LXM LAW LLP
Business Lawyers | Consultants

Public procurement law in Canada – An overview (2020)

From changes in the Supreme Court of Canada’s jurisprudence to an aggressive international trade strategy, over the past 40 years, Canadian public procurement law has gradually transformed itself from a relatively straightforward area of law to something far more complex. Suppliers and public purchasers need to be vigilant in keeping up with legal developments in public sector procurement law or otherwise risk running into surprise legal, reputational or operational problems. This article provides a high-level overview of the broad categories of rules widely understood as defining the parameters of procurement law in Canada today.

In Canada, the law governing public procurement is informed by several categories of legal rules: (A) common law (judge-made law); (B) international and domestic trade agreements, (C) statutes and regulations; and (D) administrative rules such as policies and procedures.

The rules that apply to a particular procurement are generally a function of the following:

  • the nature of the purchaser;
  • the location of the purchaser;
  • the location of the supplier;
  • the type of goods or services being procured;
  • the value of the procurement.

 

Disclaimer: Below are general categories of rules that shape public procurement law in Canada. This summary should not be relied upon as definitive guidance on the rules that apply to a specific organization or procurement. For definitive guidance, it’s always best to consult with legal counsel.

Category A: Common law (judge-made law)

The 1981 decision of the Supreme Court of Canada Ontario v. Ron Engineering & Construction (Eastern) Ltd. was the first in a series of Supreme Court of Canada decisions which today defines Canada’s bidding and tendering law at common law. The broad parameters of public procurement law under common law have been established by the series of court decisions set out below.

1981: The Contract A/Contract B Paradigm

When a purchaser issues a tender call, often called a “request for tenders,” and a bidder submits a compliant bid in response to that tender call, a binding process contract (also called “Contract A”) is formed between the purchaser and each compliant bidder. Contract A consists of the terms of the bid process. Contract B, the performance contract, is the contract awarded to the winning bidder.

In Canada, the bid process rules in Contract A, such as the time bids need to be delivered, have been strictly enforced by the courts. Purchasers and bidders must ensure bid process rules are strictly followed.

Examples of strict compliance requirement

  • A bid that was delivered 30 seconds past the date and time specified in the solicitation was deemed to be validly rejected by the purchaser. (Bradscot (MCL) Ltd. Hamilton Wentworth Catholic District School Board [1999] 42 O.R. (3d) 723 (Ont.C.A.))
  • A bid that used the wrong version of the tender form was deemed to be validly rejected by a purchaser. (Steelmac Ltd. v. Nova Scotia (Attorney General) [2007] NSJ. No. 216)

1999: Contract A and the implied duty of fairness

The courts have implied a contractual duty of fairness and good faith as part of Contract A, an implied duty owed by the purchaser to all compliant bidders.

The courts have relied upon the duty of fairness and good faith as the basis for other implied purchaser duties, such as:

  • duty to provide proper disclosure to bidders;
  • duty to reject non-compliant tenders;
  • duty to conduct a fair competition;
  • duty to award the contract to the winning bidder; and
  • duty to award the Contract B as tendered.

Each of these implied duties imports specific sub-duties that are beyond the scope of this article. It suffices to say that, under this Contract A/Contract B paradigm, purchasers operate in a minefield of implied legal duties that exposes them to unanticipated and undesired results when procuring by way of a binding bid solicitation process.

This is not only a minefield for purchasers. As the examples in this article show, uninformed bidders are also at risk of unanticipated rejection for what may seem to be minor technicalities like being seconds late with their submission. Welcome to the particularities of Canadian public procurement laws.

How Contract A complicates matters

As we discuss above, purchasers must reject tenders that are delivered seconds late. Imagine a supplier that’s 30 seconds late delivering their tender because the courier delivery service got caught in traffic. Now imagine this is a well-known reputable supplier with what is believed to be the best product on the market. Where a bid is delivered 30 seconds late under Canadian law, under a binding procurement process the purchaser must reject the bid. What if rejecting your best supplier presents major operational risks – leaving the purchaser with only 1 compliant bidder with a less desirable product?

The purchaser in our scenario is left having to balance the legal vs. operational risks of accepting the late bid. Below are the options the purchaser would normally consider.

  • Accept the late bid.  While operationally this is preferable, this exposes the purchaser to legal risk. A compliant supplier that submitted their bid on time may claim the purchaser breached a Contract A duty and a court may award that compliant supplier its lost profits, making this a very expensive decision for the purchaser!
  • Reject the late bid.  This is the best option from a legal risk standpoint but operationally this may be untenable as it means losing access to the best product.
  • Cancel and re-issue the solicitation. The purchaser risks a legal challenge for improper cancellation and other risks if the purchaser retenders for the same product. Operationally, the purchaser will suffer acquisition delays which may compromise operational objectives.

None of these options are appealing, yet the above scenario and other similar catch-22 situations are  surprisingly common under Canada’s Contract A/Contract B paradigm.

Contract A is not always formed

Courts have recognized the possibility of running solicitation processes outside of the Contract A/Contract B framework. The possibility of developing RFx documents free of the Contract A implied duties has led to a sort of sliding scale of procurement vehicles in Canada. At one end of the scale there’s the informal emailed request for quotes and at the other end is the traditional binding tender call with implied Contract A duties. It’s not uncommon to find vehicles that appear to fall in between these extremes.

Why is that?

Because of the potential of facing an unforeseen and unwanted outcome under Contract A as discussed above under “How Contract A complicates matters”, some purchasers are using solicitations that have elements of the tender format while taking measures to eliminate Contract A to avoid the risks caused by these implied contractual duties of fairness.

This is often done by deliberately loosening the rules around the solicitation process. Common earmarks of a non-binding procurement process include:

  • omitting Contract B or indicating that Contract B will be negotiated once the top-ranked bidder is identified;
  • using clauses that have bidders acknowledging, as at term of the solicitation, that there is no contract A or having bidders sign a separate acknowledgement to that effect;
  • recognizing the bids may be withdrawn at any time or staying silent on bid irrevocability.

While the use of approaches such as these is a legally sound business practice to avoid the minefield of implied Contract A duties under common law, in light of the current state of the law and the application of the trade agreements, which introduce Contract A-like duties in all processes whether binding or non-binding, the duties of fairness are not entirely eliminated by the non-binding RFx process. Furthermore,  some Canadian courts have shown a low tolerance for public sector purchasers engaging in quasi-tender solicitations while attempting to circumvent the duties of fairness to bidders suggesting that even in a non-binding bid process, purchasers may still be held accountable for treating bidders unfairly.

1999-2018: Enforceability of privilege and liability limitation clauses

Tender documents often include a long list of purchaser-reserved rights and privileges and limitations of liability clauses, or what I call exculpatory clauses.

No matter how broadly worded, an exculpatory clause giving the purchaser privileges and protections in the bidding process over breaches of duties of fairness and good faith runs the risk of being interpreted narrowly by Canadian courts in order to protect the integrity and business efficacy of the bidding process.

In the 2010 Supreme Court of Canada decision Tercon Contractors Ltd. v. British Columbia the Court was divided on whether to recognize the application of a broad liability disclaimer clause to protect the B.C. government from liability for breach of its implied duty of fairness/duty to reject a non-compliant bid. Using contract interpretation principles, the majority of the court (5 of 9 Supreme Court Justices) interpreted a broadly worded limitation of liability clause narrowly and concluded the clause did not shield the government from liability in these circumstances. However, the minority (4/9 Supreme Court Justices) interpreted the clause differently and held the clause protected the B.C. government.

The decision of the court in Tercon is reflective of the approach used by Canadian jurisprudence courts prior to 2010 on the interpretation of privilege clauses in procurement processes. Much like the divided court in Tercon, the courts’ interpretation of privilege clauses on similar sets of facts can be inconsistent leaving purchasers and bidders in a land of uncertainty around the enforceability of these provisions.

While the foregoing is certainly true based on the body of caselaw up to 2010, something interesting unfolded following the Tercon case.  While the majority in Tercon used an interpretive technique to work around the limitation of liability, since then, lower level courts have preferred the reasoning used by the minority who held that such clauses should be upheld unless contrary to public policy. Appeal courts have, since Tercon, proven to be receptive to the idea that procuring entities are within their right to limit their liability for breaches of Contract A. (See for example: Mega Reporting Inc. v. Yukon (Government of), 2018 YKCA 10 (CanLII), leave to appeal denied by the Supreme Court of Canada; and Rankin Construction Inc. v. Ontario, 2014 ONCA 636 (CanLII)).

These post-Tercon appeal court decisions are likely the reason we’re seeing  liability limitation clauses appearing more frequently in public sector competitive solicitation documents.

Despite these purchaser-friendly trends, purchasers continue to be well advised to be as clear as possible in the wording of their privilege and other exculpatory clauses and not to rely too heavily on their protection.  We have often seen courts, and in particular trial level courts, work around these clauses when necessary to protect the integrity and fairness of the bidding process.

Category B: Trade agreements

The Canadian federal government, and Canada’s provinces and territories are parties to a number of trade agreements intended to broaden market access for their domestic suppliers.

The notable multilateral agreements that apply most broadly to government entities across Canada are the 2017 domestic Canadian Free Trade Agreement (“CFTA”) and Canada-European Union Comprehensive Economic Trade Agreement (“CETA”). CETA was ground-breaking in its breadth of coverage in that it is the first international agreement that applies to all levels of government in Canada, government agencies, municipalities and certain publicly funded entities.

While less far-reaching in their application within Canada, in addition to the foregoing treaties, Canada’s federal and provincial/territorial governments are bound by a number of bilateral and multilateral international agreements including the World Trade Organization’s Agreement on Procurement (WTO-AGP) the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In addition,  provinces/territories have entered into various regional domestic trade agreements that may lower the threshold for competitive procurements.  All of these trade agreements generally reflect the principles contained in the CFTA and CETA.

The CETA and CFTA are surprisingly detailed in terms of the process rules they impose on purchasers, effectively codifying the procurement procedures that must be followed for covered procurements. To illustrate the granularity of the rules, a sample is provided below.

  • Purchasers must publish tender notices on an electronic tendering portal;
  • Minimum time periods must be respected between the publication of the tender notice and the deadline for the receipt of tenders;
  • Procuring entities must:
    • draft technical specifications so as to not favour a particular product or supplier;
    • use weighted evaluation criteria where price is not the only evaluation criteria;
    • offer debriefing sessions to unsuccessful bidder; and
    • establish a process for receiving/addressing bidder complaints.

Category C: Statutes and regulations

In addition to procurement rules imposed by the common law and trade treaties, some Canadian jurisdictions have also enacted procurement statutes or regulations that govern public procurement. These statutes are sometimes used to establish procurement entities or agencies within the province (e.g., to centralize procurement activities) and/or to  assign accountabilities within government for the procurement function; they may codify certain requirements of the trade agreements; elaborate rules in general areas of the trade agreement; or add rules where certain things are not covered by the trade agreements.

For example:

  • In Ontario, the Broader Public Sector Accountability Act authorizes the provincial government to issue directives governing the procurement of goods and services by designated public sector organizations. Ontario has issued a procurement directive that governs the procurement activities of public sector entities, including hospitals, school boards, colleges and universities.
  • Newfoundland enacted the Public Procurement Act which establishes the Public Procurement Agency and creates the role of chief procurement officer, among other things.
  • New Brunswick has the Procurement Act that segregates government entities into various categories for purposes of procurement rules where Schedule A entities must procure goods through a central government agency while others are not subject to the jurisdiction of the central procurement agency. There are regulations promulgated under the Procurement Actwhich apply to ancillary matters, including a regime governing the disqualification of bidders.
  • In Yukon, the Contract and Procurement Regulation promulgated under the Financial Administration Act sets out various rules including how unit price corrections will be made during the evaluation process, codifying the requirement (already in trade agreements) that procurement authorities ensure there’s a bid resolution mechanism in place to receive bidder complaints, and setting out minimum terms of reference for the bid resolution mechanism, which is lacking from the trade agreements.

These are just a few examples of statutes or regulations that have been promulgated by individual provinces and territories to govern procurement. As these legal instruments vary widely across Canada, it’s not possible to include a meaningful discussion of each statutory instrument as part of this high-level overview; however, any analysis of what legal regime applies to a specific procurement must always include a consideration of these local statutory instruments.

Category D: Administrative rules, such as policies and procedures

In addition to the above categories, or layers, of rules, procuring entities typically adopt administrative documents such as policies and procedures to govern their procurement activities. These are administrative documents in the sense that they are generally within the domain of the procuring entity, to be amended as the entity sees fit, subject always to remaining compliant with the trade agreements and the applicable laws.

Policies and procedures tend to assign internal accountabilities for procurement, summarize and/or operationalize the applicable legal rules to enhance compliance, and may elaborate on matters not dealt with in detail in the trade agreements and the statutes/regulations.

While not technically legal instruments, suppliers can take legal action to hold entities accountable for compliance with their own internal rules. For example, in the decision Rapiscan Systems Inc. v. A.G. (Canada) (upheld on appeal), the court invalidated a contract that was the result of a solicitation process that did not follow the internal procedures. In that case, the board of directors of the Canadian Air Transport Security Authority (CATSA) approved the award of a contract to a Rapiscan competitor without having been informed that the procurement process used was not recognized by the entity’s procedures. The court found that, because the board had not been advised that the process used for the solicitation was not recognized by CATSA’s internal procedures, the board’s decision to award the contract was flawed. Based on this, and other factors, the judge invalidated the award of contract.

The court in Rapiscan confirmed that, under Canadian law, in the face of non-compliance with an internal policy or procedure, disgruntled suppliers may be able convince a court to nullify a contract award.

The changing landscape of Canadian public procurement law

Public procurement law in Canada has evolved considerably since 1981 to provide purchasers and sellers with rights and obligations when participating in bid solicitations and is still in a state of evolution. In addition to evolving Supreme Court of Canada jurisprudence in the last few decades, Canada is aggressively pursuing an international trade strategy that has seen it move from having trade agreements with only 2 countries in the 1990s to having agreements in place/being finalized with dozens of countries. Based on the federal government reports, efforts to close on more trade agreements are ongoing.

Some aspects of the public procurement law in Canada remain uncertain as Canadian courts have frequently demonstrated a tendency towards purposive reasoning, meaning they interpret the law to achieve a just result. This has left us with conflicting or unclear guidance in some instances. This lack of consistency in the caselaw means it can be difficult to predict how the courts react given a particular fact-situation. Purchasers and sellers are therefore well advised to stay abreast of legal developments as they conduct their procurement and bidding activities in Canada.

LXM LAW provides confidence in procurement and contracting, helping you make fully informed decisions that make sense. 

Contact Us