This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Amendments to the Canada’s Competition Act in March 2009 put the spotlight back on the area of bid-rigging, highlighting the risks faced by unsuspecting purchasing institutions in falling prey to unscrupulous suppliers. This discussion provides some recent examples of bid-rigging drawn from a high-profile lawsuit involving a government institution that successfully recouped damages against a party who illegally used insider advantage to win phantom contracts and purchase government land at a bargain basement price.
In 2009, Canada’s federal government enacted amendments to the Competition Act that targeted anti-competitive practices in the marketplace. While most of the amendments dealt with supplier conduct outside of the bidding process, the bid-rigging amendments were squarely directed at creating a greater deterrent against illegally manipulating the competitive bidding process. In fact, the new amendments significantly increased the penalties relating to bid-rigging, upping the maximum term of imprisonment from five years to 14 years. This amendment provided the Competition Bureau with additional leverage when negotiating plea bargains with unscrupulous suppliers caught red-handed in tainted tendering procedures.
In addition to criminal prosecution, parties that engage in bid-rigging can also face civil action. The 2009 Ontario Superior Court of Justice decision in Ontario Realty Corp. v. P. Gabriele & Sons Ltd. offers a high-profile case study. In this case, the defendants were found to have engaged in bid-rigging in connection with a contract with an Ontario Realty Corporation (ORC) soil remediation contract. The ORC was awarded $350,050 after the Court found unlawful conspiracy in relation to that contract. The ORC was also awarded additional damages for unjust enrichment in relation to a second contract for the sale of land. Both of these tainted tenders are described below.
In the first claim, the Court found that the ORC made payments but received no work after the defendant supplier was awarded a contract based on “a phony tender process”. The Court drew “the inescapable inference that there was collusion” between the supplier and an employee of ORC which included the employee preparing false competing bids to paper the file prior to awarding the untendered contract to the supplier. The Court also found “overwhelming evidence” that no work was actually done on that contract and that “ORC received nothing in return for the payments made.” It found the supplier liable for fraud in the amount of $350,050 in connection with the false invoices.
In the same lawsuit, the Court also found that ORC was entitled to damages for unjust enrichment in connection with a bid-rigging swindle involving the sale of government land. While there are numerous reported cases dealing with the improper use of post-bid “clarifications” that enable bid repair and result in the improper award of a contract, this case took post-bid clarification abuses to new depths. The Court found that an ORC employee served as an inside accomplice and allowed the defendant supplier to improve its bid after bidding deadline to beat out a superior competing offer. To make matters worse, the price was then readjusted downwards after the award of the contract to make it less attractive than the original competing offer. As the Court found, the defendant supplier made out with a bargain, purchasing the land for $1,922,000 before flipping it less than eight months later for $4,390,000. The Court concluded that “the bidding process was manipulated to harm ORC” and recognized ORC’s claim against the supplier for unjust enrichment, thereby entitling ORC to the return of the profits obtained from the tainted tender.
As these bid-tampering swindles illustrate, tendering abuses can cause significant harm to an institution. While such conduct is subject to serious criminal and civil sanction, these deterrents can only be effective if potential perpetrators feel that there is a real likelihood of detection. To reduce the risk of falling victim to the next tainted tender, institutions should implement the following due diligence measures:
- obtain the necessary internal training to assist in detecting bid-rigging;
- implement proper reporting procedures to alert the authorities; and
- notify suppliers that bid-tampering barriers have been put in place.
While no institution is immune from bid-rigging and other tendering conspiracies, proper due diligence can go a long way to reducing the risk. As is often the case, there is no substitute for being prepared. The following section contains the relevant bid-rigging provisions from Canada’s Competition Act.
