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A Deep Dive into Canada’s Public Procurement Law - 2 Part Series

Part 1

On November 17, 2021, McCarthy Tétrault hosted Part One of our Two-Part series on a Deep Dive into Canada’s Public Procurement Law. The seminar, hosted by Robert A. Glasgow, covered Canada’s procurement landscape, Canada’s Trade Agreements (“Trade Agreements”), and offered useful tips for government entities that publish procurement opportunities in Canada. Here are the top 5 takeaways from the session:


1. Canada’s procurement market offers unprecedented opportunity

Canada has a very large public procurement landscape totalling more than $130 billion. Due to the country’s ever changing needs and constant expansion, government tenders offer lucrative opportunities with high deal stream. Traditionally, the procurement market has been dominated by regional small-to-medium enterprises (“SMEs”). However, this may change as SMEs are faced with more competition due to Canada’s three main Trade Agreements.


2. There are four key Trade Agreements governing Canadian procurements

The four key Trade Agreements include: the Canadian Free Trade Agreement (“CFTA”), the Canada-European Union Comprehensive Economic & Trade Agreement (“CETA”), the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”), and the World Trade Organization Agreement on Government Procurement (“WTO-AGP”). The four main Trade Agreements exist to help make government tenders more transparent. They serve as a powerful tool - for both national and international vendors - in obtaining fair and reasonable access to procurement markets across the country.

First, the CFTA is an internal agreement which covers federal procurements, provincial and sub-provincial procurements. The CFTA helps protect Canadian suppliers from regional discrimination. Federal contracts are adjudicated by the Canadian International Trade Tribunal (“CITT”), while provincial contracts have their own regulatory mechanisms in place.

Second, the CETA applies to government contracts between Canada and the EU. The CETA presents Canadian businesses with preferential access to and growth opportunities in the EU (and vice versa). Similar to the CFTA, federal contracts are reviewed by the CITT, while provincial contracts have their own regulatory mechanisms.

Third, the CPTPP takes many of the same commitments under the CFTA and CETA and expands them to the Asia-Pacific regions, providing Canadian suppliers with preferential access to public procurement markets throughout the Pacific.

Fourth, the WTO-AGP is a multi-lateral agreement between World Trade Organization (“WTO”) members who have signed together to open the procurement market to each other. It applies to select “sub-central” government entities and enables bids from both Canadian and foreign suppliers from 13 different countries.

It is not uncommon to be governed by multiple Trade Agreements at one time. It is the responsibility of both government entities and prospective vendors to understand their relevant obligations under the Trade Agreements. Notably, parties must adhere to the most strenuous obligation that applies to them.


3. NAFTA is no longer relevant to Canadian procurement contracts

As a practice point, parties should keep in mind the Canada, United States, Mexico Agreement (“CUSMA”), which replaced the North American Free Trade Agreement (“NAFTA”) on July 1, 2020. As noted in a policy notice by the Government of Canada, Canada is not a party to the government procurement chapter in CUSMA, which pertains only to Mexico and the United States. This change does not affect legacy procurements created under NAFTA.


4. Trade Agreements impose common obligations on government procurements

Most of the Trade Agreements impose common obligations on government entities that publish procurement opportunities. The Trade Agreements demand consistency and transparency in the type of tender (open, limited, or closed submissions); set standards for submission periods; set conditions of participation; require transparent negotiation protocols (including Rank & Run or Best and Final Offer (“BAFO”)); and mandate the use of transparent criteria to rank bids. In a number of decisions involving federal contracts, the CITT made it clear that suppliers have a right to know how to maximize their bid and how to make their bid as attractive as possible to a purchaser.


5. The CITT offers speedy dispute resolution for federal contracts

The Canadian International Trade Tribunal (“CITT”) oversees federal procurement contracts under the CFTA and the CETA. Notably, the CITT has a statutory limit of 90 days to resolve a dispute and sets a strict 10 business day limitation period to bring a claim (from the actual or constructive knowledge of the breach). The CITT has substantial broad remedy powers to cancel, re-evaluate, and re-tender procurements in progress but it cannot cancel an existing contract. Notably, the Trade Agreement protections do not ordinarily apply to sub-contractors.

This series will continue with Part Two on December 1, 2021 For further information on Procurement Law in Canada or if you have questions about the impact of Free Trade Agreements on your business, please contact your McCarthy Tétrault trusted advisor.

Part 2

On December 1, 2021, McCarthy Tétrault hosted Part Two of our Deep Dive into Canada’s Public Procurement Law series. The seminar, hosted by Robert Glasgow, covered Canada’s procurement landscape and Non-binding Requests for Proposals (“NRFPs”). This blog describes the top five takeaways from the session.


1. Canada’s procurement industry is highly litigious

Canada has a large public procurement market that sees greater than $130 billion in business annually. Unlike other jurisdictions, Canada lacks a centralized statute based system to govern procurement. Instead, Canada’s procurement law is governed by a mixture of administrative and common law that are both complex and something of a patchwork from province to province.

The traditional hallmark of Canadian procurement law is the recognition of a binding RFP process that divides the procurement into two separate contracts: “Contract A” and “Contract B”. Contract B is relatively simple: it is the contract for the work being bid which will be entered into between the purchaser and the winning bidder.

By contrast, Contract A is the bidding contract: the solicitation documents put out by the purchaser that contain express terms and conditions of the procurement. Contract A generally includes highly detailed terms such as instructions to bidders for submitting proposals, rules regarding limitations on liability, technical specifications bidders are required to meet, the scoring methodology for evaluating proposals, and terms requiring all bidders to keep their bids open and valid for a set period of time. This last criteria makes the bids irrevocable, thus suppliers who revoke their bids are in breach of Contract A.

To counterbalance these obligations of bidders, purchasers bear a large number of implied duties under Contract A. The purchaser must, among other things: make fair and equal disclosure to suppliers, provide reasonable time for suppliers to submit proposals, and maintain fairness in evaluation and evaluation methodology. Canadian courts have been diligent in enforcing these duties, and require a high degree of integrity on the part of purchasers.  Where a purchaser falls below the expected standard, it breaches Contract A and leaves itself vulnerable to a challenge for breach of contract.  This leads to the possibility for courts to award complaining bidders expectation damages, which effectively are their lost profits on the performance of the contract.

As a result, Canada sees more procurement litigation than almost any other country in the world. This makes both suppliers and purchasers hyper-aware of the potential for litigation.  It also makes purchasers comparatively risk averse.

It must be noted that while a breach of contract claim is, historically, the most common route forward, the purchasing activity of a government purchaser has (in some venues) been seen as appropriate for judicial review and some can also be subject to complaints under Canada’s trade agreements (as discussed in Part One - above). This has led some suppliers to attempt the “double barrel” action - this means that instead of choosing an administrative action or a breach of contract action, suppliers will bring both.


2. NRFPs are a way for procurement to be more efficient and less risky

Over the last half-decade, the market has been increasingly embracing a new form of solicitation to mitigate the impacts of the Contract A/Contract B framework: non-binding RFPs (or NRFPs). The NRFP framework begins from a simple premise: if the first step in a procurement analysis is establishing whether Contract A exists, it would be preferable to avoid it altogether.  Under an NRFP, the purchaser solicits a request for suppliers to submit proposals that form the basis of negotiations rather than a firm invitation to enter into a binding agreement.

This has several impacts.  First and foremost, the bids are no longer irrevocable. Suppliers can walk away at any time before entering into an agreement, free of any risk of being sued. Suppliers also have considerably more room to engage in post-bid negotiations with purchasers, offer innovative and “outside the box” solutions, and use their own standard commercial terms and solutions (instead of fitting a round peg in a square hole).

In exchange, purchasers also receive several benefits. First, they avoid the common law obligations of Contract A: since there is no Contract A, there can be no implied terms of Contract A or other duties under such a contract. This means purchasers have no duty of fairness and no duty to award a contract that can be contractually enforced. Second, they can increase flexibility of and competitive tension between suppliers, and receive the benefit of supplier innovation. Third, purchasers can structure their procurements to allow for processes, such as “cure ladders” or rectification periods that would otherwise be prohibited by Contract A.

Perhaps most importantly, if there is no Contract A then the ability to recover damages for breach of contract evaporates.  Without Contract A, there can be no breach of said contract.  Bidders may still rely on administrative/public law judicial review processes, but this seriously undercuts the incentive to engage in costly and protracted litigation.


3. Even in an NRFP, purchasers may still imply Contract A

Notwithstanding the terms of the NRFP, up to and including terms explicitly disclaiming the existence of Contract A, Purchasers may still imply Contract A through communications or representations to suppliers. If a supplier successfully shows that Contract A really did exist (largely due to inadvertence or mistakes during the process), it can use that implied Contract A to bring an action for lost profits.

In order to avoid implying Contract A, purchasers must ensure that their solicitation process and documents avoid ambiguities that could give rise to a finding that Contract A does exist. In this context, relying on old precedents may present problems as many of those were written under the assumption that Contract A was a given.  These precedents include problematic terms, such as bid security requirements or irrevocability requirements, that are classic hallmarks of Contract A and may give rise to a finding that Contract A does exist. This process of bolting on NRFP terms to a traditional RFP precedent (or creating a “Frankenstein” RFP) is fraught with risk and should be avoided.

In addition to avoiding “Frankenstein” RFPs, one common tactic is to include a clause expressly disclaiming the existence of Contract A and affirming the purpose of the bid is to be selected for negotiations to potentially enter into a contract.  This was the case in Murray Purcha & Son Ltd v Barriere (District), 2019 BCCA 4, which case provides a good example as the British Columbia Court of Appeal, in the course of its review, reproduced the below disclaimer clause and approved of it as a manner of avoiding forming Contract A:

This RFP is not a call for tenders or a request for binding offers and no contractual or other legal obligations shall arise between the District and any Proponent as a result of the issuance of this RFP or the submission of any Proposal in response to this RFP, until and less the District and a Proponent enter into a contract for the services sought by the District under this RFP. For clarity and without limiting the foregoing, this RFP does not commit the District in any way to treat Proponents in any particular manner, to select a Proponent, to proceed to negotiations with any Proponent or to enter into any contract and the District may reject any or all Proposals, re-issue a new RFP or end this RFP process at any time, at its sole discretion.


4. Public law obligations of procedural fairness continue to exist for public purchasers

Even under an NRFP, a public purchaser remains a government decision maker, which, depending upon the particulars of its character and activities, may be subject to judicial review.  In such a case, a supplier may make an administrative application for judicial review of a public purchaser’s NRFP. If anything, the fact that there is no Contract A may weigh in favour of allowing a judicial review proceeding to go forward, as there would be no adequate alternative remedy for a complainant.

The requirements in this context are also somewhat different, even though they may bear similarities with the obligations under Contract A.  In the context of an administrative application, there remains a duty of procedural fairness. This is similar to the Contract A fairness duties; however, courts generally have higher standards for complainants to show a breach of procedural fairness than the Contract A fairness obligations.  This reduces risk to a purchaser for a claim.

It is also important to note that the remedies under an administrative application are very different from those under a claim for breach of Contract A.  Generally, damages are not available at judicial review.  Instead, remedies are more likely to be orders quashing an award and requiring a re-tender or re-evaluation of bids.


5. Drawbacks of the NRFP process

NRFPs are not without any disadvantages.  Purchasers generally have reduced control over the process. Suppliers can withdraw their bids, which can cause issues with certain purchasers requiring certainty that a bid will be enacted if made.  In addition, the ability to bind suppliers to the terms and conditions of a procurement is questionable.  This may necessitate a scaffolding of non-disclosure agreements, participation agreements and the like to ensure any terms that are required for a secure procurement process are binding on all parties. Finally, while the risk of litigation is greatly reduced, some legal risk remains.

The concern that suppliers will more frequently withdraw bids is mitigated by a mixture of structure and human psychology.  Issues that may previously have led a supplier to walk away are now more likely to use the expansive negotiation scope that is allowed under an NRFP mechanism. Suppliers are also bound by loss aversion – it becomes hard to justify walking away from a flexible negotiation process when success is tantalizingly close for the bidder to be awarded the work.

Finally, the risk of an administrative law remedy is lower than the risk of a contractual remedy given the reduced potential for a material damages award.

As can be seen, the introduction of an NRFP structure can have considerable benefits for a purchaser and for suppliers.  However, these can be complicated and difficult to successfully navigate for entities without extensive experience.  The assistance of experienced counsel is a great asset, particularly in reconciling the NRFP structure with a purchaser’s obligations under Canada’s trade agreements (as discussed in Part One - above).

For further information on Procurement Law in Canada or if you have questions about the impact of Free Trade Agreements on your business, please contact your McCarthy Tétrault trusted advisor.