Canada: Anti-Assignment Clauses In Government Contracts: Highest-Ranked Bidder Lost $75-Million Government Contract Due To Corporate Restructuring During Procurement Process

When bidding on government contracts, special care should be taken to consider the consequences of any decision to restructure the bidding entity during the procurement process. Anti-assignment clauses in federal government solicitation documents will be strictly interpreted by the courts to allow disqualification of a potential supplier, even though the bidder would have been awarded the contract on the basis of the highest financial and technical score. Though recognizing the public interest in awarding the contract to the lowest-cost technically compliant proposal, the courts have held that this does not override the paramount objective of ensuring integrity in the process of public procurement.

At issue is the recent decision of the Federal Court in Selex Sistemi Integrati S.p.A. (Selex) v. Attorney General of Canada and EADS Deutschland GmbH (EADS).¹

On January 26, 2013, Public Works and Government Services Canada (PWGSC) issued an RFP for the procurement of radar for Canadian Air Force military bases. The RFP incorporated by way of reference an anti-assignment clause in section 05.8 of PWGSC's Standard Acquisition Clauses and Conditions (SACC), which stated that "[a] bid cannot be assigned or transferred in whole or in part." Selex, an Italian company, and four other pre-qualified bidders submitted bids by the closing date on May 2, 2012.

In October 2012 PWGSC evaluated the bids and found that Selex had submitted a lower price, but that EADS had scored higher on the technical components. As a result, PWGSC scored Selex's bid at 86.5 while EADS's bid received a lower score of 85.74.

On January 1, 2013, seven months after bid closing but prior to contract award (on March 13, 2013), Selex underwent a corporate reorganization, as did a number of its sister companies, all of which were owned by Finmeccanica S.p.A. (Finmeccanica). Prior to the reorganization, Finmeccanica operated its defence business operations through three Italian companies: Selex, Selex Elsag S.p.A. (Elsag) and Selex Galileo (Galileo). All three companies were wholly owned by Finmeccanica, and each had at least one wholly-owned non-Italian subsidiary. In the case of Selex, its wholly-owned subsidiary was Selex Systems Integrations Inc., a U.S. corporation.

Finmeccanica consolidated all of its defence companies to create one European entity, Selex ES S.p.A. (Selex ES). Elsag and Galileo merged into Selex ES and thereafter ceased to exist. In the case of Selex, all of its assets and personnel were transferred to Selex ES, though Selex as a legal entity remained in existence with no assets or staff.

On January 9, 2013, Selex advised PWGSC of the reorganization, arguing that since there had been the sale of the whole business complex of Selex, this was substantially the same as if Selex had merely merged with Selex ES, the only difference being that Selex remained as a legal entity with no assets or staff; but that in fact Selex ES had become the interlocutor with PWGSC and that all its assets and liabilities (including those in the bid) had been assigned to Selex ES. At the same time Selex advised PWGSC that it no longer had the ability to perform the obligations in the RFP, as all of its technical and industrial capabilities had been transferred to Selex ES.

On March 13, 2013, PWGSC awarded the contract to EADS at a cost of $75,498,650. PWGSC advised Selex that its bid had been rendered non-compliant because it had contravened the explicit prohibition in the RFP on transfer or assignment of a bid; and that in any event, Selex was no longer capable of performing the work contemplated by the RFP since it had transferred its business, including its technical and industrial capabilities, as well as the bid itself.

Selex applied for judicial review of PWGSC's decision to declare its bid non-compliant and sought an order to terminate the contract award and award the contract to Selex, or, alternatively, to direct PWGSC to re-evaluate Selex's bid. On March 19, 2014, the Federal Court dismissed the application.

In regard to the first issue, whether PWGSC had erred in its interpretation of the anti-assignment clause in the SACC, the Court held this to be a question of law and said that PWGSC was correct in its interpretation that the transfer of virtually all of Selex's assets to a newly created sister company, Selex ES, during the bidding process was contrary to that clause. It held that "[a] transfer or assignment of a bid, in whole or in part, has the practical effect of changing the bidder during the bidding process. Moreover, a transfer or assignment of virtually all of the bidder's assets has the practical effect of rendering the bidder no longer capable of meeting the technical and management requirements of the RFP" (para. 39).

With respect to the second issue, whether PWGSC had erred in its application of the non-assignment clause, the Court held that it was reasonable for PWGSC to decide that Selex had rendered its bid non-compliant by its corporate reorganization and therefore had breached the anti-assignment clause. What was relevant was that the evidence demonstrated that Selex had transferred its business and assigned its bid to Selex ES. Selex could no longer be awarded the contract as it had become a shell company when it divested itself of all of its assets and personnel. Nor could PWGSC award the contract to Selex ES, as it did not have standing during the bidding process and was not a pre-qualified bidder.

The Court dismissed Selex's argument that for all intents and purposes the transfer of its business to Selex ES had the practical effect and operating consequence of a merger, as Selex ES succeeded Selex in all of its rights, obligations, contracts, tenders, proposals and offers (including Selex's bid in relation to the RFP). The Court agreed with PWGSC that the questions as to the nature of the reorganization and especially whether a merger should been considered compliant with the non-assignment clause were irrelevant. The Court observed that Selex and/or Finmeccanica were fully aware of the difference between a merger and a sale of assets, and noted that they nonetheless proceeded to make a decision to merge Elsag and Galileo into Selex ES, but not to do so in the case of Selex. In the Court's view, Selex had failed to properly consider the consequences of that decision as it related to the bid in question. The Court concluded that any failure by PWGSC to have proceeded as it did could very well have been considered unfair toward the other bidders.

Footnote

1. 2014 FC 263.

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