Thomas G. Heintzman, O.C., Q.C.

, FCIArb
Heintzman ADR
Arbitration Place Toronto, Ontario

www.arbitrationplace.com

416-848-0203
[email protected] www.constructionlawcanada.com www.heintzmanadr.com
Thomas Heintzman specializes in the field of alternative dispute resolution. He has acted as counsel in trials, appeals and arbitrations in Ontario, Newfoundland, Manitoba, British Columbia and New Brunswick and has made numerous appearances before the Supreme Court of Canada. Mr. Heintzman practised with McCarthy Ttrault LLP for over 40 years with an emphasis in commercial disputes relating to securities law and shareholders rights, government contracts, broadcasting and telecommunications, construction and environmental law. Thomas Heintzman is the author of Heintzman & Goldsmith on Canadian Building Contracts , 4 Edition which provides an analysis of the law of contracts as it applies to building contracts in Canada.
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The Mother Of All Tender Cases!

The recent decision in Envoy Relocation Services Inc. v. Canada (Attorney General) certainly deserves the title of Mother of All Tender Cases. It is a judgment of over 1800 paragraphs in which Mr. Justice Annis of the Superior Court of Ontario analyzed and found in great depth how an invitation to tender by the federal government went wrong due to unfairness. Not only is the factual analysis extremely detailed. The legal issues are of the greatest importance to the building industry and the procurement process, particularly relating to allegations of favoring an incumbent or preferred bidder.

The basic issue in this case was whether unfairness by a sponsor of a procurement which occurs prior to the time when the tenders are submitted by the bidder, or after the award of the substantive contract to the successful bidder, can be a breach of the bidding contract (known as Contract A under the Ron Engineering analysis). The Crown said that the prior conduct could not be a breach of contract, since before the submission of tenders there was no Contract A. As well, the Crown said that the subsequent conduct could not be a breach of conduct since, upon the award of the final contract (known as Contract B under the Ron Engineering analysis), the tender process was terminated. The Crown said that it was only conduct by the sponsor between the time that the tenders were received and the time of the award of the contract to the successful bidder that could be considered for unfairness under the Ron Engineering line of tender cases. Mr. Justice Annis held that the unfairness principle applied to conduct by the sponsor before the tenders were submitted because that conduct was embedded in the tender documents and in the sponsors consideration of the bid. Mr. Justice Annis also held that this unfairness principle applied to the sponsors conduct after the award of the contract if the sponsor colluded in the improper award of the contract. Background Mr. Justice Annis took 1194 paragraphs to set forth the facts, so the following is a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP. An earlier RFP had been undertaken in 2002. One element in both RFPs was a service called Property Management Services, or PMS. Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract. Then, in the 2004 RFP, the incumbent provider again knew that few individuals used the PMS service. So it again included zero cost for this service in its bid. The other bidders were told by the sponsor to include a specified level of projected users of the PMS service, and did so. By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services, as the incumbent had done.

These facts about the 2002 and 2004 procurements were subsequently discovered by the Office of the Auditor General. One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued. Reasons of the Trial Judge The trial judge concluded that the Crown had breached the express terms of the 2004 RFP, for instance by accepting the incumbents zero cost for PMS services. The trial judge also concluded that the Crown had breached the implied term that the invitation to tender would be fairly conducted. His reasons included the following: a. By inserting a zero price for the PMS, the incumbent had failed to bid the ceiling price in accordance with the requirements of the 2004 RFP, and its bid was non-compliant and ought to have been disqualified. b. By inserting a zero price for the PMS, the incumbent was in an obvious actual conflict of interest. By quoting a zero price for PMS, the incumbent would wish to discourage any transferee form using the PMS services, because it would have to pay for those services if the transferee requested them. c. the weighting in the selection formula used by the Crown was intentionally amended to favour the incumbent bidder, and the governments conduct on the issue of amending the selection formula [constituted] bad faith. d. The Crown fail*ed+ to follow its own published evaluation process, which was also set out in the RFP. e. The Crown was in a conflict of interest as the result of being implicated in litigation with the incumbent bidder arising out of the 2002 RFP. The Crown knowingly drafted...the provisions of the [2004] RFP intended to favour the incumbent. f. The Crown intentionally turn*ed+ a blind eye to *the incumbent bidders+ intention to breach the contract, if awarded it since the incumbent intended to charge for PMS services even though it had bid a ceiling of zero for this service. Some of the other comments of the trial judge about the conduct of the Crown are best left to be read in the actual judgment. Based upon these findings, the trial judge found that Envoy Relocation Services would have been the winning bidder if the RFP had been properly conducted and he awarded about $29 million in damages for breach of contract. The Legal Issues

The Crown maintained that any alleged misconduct by it fell outside its contractual duty of good faith under the decisions of the Supreme Court of Canada in MJB, Martel and Double M Earthmovers, which followed and applied the decision in Ron Engineering. The Crowns position was that: a. Any misconduct before the tenders by Envoy and the other bidders were filed could not fall within any contractual duty of good faith. Until those tenders were filed, there was no Contract A applicable to the bidding process, under the Ron Engineering analysis. The trial judge put the Crowns position this way: The defendant argues that the duty of fair and equal treatment is limited to the assessment of bids and does not apply to all aspects of the bidding process. Therefore, the plaintiffs cannot make any claim in respect of property management services because it relates to the drafting of the tender documents, not the evaluation of tenders . *The+ duty of fairness does not extend beyond a duty to treat all bidders fairly and consistently in the process of assessing bids. The duty of fairness therefore, does not apply to other aspects of the bidding process. In particular, it does not apply to the preparation of tender documents. b. Any misconduct occurring after the 2004 contract was awarded to the incumbent could not be attacked because, under the Double M Earthmovers decision, once that award was made the contract applicable to the bidding process (that is, Contract A) came to an end. There were many other important legal issues discussed in this judgment but for procurement and construction law purposes, those are two of the most interesting. The Trial Judges Decision The trial judge found several elements of unfairness in the way the RFP was run, particularly in relation to the incumbent bidder. The incumbent had access to information that it could bid the PMS item based on actual volumes, which Envoy was not aware of because the answers to questions had directed Envoy to use estimated volumes found in the BOP formula. The trial judge concluded that had accurate PMS volumes been provided to non -incumbent bidders, it would have become immediately apparent that the PMS tendering provisions were a scam by their use of egregiously inflated PMS volumes that in no way could be described as estimates.

In addition, the repetition of the 2002 PMS provisions in the 2004 RFP constituted a hidde n preference to [the incumbent] that was concealed from Envoy and the other bidders. The trial judge rejected the Crowns defence that the Crowns conduct could only be legally unfair if it fell within the time period between the submission of the tenders and the award of the final contract. As to the Crowns conduct before the tenders were delivered, the trial judge essentially found that that conduct was embedded in the tender documents and the sponsors selection decision. The tender documents themselves were unfair by reason of the Crowns conduct in preparing and administering them in the tender process. As the trial judge said: Firstly, the simplest answer is that the definition of what constitutes an unfair evaluation would include an evaluation carried out on an RFP that includes concealed advantages or disadvantages to any bidder. Any aspect of the tendering process upon which an evaluation is based is part of the evaluation process. Accordingly, if the tender terms are inherently unfair because of undisclosed preferences, the evaluation based on those tender terms is equally unfair. The jurisprudence upholds this result. (emphasis added) Second, the trial judge relied upon several decisions that establish that undisclosed standards or criteria are classic examples of unfair tenders. The present situation was, in his view, no different: I find no distinction between a concealed preference and an undisclosed standard referred to in the decisions above with respect to preferring local contractors or providing insufficient details. In either case, tender documents concealing preferences or undisclosed standards undermine the integrity of the bidding process and with that, the implied obligation to treat all bidders fairly and equally. So far as evidence about the Crowns conduct after the award of the 2004 RFP to the incumbent, the trial judge distinguished the Double N Earthmovers decision of the Supreme Court of Canada: *T+he Crown Collusion is also relevant to the blameworthiness of the owner. One of the factors in the Double N decision was that the City of Edmonton was an innocent party because it had no forewarning or knowledge of the contractors deceitful behaviour. In contradistinction to those facts, blameworthiness and culpability on the part of the Crown is evident throughout this tendering process. In addition, the trial judge held that the court could look to any relevant evidence, including conduct before or after the moment when the tenders were filed, in determining whether the

conduct of the Crown in accepting the incumbents bid and rejecting another competing bid, was fair. Comment There are two useful aspects of the Envoy Relocation Services decision. First, the factual circumstances contain a wide variety of circumstances in which an invitation to tender may be found to be unfair, particularly if there is an incumbent bidder: permitting the incumbent access to information not available to other bidders; requiring other bidders to use criteria not used by the incumbent in its bid; failing to address the conflict which may arise if the incumbent has a claim against the sponsor rising from the prior contract, etc.

In fact, the Envoy Relocation Services decision provides a virtual check-off list of problems to be considered anytime an invitation to tender involves an incumbent bidder or potential favouritism to any bidder. Second, the decision provides a good explanation of why a sponsors conduct may be contractually unfair even if it occurs before the bidders tenders are submitted. It may be unfair if it affects the fairness of the tender documents or the selection made by the sponsor. In either case, while the conduct may occur before the bidders submit their tenders, that conduct affects the sponsors conduct after the tenders are submitted. That prior conduct affects the fairness of the crucial decision made as part of the bidding contract, namely, the selection of the winning bidder. That conduct prior to the submission of the tenders may not give rise to liability in tort (as found in Martel). And it may seem illogical that conduct prior to the making of the Contract A bidding contract could be the basis of a claim for breach of that contract. However, the trial judge found that it is entirely logical because that conduct is part of the tender documents and part of the sponsors selection decision. So far as the conduct of the sponsor after the selection of the winning bidder is concerned, the Envoy Relocation Services decision confirms that such conduct may be the basis of unfairness if the owner knows (or is reckless) as to the winning bidders subsequent conduct. If the sponsor knows before awarding the bid that the winning bid is really non-compliant based upon that bidders tender or clear intentions (as found in Envoy Relocation Services and MJB,) then the sponsor can be held to have acted unfairly in awarding the contract to that bidder. If the

sponsor does not know these facts (as found by the majority in Double N Earthmovers), the subsequent conduct of the sponsor or winning bidder will not be the basis of allegations of unfairness against the sponsor. See Heintzman and Goldsmith on Canadian Building Contracts (4 th ed.), chapter 1, paragraph 1(f) Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034 Construction Law - Tenders - Non-Compliant Bids - Incumbent bidder - Fairness Thomas G. Heintzman O.C., Q.C., FCIArb www.heintzmanadr.com www.constructionlawcanada.com May 8, 2013