Canada: Canadian Procurement Law – The Basics

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Procurement, September 2011

Introduction

The law in Canada with respect to competitive procurement/tendering has been in development since 1981. What is somewhat unique to Canadian law is that competitive procurement processes create two contracts: (i) the bidding contract which sets out the "rules" that apply up until the completion of the competitive procurement process; and (ii) the substantive contract entered into between the procuring authority and the successful bidder.

Layered on top of this legal framework is a collection of trade agreements and government guidelines that regulates procurement practices of government and quasi-government entities. Finally, there are also recent indications that judicial review of government procurement practices will play an increasingly significant role in the resolution of procurement disputes.

Case Law

There are a number of Supreme Court of Canada (SCC) cases which presently inform the law of competitive procurement in Canada.

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

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

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

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

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

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

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

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

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

Canadian International Trade Tribunal (CITT) and Trade Agreements

An expanding and important factor in the Canadian procurement context is the requirements imposed by various domestic and international trade treaties. The connection between trade treaties and procurement is a relatively straightforward one: since regulating public (and quasi-public) sector purchasing is an important way to encourage the elimination or management of trade barriers, procurement rules to ensure fair and open access to government contracts are a natural consequence. Therefore, all government/public sector entities must be very certain to understand which international and domestic trade treaties, and embedded procurement process requirements, apply to them.

Canadian Federal Government Procurement

A separate body of case law arising out of decisions of the CITT is dominant in the regulation of Canadian federal government procurements. A detailed discussion of the law related specifically to Canadian federal government procurements is beyond the scope of this bulletin. However, it is important to note that the CITT cases, and the Federal Court cases arising out of appeals from CITT decisions, form a second body or "stream" of case law which sets out the legal context within which federal government procurements are to proceed.

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