Local Preference in Public Purchasing:

Risks and Recommendations

A Whitepaper

By Paul Emanuelli

March 31, 2009

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Background

This whitepaper was commissioned by the Ontario Public Buyers Association to help

inform the issue of Canadian content and local preference as it impacts public

procurement in the Ontario municipal sector. These materials are for general

information and reference purposes only. They do not reflect the views of any past or

present employers or clients and should not be relied upon as a substitute for situation-

specific qualified professional advice.

About the Author

Paul Emanuelli is an internationally known author and procurement lawyer with an

extensive track record of public speaking, publishing and training. His legal and

consulting practice focuses on major procurement projects, information technology

transactions, outsourcing, corporate governance and supply chain management. He has

in-depth experience advising institutions on the legal and strategic aspects of purchasing

operations, developing procurement formats and negotiating commercial transactions.

He is the author of the textbooks Government Procurement and The Laws of Precision

Drafting: A Handbook for Tenders and RFPs. He also circulates the free quarterly

National Tendering Law Update newsletter and hosts Live Quarterly Update, a

procurement law “talk show” teleconference series. Paul can be reached at

paul.emanuellli@procurementoffice.ca.

© Paul Emanuelli, 2009. All Rights Reserved.

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Executive Summary – Risks and Recommendations Overview

In the heat of the recent economic crisis, the issue of local preference (i.e. giving

preferential treatment to local suppliers over other suppliers as a means of using public

spending to create or protect local jobs) has re-emerged on the procurement landscape.

In the midst of an anticipated increase in transfer funds to municipalities, municipal

purchasing departments in Ontario are facing considerable pressure to adopt Buy

Canadian policies and other local preference practices to help support local businesses

and protect and create local jobs.

The Canadian Auto Workers Union has been at the forefront of this debate, calling for

the implementation of Buy Canadian policies across the public sector. The CAW

commissioned a legal opinion from international trade lawyer Steven Shrybman of Sack

Goldblatt Mitchell LLP which claims that governments can legally adopt Buy Canadian

policies, whether at the municipal, provincial or federal levels. While the legal opinion

may, for the most part, be technically correct within its specific narrow context, an issue

of this significance cannot be reduced to the narrow legal analysis of specific trade

treaty provisions of the Agreement on Internal Trade (“AIT”). Rather, it must be framed

within the broader legal and policy context within which the public procurement

process operates. More specifically, the CAW’s “Buy Canadian - Build Communities”

campaign raises the following significant legal and policy concerns:

Narrowing Competition: the CAW campaign advocates creating a preference to

contractors based on their place of origin, citing narrow exceptions that permit

Canadian content polices under limited circumstances while downplaying the

letter and spirit of domestic and international trade rules that generally aim to

remove protectionist barriers to competition;

Distinguishing Canadian Content from Local Preference: the CAW’s “Buy

Canadian – Build Communities” campaign fails to adequately distinguish between

Canadian content and local preferences, noting narrow exceptions that permit

Canadian content while glossing over the general prohibition against local

preferences and other restrictive specifications;

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Implementation Risks: the CAW campaign downplays the practical challenges

posed in properly implementing a Canadian content policy, calling on

governments to eventually enact legislation to establish clear rules while, in the

interim, leaving municipalities to fend for themselves to navigate significant legal

and policy risks in a legislative and policy vacuum;

Politicized Procurement: the CAW campaign politicizes the public procurement

process in the name of overriding public policy considerations but fails to

adequately consider the significant risks created whenever “exceptional

circumstances” are cited as a reason to bypass the established best practices of

open, transparent and fair competition.

Narrowing Competition: Trade Treaties and Trade Wars

While it is technically true that the AIT contains narrow exceptions for Canadian contentpreferences, those exceptions run in stark contrast to the generally prevailing letter andspirit of international and domestic trade treaties that prohibit protectionist practicesand promote open competition. The AIT is a domestic treaty so it is, by definition,largely silent on international matters. However, this is not the same as saying that themunicipal sector conducts its procurement in a vacuum that makes it immune frominternational trade issues.

Recommendation 1:

Before a municipality adopts protectionist policies in favour of domestic or local

suppliers or products, it should assess the potential impact on our domestic and local

suppliers of retaliatory protectionist practices adopted by U.S. municipal institutions.

Blurring the Canadian Content Exception and Local Preference

The CAW’s “Buy Canadian – Build Communities” campaign fails to clearly distinguish

between permitted Canadian content policies and prohibited local preferences. The AIT

Canadian content provisions referred to by the CAW are an exception to the general

non-discriminatory rules contained in that treaty. These rules prohibit the adoption of

local or other geographic preferences or other restrictive procurement specifications

and call for general reciprocal non-discrimination across all Canadian suppliers and

products. “Buying Canadian” does not translate into building your local community. It

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simply allows for a generic Canadian preference for all Canadian suppliers and products

across all Canadian communities.

Recommendation 2:

Municipalities should respect the reciprocal non-discrimination rules in the Agreement

on Internal Trade and should adopt clear policies against local supplier preferences or

other biased specifications.

Recommendation 3:

Before adopting any Canadian content preferences, municipalities should consider

how these policies would benefit their own ratepayers and the net effect of such

policies on municipal expenditures and revenues (i.e. will the costs of a Canadian

subsidy paid by local taxpayers to Canadian suppliers and products from other parts of

Canada create more jobs and revenues within the municipality?)

Implementation Risks

A. Treaty Breaches

As a general rule the AIT prohibits the adoption of local preferences. Unless a

municipality can justify that local preference under another recognized exception,

adopting such preferences would put it in contravention of the treaty.

Recommendation 4

Public institutions that are subject to the Agreement on Internal Trade should govern

their procurement practices in accordance with the requirements of that treaty. Any

departure from the general standards of open procurement should: (a) be based on

the established exceptions recognized by the treaty; (b) be based on decisions made

at the appropriately senior levels within the organization; and (c) be properly

documented to ensure accountability and transparency in the expenditure of public

funds.

B. Potential Statutory Restrictions

The federal Competition Act and Ontario’s Discriminatory Business Practices Act are

often cited within purchasing circles as potential statutory restrictions that could

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prohibit the adoption of local preference policies. A preliminary review of the relevant

statutory provisions indicates that the application of these statutes to bar the adoption

of restrictive procurement specifications (such as local preferences) is far from clear.

Recommendation 5

Prior to adopting a local preference policy, a purchasing institution should seek a

written opinion from the federal Competition Bureau to confirm what, if any,

restrictions may be imposed on local preferences by the Competition Act.

Recommendation 6

Before it applies any local preference to its procurement, a purchasing institution

should investigate the possible application of the Discriminatory Business Practices Act

by: (a) seeking clarification from the government department responsible for

administering the statute; and (b) investigating the possibility of obtaining an

advanced judicial interpretation on the issue.

C. The Common Law Risks (Vague and Hidden Preferences)

Unless it establishes precise and transparent rules that meet the strict legal fairness

standards imposed by the common law of competitive bidding, a purchasing institution

that implements Canadian content requirements or other local preferences faces

considerable legal exposures when conducting a tendering process.

The legal opinion commissioned by the CAW recommends that legislation be enacted to

create standard practices to address: (i) the rules for ascertaining Canadian content; (ii)

the circumstances where sufficient competition will be deemed to exist in order to limit

competition to Canadian suppliers only; and (iii) the reporting requirements that would

apply to public institutions in relation to the implementation of a Canadian content

policy. There is much work to be done to properly implement a Buy Canadian policy in a

consistent, transparent and legally defensible manner. In the absence of such clear

standards and evaluation criteria, municipalities face significant legal exposures during a

tendering process if they seek to implement these policies.

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Recommendation 7

Purchasing institutions should ensure that all of their contract award criteria meet the

standards of clarity, transparency and objectivity required to ensure a legally

defensible tendering process.

Politicizing the Procurement Process

Buy Canadian policies and other local preferences can lead to the politicization of the

procurement process. Irrespective of the merits of the particular context or the merits

of the particular public policy that is being pursued, taxpayers have every right to be

wary whenever a competitive procurement process is bypassed and a contract is

negotiated behind closed doors in the name of “the greater public interest”. The track

record of the Canadian public sector in this regard has been far from stellar and by some

well documented indications, the situation may actually be deteriorating rather than

improving. When spending decisions are made at the political level and “pressing public

priorities” are used to justify “exceptions” to general procurement rules, the public

interest can be seriously compromised.

To maintain the integrity of the bidding process, contract award decisions need to be

based on the objective application of transparent evaluation criteria. The integrity of the

process and quality of the outcome can become compromised when the decision-

making becomes politicized, is open to the influence of lobbying activities or is

otherwise based on factors other than the objective application of predetermined

transparent criteria.

Recommendation 8

As a general rule, government contract award decisions should be based on clear,

transparent and objective criteria that are applied free from political considerations or

political interference.

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Introduction

As we stand in the grip of a global economic crisis, government leaders around

the world are embarking on unprecedented spending sprees. Their plan is to

inject billions of dollars into the marketplace to stimulate an economic recovery.

Much of that spending will occur through public procurement projects in every

conceivable area from construction to technology. This is not the first time that

procurement professionals have been called on to deliver extraordinary results

under pressing conditions. Nor will it be the last.

In the coming months and years, procurement professionals in the public sector

will face overwhelming pressure to get to market as quickly as possible with their

tenders and requests for proposals. Paradoxically, as their tightening timeframes

are compressed even further, they will also be put to the highest standards of

probity in spending and transparency in process. The initial rush to market will be

replaced with a rush to judgment if mistakes are made or standards are not met.

In the heat of the recent economic crisis, the issue of local preference (i.e. giving

preferential treatment to local suppliers over other suppliers as a means of using

public spending to create or protect local jobs) has re-emerged on the

procurement landscape. In the midst of an anticipated increase in transfer funds

to municipalities, municipal purchasing departments in Ontario are facing

considerable pressure to adopt Buy Canadian policies and other local preference

practices to help support local businesses and protect and create local jobs.

This whitepaper will canvass the significant legal and public policy risks associated

with local preferences in public purchasing and will offer some recommendations

on how to deal with those risks. More specifically, this whitepaper will cover the

following topics relating to local preference:

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1. The CAW’s “Buy Canadian - Build Communities” Campaign

2. Narrowing Competition: Trade Treaties and Trade Wars

3. Distinguishing Canadian Content from Local Preference

4. Implementation Risks

A. Treaty Violations

B. Statutory Restrictions

C. Common Law Risks (Vague and Hidden Preferences)

5. Politicizing the Procurement Process

1. The CAW’s “Buy Canadian – Build Communities” Campaign

As we find ourselves in the midst of an economic crisis, governments around the

world are looking to leverage their spending power to help stimulate an economic

rebound. While many economists warn against the adverse impact of

protectionist policies on international trade and economic growth, the United

States Congress recently threatened to attach stringent new Buy American

policies to President Obama’s multi-billion dollar stimulus package. The outcome

of this debate will have a significant impact on Canadian suppliers who currently

access a large US customer base.

Meanwhile, Canadian governments are facing similar policy choices as they

quickly develop their own economic stimulus strategies. These strategies include

flowing significant public funds to municipal governments in the upcoming years.

In the midst of this anticipated increase in transfer funds to municipalities,

municipal purchasing departments are facing considerable pressure to adopt Buy

Canadian policies to help support local businesses. The Canadian Auto Workers

Union has been at the forefront of this debate, calling for:

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federal, provincial and territorial governments to enact Buy Canadian

legislation to apply to municipal purchasing and to the funds transferred to

municipalities;

a minimum of 50% Canadian content and domestic final assembly in the

purchase of public transit vehicles; and

the highest possible Canadian content for all goods and services, not just

public transit vehicles and services.

The following excerpt from the CAW’s website provides some highlights from the

“Buy Canadian – Build Communities” campaign launched by the trade union in

late 2008:

Buy Canadian - Build Communities:Tell Your Elected RepresentativesDecember 10, 2008, 1:29 PM EST

Municipal councils across the country must be challenged to endorse the CAW's Buy

Canadian - Build Communities resolution that ensures whenever there is a

procurement opportunity tax dollars are used to put Canadians to work.

CAW Council delegates were reminded about a recent legal opinion which clearly

shows Canadian governments can require Canadian made products and services to

be purchased when procurement decisions are being made.

The CAW commissioned this legal opinion to dispel the right-wing myth that Buy

Canadian procurement policies would be against the rules of international trade

agreements such as NAFTA, WTO and others.

The municipal resolution commits municipal governments to purchase goods with

the highest possible amount of Canadian content as well as purchasing public

transit vehicles with a minimum of 50 per cent Canadian content, including final

assembly in Canada. As well, it calls for an annual report to the council on the

amount of Canadian content in purchases.

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Bob Chernecki, assistant to CAW National President, spoke of the need for every

local union to approach their municipal and regional councils to endorse the Buy

Canadian resolution. "It can be done -let's get to work and make sure that these

jobs stay in Canada."

As the CAW states on its website, to “dispel the right wing myth” that Buy

Canadian policies contravene international trade agreements, it commissioned a

legal opinion from international trade lawyer Steven Shrybman of Sack Goldblatt

Mitchell LLP which claims that governments can legally adopt Buy Canadian

policies, whether at the municipal, provincial or federal levels. That opinion

contains the following significant points:

While they significantly impact federal government procurement,

international procurement agreements do not apply to provincial or

municipal governments.

Neither domestic nor international trade treaties prevent municipal

governments from adopting Buy Canadian policies.

The domestic Agreement on Internal Trade (“AIT”) expressly permits Buy

Canadian policies.1

The AIT permits a 10% preference for “Canadian value added”.2

1 However, the AIT prohibits discrimination based on location or place of origin within Canada and therefore prohibits

discriminating between Canadian suppliers. Buy Canadian should not be confused with local preferences, which are generally not

permitted under the AIT. See the discussion below.2 “Canadian value added” is defined by the AIT to mean the proportion of the contracted services performed by Canadian residents.

In relation to goods, this means the value added to imported goods by manufacturers and distributors.

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The AIT permits limiting tendering to Canadian goods and services provided

that there is sufficient competition amongst Canadian suppliers.3

The legal opinion recommends enacting legislation to create standard

practices to address: (i) the rules for ascertaining Canadian content; (ii) the

circumstances where sufficient competition will be deemed to exist in

order to limit competition to Canadian suppliers only; and (iii) the reporting

requirements that would apply to public institutions in relation to the

implementation of a Canadian content policy.

While the legal opinion may, for the most part, be technically correct within its

specific narrow context, this paper will explain why an issue of this significance

cannot be reduced to the narrow legal analysis of specific trade treaty provisions.

Rather, it must be framed within the broader legal and policy context within

which the public procurement process operates. More specifically, this paper will

discuss the following significant legal and policy concerns raised by the CAW’s

“Buy Canadian- Build Communities” campaign:

Narrowing Competition: the CAW campaign advocates creating a

preference to contractors based on their place of origin, citing narrow

exceptions that permit Canadian content polices under limited

circumstances while downplaying the letter and spirit of domestic and

international trade rules that generally aim to remove protectionist barriers

to competition;

Distinguishing Canadian Content from Local Preference: the CAW’s “Buy

Canadian – Build Communities” campaign fails to adequately distinguish

3 The AIT defines “Canadian good” to mean: (i) produced exclusively from domestic materials; (ii) manufactured in Canada; (iii) a

good which if exported would qualify as a Canadian good under rules of origin.

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between Canadian content and local preferences, noting narrow exceptions

that permit Canadian content while glossing over the general prohibition

against local preferences and other restrictive specifications;

Implementation Risks: the CAW campaign downplays the practical

challenges posed in properly implementing a Canadian content policy,

calling on governments to eventually enact legislation to establish clear

rules while, in the interim, leaving municipalities to fend for themselves to

navigate significant legal and policy risks in a legislative and policy vacuum;

Politicized Procurement: the CAW campaign politicizes the public

procurement process in the name of overriding public policy considerations

but fails to adequately consider the significant risks created whenever

“exceptional circumstances” are cited as a reason to bypass the established

best practices of open, transparent and fair competition.

2. Narrowing Competition: Trade Treaties and Trade Wars

The objectives of value-for-money, transparency and trade liberalization are thethree corners of the procurement policy pyramid. These policies are captured inthe opening paragraph of Chapter 5 of the AIT, which refers to the open publictendering system as essential to:

… ensure equal access to procurement for all Canadian suppliers in order tocontribute to a reduction in purchasing costs and the development of a strongeconomy in a context of transparency and efficiency.4

Over the last few decades, removing barriers to trade for private sector suppliers,

enhancing value-for-money for Canadian taxpayers and increasing transparency in

4 Agreement on Internal Trade, 18 July 1994, [entered into force 1 July 1995], c. 5, Art. 501. See online: <http://www.ait-aci.ca/index_en.htm>.

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public sector spending have all become well recognized norms of government

procurement.

In the introduction to its Agreement on Government Procurement, the WorldTrade Organization notes the protectionist pressures faced by governments tofavour suppliers from within their own jurisdiction:

In most countries the government, and the agencies it controls, are together thebiggest purchasers of goods of all kinds, ranging from basic commodities to high-technology equipment. At the same time, the political pressure to favour domesticsuppliers over their foreign competitors can be very strong.5

In order to open government procurement to greater competition, the applicabletrade treaties seek to counter these protectionist tendencies by establishingprotocols for “reciprocal non-discrimination” or “national treatment” throughwhich each signatory pledges that its public institutions will provide equal accessto suppliers from the other jurisdictions as it does to suppliers from its ownjurisdiction.

In its 2000-2001 Annual Report, Canada’s Internal Trade Secretariat also refers tothe public policy objective of reducing domestic barriers to trade within Canadaby implementing non-discriminatory public procurement policies and byeliminating:

…local price preferences, biased technical specifications, unfair registrationrequirements and other discriminatory practices for non-resident suppliers in orderto ensure equal access to procurement for all interested Canadian suppliers.6

As this passage illustrates, one of the key tenets of government procurement is toopen a level playing field to all suppliers falling within the umbrella of theapplicable trading block. The expansion of trade treaties has thus expanded thepool of potential domestic and international suppliers bidding on governmentwork in Canada.

5 See online: <http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm10_e.htm>.6 Canadian Internal Trade Secretariat, 2001-2002 Annual Report at 4.

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The World Trade Organization’s Agreement on Government Procurement (“AGP”),effective January 1, 1996, replaced the General Agreement on Tariffs and Trade’sCode on Government Procurement. As the World Trade Organization states, theoriginal agreement:

… was first negotiated during the Tokyo Round and entered into force on 1 January1981. Its purpose is to open up as much of this business as possible to internationalcompetition. It is designed to make laws, regulations, procedures and practicesregarding government procurement more transparent and to ensure they do notprotect domestic products or suppliers, or discriminate against foreign products orsuppliers.7

The increasing international prominence given to government procurementculminated in the Uruguay Round with a marked international expansion of opengovernment procurement practices:

The present agreement and commitments were negotiated in the Uruguay Round.These negotiations achieved a 10-fold expansion of coverage, extendinginternational competition to include national and local government entities whosecollective purchases are worth several hundred billion dollars each year. The newagreement also extends coverage to services (including construction services),procurement at the sub-central level (for example, states, provinces, departmentsand prefectures), and procurement by public utilities. The new agreement tookeffect on 1 January 1996.8

The signatories include a large number of Canada’s trading partners in Europe,Asia and North America. This treaty gives Canadian suppliers the right to bidwithout discrimination on a broad range of public sector tender calls issued in thesignatory nations:

The AGP applies to government procurements with a value equal to or greater thancertain monetary thresholds. The monetary thresholds applicable to procurementsby government departments, agencies and enterprises are $261,300 for goods,

7 See online: <http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm10_e.htm>.8 Ibid.

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services or any combination thereof and $10.0 million for construction servicescontracts. These thresholds are revised periodically in accordance with theprovisions of the AGP.9

In exchange, the Canadian federal government must provide reciprocal non-discrimination to the other signatory’s suppliers.

The AGP also requires signatory nations to establish a domestic forum within eachsignatory nation where suppliers can challenge breaches of the treatycommitments. As the World Trade Organization states, the AGP:

…reinforces rules guaranteeing fair and non-discriminatory conditions ofinternational competition. For example, governments will be required to put inplace domestic procedures by which aggrieved private bidders can challengeprocurement decisions and obtain redress in the event such decisions were madeinconsistently with the rules of the agreement.10

In Canada those suppliers can launch challenges to Canadian federal governmentprocurements by filing a complaint with the Canadian International TradeTribunal.

Chapter 10 of the North American Free Trade Agreement (“NAFTA”) deals withthe government procurement obligations of Canada, the United States of Americaand Mexico. Canada’s Department of Public Works and Government Services’Supply Manual states that NAFTA:

Focuses on achieving greater competition for, and transparency in, governmentprocurement, eliminating protection of domestic products or suppliers ordiscrimination among foreign products or suppliers. It also details Canada’s

9 See The Canadian International Trade Tribunal’s Procurement Review Process: A Descriptive Guide under “Background”, “NAFTA”online: <http://www.citt-tcce.gc.ca/publicat/guide2004_e.asp#P21_3080>.

10 See online: <http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm10_e.htm>.

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agreement to undertake certain government procurement functions in accordancewith procedures prescribed in the Act.11

The Act referred to above is the North American Free Trade AgreementImplementation Act, which brings the NAFTA commitments into legal effect inCanada and, among other things, establishes the Canadian International TradeTribunal as the forum for procurement disputes involving federal governmentprocurements.

Chapter 10 of NAFTA, effective January 1, 1994, gives Canadian suppliers the rightto bid without discrimination on U.S. and Mexican federal governmentprocurements valued over the prescribed thresholds. The Canadian InternationalTrade Tribunal’s Procurement Review Process: A Descriptive Guide explains theNAFTA thresholds as follows:

NAFTA applies to government procurements with a value equal to or greater thancertain monetary thresholds. The monetary thresholds applicable to procurementsby government departments and agencies are $89,000 for goods, services or anycombination thereof and $11.5 million for construction services contracts. Themonetary thresholds applicable to procurements by government enterprises are$445,000 for goods, services or any combination thereof and $14.2 million forconstruction services contracts. As between Canada and the United States, themonetary threshold for the procurement of goods by departments and agencies is$38,000. These thresholds are revised periodically in accordance with theindexation and conversion provisions in NAFTA.12

In turn, for procurements exceeding the monetary thresholds, the Canadianfederal government must provide reciprocal non-discrimination to suppliers fromMexico and the United States. The specific procurement obligations under NAFTAare similar to those contained in the AGP. As with the AGP, U.S. and Mexicansuppliers can launch challenges to Canadian federal government procurements byfiling a complaint with the Canadian International Trade Tribunal.

11 “Supply Manual” Department of Public Works and Government Services, Government of Canada, Chapter 4 – National and

International Trade Agreements, at 4.008. See online: <http://www.pwgsc.gc.ca/acquisitions/text/sm/chapter04-e.html#nafta>.

12 See The Canadian International Trade Tribunal’s Procurement Review Process: A Descriptive Guide under “Background”, “NAFTA”online:<http://www.citt-tcce.gc.ca/publicat/guide2004_e.asp#P21_3080>.

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The AIT is a domestic treaty signed by the federal, provincial and territorialgovernments in Canada. Chapter 5 of the AIT sets out specific rules forgovernment procurement. Subject to the monetary thresholds of $25,000 forgoods and $100,000 for services and construction,13 the parties agree that theywill procure by way of open tender call accessible equally to all Canadiansuppliers. As with the international treaties, the AIT aims to implement theprinciples of open competition and reciprocal non-discrimination for the benefitof Canadian suppliers from all jurisdictions within Canada:

The AIT prohibits the federal government from discriminating against goods orservices of a particular province or region and the suppliers of such goods orservices and those of any other province or region. The AIT imposes proceduraldisciplines aimed at promoting equal access to procurement for all Canadiansuppliers.14

The annexes to Chapter 5 contain detailed lists of public sector entities that areincluded or excluded from these AIT obligations. Those obligations are similar tothose contained in the AGP and NAFTA and include: (a) “reciprocal non-discrimination” provisions to protect Canadian suppliers from barriers to trade;(b) procedural rules aimed at ensuring equal access to all Canadian suppliers; (c)prescribed methods for issuing a tender call; and (d) the specific types ofinformation that must be included in all tender calls.

In Canada, the Internal Trade Secretariat oversees and administers the AIT. TheSecretariat notes that the AIT’s procurement-related objectives are subject toongoing negotiations to promote the expansion of the treaty’s scope:

Eliminating local price preferences, biased technical specifications, unfairregistration requirements and other discriminatory practices for non-residentsuppliers to ensure equal access to procurement for all interested Canadiansuppliers. [The provisions for extending this chapter to the MASH (municipalities,

13 Article 502 of the AIT sets the fixed thresholds at $25,000 for goods and $100,000 for services and construction. Some publicinstitutions may be exempt or subject to higher thresholds based on specific annexes to Chapter 5 of the AIT.

14 See The Canadian International Trade Tribunal’s Procurement Review Process: A Descriptive Guide under “Background”, “AIT”online:<http://www.citt-tcce.gc.ca/publicat/guide2004_e.asp#P21_3080>.

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the academic community, school boards, health and social services) sector are beingnegotiated.]15

In fact, the AIT’s Sixth Protocol of Amendment came into effect January 1, 2005.This round of negotiations expanded the scope of public institutions acrossCanada in this MASH sector (sometimes referred to as the broader public sectori.e., municipalities, the academic community, school boards, health and socialservices) that are now subject to the AIT’s open procurement obligations.16

As with the international suppliers falling within the AGP and NAFTA, Canadiansuppliers can also file complaints against the federal government through theCanadian International Trade Tribunal. However, the Tribunal does not havejurisdiction over the procurement practices of provincial, territorial or municipalgovernments or their subsidiary institutions. Those procurements are subject tothe Chapter 5 government-to-government protest procedures, to the internalgovernance processes that may be established by each particular institution andto traditional legal challenges through the courts.17

It is within this context that the CAW’s “Buy Canadian - Build Communities”campaign enters into the public policy debate. While it is technically true that theAIT contains narrow exceptions for Canadian content preferences, thoseexceptions run in stark contrast to the generally prevailing letter and spirit ofinternational and domestic trade treaties that prohibit protectionist practices andpromote open competition. The AIT is a domestic treaty so it is, by definition,largely silent on international matters. However, this is not the same as sayingthat the municipal sector conducts its procurement in a vacuum that makes itimmune from international trade issues.

15 See Internal Trade Secretariat website’s “Overview of the Agreement on Internal Trade” at<http://www.intrasec.mb.ca/index.en.htm>.

16 The May 2007 consolidated version of the AIT, which incorporates all Protocols of Amendment up to the Seventh Protocol of

Amendment is available at the above noted website.17 As evidenced by the large body of common law discussed in other chapters, bidders seeking to challenge the procurements of

non-federal public sector entities tend to prefer traditional court-based litigation over the Chapter 5 dispute resolutionprovisions.

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While it is technically correct to state that the international trade treaties do notapply directly to the municipal sector in Ontario (i.e. suppliers cannot bring a legalchallenge to the Canadian International Trade Tribunal against a municipalitysince the Tribunal’s jurisdiction is limited to the federal sector) it is alsotechnically accurate to state that these treaties do not apply to the municipalsector in Michigan or New York State. Reducing the issue to a legal interpretationof the scope of a domestic trade treaty and the jurisdiction of a federal tradetribunal misses the larger point. While at the municipal level protectionism maynot be a legal issue, it certainly remains a trade issue with significant economicimplications. Protectionism is a two way street. Jobs are not created or saved byprovoking trade disputes with trading partners who harbour their own populistprotectionist tendencies and are waiting for a justification to shut Ontariosuppliers out of their markets.

Recommendation 1:

Before a municipality adopts protectionist policies in favour of domestic or local

suppliers or products, it should assess the potential impact on our domestic and

local suppliers of retaliatory protectionist practices adopted by U.S. municipal

institutions.

3. Blurring the Canadian Content Exception and Local Preference

The CAW’s “Buy Canadian – Build Communities” campaign fails to clearly

distinguish between permitted Canadian content policies and prohibited local

preferences. Read in its full and proper context, the AIT Canadian content

provisions referred to by the CAW are an exception to the general non-

discriminatory rules contained in that treaty. These rules prohibit the adoption of

local or other geographic preferences or other restrictive procurement

specifications and call for general reciprocal non-discrimination across all

Canadian suppliers and products. The main AIT rules relevant to this issue are

excerpted below:

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Article 501: PurposeConsistent with the principles set out in Article 101(3) (Mutually Agreed Principles)and the statement of their application set out in Article 101(4), the purpose of thisChapter is to establish a framework that will ensure equal access to procurementfor all Canadian suppliers in order to contribute to a reduction in purchasing costsand the development of a strong economy in a context of transparency andefficiency.

Article 504: Reciprocal Non-Discrimination1. Subject to Article 404 (Legitimate Objectives), with respect to measures coveredby this Chapter, each Party shall accord to:

(a) the goods and services of any other Party, including those goods and servicesincluded in construction contracts, treatment no less favourable than the besttreatment it accords to its own such goods and services; and

(b) the suppliers of goods and services of any other Party, including those goods andservices included in construction contracts, treatment no less favourable than thebest treatment it accords to its own suppliers of such goods and services.

2. With respect to the Federal Government, paragraph 1 means that, subject toArticle 404 (Legitimate Objectives), it shall not discriminate:

(a) between the goods or services of a particular Province or region, including thosegoods and services included in construction contracts, and those of any otherProvince or region; or

(b) between the suppliers of such goods or services of a particular Province orregion and those of any other Province or region.

3. Except as otherwise provided in this Chapter, measures that are inconsistent withparagraphs 1 and 2 include, but are not limited to, the following:

(a) the imposition of conditions on the invitation to tender, registrationrequirements or qualification procedures that are based on the location of asupplier's place of business in Canada, the place in Canada where the goods areproduced or the services are provided, or other like criteria;

(b) the biasing of technical specifications in favour of, or against, particular goods orservices, including those goods or services included in construction contracts, or in

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favour of, or against, the suppliers of such goods or services for the purpose ofavoiding the obligations of this Chapter;

4. No Party shall impose or consider, in the evaluation of bids or the award ofcontracts, local content or other economic benefits criteria that are designed tofavour:

(a) the goods and services of a particular Province or region, including those goodsand services included in construction contracts; or

(b) the suppliers of a particular Province or region of such goods or services.

5. Except as otherwise required to comply with international obligations, a Partymay accord a preference for Canadian value-added, subject to the followingconditions:

(a) the preference for Canadian value-added must be no greater than 10 per cent;

(b) the Party shall specify in the call for tenders the level of preference to be used inthe evaluation of the bid; and

(c) all qualified suppliers must be informed through the call for tenders of theexistence of the preference and the rules applicable to determine the Canadianvalue-added.

6. Except as otherwise required to comply with international obligations, a Partymay limit its tendering to Canadian goods, Canadian services or Canadian suppliers,subject to the following conditions:

(a) the procuring Party must be satisfied that there is sufficient competition amongCanadian suppliers;

(b) all qualified suppliers must be informed through the call for tenders of theexistence of the preference and the rules applicable to determine Canadiancontent; and

(c) the requirement for Canadian content must be no greater than necessary toqualify the procured good or service as a Canadian good or service.

23

In summary, while the Canadian content exceptions noted above may permit a

municipality to adopt limited preferences for Canadian content (Articles 504.5,

504.6), they do not allow a municipality to favour its local suppliers over other

Canadian suppliers. Since all Canadian suppliers are entitled to equal treatment

under the preceding provisions (Articles 501, 504.1, 504.3 and 504.4) “Buying

Canadian” does not translate into building your local community. It simply allows

for a generic Canadian preference for all Canadian suppliers and products across

all Canadian communities.

Recommendation 2:

Municipalities should respect the reciprocal non-discrimination rules in the

Agreement on Internal Trade and should adopt clear policies against local

supplier preferences or other biased specifications.

Recommendation 3:

Before adopting any Canadian content preferences, municipalities should

consider how these policies would benefit their own ratepayers and the net

effect of such policies on municipal expenditures and revenues (i.e. will the

costs of a Canadian subsidy paid by local taxpayers to Canadian suppliers and

products from other parts of Canada create more jobs and revenues within the

municipality?)

24

4. Implementation Risks

The next section canvasses the following legal and procurement practice risks

inherent in the adoption of Canadian content criteria and other local preference

policies:

A. Treaty Breaches

B. Potential Statutory Restrictions

C. Common Law Risks (Vague and Hidden Preferences)

A. Treaty Breaches

As noted above, a municipality in Ontario may be permitted under the AIT to

adopt a Canadian content policy but as a general rule the treaty prohibits the

adoption of local preferences. Unless a municipality can justify that local

preference under another recognized exception, adopting such preferences

would put it in contravention of the treaty. 18

Those institutions operating beyond the jurisdiction of the Canadian International

Trade Tribunal may be tempted to dismiss AIT breaches as inconsequential since,

unlike their federal counterparts, they cannot be directly sued by suppliers at the

Tribunal for breaching the treaty. However, the immunity from sanction at the

municipal level for breaching the AIT has been greatly exaggerated. The potential

legal and administrative risks for such breaches include the following:

18 It is noted that there are a number of exceptions to the application of the treaty which can be considered on a case-by-case basis

(e.g. contract value thresholds, direct contract award exceptions, exclusions for regional economic development). However, the

general rule prohibits local preference and restrictive specifications.

25

Potential legal exposures when treaty breaches also result in the

application of vague or hidden contract award criteria;19

Inter-jurisdictional trade dispute remedies under Chapter 5 of the AIT; 20

Violations of specific transfer fund arrangements with the senior levels of

government;21 and

Long term reputational risks to the institution.22

Recommendation 4

Public institutions that are subject to the Agreement on Internal Trade should

govern their procurement practices in accordance with the requirements of that

treaty. Any departure from the general standards of open procurement should:

(a) be based on the established exceptions recognized by the treaty; (b) be

based on decisions made at the appropriately senior levels within the

organization; and (c) be properly documented to ensure accountability and

transparency in the expenditure of public funds.

19 See the subsequent discussion under “Common Law Risks: Vague and Hidden Preferences”. In addition to the tendering law

risks raised in that section, it should also be noted that additional legal risks are created when treaty obligations are incorporated

into the statutory or contractual structures of a purchasing institution (e.g. through municipal bylaws or through incorporation into

the terms of the tendering documents and tendering process). In those instances, the treaty can be transformed from “soft law” into

“hard law”. Furthermore, administrative law remedies such as judicial reviews can also apply to create legal risks in the municipal

setting. These potential exposures need to be assessed on a case-by-case basis and are beyond the scope of this paper.20 Under the Agreement on Internal Trade’s dispute resolution provisions, an out-of-province Canadian supplier who was denied

an opportunity due to a local preference policy could raise a complaint via its home jurisdiction which could, in turn, initiate a trade

complaint against Ontario pursuant to the provisions in Article 513: Bid Protest Procedures – Provinces.21 Administrative spending controls are often applied by the federal and provincial governments through transfer fund agreements

that require compliance with trade treaty obligations and other public procurement rules.22 See, for example, the Bellamy Report released as part of the Toronto Computer Leasing Inquiry and the Toronto External

Contracts Inquiry. That report, which is discussed later in this paper, contains an extensive series of research papers focusing on

procurement improprieties, their corresponding adverse impact on the reputation of purchasing institutions and recommendations

for re-establishing public confidence in municipal government procurement.

26

B. Potential Statutory Restrictions

The federal Competition Act and Ontario’s Discriminatory Business Practices Act

are often cited within purchasing circles as potential statutory restrictions that

could prohibit the adoption of local preference policies. A preliminary review of

the relevant statutory provisions indicates that the application of these statutes

to bar the adoption of restrictive procurement specifications (such as local

preferences) is far from clear. As discussed below, it is recommended that

further clarification be sought regarding the scope of these statutes prior to

adopting any local preference policies.

(i) The Competition Act

The impact of the federal Competition Act on the public procurement process is

most often seen through the enforcement of its Part VI Offences in Relation to

Competition provisions (namely the section 45 conspiracy provisions and the

section 46 bid-rigging provisions). The section 46 bid-rigging provisions are aimed

at preventing supplier collusion in the preparation of tenders and are not relevant

to the issue of local preference. However, the section 45 conspiracy provisions

are broader and include the following prohibitions with emphasis added:

Conspiracy

45. (1) Every one who conspires, combines, agrees or arranges with anotherperson

(a) to limit unduly the facilities for transporting, producing, manufacturing,supplying, storing or dealing in any product,

(b) to prevent, limit or lessen, unduly, the manufacture or production of a productor to enhance unreasonably the price thereof,

(c) to prevent or lessen, unduly, competition in the production, manufacture,purchase, barter, sale, storage, rental, transportation or supply of a product, or inthe price of insurance on persons or property, or

27

(d) to otherwise restrain or injure competition unduly,

is guilty of an indictable offence and liable to imprisonment for a term notexceeding five years or to a fine not exceeding ten million dollars or to both.

While it may be unlikely that these provisions would apply to prohibit the

Canadian content policies that were recognized in the AIT by the federal,

provincial and territorial governments, it is unclear whether those provisions

could be applied to the adoption of local preferences that contravene the AIT.

There do not appear to be any reported decisions on point.23 The potential

application of the Competition Act to the adoption of local preferences appears to

be a genuine grey area in the law.

Fortunately, the federal Competition Bureau offers a written opinion service that

could authoritatively resolve the matter to provide guidance to public institutions

in this area. As stated on the Bureau’s website:

The Bureau provides legally binding written opinions to businesses seeking tocomply with the Competition Act. Company officials, lawyers and others mayrequest written opinions on whether proposed business plans and practices wouldraise concerns under the Act. The Bureau’s written opinions take into accountjurisprudence, previous written opinions and current policies. Written opinions arebinding for as long as the facts of the situation remain substantially unchanged andthe firm carries out the business plan or practice substantially as proposed.

With the consent of the requesting parties, opinions are published in their entirety.Where consent is not obtained, the Bureau edits the opinion to remove companynames and/or produce a summary of the opinion that protects identities andcommercially sensitive information.

23 A preliminary review of the reported decisions relating to these provisions did not uncover any cases that considered the

application of the statute to local preferences or other restrictive specifications in the context of a procurement process.

28

An institution that is concerned with breaching the restraint on competition

provisions contained in the Competition Act could therefore approach the Bureau

to seek a clarification on the matter.

Recommendation 5

Prior to adopting a local preference policy, a purchasing institution should seek

a written opinion from the federal Competition Bureau to confirm what, if any,

restrictions may be imposed on local preferences by the Competition Act.

(ii) Discriminatory Business Practices Act

Like the federal Competition Act, Ontario’s Discriminatory Business Practices Act

also contains a potential statutory bar against the adoption of local preference

rules. The relevant provisions from that statute are reproduced below with

emphasis added:

Purpose and intent of Act

2. The purpose and intent of this Act is to prevent discrimination in Ontario onthe ground of race, creed, colour, nationality, ancestry, place of origin, sex orgeographical location of persons employed in or engaging in business. R.S.O.1990, c. D.12, s. 2.

Discriminatory business practices

4. (1) For the purposes of this Act, the following shall be deemed to bediscriminatory business practices:

1. A refusal to engage in business with a second person, where the refusal,

(a) is on account of an attribute,

(i)of the second person, or

(ii) of a third person with whom the second person conducts, has conductedor may conduct business; and

29

(b) is a condition of the engaging in business of the person making the refusal andanother person.

Definitions

(2) In subsection (1),

“attribute”, with reference to a person, means the race, creed, colour, nationality,ancestry, place of origin, sex or geographical location of the person, and includesthe race, creed, colour, nationality, ancestry, place of origin, sex or geographicallocation of a person connected with the person or nationals of a country with thegovernment of which the person conducts, has conducted or may conduct business;(“attribut”)

“engaging in business” includes selling goods or services to or buying goods orservices from, and “engage in business” has a corresponding meaning; (“se livrer aucommerce”)

Discriminatory business practices prohibited

5. (1) No person in Ontario shall engage in a discriminatory business practice.R.S.O. 1990, c. D.12, s. 5 (1).

The statute creates a complaint process to the Director in the relevant

government Ministry, as well as the right to seek a court order to strike down a

discriminatory practice. It also recognizes the right of a prejudiced party to obtain

damages, including punitive damages, against an offending party. Unfortunately,

as with the federal Competition Act, there do not appear to be any reported

decisions that have considered the application of the statute to the issue of

adopting local preferences in a public procurement process.

The application of the statute to local preferences would appear to turn on the

interpretation of “place of origin” and “geographic location”. A narrow

interpretation would place those terms within the context of the surrounding

phrases and concepts which appear to be dealing with discrimination as

commonly understood within the context of human rights legislation (i.e. “place

of origin” and “geographic location” used in the sense of ethnic origin outside of

Canada and prohibiting discrimination against a business person of, for example,

Italian or French origin). A broader interpretation would take those terms to

30

literally mean any form of discrimination that was based on a supplier’s location

(i.e. “place of origin” and “geographic location” prohibiting discrimination against

a business person operating out of, for example, Hamilton or Thunder Bay).

In one reported case that considered the interpretation of these provisions, the

Ontario Superior Court of Justice appeared at first to adopt the narrower human

rights interpretation of the legislation but then proceeded to consider the

application of the statute to geographic locations within Ontario. In its December

14, 2004 decision in Beauchamp (Litigation Guardian of) v. North Central

Predators AAA Hockey Assn., the Court considered the application of the statute

to the mobility restrictions applied to minor hockey league players living outside

of Toronto who were prohibited from playing with a Toronto hockey team. While

the Court ultimately dismissed the application of the statute on the basis that the

minor hockey league was not “engaging in business”, it also made the following

general statements about the human rights-related objectives of the statute:

49 The Act received Royal Assent on November 8, 1978, after passage by the

Ontario Legislature. Minor amendments were made in 1999, 2001 and 2002. No

regulations have been passed under the Act. Since its passage, the Act has been

considered in 2 reported decisions in Ontario. Neither of these cases, on different

facts, provide insight into the Act except the Act was held not to apply in each case.

50 The Act originated as a result of concerns relating to the Arab boycott of Israel

and the effects it could have on the Ontario marketplace. The boycott was primary,

secondary and tertiary in nature.

51 While the Act can be characterized as human rights legislation, it is human

rights legislation of a relatively unique kind to be considered within the context of

the Act's purpose and intention.

52 The purpose of the Act is to prohibit discrimination in business relationships.

53 In a useful and insightful article on the Act, Phillipe V. Lalonde states at page

89:

31

It is submitted that the primary purpose of the Act....was to removefrom the Ontario marketplace the discriminatory effects of foreign-inspired boycotts directed against a country with which Canadamaintains friendly relations...this writer further submits that anexamination of the legislative history of the measure confirms that theunderlying principle is, and was widely recognized to be, that a neutralstate has a right to insist that its corporate citizens are not conscriptedinto transnational economic warfare originating from abroad.

(Lalonde, Phillipe V., The Discriminatory Business Practices Act: whatprice symbolism? (1980) 38 (1) U.T. Fac. L.R. Rev. 83)

While the above passage appeared to support a narrower international human

rights based objective for the statute, the Court then proceeded to consider

alleged discrimination based on the geographic location of the players within

Ontario with no reference to ethnic origin. While the Court ultimately

determined that the league was not discriminating against the players since all

players were required to play within their geographic zones, it did not rule out the

application of the statute based on “place of origin” or “geographic location”

within Ontario. This decision appears to be the closest case on point to the issue

at hand. However, it provides little clear guidance regarding the potential

application of the statute to local preference policies. The potential application of

the Discriminatory Business Practices Act appears to be another genuine legal

grey area calling for further clarification. A municipality that adopts formal or

informal local preference policies could very well provide the basis for the test

case that could clarify this legal issue.

Recommendation 6

Before it applies any local preference to its procurement, a purchasing

institution should investigate the possible application of the Discriminatory

Business Practices Act by: (a) seeking clarification from the government

department responsible for administering the statute; and (b) investigating the

possibility of obtaining an advanced judicial interpretation on the issue.

32

C. The Common Law Risks (Vague and Hidden Preferences)

Unless it establishes precise and transparent rules that meet the strict legal

fairness standards imposed by the common law of competitive bidding, a

purchasing institution that implements Canadian content requirements or other

local preferences faces considerable legal exposures when conducting a tendering

process.

The courts have recognized that transparency is a cornerstone of the public

procurement process. Generally speaking, these tendering law duties call for the

disclosure of information relevant to the award of a tendered contract. More

specifically, the common law rules require purchasing institutions to disclose the

evaluation criteria that will apply to the competition, including the evaluation

rules that will apply to the screening of suppliers and to the ranking of suppliers.

Most tender competitions include a threshold screening stage where competing

suppliers are assessed to determine whether their submissions are eligible for

consideration in subsequent evaluation stages. Given that a duty to reject

noncompliant bidders typically applies to a tendering process, purchasing

institutions should generally limit eligibility requirements to essential minimum

standards and should draft those requirements with clarity and precision. As the

cases have shown time and again, unclear screening requirements are a breeding

ground for procurement-related litigation.

Common law obligations also prohibit the use of hidden evaluation criteria and

call for the disclosure of the following information in procurement documents:

33

• The pricing structures, volume estimates and scoring formulas that will be

relied upon to calculate the total bid price;

• A clear indication of whether supplier ranking will be based on the “lowest

bid” rule or on criteria that combine price and non-price factors; and

• All of the scored criteria that will be used to evaluate bids, including the

methods of evaluating and weighting those criteria.

As evidenced by well established legal precedents, the failure to clearly establish

transparent and objective contract award criteria can lead to interpretive

disputes, legal challenges and potentially significant legal liability.

The legal opinion commissioned by the CAW recommends that legislation be

enacted to create standard practices to address: (i) the rules for ascertaining

Canadian content; (ii) the circumstances where sufficient competition will be

deemed to exist in order to limit competition to Canadian suppliers only; and (iii)

the reporting requirements that would apply to public institutions in relation to

the implementation of a Canadian content policy. There is much work to be done

to properly implement a Buy Canadian policy in a consistent, transparent and

legally defensible manner.

The CAW’s “Buy Canadian – Build Communities” campaign calls for provincial

legislation to regulate the Canadian content policies and create consistent and

transparent practices to apply to municipalities and to Crown agencies.

However, in the absence of such clear standards and evaluation criteria,

municipalities face significant legal exposures during a tendering process if they

seek to implement these policies.

34

While the authorities in support of this proposition are too many to completely

canvass in this paper, the following cases provide some highlights from leading

Canadian and international jurisprudence dealing with the application of domestic

or local preferences in the tendering process.

Chinook Aggregates Ltd. v. Abbotsford (District)

In its November 1989 decision in Chinook Aggregates Ltd. v. Abbotsford(District),24 the British Columbia Court of Appeal held that a purchaser cannot relyon a privilege clause to apply undisclosed evaluation criteria. The case involved amunicipal tender call for a gravel crushing contract. The municipality had adoptedan undisclosed local preference policy and awarded contracts to local bidderswho were within 10 per cent of the lowest bid. The plaintiff challenged thecontract award made on the basis of the hidden preference. The Court of Appealdescribed the undisclosed local preference policy and its impact on the biddingprocess:

The appellant had made a considered decision prior to inviting tenders, not to givenotice of its local preference policy to bidders in its instructions to bidders. Officialsof the municipality considered that if notice was given this might alert localcontractors to the fact that they were afforded a preference. Presumably theappellant considered that the absence of notice would give it a price advantage. Onthe other hand, outside contractors such as the respondent believed that they wereon an equal footing with all bidders. Mr. Tanner, the principal officer of therespondent, testified that if he had been aware that the appellant might apply alocal preference in favour of local contractors up to ten per cent over the lowestbid, he would not have bid on the job because it would have been virtuallyimpossible, in view of the competitive market, for him to bid ten per cent lowerthan the lowest bidder.25

The municipality argued that the privilege clause in its tender call gave it “theright to select any tender made by any qualified bidder, not just the lowesttender”.26 The Court of Appeal disagreed since it was “unable to accept counsel’ssubmission that the privilege clause gave the appellant the right to exercise a local

24 [1989] B.C.J. No. 2045, 40 B.C.L.R. (2d) 345 (B.C.C.A.).25 Ibid., at 2 of 6 (QL).26 Ibid., at 3 of 6 (QL).

35

preference when that local preference was not revealed by, or stated in, thetender documents”.27 Furthermore, the Court of Appeal found that unless thetender call expressly stated otherwise, the implied industry practice was to awardto the low bidder:

… the trial judge found that the custom and usage in the tendering process was inaccordance with the opinions of Mr. Brawner and Mr. Ouimet. I interpret hisreasons to mean that he found that there was a custom and usage in theconstruction industry indicated by the evidence of those experts that in the absenceof notice from the owner of preferential rules or criteria for the award of a contract,then all the participants in the industry acted on the principle that the low qualifiedbidder got the job.

In my opinion, there was evidence upon which the trial judge was entitled to reachthat conclusion. I am unable to find that he erred in principle or committed palpableerror in reaching that conclusion.28

As this case illustrates, in appropriate circumstances a privilege clause may relievea purchaser of its implied duty to award to the lowest bidder. However, if apurchaser wants to rely on specific evaluation factors other than price then thosefactors should be disclosed in the tender call. While a purchaser is always free toargue that specific undisclosed evaluation factors fall within prevailing industrynorms, the practical reality is that industry practices are often subject tointerpretation and debate. As this case illustrates, a purchaser should clearlydisclose the evaluation factors it intends to rely on in order to protect itselfagainst challenges to its evaluation process.

Kencor Holdings Ltd. v. Saskatchewan

In its September 1991 decision in Kencor Holdings Ltd. v. Saskatchewan,29 theSaskatchewan Queen’s Bench held that the government could not rely onundisclosed criteria to bypass a low bidder. The case dealt with a tender callissued by the Government of Saskatchewan for the construction of a bridge. Asthe decision explains, Saskatchewan took the position that its general privilege

27 Ibid., at 4 of 6 (QL).28 Ibid., at 5 of 6 (QL).29 [1991] S.J. No. 439, [1991] 6 W.W.R. 717 (Sask. Q.B.).

36

clause allowed it to bypass the low bidder based on an undisclosed localpreference policy:

In the tender documentation the following privilege clause appears:

1200-1 . . .

The Minister may refuse to accept any tender, waive defects or technicalities, orsubject to Section 13 of the Highways Act accept any tender that he considers to bein the best interests of the Province. [emphasis added]

Section 13 of The Highways and Transportation Act, R.S.S. 1978, c. H-3 reads:

13 Where the minister deems it inexpedient to let the work to the lowest bidder, heshall report the matter to and obtain the authority of the Lieutenant Governor inCouncil before awarding the contract to any other than the lowest bidder.[emphasis added]

According to the Government, the combination of these two clauses permitted it todecline the lowest bid and to approve the more expensive one.30

The low bidder sued, arguing that these clauses did not give Saskatchewan theright to rely on undisclosed criteria, maintaining that “in the exercise of itsdiscretion respecting tenders, the Government may not consider policy which isunknown to bidders”.31 The Court agreed, noting that there “was no indication inthe tender documents that preference might be extended to Saskatchewanbidders, and the plaintiff was unaware of this possibility”.32 The Court found thatin the interest of maintaining the integrity of the bidding process, evaluationfactors should be clearly disclosed:

To maintain the integrity of the tendering process it is imperative that the low,qualified bidder succeed. This is especially true in the public sector. If governmentsmeddle in the process and deviate from the industry custom of accepting the lowbid, competition will wane. The inevitable consequence will be higher costs to thetaxpayer. Moreover, when governments, for reasons of patronage or otherwise,apply criteria unknown to the bidders, great injustice follows. Bidders, doomed in

30 Ibid., at 2 of 4 (QL).31 Ibid.32 Ibid., at 3 of 4 (QL).

37

advance by secret standards, will waste large sums preparing futile bids. Theplaintiff here for example, spent $23,000.00 on its abortive tender.33

The plaintiff was awarded lost profit damages on account of the government’simproper reliance on undisclosed selection criteria. As this case illustrates,whenever purchasers intend to rely on factors other than best price in makingtheir contract award decisions, those factors should be clearly disclosed to allbidders.

Hughes Aircraft Systems International v. Airservices Australia

In its June 1997 decision in Hughes Aircraft Systems International v. AirservicesAustralia,34 the Federal Court of Australia, General Division, determined that thetendering process initiated by Australia’s Civil Aviation Authority gave rise to atendering process contract that contained an implied duty of fairness. The Courtthen found the Authority liable for conducting an unfair evaluation of bids basedon undisclosed evaluation factors. The case dealt with a tender call for theAustralian Advanced Air Traffic System Acquisition contract (“TAAATS II”). Thecontract was awarded to an Australian corporation that was a subsidiary of aFrench company. The plaintiff, Hughes Aircraft Systems International, was anunsuccessful California-based bidder. Although it submitted the lowest qualifyingbid, Hughes was bypassed in favour of a domestic bid that offered greater“community benefits.”

Hughes argued that the Civil Aviation Authority “by contract, representation orpromise obliged itself to conduct the tendering process leading to the award ofthe TAAATS II contract fairly and in accordance with defined procedures andcriteria.” Hughes maintained that the Authority owed bidders a legal duty offairness when it conducted its evaluation process. Hughes also argued that theAuthority breached that duty when it relied on undisclosed considerations tobypass the low bid. The Court agreed.

While the Court was careful to note that the Canadian “Contract A” tenderingprocess contract (as recognized by the Supreme Court of Canada in Ontario v. RonEngineering & Construction (Eastern) Ltd.) did not apply to every tender call —since “each case turns on its own facts” — the Court did recognize that, based on

33 Ibid., at 4 of 4 (QL).34

146 ALR 1

38

the facts before it, the parties had created a binding tendering process contract.As the Court stated, the parties had agreed on “procedures to be followed andthe criteria to be applied, in the award of the TAAATS acquisition contract” andthat the parties “by agreement, had used contract to protect ‘the integrity of thebidding system.’” The Court also recognized that the implied duty of fairness is anessential element of the process contract:

If the purpose of a tender process contract is to be accomplished, if contractor-

tenderers are to be given an effective opportunity to enjoy the fruits of the bid and

not have that opportunity destroyed by the unfair dealing of the other party to thecontract, a duty such as I have described would appear to me to be a presupposition

of such a contract.35

The Court then determined that the Authority breached the process contract byunfairly straying from the predetermined evaluation rules. In particular, the Courtconcluded that the evaluators breached the terms of the process contract whenthey failed to follow the evaluation criteria established under the tender call andbypassed the low bidder in favour of a domestic bidder:

Mr Mant decided on idiosyncratic grounds. He appears to have had his own “geo-political” reasons for preferring Thomson.… [O]n his own admission he did not see

the criteria as having a priority ranking let alone one he was bound to apply strictly

and in accordance with para 16.2.3.

One might register some surprise that the Board was not given explicit advice onhow, consistent with the requirements of paras 16.1 and 16.2 of the RFT, it was to

approach its decision making in the circumstances.… I refrain from comment on the

evidence revealing the unfamiliarity of some board members with the provisions ofpara 16 of the RFT. All that needs be said is that no matter how honest the decision

making of the Board, a majority (at the least) failed to appreciate that their decision

was being taken in discharge of a contractual obligation to each of the tenderers.The manner of their decision-making ensured the CAA would be in breach of that

contract. The board members…simply did not decide in the manner required of

them by the RFT.

35 Ibid., at 39.

39

Lest there be any doubt in my conclusion, I am not taking issue with a business

judgment made by the Board. What I am concluding is that the methodology and

criteria of the RFT were not applied as contractually required.36

Since a purchasing institution may be legally challenged for not following itsstated evaluation criteria when it considers competing tenders, it should ensurethat it clearly and thoroughly discloses all of the criteria that will influence itscontract award decision. As this decision and the following case studydemonstrate, failing to follow the predefined evaluation rules and relying onvague or hidden preferences can result in a breach of the legal duties owed tocompeting bidders.

Harmon CFEM Facades (UK) Ltd. v.

The Corporate Office of the House of Commons

In its October 1999 judgment in Harmon CFEM Facades (UK) Ltd. v. The CorporateOffice of the House of Commons,37 the England and Wales High Court (Technologyand Construction Court) found that the Corporate Office of the House ofCommons breached the tendering rules by applying an undisclosed Buy Britishpolicy to the evaluation of competing bids. The case involved a tender call to buildthe New Parliamentary Building for the House of Commons in Bridge Street,Westminster, to create new offices for 210 Members of Parliament and theirstaff. The initial projected project costs were set at £250 million, making it one ofthe most expensive buildings ever built in London.

There were two bidding teams vying for the contract award. The first team, led bythe plaintiff, Harmon CFEM Facades (UK) Ltd. (“Harmon”), a consortium of foreignsuppliers, submitted the low bid. The second team, a consortium referred to asSeele-Alvis that included a major domestic contractor, submitted a higher bid. TheHouse of Commons bypassed Harmon’s low bid in favour of Seele-Alvis’s higherbid. Harmon sued, alleging that the evaluation breached the applicableprocurement rules. The Court agreed.

36 Ibid., at 66.37 [1999] EWHC Technology 199

40

The Court’s lengthy decision documented a complex series of events, includingaggressive lobbying and political pressure in favour of Seele-Alvis, whichculminated in the bypass of the low bid on purported “best value for money”considerations. As detailed below, the Court found that this “best value formoney” evaluation process was “a charade”:

The events leading to the preparation of the task force report leave no doubt thatthe objective or “game” as understood and endorsed by Mr Quick, MHP and AFE

was to ensure that Seele/Alvis was presented as the preferred tenderer largely by

“fudging the figures”, both by introducing elements of “soft costs” which hadpreviously not been considered either at all or as material and by the substitution of

figures where they could or would not be supported by G & T or which were highly

subjective. The effect was marked as the difference between Harmon andSeele/Alvis widened to about –2.4 million. Mr Quick obviously wanted the task

force to recommend the acceptance of Seele/Alvis and when faced with the

prospect of lack of unanimity sought clearance from Mr Makepeace to produce amajority report. It is clear to me that Mr Quick had been appointed for this very

purpose. Mr Quick was the only member of the task force who Mr Mumford

thought might possibly be in favour of a British contractor. He maintained thatotherwise the project team had no such bias, although that is not a view that I

share. MHP was plainly biased towards a UK contractor and towards Alvis (see for

example Mr Pringle’s evidence and the opposition to a shift to a performancespecification) and AFE wanted Alvis for its skills. In my view Mr Fernyhough was

entirely right to have put to Mr Mumford that Mr Quick’s original draft was “a

travesty of the truth”, and to describe this part of the tender process in November1995 as “a charade”. Both descriptions are apt and accurate. I accept Harmon’s case

that the final report was slanted towards Seele/Alvis and I also accept that on the

evidence before me Mr Quick was determined that the tender of Seele/Alvis wouldbe recommended. The defendant did not call Mr Quick to explain what he did or

why he did it. Thus the project team recommended Seele/Alvis even though its

tender was about –2.4 million higher than the Harmon’s price of –31,370,996without any calculation to support its conclusion that it represented “best value for

money”.38

According to the Court, rather than representing the “best value for money,” theselection process represented a flawed procurement conducted in contraventionof the applicable procurement rules. In fact, the then-applicable regulations

38Ibid., at 92.

41

required that the low bid rule be applied to determine the winning bidder unlessthe additional non-price criteria were disclosed in the tender call document. TheCourt found that the tender call failed to disclose the non-price-related criteria:

Article 20 of the 1971 Directive states that “contracts shall be awarded on the basis

of the criteria laid down in chapter 2...”. This word clearly imposes an obligation inrelation to the actual award of any contract. Chapter 2, Article 29, provides:

The criteria on which the authorities awarding contracts

shall base the award of contracts shall be:

– either the lowest price only

– or, when the award is made to the most economically

advantageous tender, various criteria according to thecontract: e.g. price, period for completion, running costs,

profitability, technical merit.

In the latter instance, the authorities awarding contracts

shall state in the contract documents or in the contractnotice all the criteria they intend to apply to the award,

where possible in descending order of importance.

Regulation 20(1) to (4) of the 1991 Regulations repeats these provisions.

In my judgment they impose the obligation upon the awarding authorityto award the contract only by reference to certain criteria. The authority

is at liberty to award the contract on the basis of which is most

economically advantageous only if the criteria it is going to use have beenstated beforehand. It follows that, unless the authority has in advance

stated other criteria, it can only use the criterion the lowest price and

that if it should do anything else it will be in breach of the Directive andthe Regulation. This was the submission of Miss Boswell and it was in my

judgment correct.39

The Court determined that the contract award decision was made on the basis ofan improper hidden Buy British preference that drove the evaluators to bypassthe low bidder.

39Ibid., at 119.

42

The Court also found that the tendering process placed a duty of fairness on theHouse of Commons that regulated the manner in which the House shouldconduct its tender evaluations:

These contractual obligations derive from a contract to be implied from the

procurement regime required by the European directives, as interpreted by theEuropean Court, whereby the principles of fairness and equality form part of a

preliminary contract of the kind that I have indicated. Emery shows that such a

contract may exist at common law against a statutory background which mightotherwise provide the exclusive remedy. I consider that it is now clear in English law

that in the public sector where competitive tenders are sought and responded to, a

contract comes into existence whereby the prospective employer impliedly agreesto consider all tenderers fairly: see Blackpool and Fairclough.40

The Court determined that the House of Commons breached these implied dutiesby conducting a flawed evaluation process based on improper hidden criteria, andawarded the plaintiff its lost profits. As this case illustrates, to protect theintegrity of the tendering process and better ensure the defensibility of contractaward decisions, purchasing institutions should make sure they properly disclosetheir bid evaluation criteria and refrain from applying hidden preferences to theirbid-selection decisions. As evidenced by this and many other cases, relying onimproper hidden evaluation factors can result in significant legal liability.

Recommendation 7

Purchasing institutions should ensure that all of their contract award criteria

meet the standards of clarity, transparency and objectivity required to ensure a

legally defensible tendering process.

40Ibid., at 136.

43

5. Politicizing the Procurement Process

In promoting its campaign on its website, the CAW put forward the deal reached

between the City of Toronto and Bombardier as an example of the successful

application of its Buy Canadian policy:

Paul Pugh, president of CAW Local 1075, spoke about a new collective agreement

reached recently with Bombardier in Thunder Bay. "Thanks to that work brought in

through the TTC campaign, this plant which had been scheduled for shut down, is

now running at full capacity." The union initiated a successful campaign in 2006 to

ensure that that the $700 million TTC subway car purchase contract would go to

Canadian producer, Bombardier.

As is often the case, there are two sides to every story. While the CAW may view

the $700 million contract awarded directly to a Canadian supplier as a public

policy victory, others take a different view of the matter. The following story ran

on City News on August 31, 2006 when the above noted contract award was first

announced:

TTC Votes To Award Subway Contract To Bombardier

A plan to award Bombardier the contract to build 234 subway cars worth $710

million breezed through a vote by TTC officials Wednesday night. The deal, which

must still pass a full city council vote in September, has come under scrutiny over

the potential cost to taxpayers. Critics including Toronto mayoral candidate Jane

Pitfield said the deal should have been put out to tender before simply being

awarded to Bombardier. "Another two to three months just to allow other

companies to bid. That's all it would take, and then we'll know whether we're really

getting the best deal for Toronto taxpayers," Pitfield argues.

44

As this example illustrates, Buy Canadian policies and other local preferences can

lead to the politicization of the procurement process. Irrespective of the merits

of the particular context or the merits of the particular public policy that is being

pursued, taxpayers have every right to be wary whenever a competitive

procurement process is bypassed and a contract is negotiated behind closed

doors in the name of “the greater public interest”. The track record of the

Canadian public sector in this regard has been far from stellar and by some well

documented indications, the situation may actually be deteriorating rather than

improving.41 When spending decisions are made at the political level and

“pressing public priorities” are used to justify “exceptions” to general

procurement rules, the public interest can be seriously compromised. By way of

recent example:

The Sponsorship Scandal

In the wake of a near-win by separatist forces in the 1995 Quebec referendum,

Canada’s federal government established the Sponsorship Program. Although the

official objective was to promote federal government activities in Quebec as a

means of fending off the separatist threat, millions of tax dollars were spent on

improperly awarded, and often haphazardly performed contracts. In some

instances, public funds were improperly diverted for partisan political ends. After

Canada’s Auditor General released a highly critical report, the Prime Minister

launched a public inquiry. On November 1, 2005, the Honourable Justice John. H.

Gomery, the Quebec Superior Court judge who presided as Commissioner over

the Inquiry, released the damaging Fact Finding Report that led to the collapse of

the federal government and to the electoral defeat of the ruling Liberal Party. On

February 1, 2007 Justice Gomery released his second and final report entitled

Restoring Accountability. The latter report contained a number of far-ranging

recommendations and background studies aimed at illustrating, among other

41 See the discussion below on the Gomery and Bellamy reports.

45

things, the risks inherent in politicizing the procurement process. (These two

reports are collectively referred to hereafter as the “Gomery Report”).

The Toronto Computer Leasing Scandal

In recent years the City of Toronto faced its own spending scandal and resulting

public inquiry. In the wake of a runaway computer leasing contract that was

entered into during the rush to amalgamate the new “Mega-City”, Toronto’s City

Council struck two public inquiries to investigate questionable procurement

practices. On September 12, 2005, the Honourable Madam Justice Denise E.

Bellamy, the Ontario Superior Court of Justice judge who presided as

Commissioner over the Toronto Computer Leasing Inquiry and the Toronto

External Contracts Inquiry, submitted her report to the Mayor and Council of the

City of Toronto (“Bellamy Report”). Volume 2 of the four-volume report, entitled

“Good Government”, contains an extensive series of research papers focusing on

procurement practices, conflict of interest, lobbying and municipal governance

which highlight, amongst other things, the perils of politicizing the procurement

process.

BC’s Olympic Overrun

In October 2007, the Office of the Auditor General of British Columbia released A

Review of the Vancouver Convention Centre Expansion Project: Governance and

Risk Management. The report reviewed the convention centre expansion project

that was initiated in preparation for the 2010 Winter Olympics in Vancouver. The

report detailed significant costs overruns:

Thoughts of expansion started in earnest in the late 1990’s. The initial capital costestimate for the project announced in 2000 was $495 million. Little happened forseveral years, then, in early 2003, the provincial government announced that it wouldundertake the expansion project, using a Crown agency (VCCEP), to have it designed,

46

constructed, commissioned, and owned. The announced capital cost of the expansionwas still $495 million.

VCCEP’s first approved project budget of $565 million was announced in June 2004.This amount was subsequently revised to $615 million in July 2005. Since then,government has approved three interim budget increases to ensure constructionwould not be interrupted while it considered a final project budget and schedule. Byearly 2007, the project was drawing significant public attention because of thechanges in the announced schedule and repeated increases in the budget. Thecurrent budget, approved by government in July 2007, is $883.2 million.42

Amongst other things, the report noted that the original estimates were not

based on detailed project budgets and concluded that there were no guarantees

to guard against even more cost escalations or project delays. As the report

highlighted, additional risks were created by the need to complete the project

within tight timeframes:

As far back as 2000, a convention centre task force recommended an expansionof the existing facility. The government agreed to a July 2008 completion date andconsidered using an expanded convention centre as part of the 2010 Olympic andParalympic Winter Games (the Games) if Vancouver was selected to host theGames. After Vancouver was selected to host the Games in mid-2003, the intentionwas to complete the new expanded centre before the Games, to take advantage ofthe international exposure it would receive. In late 2004, the expanded centre waschosen to house all Games-related press and broadcast activities. This meant thatthe facility needed to be ready well before the Games to allow for somepreliminary use and time to prepare it for those using it during the Games.

This showcasing opportunity, however, had several drawbacks. First, the harddeadline, combined with a year of elapsed time during an unsuccessful attempt at apublic-private partnership agreement prior to the formation of VCCEP, meant thatVCCEP’s choices regarding a procurement approach were somewhat limited.Instead of proceeding with a traditional staged procurement approach such asdesign-bid-build, VCCEP felt obliged to proceed concurrently with construction ofthe marine and platform works while design of the building was being completedand retain a private sector construction management company to provide pre-construction services. Second, the procurement approach assumed that VCCEP

42 British Columbia Office of the Auditor General, A Review of the Vancouver Convention Centre Expansion Project: Governance and RiskManagement (October 2007) at 1, online: <http://bcauditor.com/AuditorGeneral.htm>.

47

would be able subsequently to negotiate a stipulated lump-sum contract with theconstruction management company. None of the early cost estimates reflected anyrisk premium that would be needed to compensate the construction manager foraccepting the transfer of risk that would be the result of a stipulated lump-sumcontact. The stipulated lump-sum contract was not completed until the first part of2007, by which time most of the large contracts had already been let by VCCEP.This has left VCCEP to bear the originally unanticipated cost escalations.

In addition, the risk transfer premium has proven to be significant, resulting inincreased fees in excess of $35 million.43

This provides another reminder of the increased procurement risks created when

major public procurement projects blend urgency with political intervention.

Proper procurement calls for the clear definition of roles and for a de-

politicization of decision making relating to contract awards. A clear definition of

roles is essential to implementing accountability mechanisms and to avoiding

the unnecessary confusion and inefficiency caused by role overlap and by

accountability gaps. The Bellamy Report notes the importance of proper roles

definition in the procurement process:

Experts and practitioners alike agree that a lack of internal clarity with respect tothe relative roles and responsibilities of different players in the procurementprocess poses a high risk for both the integrity of the process and the likelihood of avalue-for-money outcome. This includes roles and responsibilities for the centralpurchasing authority, the buying department, legal counsel, finance/budget staff,etc.

The best practice in this area is relatively straightforward — to identify and describethese roles and responsibilities in clear and unambiguous terms as part of theoverall purchasing policy and to embed these descriptions in training, guidelines,handbooks, checklists, case studies, etc. as part of ensuring a clear and consistentunderstanding across the organization.44

43 Ibid., at 3.44 Ibid., at 75.

48

The Gomery Report echoes these observations, noting that the Sponsorship

scandal arose within a climate of vague accountability constructs:

In my first Report, I was able to establish that there had been partisan politicalinvolvement in the administration of the Sponsorship Program; insufficientoversight by senior public servants; deliberate actions taken to avoid compliancewith federal legislation and policies; a culture of entitlement among politicalofficials and public servants involved with Sponsorship initiatives; and the refusal ofMinisters, senior officials in the Prime Minister’s Office and public servants toacknowledge any responsibility for the mismanagement that had occurred. I askedwhy it is that we have a system of responsible government, yet no one is preparedto accept responsibility for the abuses committed in the administration of theSponsorship initiatives. No one has provided an answer.45

As the Gomery Report notes, this lack of accountability resulted in a systemiccollapse in proper procurement practices, as illustrated by:

• clear evidence of political involvement in the administration of the SponsorshipProgram;

• insufficient oversight at the very senior levels of the public service which allowedprogram managers to circumvent proper contracting procedures and reportinglines;

. . .• the refusal of Ministers, senior officials in the Prime Minister’s Office and public

servants to acknowledge their responsibility for the problems of mismanagementthat occurred. 46

Setting out the scope of roles and responsibilities is critical to avoiding

overlapping accountability wherein no one is clearly accountable for decision-

making or project outcomes, and to avoiding responsibility gaps which can leave

45 Gomery J., Restoring Accountability Recommendations, Phase II Report (Canada: Commission of Inquiry into the SponsorshipProgram and Advertising Activities, 2006) at 197, online: <http://epe.lac-bac.gc.ca/100/206/301/pco-bcp/commissions/sponsorship-ef/06-02-10/www.gomery.ca/en/phase2report/recommendations/cispaa_report_full.

pdf>.46 Gomery J., Who is Responsible? Summary Phase I Report (Canada: Commission of Inquiry into the Sponsorship Program and

Advertising Activities, 2005) at 6-7, online: <http://epe.lac-bac.gc.ca/100/206/301/pco-bcp/commissions/sponsorship-ef/06-02-10/www.gomery.ca/en/phase1report/summary/es_full_v01.pdf>.

49

critical issues unaddressed and unresolved. Given the often complex and multi-

disciplinary nature of a procurement project, it is crucial to establish a common

universally understood allocation of roles, responsibilities and process roadmaps

for the administration of both overall procurement practices and specific

procurement projects. However, as the Gomery Report notes, the articulation of

proper roles and responsibilities within the procurement process is neither clear

nor universally understood:

The view from other Canadians, expressed on the Commission’s website and at theroundtable consultations, focuses on the need to pinpoint who is responsible whenthings go wrong, and who is to blame. One respondent from Manitoba to thewebsite wrote:

There should be real consequences to public officials being caughtmismanaging public funds, such as job loss, pension loss (definitely nonice severance package) and even prison time. At present, they aregiven a slap on the wrist and allowed to continue on as before.

There is a remarkable lack of uniformity in the abstract definitions of responsibility,answerability and accountability offered by the Government, by career officials andby academics. A cynic would say that each definition depends on the interests ofthe person proposing it or the particular circumstances under which the definition isrequired. Elected and career officials are left to try to make sense of these conceptsin practice, and this ambiguity can make life difficult for those working ingovernment. Clear and simple definitions are needed.47

Public institutions clearly require a coherent set of roles and responsibilities tohelp govern their procurement practices.

The failure to establish these clear support mechanisms and governingframeworks for a procurement team can lead to unnecessary delays andconfusion and can undermine the quality of the outcome by drawing attentionaway from the merits of the particular project and directing critical planning timetowards the creation of ad hoc self-governance measures.

47 Gomery J., Restoring Accountability Recommendations, Phase II Report (Canada: Commission of Inquiry into the SponsorshipProgram and Advertising Activities, 2006) at 9, online: <http://epe.lac-bac.gc.ca/100/206/301/pco-bcp/commissions/sponsorship-ef/06-02-10/www.gomery.ca/en/phase2report/recommendations/cispaa_report_full.pdf>.

50

For example, when establishing and defining appropriate roles andresponsibilities within a procurement organization, great care should be given tosetting up a clearly delineated separation of roles between:

(1) elected officials;

(2) the senior management officials responsible for establishing and enforcingcompliance with procurement rules; and

(3) the front-line procurement professionals responsible for specificprocurement processes.

Front-line procurement staff should have a clear understanding of the scope oftheir discretion to make tactical decisions and should be sequestered frominappropriate interference with that decision-making. For example, procurementstaff responsible for administering specific projects should be insulated frominappropriate political interference.

The Gomery Report notes how critical it is to establish a clear understanding ofrespective roles between elected officials and public institutions:

The public service is the organ of government that is responsible for theadministration of government programs. The public service has manyresponsibilities and commitments: to the public it serves; to the laws that govern itspowers and management; to the Ministers who are the political heads ofdepartments; to future governments that might some day be in power; and to theParliament that passes the laws and approves the budgets administered by theservice. Many of these obligations extend beyond the duty of the public service tothe politicians who form the Government of the day.

These multiple responsibilities can create tensions between the duty of the publicservice to serve the Government and its ethical obligation to promote the publicinterest. Obligations and responsibilities create accountabilities. Resolving thesetensions requires that two issues be examined: first, the role and identity of thepublic service apart from that of the Government of the day; and, second, theaccountability of the public service, and particularly whether its accountability is

51

entirely internal, within government, or whether Parliament should have a role aswell.48

As the Bellamy Report notes, elected officials can play a legitimate role in theprocurement process by providing overall approval and general oversight of theorganization:

Experts suggest that in best practices jurisdictions — U.S. and Canada, federal,provincial/state, and municipal — elected officials understand the importance ofremaining outside of the competitive tendering process. In this regard, it isgenerally viewed that one of the benefits of a having a highly professionalizedprocurement function is the ability to insulate and protect politicians fromallegations of attempting to influence procurement decisions.

In discussing the role of politicians, most experts emphasize the up-front role ofelected officials to:

Approve procurement policies, including identifying which types ofprojects require their express approval.

Ensure that a professional purchasing infrastructure exists. Pre-approve the organization’s purchasing requirements as part of the

overall budget process. Approve any purchasing needs that exceed approved budgets before

any formal purchasing activity is initiated.

For the most part, the above are seen as relatively straightforward and non-controversial….49

However, the Bellamy Report also notes that it is in the self-interest of electedofficials to avoid direct involvement in specific procurement processes:

Experts suggest that one of the important benefits of a having a highlyprofessionalized procurement function is the ability to insulate and protectpoliticians from allegations of attempting to influence procurement decisions …

48 Ibid., at 62.49 Bellamy J., Toronto Computer Leasing Inquiry/Toronto External Contracts Inquiry Report, vol. 2: Good Government, Addenda,

Toronto Computer Leasing Inquiry Research Paper: Procurement, Volume 1: Common Risk Areas (Toronto: December 2003)(<http://www.toronto.ca/inquiry/inquiry_site/report/pdf/TCLI_TECI_Report_Good_Government.pdf >) at 55.

52

To the extent that problems with political involvement in the procurement processarise, they tend to be either during or at the back-end of the process, e.g. at thecontract award stage or in the handling of debriefings and/or complaints.50

Unfortunately, the Bellamy Report notes that this ideal of enlightened “hands-off”political leadership is not always observed in practice. An analysis of the municipallevel of government in Ontario revealed that elected officials often exercise aninordinate amount of direct influence over the public procurement process:

According to the experts, politicians do not always support fair and opencompetition, particularly when constituents are involved, i.e. not understandingthat their direct intervention on behalf of a constituent would affect the fairnessand equity of the process for other bidders. Typical examples of poor practices onthe part of individual elected officials include:

• Becoming directly involved in the development of request documentsincluding involvement in the development of the detailed specifications.

• Attempting to provide direction to staff with respect to any aspect of therequest document’s development that would influence who might ultimatelybe able to bid on a project.

• Requesting or receiving copies of draft specifications or even complete requestdocuments prior to their public release or outside of the formal internalapproval process.

• Meeting with bidders and/or their lobbyists after a request document hasbeen released. (According to experts, in best practice jurisdictions, electedofficials often decline meetings with bidders/lobbyists at an even earlier stage,i.e. once a certain stage has passed in the request document developmentprocess.)

• Directing or attempting to direct staff to waive or disregard mandatory criteriafrom a request document, e.g. missed deadline for submission, incomplete biddocument, late amendments to a bid document.

• Entertaining complaints from bidders and/or their lobbyists with respect to acurrent or closed competition instead of, as a matter of course, referring thecomplainant to the appropriate internal complaints resolution process.51

The report attributes part of this interference to a lack of clear roles definition. Italso notes a lack of appreciation on the part of some elected officials of thecontrol mechanisms that are in place, or should be in place, to ensure the properadministration of procurement processes.

50 Ibid., at viii.51 Ibid., at 55-56.

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The Gomery Report also identifies a number of significant deficiencies in theproper definition of roles and proper separation of elected officials frominfluencing the day-to-day decisions relating to the procurement process. Thereport contains a number of insightful research studies that provide detailedassessments of some of the problematic practices that result in a blurringbetween the political and administrative spheres within the federal government.In “The Life and Times of Parliament’s Statutory Orphans”, Liane E. Benoithighlights some of the significant issues raised by the presence of political staffworking in a Minister’s office:

Of the many footfalls heard echoing through Ottawa’s corridors of power, those thatoften hit hardest but bear the least scrutiny belong to an elite group of young,ambitious and politically loyal operatives hired to support and advise the Ministers ofthe Crown. Collectively known as “exempt staff,” recent investigations by the PublicAccounts Committee and the Commission of Inquiry into the Sponsorship Program andAdvertising Activities, hereafter referred to as the “Sponsorship Inquiry”, suggest thatthis group of ministerial advisors can, and often do, exert a substantial degree ofinfluence on the development, and in some cases, administration, of public policy inCanada. Further, it is evident from the current and historic record that these powerscan and are, on occasion, open to abuse. Though unelected, often uneducated in thetheory and operation of the machinery of government and regularly devoid ofprofessional qualifications relevant to the ministries with which they are involved, theseindividuals, by virtue of their political relationship with the party in power and/or theminister they serve, are well placed to influence both the bounce and bobble ofbureaucratic political interface and the pace and progress of public policy in Canada.52

As this study notes, by acting as an extension of the elected official, political staffcan assert inappropriate political influence in the government’s administrativedecision-making process. Benoit cites a 1967 study entitled “The Minister’s OfficeStaff: An Unreformed Part of the Public Services” which was published byProfessor J. R. Mallory in Canadian Pubic Administration in the wake of the federalgovernment scandal known as the “Rivard Affair”. While Mallory’s observationsmay have been made over 40 years ago, they read as fresh as the day they werefirst written:

52 Liane E. Benoit, “The Life and Times of Parliament’s Statutory Orphans” in Restoring Accountability Research Studies, Volume 1(Canada: Commission of Inquiry into the Sponsorship Program and Advertising Activities, 2006) at 146, online: <http://epe.lac-bac.gc.ca/100/206/301/pco-bcp/commissions/sponsorship-ef/06-02-10/www.gomery.ca/en/phase2report/volume1/cispaa_vol1_full.pdf >.

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In the wake of the revelations of the Rivard Affair, Professor J. R. Mallory observedthat among the Dorion Report’s many contributions, it served to “illuminate certainfacets of government which have hitherto escaped the attention of scholars.” Inredressing this oversight, it was his assessment that, contrary to what some scholarshad lauded as the Canadian constitutional system’s success in developing a “clear-cut dividing line drawn between the politician and the administrator,” there was, infact, embedded within the machinery of government in Canada, “an intermediateclass of persons in the Minister’s Office, who are political rather than bureaucraticin their functions, appointed rather than elected, and who operate in an area whichstrict constitutional theory does not recognize as existing.” The presence of thisemerging group of operatives in the Minister’s lair was, in Mallory’s estimation,inappropriate to the Westminster model of democracy.

It is clearly undesirable that a considerable number of persons not a part of the civilservice should be interposed between a Minister and his department. They lack thetraining and professional standards of the public service: it may even be the peculiarnature of the appointment means they escape the security screening which is anunpleasant accompaniment of most candidatures for responsible posts in the publicservice. Not only do these functionaries wield great power because they controlaccess to the Minister and can speak in his name, but they may wield this powerwith ludicrous ineptitude and in ways that are clearly tainted with political motives.

There was, he feared, “a danger inherent in having such untrained people, lackingthe career motives and professional standards of the civil service, in positions ofboth influence and power.” In his opinion, the duties to be performed by those in aMinister’s office should be strictly limited to the writing of the Minister’s speeches,the preparation and distribution of press releases and “such mundane matters assupporting the Minister’s public image by cultivating the goodwill of the pressgallery… He also conceded the need for a gatekeeper “to act as a buffer between abusy Minister and his constituents and political followers. Beyond that, any roleplayed by the Minister’s staff, particularly with respect to policy or programdevelopment, was an inappropriate incursion into the realm rightly held by thepublic service.53

As the Gomery Report observes, the long-standing failure to properly define therespective roles of political staff and public servants has resulted in ongoingadministrative challenges and a less-than-stellar track record of appropriateconduct:

53 Ibid., at 149-50.

55

Perhaps the most honest conclusion that can be drawn following a somewhatexhaustive review of the role of exempt staff in contemporary Canadiangovernment is that there are no absolute truths to be found in the analysis of anyaspect of the role and practice of this function, only shades of truth. If my sources arecorrect, roughly half the time these supporting political roles are carried out in acompetent and capable fashion; the incumbents act appropriately with respect to long-standing, if somewhat ill-defined, conventions, and exercise sound and constructivepolitical judgment in the execution of their duties and their relationships with thedepartment. The other half of the time, they don’t. Likewise, there remains no absoluteconsensus, in theory or in practice, either within or outside of government, as to whatconstitutes the appropriate role of exempt staff in the policy development process.After decades of various attempts by the political centre to wrest control of policy fromthe bureaucracy, there are still those who maintain that the active involvement ofexempt staff in this capacity is illegitimate, inappropriate and sometimes dangerous.Proponents, on the other hand, persist in their belief that an independent policycapacity in the Minister’s office is the politician’s best defence against the power of anobstinate and self-interested bureaucracy—that democracy demands this directionfrom its elected representatives; that the political tail should indeed wag thedepartmental dog.54

While the appropriate role of elected officials and political staff within thegovernment’s general administrative decision making process will remain asubject of ongoing debate, one thing is certain: as a general rule there should beno political involvement in government contract award decisions. In “DefiningBoundaries: The Constitutional Argument for Bureaucratic Independence and itsImplications for the Accountability of the Public Service”, Professor Lorne Sossinacknowledges that some administrative procurement decisions, such as thecreation of new spending areas, are appropriately subject to politicalconsiderations. However, he observes that a constitutional convention ofbureaucratic neutrality should generally apply to buffer specific contract awarddecisions from political considerations:

…First, the constitutional convention of bureaucratic neutrality operates to ensurethat public servants owe a primary obligation to the Crown (and, by extension, tothe people of Canada) and not to the party which happens to control thegovernment of the day; and second, the rule of law ensures that executive decision-making is animated only by proper purposes, good faith and relevant criteria set outby law. Together, I argue, these principles represent a constitutional norm of

54 Ibid., at 236.

56

bureaucratic independence. This norm suggests a requisite spectrum of separationbetween bureaucratic and political decision-making. In some areas, this separationwill be near absolute, as in the case of criminal justice decision-making involvingcourts or prosecutors. In other cases, such as policy-making spheres, where politicaldirection may be decisive, the separation may be subtle. The Sponsorship Program,and procurement generally, lie toward the end of the spectrum requiring moreindependence. While political direction may create a sponsorship program, forexample, it is difficult to imagine appropriate political intervention in the decision asto which advertising agency to award a contract.55

Unfortunately, the Gomery Report details a significant erosion in the criticalbuffering role played by senior federal government officials who in theory arecharged with the responsibility of translating political instructions into arm’s-length, neutral and objective administrative actions:

During our consultation process, Canadians debated at length the respective rolesof Deputy Minister and Minister, with little consensus beyond the fact that thisrelationship is crucial for the proper functioning of a department and that, ideally, itshould be a friendly professional relationship where differences are worked out bymutual agreement. There was general agreement that, overall, the Deputy Ministeris the person responsible for day-to-day management issues in a department,including delivery of programs, and the Minister is responsible for overall policydecisions.

Many people said that Ministers may instruct their Deputy Ministers on anythingthey want done, and that Deputy Ministers should do it, except in unusualsituations. It is these exceptional situations that need to be defined. Mechanismsfor resolving differences that are acceptable to both parties must be developed. Forexample, what constitutes undue pressure? Does it happen only when a DeputyMinister is asked to break the law? Evidently, in such situations, the Deputy Ministermust have the courage to say No to the Minister. But, as mentioned by some, asystem based solely on the courage of individuals is most probably bound to fail.And even a Deputy Minister exercising courage should have recourse to a thirdparty, a role normally assigned to the Clerk of the Privy Council.56

55 Lorne Sossin, “Defining Boundaries: The Constitutional Argument for Bureaucratic Independence and its Implications for theAccountability of the Public Service” in Restoring Accountability Research Studies, Volume 2 (Canada: Commission of Inquiry intothe Sponsorship Program and Advertising Activities, 2006) at 28-29, online: <http://epe.lac-bac.gc.ca/100/206/301/pco-

bcp/commissions/sponsorship-ef/06-02-10/www.gomery.ca/en/phase2report/volume2/cispaa_vol2_full.pdf>.56 Gomery J., Restoring Accountability Recommendations, Phase II Report (Canada: Commission of Inquiry into the Sponsorship Program

and Advertising Activities, 2006) at 36, online: <http://epe.lac-bac.gc.ca/100/206/301/pco-bcp/commissions/sponsorship-ef/06-02-10/www.gomery.ca/en/phase2report/recommendations/cispaa_report_full.pdf>.

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In fact, rather than defining clear roles and responsibilities, one expert cited in theGomery Report criticized Ministers and Deputy Ministers for engaging in systemicaccountability avoidance:

There was a sense from some Canadians that the higher up individuals are ingovernment, the more insulated they become from accountability. As oneroundtable expert put it, Ministers and Deputy Ministers “hide behind” each other.This same person added: “Avoiding responsibility has become a fact of life andstarts at the top. This culture then permeates through society as a whole.”57

Given the high level of risk associated with many procurement projects,accountability vacuums at the senior levels of government can significantly impairan institution’s ability to properly conduct its affairs and protect the publicinterest. As the Gomery Report notes, senior public officials must assumeresponsibility for building winning conditions within their institutions:

… Many recognize that Ministers’ power is discretionary and that they can choosehow to use it. That said, Canadians acknowledge that there are limits to thisresponsibility: it is impossible for Ministers to know everything that goes on in theirdepartments, and many of them lack expertise in their particular sector. Giventhese restrictions, a lot of Canadians believe that considerable responsibility shouldrest with senior management in each department. “Everyone knows seniormanagement is the main ‘change agent’ in a department,” one person wrote,adding that senior managers should be accountable to a higher authority for alltheir actions, including the management of finances.58

One of the critical areas in which senior public officials must show leadership is inensuring that the procurement operations of their institutions remain free frominappropriate political interference. The Gomery Report recognizes thesignificance of political neutrality within public institutions:

Professor Sossin points out that Canadian courts have recognized an identity for thepublic service distinct from that of Ministers and the Government of the day. TheFederal Court of Appeal has considered a right of the public at large to be served by

57 Ibid., at 37.58 Ibid., at 38.

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a neutral public service. The Supreme Court of Canada has characterized the publicservice as an “organ of government” with its own distinct duties andresponsibilities. Further, the Supreme Court has determined that “public confidencein the civil service requires its political neutrality and impartial service to whicheverpolitical party is in power.” The Government of Canada itself has recognized thatthe public service has a duty extending beyond its obligation to the Government inpower: the service must support and advance the agenda of the Government of theday, but it must do so “without compromising the non-partisan status that isneeded to provide continuity and service to successive governments of differingpriorities and political stripes.”

The principle of the rule of law requires the neutrality and impartiality of the publicservice. A non-partisan public service and adherence to the rule of law arecompatible with the duty of the public service for loyalty to the Government of theday, though the challenge of balancing loyalty with neutrality requires operationalprinciples and standards that are sufficiently flexible to accommodate political

realities.59

Public institutions need to meet these political realities by creating a coherentgovernance framework that clearly defines respective roles and responsibilities ina manner that can facilitate the efficient translation of general political policydecisions into independent, arm’s-length, objective contract award decisions.

Rather than micro-managing specific projects and specific contract awarddecisions, the Bellamy Report suggests that a proper approach to ensuringaccountability is to establish proper governing frameworks and supportmechanisms for procurement staff:

Experts suggest that politicians who understand their role and the importance offairness and equity in procurement would tend to focus on quality assurance, i.e.whether the approved process was followed and used appropriately. Only in themost exceptional circumstances would a staff recommendation be rejected or acompetition cancelled. Even more usual [sic] would be for a Council or StandingCommittee to ignore a staff recommendation and make an award to anotherbidder.

Where this kind of understanding does not exist, the political level can oftenbecome overly and in the view of many experts, inappropriately involved in thedetails of the award. This could include wanting to review the RFP in detail, wanting

59 Ibid., at 64.

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to see actual bid documents, scrutinizing individual evaluations, meeting withindividual vendors, etc. At its most extreme — and in terms of the integrity of theprocess, highest risk — this could involve a Council or Standing Committeebeginning to engage in re-evaluating the bids and making its own decision about theoutcome.60

To maintain the integrity of the bidding process, contract award decisions need to

be based on the objective application of transparent evaluation criteria. The

integrity of the process and quality of the outcome can become compromised

when the decision-making becomes politicized, is open to the influence of

lobbying activities or is otherwise based on factors other than the objective

application of predetermined transparent criteria.

Recommendation 8

As a general rule, government contract award decisions should be based on

clear, transparent and objective criteria that are applied free from political

considerations or political interference.

60 Bellamy J., Toronto Computer Leasing Inquiry/Toronto External Contracts Inquiry Report, vol. 2: Good Government (City of Toronto:2005)at 59-60, online: <http://www.toronto.ca/inquiry/inquiry_site/report/pdf/TCLI_TECI_Report_Good_Government.pdf>.