeded on the advice from the City Solicitor and the New Brunswick Department of Justice and that counsel before us stated that the Mayor signed some contracts both as Mayor of the city and as an officer of the contracting company.
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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)

(1893-08-26) BCSC

In its August 1893 decision in Coughlin & Mayo v. Victoria (City), the British Columbia Supreme Court found that an alderman was in a conflict of interest because he owned an interest in a company that was involved in the Citys bidding process and cast the deciding vote to award the contract to that company.
The Court found that the alderman was in an ongoing conflict of interest, noting that his personal interest could undermine his ability to properly discharge his public duties in the event that a contract dispute arose between the City and the successful bidder.
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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 process had been tainted with illegality:
Upon every principle of justice, the Council should be prohibited
from in any way furthering what was thus illegally done. Not only the plaintiffs, but the ratepayers at large, are deeply interested in seeing that all contracts, and especially for those for public works, should be entered into on the fairest principles.

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#3 Coughlin & Mayo v. Victoria (City)

(1893-08-26) BCSC

After finding that the contract award process had been unfair and illegal on account of the conflict of interest, the Court prohibited the City from carrying out the contract. The Court concluded that such an order did not interfere with the Citys rights or privileges since to do wrong is not the right or privilege of any man or body of men.

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#4 Re Complaint Filed by Dollco Printing

(5 August 2003, PR-2003-016) (CITT)

In its August 2003 determination in Re Complaint Filed by Dollco, the Canadian International Trade Tribunal found that the government failed to disclose its internal conflict of interest rules in its tender call and therefore could not reject the complainants submission on those grounds. The Department maintained that the conflict of interest rules could be read into the Agreement on Internal Trade pursuant to the common law duty of fairness.

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#4 Re Complaint Filed by Dollco Printing

(5 August 2003, PR-2003-016) (CITT)

The Tribunal disagreed, noting that the Agreement on Internal Trade does not specifically address conflict of interest, that those rules could not be implied where the tender call is silent to those rules and that any consequence of a possible conflict of interest and the definition of what constituted a conflict of interest had to be included in the tender call to permit a proper disqualification. The Tribunal therefore concluded that the Department improperly rejected the complainants tender based on undisclosed criteria.

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#5 Re Complaint Filed by Consortium Genivar-M3E-Universite DOttawa

(11 August 2003, PR-2002-074) (CITT)

In it August 2003 determination in Re Complaint Filed by Consortium Genivar-M3E-Universite DOttawa, the Canadian International Trade Tribunal considered allegations of unfair advantage arising out of a Canadian International Development Agency procurement. The case focused on the association between a consultant retained to advise the government on the procurement and one of the bidders responding to the tender call. The Tribunal found that the consultant, who was associated with the bidder in question, had an impact on the planning of the support project in question and that the information she obtained through that process gave that bidder an improper advantage.
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#6 Re Complaint Filed by J. Molson & Associates

(17 November 2004, PR-2004-014) (CITT)

In its November 2004 determination in Re Complaint Filed by J. Molson & Associates, the Canadian International Trade Tribunal considered a case where the spouse of an Assistant Deputy Minister was the owner of one of the bidding companies.
Another bidder complained, maintaining that its competitor was given preferential treatment on account of the personal relationship. The government agreed to cancel the procurement. The Tribunal ordered that the awarded contract be terminated and re-tendered and that a fairness monitor be appointed to better ensure the impartiality of the process.
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