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Sunday, September 18, 2011

Procurement controversies -- Australia

Fraud audit finds flaws in department
Department of Agriculture, Fisheries and Forestry staff have been misusing corporate credit cards, travelling without approval and improperly awarding multimillion-dollar contracts, including one last year that was deliberately split to avoid going to open tender.

The details have emerged from internal audit files that also show in the past three years there have been more than 392 breaches by the department of the Financial Management Act or its regulations.

Jodi Gatfield, a department spokeswoman, said three senior executives were investigated in 2009-10, not eight.

This is directly contradicted by a fraud report filled out by Edward Stanmore, the department's head of audit. This document, released under freedom of information, stated eight ''senior executives/managers'', each with more than nine years' tenure, had been the target of internal fraud investigations.

Consecutive internal audits of procurement identified systemic issues and warned of a need for ''substantial change in behaviour from those executing and approving procurement processes''. A 2009 audit file said there were ''high levels of non compliance'' in procurement, and the department might not be able to show ''that tenderers were treated fairly and consistently''. This was followed by a memo in June last year that cited ''widespread evidence'' of continued problems including ''inadequate procurement processes''.

Read more: http://www.smh.com.au/national/fraud-audit-finds-flaws-in-department 20110918-1kg2g.html#ixzz1YMwUsV6V

Fraud probe targets top bureaucrats
In November 2008 a legal services contract was extended for 12 months and included a decision to increase its annual value by 42 per cent to $2,817,072.00.

The department requires legal advice for variations worth more than $500,000 but ''this policy was not complied with'', and there were no documents to show the variation represented value for money.

Last year a troubling purchase related to a conference event was found, which was ''split into two parts even though the intention was to select a single provider''. This avoided an open tender.

Thursday, September 15, 2011

It's as simple as A, B, see?

There is a necessary but entirely uneasy fit between procurement law (government contracting) and the private law of contract. In the evolutionary emergence of government contracting, they share a common ancestor, or two, but care must be taken not to conflate the two . They are different in important and fundamental ways, too many and subtle to be canvassed in a blawg post.

For instance, in the Guam Procurement Process Primer, I take great pains to try to reconcile the meaning of "award" in the context of traditional contract formation law. It's an uneasy fit, perhaps more full of rationalization than design.

An award in the procurement context is both the end game of the solicitation process and the new beginning of a relationship that then becomes more cognizable in contract law. It is a moment, or moments, when the courtship gives way to the marriage, de facto or de jure.

I've concluded, rightly or wrongly, an award is that point in time, evidenced by acts and omissions of the parties, when negotiation is complete and acceptance finalized. That has never been a bright line in contract law, as the many cases over the centuries have made clear, but one that is hornbook orthodoxy.

Why should it be any clearer in procurement law? It is simply a construct, one constructed bespoke from the circumstances, every time. Somewhat like trying to determine the instant of death, or birth, or other things transitional that are better described, if clumsily defined, by comparison of the "before" picture with the "after".

An example of the struggle to put theoretical form to the award process is illustrated by the procurement bulletin published by Mr. Paul Emanuelli in the Canadian Daily Commercial News online publication, wherein he paints the transitional process as actually two separate contracting events: A, the "contract" of the solicitation process, and "B" the contract resulting from the solicitation process that executes what it is that was sought in the solicitation.

That is probably not a very artful way of expressing what he was trying to say, so here it is, in excerpted and re-ordered in parts, for you to determine. You ought to read the whole article, however, and not take my take at face value.

Ontario court rules against contractor who made mistake in bid on Toronto bus garage construction project
In Toronto Transit Commission v. Gottardo Construction Ltd., the defendant bidder attempted to rely on its own mistake as the basis for avoiding liability after it failed to honour its tender.

The tender call rules required [successful] bidders to provide additional documentation on demand within two days. This post-bidding process gave rise to confusion.

The trial judge determined that because the tender instructions provided that the TTC could demand the production of certain documents after the opening of the tenders, Contract A would not be formed until sometime after these additional documents were demanded and provided.

The reasons, however, do not address the critical issue as set out by the Supreme Court of Canada in M.J.B. Enterprises Ltd.: when did the parties in fact intend to initiate contractual relations? Rather, the trial judge appears to have confused the creation of Contract A and the process of analysis that leads to the acceptance of the tender and the formation of Contract B.

The Ontario Superior Court of Justice found that the tender was incapable of acceptance and that the bidder was therefore not liable for failing to honour its tender. In coming to this conclusion, the Superior Court found that the bidder had failed to fulfil the post-bidding follow-up steps required by the tender call rules. The bidder was therefore able to rely on its non-compliance as the basis for not honouring its tender.

Acceptance or rejection of the bid is not what leads to the creation of Contract A. Acceptance or rejection is the end point of the tender process. Once the tender is accepted, the parties enter into the construction contract referred to as Contract B. The fact that certain steps are taken and certain documents are to be produced by the tenderer after the submission and opening of tenders will not delay the formation of Contract A when the clear intent of the parties is to be bound as of the opening of the tenders.

Accordingly, the Court of Appeal concluded that Contract A had crystallized and that the tender became legally binding when the tenders were opened after the tender submission deadline. The Court of Appeal therefore found the bidder liable for $434,000 for failing to honour its bid.

This "two contract" theory is one of the unique features of Canadian procurement law, according to the following highly informative Blakes law firm article of date September 23, 2011 written by Judy Wilson and Joel Richler.

Canadian Procurement Law – The Basics
What is somewhat unique to Canadian law is that competitive procurement processes create two contracts: (i) the bidding contract which sets out the “rules” that apply up until the completion of the competitive procurement process; and (ii) the substantive contract entered into between the procuring authority and the successful bidders.

The first, and seminal, case is The Queen (Ont.) v. Ron Engineering & Construction (Eastern) Ltd., where the SCC first articulated the “Contract A”/“Contract B” analysis. Contract “A” is the contract that is made when a bidder submits a bid in response to an invitation to tender (or similar document). Contract “B” is the agreement that will be formed between the procuring authority and the winning bidder.

In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., the SCC clarified that Contract “A” can only be formed between a procuring authority and compliant bidders, that is, a procuring authority is contractually obliged through Contract A to accept only compliant bids, and only compliant bidders have legal remedies arising from the procurement process as against a procurement authority. At the same time, the SCC recognized and accepted that procuring authorities are entitled to consider “nuanced” views of price, and are therefore not bound as a matter of principle to accept only the lowest of compliant bids.

The third case, Martel Building Ltd. v. Canada, affirms that there is a duty owed to treat all compliant bidders fairly and equally, but always with regard to the terms of “Contract A” as set out in the competitive procurement documents (in this case, a tender call). At the same time, the SCC held that competitive procurement requirements aren’t negotiable, that procuring authorities have the right to reserve privileges and impose stipulations and that there is no duty of care owed in respect of the preparation of competitive procurement documents.

For some time, a reading of these SCC cases, and the many cases decided in trial and appeal courts throughout Canada since Ron Engineering, suggested three somewhat competing principles.

First, the law imposes obligations on both the procuring authorities and the bidders. Procuring authorities must, at all times, adhere to the terms and conditions of Contract A and cannot accept any non-compliant bids, no matter how attractive they may be. As well, procuring authorities must act towards all compliant bidders fairly and in good faith, particularly during the evaluation of any bidder’s submission. Also, procuring authorities cannot make their ultimate decisions to award or reject submissions based on criteria that are not disclosed in the terms and conditions of the procurement documents. Bidders, for their part, cannot revoke or supplement their submissions, unless permitted to do so by the terms and conditions of Contract A.

Second, the law does permit procuring authorities to create the terms and conditions of Contract “A” as they see fit. Thus, privilege clauses – clauses which provide the procuring authority with discretionary rights – are recognized as fully enforceable and, if properly drafted, allow procuring authorities to reserve to themselves the right to award contracts to bids that may not be for the lowest price, or not to award contracts at all. As well, procuring authorities are free to impose any number of criteria on bidders such as: prior similar work experience; the absence of claims or prior litigation; local contracting; scheduling criteria; composition of construction teams; and so on.

Third, and perhaps somewhat contradictory of the second principle, while the list of requirements and criteria imposed on bidders may be extensive, it will always be open to the courts to impose limitations where the discretion retained by the procuring authority is extreme. The courts have made it clear that maintaining the integrity of competitive procurement processes was a fundamental goal of procurement law in Canada. For some time, practitioners believed this could mean that, no matter how broadly drafted, there would be a point at which a court would say that a competitive procurement process was by design unfair, or that an “unfair” privilege clause (or another type of clause) would not be enforceable by a procuring authority. The view was that public policy concerns would come into play and the court would refuse to enforce an explicit Contract A provision on the basis that it created “unfair” consequences in the competitive procurement process. It was long suspected that the SCC would not allow procuring authorities to have “carte blanche” in the drafting of their competitive procurement documents.

These views were tested in the recent Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) case, in which the SCC refused to enforce a waiver clause with respect to damages arising out of a breach of Contract A. This case required the SCC to face the competing tension between the implied obligation of fairness in procurement and the principle that courts should enforce valid contractual terms. It appears that in a conceptual battle between the right to contract and public policy to protect the integrity of fairness in competitive procurement processes, the “fairness” obligation has prevailed. There were two other important issues dealt with or alluded to in Tercon. First, the SCC left open the door for negotiation within a competitive procurement process, subject to disclosure and a prohibition against changing the fundamental nature of Contract B. Second, the SCC made a brief reference to other administrative law remedies available to a disgruntled bidder, thereby reinforcing the idea that judicial review was an available course of action to challenge public sector procurement processes.

Two other key cases have been decided by the SCC recently and are worth mentioning. In Design Services Ltd. v. Canada, the SCC refused to recognize a new cause of action for “negligent procurement”, and in Double N Earthmovers Ltd. v. Edmonton (City), the SCC held that a procuring authority is permitted to renegotiate a contract on which a competitive procurement process was based after Contract B is signed.

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However the process is theorized, the point is, if the solicitation requires a bidder or tenderer or offeror to perform its contract in certain manner, and it fails or refuses to do so, it is in some kind of strife, whether as a default of the solicitation or of the obligations of the "contract" consummated in contract by offering a bid. Whether the theory is implied contract, contractual reliance or quasi-contract or "two-contract", it is undisputed that one party, the government, has gone to great lengths to engage a willing offeror in reliance on that offeror's implicit(actually, usually explicit under solicitation documents) agreement to perform if awarded the fruit of the selection process.

That is why there are bid bonds. The failure to enter into the contract the solicitation required is a breach of procurement law. Let the contract theorists find a way to reconcile that with their models if they feel the need. In my view, contract law has almost always been a deduction from case results, and not the other way around.

Monday, September 12, 2011

Not interested enough

A recent GAO decision highlights the need to pay careful consideration to who it is that brings a protest in a complex organizational group. This could be even more important to remember when entities are involved in acquisitions, mergers and dispositions.

The case is the Matter of: Integral Systems, Inc., B-405303.1, August 16, 2011:
Integral Systems, Inc. (ISI), of Columbia, Maryland, protests the exclusion from the competitive range of a proposal submitted by its wholly-owned subsidiary, CVG, Inc. (CVG. We dismiss the protest because ISI is not an interested party.

CVG submitted a proposal in response to the solicitation. In various places, the proposal referred to CVG as a “wholly owned subsidiary of Integral Systems, Inc.”

Regarding CVG’s relationship to ISI, the proposal explained as follows: “In early 2010, Integral Systems purchased CVG, which will eventually be renamed Integral Systems SATCOM Solutions Division.”

The proposal further explained that “[i]n the future, CVG will be doing business as Integral Systems SATCOM Solutions.”

Notwithstanding the references to ISI, the proposal reflected that CVG was the offering entity. For instance, the title pages of both the technical/management and corporate experience volumes listed the commercial and government entity (CAGE) code and data universal numbering system (DUNS) number of CVG, rather than the CAGE code and DUNS number of ISI.

Further, the cover letter that accompanied the proposal was signed by a director of CVG, Inc. Finally, throughout the technical/management an corporate experience volumes of the proposal, the entity presenting the proposal was referred to as “CVG.”

The proposal communicated, however, that ISI would have a role in performing the
contemplated contract.

Under the Competition in Contracting Act of 1984 (CICA) and our Bid Protest Regulations, our Office only may decide a protest filed by an “interested party,” which the statute defines as an “actual or prospective bidder or offeror whose direct economic interest would be affected by the award of the contract or by the failure to award the contract.” 31 U.S.C. § 3551(2) (2010); 4 C.F.R. § 21.0 (2011).

Determining whether a party is interested involves consideration of a variety of factors, including the nature of the issues raised, the benefit or relief sought by the protester, and the party’s status in relation to the procurement.

ISI argues that it is an interested party because the proposal indicated that the Integral organization as a whole would provide the proposed solution. However, regardless of the affiliation of the individuals--or the owner of the resources--that would be used perform the contract, ISI has not demonstrated that the entity with which the government would contract would be ISI, and not CVG. To the contrary, ISI states that if the agency awarded a contract pursuant to the proposal, the agency “would be in privity with CVG, Inc.”

ISI also argues that it is an interested party because the proposal indicated that a single, post-acquisition entity--the Integral Systems SATCOM division--would perform the contract. Although ISI asserts that CVG currently is doing business as Integral Systems SATCOM Solutions Division, ISI has not shown that ISI--as opposed to CVG or CVG doing business as Integral Systems SATCOM Solutions Division--is the entity with which the government would enter into a contract pursuant to the proposal.

ISI’s argument relies on Security Assist. Forces & Equip. Int’l, Inc., B-199366, Feb. 6, 1981, 81-1 CPD ¶ 71, a decision in which our Office concluded that the parent of a wholly-owned subsidiary qualified as an interested party. We decline to apply the conclusion reached in Security Assist. here because that decision was rendered before both the enactment of CICA, which defines an “interested party” as an “actual or prospective bidder or offeror,” and before our Bid Protest Regulations expressly defined an interested party. See 4 C.F.R. Pt. 21 (1981).

We note also that the circumstances here are different than those in Bulloch Int’l, B-265982, Dec. 26, 1995, 96-1 CPD ¶ 5, and E & R, Inc., B-255868, Mar. 29, 1994, 94-1 CPD ¶ 218, wherein our Office recognized that an agent may represent an interested party in a protest where the agent specifies the interested party in the protest and has been expressly authorized to act for that party.

Cf. Trandes Corp., B-271662, Aug. 2, 1996, 96-2 CPD ¶ 57 at 4 (no substitution of offerors where unincorporated division of offeror corporation submitted final proposal revision and record reflected that unincorporated division did not exist apart from offeror corporation and only could enter contracts as offeror corporation); Alabama Aircraft Indus., Inc.– Birmingham v. United States, 83 Fed. Cl. 666, 681-682 (2008) (offeror qualified as interested party because offeror was same legal entity following change in name).

Finally, ISI argues that it is an interested party because it would benefit from award of the contract, or, conversely, suffer without award of the contract. We have no doubt that ISI has an economic interest in the award of a contract to its subsidiary, CVG. Such interest, however, is not the direct economic interest of an actual or prospective offeror contemplated by CICA.

Note that the definition of "interested party" is not universally strict. The federal CICA definition hinges on a "direct economic interest" of "an actual or prospective bidder or offeror", as the decision above illustrates.

The ABA Model Procurement Regulation is somewhat broader. Model Regulation R9-101.01.1 defines an “interested party” to mean “an actual or prospective bidder,
offeror, or contractor that may be aggrieved by the solicitation or award of a contract, or by the protest.” Cases have tended to view "economic interest", direct or otherwise, as an element of the "interest" which must be aggrieved, in line, perhaps, with the broader but entirely related question of standing.

This multidimensional test is also used in the CICA context, but with more emphasis, perhaps, on the directness of the economic interest. As the decision above recognized, "determining whether a party is interested involves consideration of a variety of factors, including the nature of the issues raised, the benefit or relief sought by the protester, and the party’s status in relation to the procurement."