This article is an extract from the 5th edition of Government Procurement.
In its February 2022 decision in Ministry of Highways for the Province of Saskatchewan v. West-Can Seal Coating Inc., the Saskatchewan Court of Queen’s Bench rejected the Saskatchewan government’s judicial review application after finding no reason to set aside an arbitration ruling that found the government in breach of the Canadian Free Trade Agreement.
Turning first to the arbitration in question, in a March 2021 decision in New West Partnership Bid Protest Mechanism Arbitration HWY-20126, Saskatchewan, an arbiter determined that the Saskatchewan provincial government breached the Canadian Free Trade Agreement by improperly evaluating past performance criteria and applying improper local labour requirements. The arbitration was conducted pursuant to the bid protest mechanism established by the four western Canadian provinces for the adjudication of trade treaty bid protests.
The arbitration dealt with the government’s award of a contract for highway micro surfacing. The contract was awarded based on a 110-point evaluation scale, in which bidders were assigned points in four categories, with the work zone traffic audit (“WZTA”) scored out of five points, contractor performance evaluation (“CPE”) scored out of 10 points, community benefits scored out of 25 points, and bid price scored out of the remaining 70 points.
A losing low bidder, West-Can Seal Coating Inc., (“West-Can”) initiated an arbitration process alleging that the government breached Chapter 5 of the Canadian Free Trade Agreement by, among other things, improperly assessing past performance and applying local preferences that unfairly favoured the winning Saskatchewan bidder, Morsky Construction Limited (“Morsky”). The complainant asserted that the contract award reflected a long pattern of discriminatory procurement practices by the government that unfairly favoured local bidders:
West-Can argues that the particular procurement is only one example in a long pattern of discrimination against out-of-province suppliers by the Ministry. It says the Ministry’s approach has resulted in 100% of micro-surfacing contracts tendered by the Ministry since 2017 being awarded to Saskatchewan bidders. West-Can argues that it has experienced a systematic and unfair pattern of favouritism for local bidders that has resulted in various contracts lost to the same local bidder, notwithstanding West-Can having made the low bid in those contracts and competitively met all other relevant tender criteria.
West-Can alleged that government’s biased and discriminatory conduct in applying the work zone traffic audits and community benefits scores unfairly denied it a contract award. Those evaluation rules allocated points to bidders based on work zone traffic audit scores and contractor performance evaluation scores. Where past scores were unavailable, an industry average score was applied to bidders. West-Can alleged that it was discriminated against in the government’s application of the work zone safety audit scores since the government included an out-of-scope contract in its score, while Morsky’s score for a problematic in-scope contract was improperly excluded from the bid evaluations.
West-Can argued that when the government incorporated workplace safety scores into future bid evaluations in November 2018, it retroactively expanded the scope of prior contracts to those beginning in April 2017 that included a contract performed prior to the adoption of the new scoring system. The complainant argued that the government’s performance audit of that pre-November 2018 contract was flawed and that it would have contested the audit result had it known that those scores would be used against it in the future bid evaluations. However, once West-Can became aware of the retroactive application of that score to future bids, the government did not allow it to contest the problematic prior assessment, claiming that it was too late to do so, but still included that contract score in the new evaluation. West-Can also asserted that the government’s method for scoring past performance prior to November 2018 was materially different than the method used after that date, which further invalidated past performance scores performed prior to November 2018. West-Can asserted that the inclusion of that problematic prior score undermined what would otherwise be its perfect prior performance score for that category.
West-Can further alleged that the government failed to include a problematic prior contract in Morksy’s evaluation scoring. In fact, the record showed that the government had sued Morsky for the supply of faulty asphalt, which the contractor blamed on its asphalt supplier. That disputed contract was not included in Morsky’s past performance assessment. The government countered by arguing that the matter was still in litigation so that it would not be fair to include that contested contract in Morsky’s prior performance assessment.
Further, West-Can asserted that the government’s community benefits evaluation category constituted an improper local preference. As the arbiter noted, the government had “taken measures to support regional economic development and enhance quality of life across the province of Saskatchewan” since, as the government stated, the project in question was “located in an area that has experienced a dramatic drop in employment and economic activity” and an objective of the project was to generate local community benefits. Under this scheme, a contractor’s ability to offer those benefits would be assessed as part of the bidding process to determine a contractor’s commitment to “generate economic development in the region and maximize the on-site employment opportunities” for local persons.
The solicitation defined “local persons” as “an individual who has a permanent residence in Saskatchewan and is directly employed with the Contractor or an individual who has a permanent resident in Saskatchewan and is directly employed with a subcontractor providing services at the Project Site (as defined in the Contract).” The community benefits scoring scheme assigned a full 25 points to contractors who provided 100 percent local labour, while awarding no points to contractors who provided less than 60 percent local labour. Further, the solicitation stated that contractors who failed to meet the local labour quotas committed to in their bids would “face economic penalties, including a lump sum $25,000 deduction to the price paid under the contract” as well as additional deductions of up to 5 percent of the contract value for resulting impacts on their contractor performance evaluations.
West-Can asserted that the scoring scheme, which gave the full 25 points to contactors who used 100 percent local labour, while scoring contractors with less than 60 percent local labour no points, compelled the hiring of local labour to win bids. The government countered by arguing that the prohibitions against local preferences in the trade treaties applied to goods, services and suppliers and did not apply to workers and that, in any event, the complaint still scored full points in that evaluation category.
After considering the competing arguments, the arbiter ruled that West-Can was not treated fairly and equally and that the government had breached the procurement rules under the Canadian Free Trade Agreement.
Turning first to the workplace safety audits, the arbiter ruled that government’s retroactive inclusion of a pre-November 2018 contract in West-Can’s bid evaluation was unfair since the scoring process used prior to that date was substantially different than the process used under the new scoring scheme. The arbiter also found that the complaint was not provided proper notice that its prior score would be used in future bid evaluations and was denied a meaningful opportunity to contest that prior score. Further, the arbiter found that government’s treatment of the complainant in scoring that category was markedly different than the treatment the government afforded the local bidder Morsky. The arbiter ruled that this breached the Canadian Free Trade Agreement’s requirement to provide a fair, open and equal opportunities to competing bidders based on transparent evaluation criteria that are applied through impartial processes. The arbiter concluded that the West-Can’s prior work zone traffic audit score from a contract that pre-dated the new scoring scheme should not be included in the complainant’s bid score.
The arbiter also found that it was unreasonable for the government to ignore evidence of Morksy’s problematic past performance simply because the contract in question was subject to ongoing litigation, concluding that this contrary to the equal treatment rules under the Canadian Free Trade Agreement. In fact, as the arbiter noted, the government’s court documents claimed that Morsky breached its contractual obligations and the decision to exclude this evidence due to an ongoing lawsuit was flawed since it allowed contractors to avoid unfavourable scores by initiating litigation. The arbiter found that Morsky’s past performance score for the disputed contract should be included in the bid evaluations based on the assessment of the government’s engineers, failing which the CPE policy should be reworked to better ensure the timely and equitable assignment of scores:
This situation would appear to illustrate a problem with the CPE process. A contractor that may be in line for an unfavourable CPE evaluation could avoid that score by initiating litigation. If there are only two contractors using CPE scores and one is in province while the other is out of province, differential treatment would result. I urge the Ministry to carefully examine and consider issuing a CPE score to Morsky based on the best judgement of its professional engineers. Should the Ministry conclude that it is unable to issue a CPE score I recommend reworking the CPE policy to ensure equitable and timely assignment of CPE scores.
The arbiter also ruled that the government’s community benefits scheme breached the Canadian Free Trade Agreement local preference prohibitions by improperly penalizing non-local contractors:
The community benefits provision encourages the use of local labour and penalizes contractors unable to obtain appropriate local labour. They will either face a points penalty if they bring in experienced staff from another province or incur the extra training costs if they hire inexperienced staff from the local market. Either way the provision benefits a resident company with trained resident staff to the detriment of out of province suppliers.
In summary, after finding the above-noted breaches the Canadian Free Trade Agreement, the arbiter ruled that the government should rectify its evaluation by: (i) removing West-Can’s contested work zone safety score; (ii) including Morky’s performance score for the litigated contract; and (iii) removing community benefits scoring and penalties from all future procurements. The arbiter also ruled that the government should revise its general approach to the above-noted practices to better ensure compliance with its trade treaty duties. While lost profit damages were not an available remedy under the arbitration process, the arbiter ordered costs against the government in the amount of $45 000.00 to compensate the complainant for its bid preparation costs and bid protest costs.
The Saskatchewan government brought an application to the Saskatchewan Court of Queen’s Bench seeking that the court either set aside the arbiter’s decision or order a new arbitration with a new arbiter. However, in its above-noted February 2022 decision in Ministry of Highways for the Province of Saskatchewan v. West-Can Seal Coating Inc., the court rejected the government’s application after finding no basis to set aside the arbiter’s decision.
In its application the government argued that the arbiter breached principles of procedural fairness and rendered an unreasonable decision that exceeded the scope of the arbitration. More specifically, the government asserted that the arbiter: (i) failed to give the government an opportunity to respond to the complainant’s arguments; (ii) considered irrelevant evidence while failing to consider relevant evidence; and (iii) rendered a wholly unreasonable decision. The court disagreed.
As the court noted, the bid protest mechanism included the right to a court review of the arbiter’s decision in accordance with the general statutory provisions that apply to the review of arbitrations. In this case, those statutory provisions were set out in Saskatchewan’s Arbitration Act, which allowed a court to set aside an arbitration decision on the following limited grounds:
The provisions of The Arbitration Act, 1992, SS 1992, c A-24.1, so identified are:
46(1) On a party’s application, the court may set aside an award on any of the following grounds:
…
(c) the award deals with a matter in dispute that the arbitration agreement does not cover or contains a decision on a matter in dispute that is beyond the scope of the agreement;
…
(f) the applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator;
(g) the procedures followed in the arbitration did not comply with this Act or the arbitration agreement;
(h) an arbitrator has committed a corrupt or fraudulent act or there is a reasonable apprehension of bias;
(i) The award was obtained by fraud.
The government argued that, in addition to the grounds for setting aside an arbitration set out in the applicable statutory provisions, the court also had the jurisdiction to judicially review the arbitration decision under its general review powers. While the court agreed that it had the power to set aside the arbitration ruling in accordance with the parameters established under the Arbitration Act, it ruled that general judicial review remedies did not apply to an arbiter’s decision under the private commercial arbitration proceedings established under the Bid Protest Mechanism:
On this application the court is reviewing an arbiter’s decision in a commercial arbitration. That being the case, the court’s power to review the decision is the power that was contractually specified by the parties. The court does not have a broader judicial review power. The power of the court to review the arbiter’s decision is the power described in the specified sections of s. 46 of The Arbitration Act, 1992.
The court ruled that the arbiter’s decision should be subject to a high degree of scrutiny under a strict procedural correctness standard, rather than a more deferential procedural reasonableness standard. However, for the reasons discussed below, the court found no basis to set aside the arbitration decision.
In its arguments, the government asserted that the arbiter’s decision exceeded the scope of the arbitration since the purpose of the bid protest mechanism (“BPM”) was to address issues arising out of a specific tendering process, rather than addressing broader issues regarding government procurement practices more generally:
In the face of these findings, the Ministry’s argument is that the arbiter did not make any proper determination as to whether procurement H20126 was consistent with the CFTA. The BPM, says the Ministry, is intended for use regarding disputes relating to a specific procurement. It is intended to be a “quick hitter”, on a “one-off” basis, to resolve a discrete procurement dispute quickly and efficiently. In particular, says the Ministry, the BPM is not intended to include a review of broader government procurement policies or government decisions that underlie the subject procurement.
This is why, the Ministry argues, the BPM permits no oral evidence, no cross-examination and no scrutiny of technical information. It is why submissions are limited to the two parties involved and to the specific procurement issue.
In so saying the Ministry cites the NWPTA, which includes not only the BPM but also provides another, broader dispute resolution process. It is that latter process, submits the Ministry, that is intended to be the process for considering the broader policies and government decisions that were considered here by the arbiter. Therefore, the Ministry concludes, here the arbiter exceeded the scope of the arbitration by basing his decision on such broader policies and government decisions.
The court disagreed, finding that this argument unnecessarily narrowed the ability of an arbiter to adjudicate a bid protest dispute since the issues under dispute may be based on general government procurement practices, rather than on issues unique to a specific bidding process. The court found no basis to conclude that parties to the BPM had intended the scope of arbitration rulings to be limited to the extent argued by the government:
If the Ministry is correct in asserting that the arbiter was not permitted to consider many or most of the factors that he did, then it becomes unclear how the arbiter was supposed to determine the arbitration, in particular how the arbiter was supposed to separate characteristics of contract H20126 from the broader context of the Ministry’s procurement process, and yet be able to make a recommendation under article 5, paragraph 7(c) of the BPM “for corrective action as to how the government entity may bring itself into compliance with the applicable trade agreement”.
If the Ministry is correct, then the arbiter would have been left with little evidence on which to base his decision. Certainly he would have been left without the evidence on which he relied in finding inconsistencies with the CFTA. He would have been required to tell West-Can that, because the inconsistencies that were apparent from the evidence related to broader polices and government decisions, the arbiter was not in a position to rule on the dispute. He could have done no more than to suggest to West-Can that it must use the other dispute resolution process to resolve the underlying circumstances, to attempt in that way to remove the effective cause of the inconsistencies.
The Ministry’s interpretation goes to the fundamental meaning of the BPM. I am not prepared to conclude that the parties to the NWPTA intended the scope of the BPM to be so extremely limited by way of mere implication. If the parties had intended to so limit the scope of the BPM they could and should have included that limitation in the agreement expressly. They did not, and I do not conclude that they intended the meaning advanced by the Ministry.
The scope of the BPM is not limited as the Ministry suggests. The arbiter did not stray beyond the jurisdiction that arose from the parties’ agreement and so from the BPM. The approach taken by him complies with the plain meaning of BPM article 5, paragraph 7(b) and (c). He determined that procurement H20126 was inconsistent with the CFTA, and he recommended corrective action.
With respect to the scope of the arbitration, the arbiter was correct in the sense that he proceeded in a procedurally fair manner.
After concluding that the issues considered under the arbitration fell within the proper scope of the BPM, the court then turned to the government’s assertions that the arbiter denied the government an opportunity to respond to the complainant’s evidence. The court found that the government was aware of the issues in question from the outset of the arbitration, that the arbiter did not draw any adverse inferences from the government’s lack of reply to some of the specific matters raised by the complainant, and that the manner that the evidence was considered did not result in any unfairness to the government.
Turning next to the government’s assertion that the arbiter failed to consider relevant evidence and considered irrelevant evidence in arriving at the arbitration decision, the court ruled that this argument was simply and extension of the government’s first argument that asserted that the arbiter had exceeded the proper scope of an arbitration. The court ruled that the evidence considered by the arbiter was relevant to the issues that were before the arbiter and that the arbiter’s consideration of the evidence was procedurally correct.
Finally, turning to the government’s assertion that the arbiter’s decision was “wholly unreasonable” the court noted that this consideration fell beyond the scope of set-aside grounds established under the Arbitration Act. However, the court also noted that if a broader judicial review was applied to the arbiter’s decision, it would conclude that the arbiter’s decision was reasonable based on applicable case law principles that applied to the review of substantive decisions:
If it were necessary to consider whether the arbiter’s decision is wholly unreasonable, I would find that the arbiter delivered a decision that falls within the description of a reasonable decision in Vavilov. In the course of the decision he identified the relevant circumstances, the issues, the arguments on both sides, the evidence and the pertinent contractual provisions. Further, he considered these factors and then decided the issues (with the exception of one issue that West-Can had advanced, so that his failing to address that issue does not adversely affect the Ministry).
The arbiter explained why and how he decided the issues. In particular, he explained his conclusion that the procurement of contract H20126 was inconsistent with Chapter 5 of the CFTA, and he specified how that was so in relation to West-Can’s WZTA score, Morsky’s WZTA score, Morsky’s CPE score and the community benefits provision.
If it had been necessary to decide the issue, I would have concluded that the arbiter’s decision meets the test of reasonableness.
The court therefore dismissed the government’s application and, after noting that the matter was “among the most complex and involved of litigation matters”, awarded costs to the complainant on a higher scale than would be applicable to less complex proceedings. The court ultimately found no basis for setting aside the arbitration decision that determined that the government’s past performance scoring procedures and community benefits scheme violated the fair competition standards contained in the Canadian Free Trade Agreement.
