This article is an excerpt from Government Procurement, which is available for purchase.
In its April 2015 ruling in Rapiscan Systems Inc. v. Canada (Attorney General), the Federal Court of Appeal upheld a February 2014 Federal Court trial decision that set aside a contract awarded by the Canadian Air Transport Security Authority (“CATSA”) after finding that the contract was unlawfully awarded pursuant to an unfair bidding process. The dispute arose over the procurement of airport security screening equipment. The contract was awarded to the incumbent equipment provider, Smiths Detection Montreal Inc. A competing supplier of security screening equipment, Rapiscan Systems Inc., brought the legal challenge after submitting an unsuccessful bid. Rapiscan alleged that the process was unfairly biased in favour of Smiths after CATSA had previously awarded Smiths sole source contracts for the provision of similar equipment and had relied on hidden evaluation criteria.
In its judgment, the Federal Court noted that CATSA operates under federal statute with a mandate that includes screening passengers and their carry-on and checked baggage. While it is not subject the Treasury Board contracting policies or federal government contracting regulations, CATSA’s governing statute, the Canadian Air Transport Security Authority Act, provides that CATSA is governed by a board of directors comprised of a chairperson, ten other directors, and a chief executive office, who are responsible for financial oversight, corporate oversight and good governance. The court also noted that CATSA’s internal contracting policy called for open competitive bidding to obtain and demonstrate value for money and promote openness, transparency and fairness in its contracting process. That policy also required the use of transparent evaluation criteria in contract award decisions.
As the Federal Court noted, since its creation in 2002, CATSA had purchased it screening equipment exclusively from Smiths. While CATSA was criticized by the Auditor General of Canada in a December 2006 report for its sole-sourcing practices, the court observed that in 2009, after conducting informal internal comparisons of the Smiths and Rapiscan security screening equipment, CATSA awarded another sole source contract to Smiths. As the court explained, CATSA officials preferred the new Smiths equipment since it was able to generate baggage images or “views” from four different vantage points. According to CATSA officials, the multiple view capture function helped expedite the screening process for security staff. The Rapiscan equipment, while considerably less expensive, was only able to capture views from two different perspectives. These technical considerations were relied on by CATSA management to obtain board approval for the $30 million sole-source award to Smiths in 2009. Under that contract, CATSA replaced the single view equipment that had previously been provided by Smiths through a prior sole sourced contract.
In July 2010 CATSA prepared a new plan to competitively procure additional security screening equipment at an estimated cost of $40.5 million and went to market in August 2010 with a solicitation document that it referred to as a Request for Submissions (“RFS”). The court described the RFS as follows:
32 The RFS contained the following exemption clause in the body of its contract and the disclaimer:
This RFS does not constitute an offer by CATSA, nor is it intended to give rise to any legally binding obligations (sometimes referred to as a Contract “A” under Canadian law) on the part of CATSA. It is not a tender, request for tenders or a request for proposals.33 The RFS further described Phase I of the process as follows:
During Phase I of the Process[…] following a review of the Submissions […], if CATSA determines that one (1) or more Suppliers are able to provide the required Equipment and related goods and services at a price which offers the best value to CATSA, in CATSA’s sole discretion, then CATSA may create a short list of Suppliers with whom to enter into further discussions regarding the Supplier’s Submission and/or negotiate a Standing Offer Agreement.34 The RFS further reserved the right not to proceed to a competitive bid in respect of the award of contract in the following terms:
CATSA reserves the right not to proceed to a competitive bid or other form of selection process and may select one (1) or more Suppliers to establish a Standing Offer Agreement with (in the form attached at Schedule “C” as may or may not be negotiated with a Supplier) based on their respective Submission, other information provided by the Supplier under this RFS, and other information obtained by CATSA from third parties, including without limitation, other agencies.35 Even though the contract contained no requirements, the RFS contained a further exception not requiring it to comply with requirements, stated as follows:
3.5 TERMS. Notwithstanding anything to the contrary in this RFS, CATSA reserves the right in its sole and absolute discretion, without any liability whatsoever to any Supplier to:
Accept submissions which fail in any respect to comply with the requirements of the RFS;[…]36 The Schedule “A” Statement of Requirements in the RFS consisted of a series of requests to provide information on available checkpoint multiview advanced technology x-ray products, including product technical information and information on accessories, maintenance, training and documentation. It did not contain any requirements, mandatory or otherwise, that CATSA demanded be met by the RFS. It also did not include any selection criteria, weighted or otherwise.
After discovering that Rapiscan had failed to download the solicitation from MERX, CATSA directly approached Rapiscan to encourage Rapiscan to participate in the bidding process:
37 Having posted a summary of the RFS on the electronic tendering service MERX, Ron McAdam, the General Manager of New Technology at CATSA, noticed that Rapiscan was not among the list of suppliers on MERX. After some internal discussion, CATSA decided to contact Rapiscan and notify it of the RFS. CATSA accordingly contacted Rapiscan and drew Rapiscan’s attention to the 2010 RFS, inviting it to participate in the procurement process. Rapiscan subsequently responded to the RFS along with Smiths, L-3 Communications, and Reveal. Rapiscan was the only party submitting a bid that was not an existing supplier of CATSA.
By October 2010 CATSA officials sought approval from the board to award a new contract to Smiths. According to the briefing note provided to the board, Smiths had been selected pursuant to a process that was designed to “obtain competitiveness, openness, fairness, transparency and value for money” and the Smiths equipment had “rated highest in each category” of evaluation. The briefing note also indicated that the Rapiscan equipment had not met the requirement of being able to generate at least three views of scanned baggage. In response to questions by the board, CATSA’s CEO provided assurances that Smith’s equipment “meet the needs required now” and was “the highest performing technology that exists today with the most potential for improvement.” The board approved the award of a five year standing offer to Smiths, with an option to extend for up to five additional years.
Rapiscan brought a legal challenge against this contract award, seeking a court declaration that the award decision was unlawful and unfair and seeking that the court direct CATSA to conduct a new procurement process that complied with CATSA’s statutory obligations and contracting procedures.
In its trial decision, the Federal Court set out the following three legal issues that had to be assessed in considering Rapiscan’s judicial review application:
44 The following are the issues for consideration in this matter:
a. Is the matter coloured with a public element, flavour or character sufficient to bring it within the purview of public law and therefore review by this Court on the rationale that:
i. it involves a breach of a statutory duty, or
ii. it involves the integrity of government procurement processes?
b. If the matter is reviewable, what is the applicable standard of review?
c. In the circumstances, did the Board’s decision meet the standards of legality, reasonableness and fairness required for good governance?
With respect to the first issue, the court determined that CATSA’s procurement process had a sufficient public element to bring it within the scope of an administrative law review based both on the statutory duties that applied to CATSA and on the need to protect the integrity of the procurement process in light of how CATSA had conducted the procurement process. With respect to the second issue of determining the standard of review, the court found in favour of the more deferential reasonableness standard as opposed to the stricter review standard of correctness. On the final issue, the court ultimately concluded that CATSA’s contract award was unlawful.
In providing its reasoning for reviewing CATSA’s contract award decision, the Federal Court acknowledged that the judicial review of government commercial decisions has a long and complex history and that the courts have traditionally hesitated in reviewing these contracting decisions:
48 As the Federal Court of Appeal noted in the first sentence of Irving Shipbuilding Inc v Canada (Attorney General), 2009 FCA 116, [2010] 2 F.C.R. 488 [Irving Shipbuilding] at para 1, “Public contracts lie at the intersection of public law and private law.” It is common ground that a procurement contract, being commercial in nature, does not normally permit recourse to administrative law remedies. Irving Shipbuilding at para 46:
46 The context of the present dispute is essentially commercial, despite the fact that the Government is the purchaser. PWGSC has made the contract pursuant to a statutory power and the goods and services purchased are related to national defence. In my view, it will normally be inappropriate to import into a predominantly commercial relationship, governed by contract, a public law duty developed in the context of the performance of governmental functions pursuant to powers derived solely from statute.
49 In Irving Shipbuilding, the Court went further in its remarks at paras 61 and 62 concerning exceptions to allow a subcontractor to rely on a public law duty. It limited deviations from the rule to situations where the integrity of the procurement process was at risk, which at least by the examples cited would occur only in situations of crimes.
50 I discuss below whether the high threshold to exceptions was intended to apply only to subcontractors, whose right to seek public law remedies was rejected on a number of bases relating to various other limitations on their rights to sue owners in contract and negligence. The Court also cited with approval the text of Paul Emanuelli, Government Procurement, 2d ed (Markham, Ontario: LexisNexis, 2008), which (at page 698) formulates a more generalized threshold to determine whether judicial review is permitted in a contractual context:
24 This view of the Court’s jurisdiction is consistent with that generally adopted by other courts in Canada: see Paul Emanuelli, Government Procurement, 2nd ed. (Markham, Ontario: LEXISNEXIS, 2008) at 697-706, who concludes (at 698):
As a general rule, the closer the connection between a procurement process and the exercise of a statutory power, the greater the likelihood that the activity can be subject to judicial review. Conversely, to the extent that the procurement falls outside the scope of a statutory power and within the exercise of government’s residual executive power, the less likely that the procurement will be subject to judicial review.
English authorities on public contracts and judicial review are considered in Harry Woolf, Jeffrey Jowell and Andrew Le Sueur, de Smith’s Judicial Review, 6th ed. (London: Sweet & Maxwell Ltd., 2007), 138-45, where courts generally require an “additional public element” before concluding that the exercise by a public authority of its contractual power is subject to judicial review, even when the power is statutory.
In considering whether a government contracting decision contains a sufficient public element to warrant a judicial review remedy, the Federal Court referred to a number of factors cited by the Federal Court of Appeal in its 2011 Air Canada v. Toronto Port Authority decision. The factors adopted from that decision included: whether the contract was a private commercial matter or one of broader interest to the public, whether the decision-maker in question was performing public responsibilities, whether the contracting decision was based on laws rather than private discretion, whether the contracting institution was operating within the network of government and exercising powers as part of that network; and the extent to which the decision-maker was an agent or controlled or influence by a public entity. After finding that these public element considerations applied to CATSA’s contract award decision, and after finding that judicial intervention was required to protect the integrity of the public procurement process in the circumstances, the court determined that the matter should be subject to judicial review.
The Federal Court then confirmed that CATSA’s contract award decision should be assessed on the reasonableness review standard and concluded that CATSA’s contract award decision was not legally valid since CATSA officials had misled the board into believing that the RFS was conducted in compliance with the organization’s contracting procedures. Rather than running a fair and open process, the court found that in its RFS process CATSA had disclaimed any fairness duties, had failed to state its requirements and had failed to disclose its evaluation criteria to prospective bidders. With respect to CATSA’s failure to adhere to its contracting procedures, the court stated that:
64 The overall failure of management was in not advising the Board that it had derogated drastically from the Contracting Procedures during the procurement process. The two areas of significant deviation from the Contracting Procedures in terms of outcomes are firstly, the drafting of an “RFS” procedure that was not a fair or competitive process; and secondly, the concealment of minimum requirements and performance standards with the result of unfairly favouring Smiths.
65 The RFS did not comply from its very conception with any authorized procurement process under the Contracting Procedures. An “RFS” was not included among the several authorized procurement processes in the list of Open Procurement Processes. It was, as the applicant described it, an “ad hoc” or concocted process to which the misdescriptive label of RFS was attached. No explanation is found in the certified record explaining why the management chose to craft its own process having no relation to any of those authorized by the Contracting Procedures. The respondent argues that it complied with the procedures throughout.
66 The RFS consisted of two distinct steps. The first was a Request For Information (RFI). The purpose stated in the Contracting Procedures for an RFI was to obtain information to be used in advance of initiating a procurement process. A CATSA RFI therefore contemplates a further procurement process for the purpose of awarding a procurement contract. It does not contemplate that the contract would be awarded on the basis of the information supplied to an RFI.
67 The second step in the RFS procedure was an un-documented process to evaluate information and award the contract. Given the arbitrariness of the procedure, the RFS contained numerous disclaimers to authorize its conduct. These included specifying that no Contract A would arise from presenting a submission to the RFS, that CATSA could ignore any requirement in the RFS (in fact there were none), and that CATSA was not to be held to any limitations that would prevent it from conducting the second step as a non-competitive selection processes including obtaining information from undisclosed third parties. It was clearly therefore an arbitrary, unbounded process whereby the CATSA could select the supplier on the basis of requirements and evaluation criteria known only by its officers.
The fact that CATSA’s management had run an arbitrary process that lacked the substantive elements of a genuine competition, and had then misled the board into believing that they were awarding a contract based on an open and fair competition, tipped the scales towards judicial intervention in order to protect the integrity of the procurement process.
The Federal Court found that CATSA’s conduct during the bidding process constituted bad faith since CATSA had encouraged Rapiscan to participate in a process where it had no chance of succeeding because of hidden technical preferences so that CATSA’s management could provide the appearance of a fair and open competition to the board:
92 I accept Rapiscan’s submission that it would not have bid against a requirement that it knew in advance it could not meet. By concealing the minimum requirement of three views, in combination with offering a specific invitation to Rapiscan to participate despite knowing that it would bid the same product as was compared with Smiths equipment a year earlier, without giving any warning that its equipment would not meet requirements, CATSA knowingly induced Rapiscan to participate in a process in which it had no fair chance of its submission being considered. Thus the process had the appearance that all industry leaders had participated in a competitive procurement, when management knew in advance that Rapiscan would be eliminated. In my view this conduct constitutes bad faith on the part of CATSA.
93 Secondly, Rapiscan points out that because it was eliminated at the minimum requirement stage, the Board was not provided with an opportunity to consider the cost advantage from its bid. If the pricing differential had been known to the Board it would have been required to seriously consider the immediate cost advantage versus the future savings argument of management. This would have entailed a diligent review of the evidence supporting the position that Smiths was the highest performer and the likelihood or not that Smiths’ equipment could be successfully upgraded in the future.
94 In the circumstances, including CATSA’s tendering history, it would appear to be a reasonable inference that the minimum requirement was adopted to prevent the Board from carrying out a fair and a proper evaluation by limiting its access to information on the significant cost advantage offered by Rapiscan’s equipment. Whether or not that was the intention, that was the result.
The Federal Court also found that CATSA’s management misled the board on the technical merits of the Smiths equipment, which was characterized as being “the highest performing technology that exists today.” The court found that there was no apparent basis for arriving at that conclusion:
106 The conclusions of the report are based on mathematical calculations; no actual performance evaluations of any screening equipment was carried out or reported on in the report. While Rapiscan challenges the report on a number of bases, the validity of the report is not reviewable in this setting. Accordingly, there is sufficient justification to support CATSA’s statement that greater potential for improvement may be obtained with Smiths’ equipment. However, there is no information contained in the certified record to support management’s advice to the Board that Smiths was the “highest performing technology that exists today”.
107 This is an important conclusion because the Board’s decision was justified by the two very short factual representations from management on existing and future highest performance of Smiths’ equipment. While I am satisfied that the justification relating to potential performance is reasonable, I find no basis in the RFS or the materials upon which the decision was said to be made that could support a conclusion that Smiths was the highest performing technology that existed at the time of the Board’s decision. I therefore conclude that the Board based its decision on an erroneous finding of fact made by management in a perverse or capricious manner and without regard to the material in front of it.
While the fact that the RFS did not create Contract A and therefore shielded CATSA from lost-profit claims was a factor in deciding to grant the judicial review remedy, the Federal Court acknowledged that the absence of Contract A was not ultimately determinative since in the circumstances the need for good governance would have called for a judicial review remedy even if the RFS had created Contract A:
123 The primary rationale advanced over the years to exclude public law remedies in matters involving commercial procurement contracts was the existence of an alternate contract remedy to the public law duty of fairness, found in the implied terms of Contract A. This point is made in a review of jurisprudence under the title of “The Adequate Alternative Remedy Bar” in Anne C. McNeely, Canadian Law of Competitive Bidding and Procurement, (Aurora, Ontario: Canada Law Book, 2010) at 83 et seq. The author’s opening remarks on the subject are as follows: “Of the various grounds for denying [public law] review or relief, an argument that the applicant for review has an adequate alternative remedy is the one which is most commonly litigated.”
124 Because the Board was misled by management to believe that fairness was a component of the RFS, Rapiscan is caught in a Catch-22 of unfairness. If it seeks redress in the courts on the basis of contract, its arguments based on a breach of the duty of fair and equal treatment are met with the submission that by responding to the RFS Rapiscan has agreed that no duty is owed. Conversely, when it shows up seeking a judicial review of CATSA’s actions, it is told it must look to its contract remedies because of the commercial context of a procurement contract.
125 I conclude that if the court is satisfied that management significantly misled the Board, resulting in it unknowingly making decisions that undermined the integrity of CATSA’s procurement process and conflicted with its mandate, where no satisfactory remedy may be achieved, or is at risk, under contract law, the matter is coloured with a public element sufficient to bring it within the purview of public law.
126 Although not necessary, I further am of the view that even were a satisfactory remedy for the applicant available in contract law, a sufficient public law element exists whenever a statutory decision-maker is significantly misled by those responsible for advising it, resulting in the suborning and misalignment of the decision with the institution’s mandate and objectives.
After determining that CATSA’s contract award decision was unfair, unreasonable, arbitrary, made in bad faith and procedurally illegal for its failure to consider relevant factors, the Federal Court ruled that the contract award should be declared unlawful and set aside.
CATSA appealed the decision but lost that appeal. While the Federal Court of Appeal reversed some of the Federal Court’s findings, including the trial court’s finding of bad faith on the part of CATSA, its April 2015 ruling ultimately upheld the trial court’s decision to strike down the contract award. The Federal Court of Appeal also agreed with the Federal Court when it acknowledged that not every procurement process creates Contract A, and that, in the absence of Contract A and its implied duties and restrictions, the traditional contract law of negotiated offer and acceptance governs the pre-award stage of the procurement process:
57 An important feature in a procurement process is the established and notional contract known as “Contract A” that is created when a bidder responds to the purchaser’s tender call and submits a tender (Ontario v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111). It is settled law that the formation of the said “Contract A” in a procurement process will create implied rights and obligations arising out of the said process (e.g. a duty of fairness), which is distinct from the contract to be awarded at the conclusion of the bidding process (“Contract B”).
58 Pursuant to M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999] 1 S.C.R. 619 [M.J.B. Enterprises], the Supreme Court of Canada established that upon submission of a tender, “Contract A” will not necessarily arise. The creation of a “Contract A” will depend on the intention of the parties – as with the formation of any contract – and the terms and conditions established in the tendering documents (M.J.B. Enterprises; Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860 and Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943). In the event that no “Contract A” is created, it follows that, in principle, the parties are governed by the traditional law of contracts and the rights and obligations implied in a “Contract A” do not arise. (Paul Emanuelli, Government Procurement, 3d ed. (Lexis, 2012) at page 68).
However, the Federal Court of Appeal disagreed with the Federal Court’s finding that the absence of Contract A resulted in the exclusion of the public institution’s duty to ensure the fair and equal treatment of bidders. As the Federal Court ultimately found, the Federal Court of Appeal noted that even in the absence of Contract A (and the commercial lost profit remedy available to bidders) public institutions continue to be under the duty of procedural fairness under administrative law:
59 The judge was alive to the notion of “Contract A” and was also concerned that the present case involved a unique aspect because the RFS explicitly excluded “Contract A”. In his opinion, the result of this exclusion was to deny “any duty of fair and equal treatment owed to the bidding parties” (judge’s reasons at para. 122). He was of the view that even if a satisfactory remedy in the traditional law of contract was available to Rapiscan, he nonetheless felt compelled given the circumstances of the case, to find a public law remedy for breach of procedural fairness (judge’s reasons at paras. 125-126). In so finding, he concluded that CATSA had breached its duty of procedural fairness vis-à-vis Rapiscan and a remedy was accordingly warranted to maintain the integrity of the governmental procurement process.
While the absence of Contract A would typically preclude a bidder’s ability to bring commercial lost profit claim against a purchasing institution, the Federal Court of Appeal agreed that the administrative law remedy of judicial review allows competing bidders to seek procedural remedies to challenge the procedural fairness of a government procurement process. These remedies can include orders to revisit an evaluation process and, as evidenced in the Federal Court’s trial decision, can result in a court nullifying a contract award decision.
However, the Federal Court of Appeal disagreed with the trial decision, and with other prior Federal Court rulings, regarding the applicable standard of review for government procurement. Rather than adopting the more deferential “reasonableness” standard, the Federal Court of Appeal concluded that the standard of review for procedural fairness in a government procurement process was the stricter correctness standard:
60 However, in finding a public law duty of procedural fairness, the judge seems to have conflated the issue of whether CATSA’s decision was reasonable with the issue of whether CATSA breached a duty of procedural fairness. This is evident when the judge states that “[t]he Board authorized an award of a contract that resulted from an unfair and non-competitive procurement process” (judge’s reasons at para. 4). [Emphasis added.] The issues of fairness and reasonableness are expressly joined together where he describes CATSA’s decision as “unfair, unreasonable, arbitrary and made in bad faith” (judge’s reasons at para. 131; see also paras. 127 and 129).
61 The root of the judge’s reasoning can be found in his reliance on GDC Gatineau Development Corp v. Canada (Minister of Public Works and Government Services), 2009 FC 1295 at paragraph 24 [GDC Gatineau], which purported to affirm earlier Federal Court jurisprudence, which stands for the questionable proposition that a tendering decision is unreasonable where “tendering authority acted in an unfair, unreasonable or arbitrary manner, based its decision on irrelevant considerations, or acted in bad faith.” By proposing that reasonableness should be measured in part in terms of fairness, the GDC Gatineau test clearly runs contrary to the well-established distinction between substantive review and procedural fairness and the resulting rule that procedural fairness is reviewed separately on a correctness standard (Khela v. Mission Institution, 2014 SCC 24, [2014] 1 S.C.R. 502 at para. 79).
In so finding, the Federal Court of Appeal parted company with the majority of recent decisions across Canada that have applied the more deferential reasonableness standard of review to government procurement. In relying on more general administrative law principles, the Federal Court of Appeal drew a distinction between the substantive decisions made in government procurement (which would presumably include technical assessments of proposals by subject matter experts), to which a reasonableness standard would apply, and the procedural rules administered in a government procurement process, which should be subject to a less deferential correctness standard. Notwithstanding the prior jurisprudential trend towards a more deferential general reasonableness standard, this aspect of the Federal Court of Appeal judgment could represent a watershed moment in introducing a new era of procedural correctness to government procurement decisions across Canada.
