By: Paul Emanuelli

This article is an excerpt from the 2021 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

While open tendering is a norm for awarding contracts in the public sector, those open tendering rules recognize an exception that allows for direct awards (also referred to as “sole-sourcing” or “single-sourcing”) based on legitimate emergency circumstances.

What is an Emergency?

The emergency exception applies to unforeseeable situations of extreme urgency.

For example, in its January 2015 decision in Fairview Valley Fire, Inc. v. California Department of Forestry, the California Court of Appeal upheld the California Department of Forestry’s stand-by emergency fire services arrangement that allowed for direct contract awards under a standing agreement, ruling that those awards would be exempt from second-stage invitational tendering rules under a California Public Contract Code exemption that applies to “cases of emergency where a contract is necessary to the immediate preservation of the public health, welfare or safety, or protection of state property.”

In this case, the government proactively set up its standing agreements for emergency call-up services in advance to deal with situations where unforeseen surges in forest fires overwhelmed government resources and required the direct award of emergency support contracts from private service providers.

Failure to Plan is Not an Emergency

However, the failure to plan is not an emergency.

For example, in its June 2018 determination in ALS Canada Ltd v. Statistics Canada, the Canadian International Trade Tribunal ruled that the Canadian federal government’s attempt to rely on the urgency exception to award a contract for municipal wastewater testing to monitor the pre-and-post cannabis legalization consumption rates in the population breached the procurement rules since the government should have known well in advance of the testing requirements given its long-planned cannabis legalization initiative. The Tribunal was also not convinced that the selected contractor was the only supplier who could provide the specialized services and awarded lost profits to the complainant for being denied an opportunity to compete for the work.

Similarly, in its January 2014 determination in Knowledge Circle Learning Services Inc. v. Department of Health, the Canadian International Trade Tribunal found that the extension of standing offers beyond the originally contemplated term constituted an inappropriate sole-source in contravention of the relevant trade treaties. In this case, the Department of Health extended a number of standing offer agreements (SOAs) as a stop-gap measure while it waited for the Department of Public Works and Government Services to establish a new national master standing offer for the required French language training services. The complainant was one of the original standing offer contractors, but its contract was not extended.

The Tribunal found that the extension of the standing offer for 18 months beyond its valid expiry date did not validly fall within the urgency and unforeseen circumstances exceptions under the trade treaties. The Tribunal rejected those sole-source exceptions in the circumstances, since the services were not required in an extreme urgency and since it was entirely foreseeable that the services would be required prior to the creation of a new national standing offer by the Department of Public Works and Government Services.

The Dividing Line Between Emergencies and Poor Planning

Distinguishing between a valid emergency and an improper direct award can be a delicate balancing act since the procurement rules are heavily biased towards open tendering, while exceptions are interpreted strictly in legal disputes and audit review. Ultimately the onus lies with the government to defend its direct award decisions.

For example, in its October 2014 decision in Nationwide Gritting Services Ltd v. The Scottish Ministers, the Scottish Court of Session – Outer House struck down the second year of emergency sole-sourcing for road salt after ruling that the government should have dealt with its supply shortages between winters. As the Court summarized, the “extreme urgency” exception to open tendering recognized under the procurement regulations needs to be strictly interpreted, does not apply to self-created situations, and is informed by risks to human health and safety.

The Court noted that the first winter saw some of the most severe weather in decades, which resulted in dwindling road salt supplies. However, while the government made emergency purchases for the first winter, it ultimately decided against stockpiling for the future winters after being advised against oversupplying based on a single season. Unfortunately, the next winter also proved problematic, seeing the road salt reserves depleted almost immediately from high usage as the worst winter in decades caused unprecedented road closures and multiple emergency situations.

The government therefore moved to directly buy more road salt on an emergency basis for the second winter in a row. The Court determined that the first year’s direct purchase of the road salt fell within the emergency exception, finding that it constituted a situation of extreme urgency caused by unexpected and unforeseeable events, rather than being self-created by the government, and that the urgency precluded the use of open tendering procedures.

However, the Court found that the direct award was not justified in the second winter. The Court agreed that the weather in both winters gave rise to an unforeseeable emergency situation. However, in the second winter, the Court found that the short salt supply was self-created since the government was aware that the salt supply arrangements in Scotland were fragile given its experience in the prior winter. The Court concluded that the government should have acted sooner to establish contracts that allowed for more salt supply, which could have been accomplished by initiating an open tendering process after the first winter. The failure to do so resulted in a self-created crisis in the second winter.

As this case illustrates, emergency direct awards remain controversial and subject to legal challenge and after-the-fact scrutiny. The onus lies with government institutions to defend those awards as validly falling within recognized exceptions to open tendering.

Factors to Consider

When deciding whether to make a direct award on an emergency basis, decision-makers should follow the following protocols:

  1. Decide if it is a real emergency. Situations of extreme urgency created by legitimately unforeseen circumstances requiring an urgent acquisition to address public health and safety concerns are recognized as falling within the emergency exception.
  2. Document your rationale. Decisions to directly award a contract can be legally challenged and are subject to future audit review. Having no records means having no defence for your direct award. Ensure that the rationale for your emergency direct award is well-documented at the time of the contract since retroactive record-keeping is typically viewed with suspicion by the courts and public auditors.
  3. Document and scope your deal. Ensure that the emergency award contract is well-documented and contains clear termination rights so that you are not tied to long-term spending commitments that go beyond the scope of the emergency exception.

Future Considerations

While matters of genuine public health and safety should remain paramount when deciding whether to directly award a contract, public institutions face significant legal and reputational exposure if they misuse the emergency exception or are retroactively found to have self-created an emergency through poor planning. In addition to dealing with immediate emergencies, public institutions should also mobilize proactive planning strategies and pre-establish standing arrangements to ensure that their supply chains are secure in advance, particularly for critical supplies and services. The best way to respond to an emergency is to plan for it in advance so that your procurement needs are covered when that moment of crisis arrives.