By Paul Emanuelli

In its April 2013 decision in Envoy Relocation Services Inc. v. Canada (Attorney General), the Ontario Superior Court of Justice found the government of Canada liable for having unfairly favoured the incumbent service provider over competing bidders by making inaccurate disclosures of anticipated work volumes in its solicitation document. The case dealt with an RFP issued in 2004 for the provision of relocation services and contemplated two contract awards: the first for the Canadian Forces and the second for the government of Canada and the Royal Canadian Mounted Police. The incumbent service provider, Royal LePage Relocation Services (“RLRS”) won both contract awards, valued at approximately $1 billion. A competing bidder, Envoy Relocation Services Inc., contested the outcome and brought a lost profit claim.

In its lengthy account of the relevant background facts, the court noted that the chain of events material to the dispute over the 2004 RFP actually arose during a prior 2002 RFP process for the same services. As with the 2004 process, RLRS was the incumbent service provider during the 2002 RFP process. After RLRS won the contract award resulting from the 2002 process, the government discovered irregularities relating to the conflict of interest of one of its employees who had attended a boat cruise with an RLRS official. The government also discovered that the 2002 evaluation process was flawed due to an unreasonably compressed posting period that unduly favoured the incumbent, as well as by the use of vague threshold evaluation criteria and flawed scoring formulas that resulted in the disqualification of all bidders except the incumbent. The government decided to terminate the 2002 contract early, which resulted in the 2004 RFP process.

As the court observed, a third critical latent defect in the 2002 process, which carried over to the 2004 process, was the government’s failure to accurately disclose the anticipated work volumes for the property management services component (“PMS”) of the contract. PMS were to be provided to those relocated employees who, instead of selling their homes, chose to rent them out after moving. The price evaluation formula in both 2002 and 2004 called for proponents to bid a percentage figure for performing PMS based on an assumed number of employees who would require that services. However, as the court noted, the percentage of relocating employees who opted to rent out rather than sell their homes was far lower than what the government represented in the 2002 and 2004 RFPs. This translated into a significant unfair advantage to the incumbent, who was privy to the actual low historical numbers for PMS and bid no additional charge for PMS while the competing bidders bid a fair market value based on the volume of work set out in the RFPs. As the court concluded, this translated into a $42 million pricing advantage to the incumbent over the plaintiff Envoy in the 2002 RFP process and to a $48 million advantage over Envoy in the 2004 process:

4 PMS was nevertheless seldom used. The Office of the Auditor General (“OAG”) found that only 183 relocations of transferees occurred using PMS out of a total 81,000 moves in the Canadian Forces for the six years from 1999 to 2005. Thus, less than one quarter of 1 percent (.00225) made use of the service.

5 Apparently, PMS as a subject matter received little attention from the drafters of the RFPs. I say this because the formula found in the RFPs used estimated volumes of 7200 moves requiring PMS. This amounted to 43,200 projected instances over the same six year period described by the OAG. Like so much in this lawsuit, no explanation was ever provided for this remarkable disparity in PMS volumes by a factor of approximately 250 times.

6 More remarkable still, Royal LePage Relocation Services (“RLRS”), the incumbent in the 1999 Pilot Program that was to be converted into a permanent program by the 2002 RFPs, bid 0 percent on PMS. This meant that PMS would be provided free to transferees. RLRS would pay its Third Party Suppliers for these services.

7 More importantly, it meant that RLRS tendered 0 dollars for this item as part of its total price component. Conversely, the plaintiffs (“Envoy”) wrote 8 percent into the BOP formula. When monetized, this amounted to a bid of over $42 million for the same services.

8 I find that the differential is accounted for by RLRS using its insider knowledge of the actual PMS volumes; knowledge that it was aware of as incumbent. Envoy, on the other hand, bid the fair market value of its Third Party Suppliers using the grossly over-estimated volumes of PMS described in the formula.

9 I say that the bid was remarkable, not only by the differential in pricing of the parties, but because PMS was a “flow-through” service providing no revenues for RLRS. This meant that to the extent of the differential between the actual value of the services over seven years, i.e. around $200,000, and the bid price of its competitors, i.e. $42 million, and $48 million by Envoy in 2004, RLRS had options on how to use the “PMS premium”.

The court determined that by allowing RLRS to bid zero for the PMS service category, the government had in effect accepted a non-compliant bid from the incumbent. It also concluded that Envoy was prejudiced by the misleading PMS volumes and that this misrepresentation had undermined the integrity of the bidding process:

1312 I conclude that had accurate PMS volumes been provided to non-incumbent bidders, it would have become immediately apparent that the PMS tendering provisions were a scam by their use of egregiously inflated PMS volumes that in no way could be described as “estimates”. I further conclude that this would have resulted in a new PMS formula being used and the evaluation conducted on the basis of fair provisions.

1313 As the results of the bidding process were unfair, I consider the implied term must exist using the test of obviousness developed by the Supreme Court that focuses on upholding the integrity of the procurement process.

The court also determined that the government had breached its duty to conduct a fair evaluation process since the incorrect volume estimates constituted a hidden preference in favour of the incumbent:

1333 Evidence of the unfair advantage in the concealed terms of the PMS was again confirmed by Mr. Singh knowingly not taking steps to obtain actual volumes, or confirm with bidders his knowledge that the estimates were grossly misleading and would lead to disproportionate outcomes if relied upon.

1334 Accordingly, I conclude that the Contract A of the 2004 CF and GOC/RCMP contained a duty of fair and equal treatment that concealed preferences to the advantage of any bidder should not be contained in the tender documents. By reason of the PMS provisions (as well as the method of selection terms) contained in the 2004 RFP that provided a concealed unequal and unfair advantage to RLRS, the defendant violated the implied duty of fair and equal treatment.

The court rejected the government’s assertions that the hidden flaws in the process did not constitute unfairness since all of the tenders were evaluated consistently according to the terms set out in the RFP. Rather, the court found that the duty of fairness extends beyond the narrow scope of determining whether the evaluation was conducted in accordance with the terms of the RFP and also includes the duty to accurately disclose relevant performance and evaluation considerations upon which the bids will be evaluated:

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[…] the simplest answer is that the definition of what constitutes an unfair evaluation would include an evaluation carried out on an RFP that includes concealed advantages or disadvantages to any bidder. Any aspect of the tendering process upon which an evaluation is based is part of the evaluation process. Accordingly, if the tender terms are inherently unfair because of undisclosed preferences, the evaluation based on those tender terms is equally unfair. The jurisprudence upholds this result.

The court determined that Envoy would have won the two 2004 contract awards had RLRS’s zero PMS cost tender been disqualified as non-compliant. It concluded that Envoy was entitled to lost profits for the 2004 contracts, as well as to 50 percent of its lost profits for the lost extension periods under those contracts. The court awarded Envoy over $30 million in lost profits.

In its subsequent follow-up judgment in May 2013, the court increased the lost profit damages award by approximately $1 million based on revised lost profit calculations. It also awarded over $3 million in pre-judgment interest, as well as legal costs at the full indemnity scale (rather than at a lower partial compensation scale) which amounted to almost $4.8 million. As the court noted, awarding legal costs at the full indemnity scale is reserved for extreme situations of defendant misconduct. The court found that the government’s conduct in the procurement process and subsequent legal proceedings warranted this higher award of legal costs in favour of the plaintiff:

99 I disagree with the defendant’s submission that there was no deliberate conduct on its part. The concealment of crucial evidence that played a major role in the outcome of the case and misled the court is grave misconduct. Moreover, this conduct was intended to conceal significant deliberate reprehensible conduct prior to litigation.

100 I also reject defendant’s submission that the conduct of Mr. Goodfellow and Mr. Singh at trial related merely to findings of credibility “which are the kind of assessment the trial judges are required to make on a daily basis” and do not constitute “a rare and exceptional circumstance”, quoting again the Hunt decision as the basis for this argument.

101 The Crown’s misconduct is not judged merely as an everyday credibility finding. The untruthfulness is crucial to findings of fact on intention. Moreover, the lack of credibility in combination with the attempts of concealment, undermine the entire foundation of the defendant’s case, coming as it does from their two key witnesses.

While the court had ruled against awarding punitive damages against the government in its initial judgment, in its subsequent judgment, it cited the public’s expectation of probity on the part of public officials as a significant factor that weighed in favour of the higher legal costs award:

138 Thirdly, I am taken aback that Federal public servants are the perpetrators of the misconduct. I do not think that it is an error in principle to hold public servants to a “higher” consequence when their behaviour stuns the court, because it thought this would not happen from persons holding responsible positions of public trust and whose actions are intended to be guided by the public interest. The Contracting Authority and senior PWGSC witnesses cited chapter and verse describing their duties of fair and equal treatment to the point that the plaintiffs relied on their testimony to describe the rules under which public procurement processes were intended to be conducted.

139 Canadians count on our public service acting honestly, fairly and with the utmost integrity. It is not simply a matter of being competent or achieving results through expediency that meets the needs of the governmental entities or their personnel at the expense of principle. The public sector is expected to act on and execute our values in its daily interactions with the other components and members of our society. When it does not adhere to fundamental principles of good governance and fairness in important matters such as the procurement of goods and services, the courts and the public are shocked, breeding cynicism and lack of respect for our institutions.

140 While there may be other means to deter and denunciate the defendant’s misconduct, the sense of justice underlying the court’s decision is that, in addition to everything else referred to, the plaintiffs should not have had to expend their resources to require the defendant to adhere to its own guiding principles when this could have been avoided but for the defendant’s grave positive misconduct.

141 Accordingly, I conclude that the plaintiffs are entitled to their costs on a full indemnity.

As this case illustrates, perpetuating a previously unfair RFP process by using hidden factors that unfairly favour an incumbent is a breach of a purchasing entity’s duty of fairness and can give rise to significant legal exposure when competing bidders launch legal challenges. Furthermore, engaging in inappropriate conduct to conceal those improprieties during the resulting litigation only serves to further undermine the credibility of the purchasing entity before the court and compound legal liabilities. In this instance, the total damages awarded amounted to almost $40 million, rendering a significant blow to the taxpayer, and to taxpayer confidence in the government’s procurement processes.