This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its May 2007 ruling in Re Zenix Engineering Ltd., the Canadian International Trade Tribunal found that the government breached its process rules when it unilaterally terminated contract award negotiations with the top-ranked proponent during a negotiated Request for Proposals (RFP) process. As the Tribunal found, the government should have offered that proponent the opportunity to meet the government’s final offer before terminating talks and proceeding to the next-ranked proponent during its negotiations on behalf of Defence Construction Canada (referred to in the decision as DCC):
According to paragraph 3.3 of RFAP, the negotiations were to include “… an agreement on a maximum amount for services authorized by DCC … .” The Tribunal is of the view that DCC never clearly communicated to Zenix what constituted the maximum budgeted amount authorized by DND. The Tribunal is of the view that, if the negotiation were to lead to an agreement on a maximum amount for services authorized, it was reasonable to expect that either DCC or DND would have had to identify, during the course of the negotiations, the monetary limit of DND’s budget authority. It also seems logical in that context that, because there were no items of discord between parties other than price, the appropriate time for communicating the nature of any budget limitations would have been when the negotiations had reached an impasse on price. In the case at hand, DND never asked Zenix to meet a price, nor were any budget limitations ever communicated to Zenix.
The meaning of the term “negotiation” is not defined in the RFAP. The Tribunal considered the dictionary definition of the verb “to negotiate” found in the Canadian Oxford Dictionary [footnote omitted] in which it is defined as “… to confer with others in order to reach a compromise or agreement … .” The Tribunal is of the view that negotiations involve a dynamic whereby parties exchange offers and counteroffers until a point where they reach either an agreement in respect of the object of the negotiations or a point where they conclude that have not reached an agreement. The concept of negotiation implies a communication between parties as to the items that are essential to reaching a compromise or an agreement. Negotiations are conducted within the limits that the parties set between themselves. In the case at hand, those limits, to the extent that they existed, were found in paragraph 3.3 of the RFAP. The only limit imposed on the negotiations in paragraph 3.3 was in respect of the moment where it could be determined that the negotiations had failed. According to the terms of that paragraph, it would only have been at that moment that DCC would have been authorized to enter into negotiations with the next ranked proponent.
There is nothing in the language of paragraph 3.3 of the RFAP that could directly or indirectly be construed as indicating that the negotiations would be conducted in a manner that is different from what can generally be understood to take place in the context of a commercial negotiation. Nothing in that paragraph indicated that, contrary to what would normally be expected in the context of a negotiation, DCC could unilaterally determine when the negotiations had reach the point of failure.
The Tribunal found that the government breached the fair process rules by failing to make clear the final offer on price before it cancelled negotiations with the top-ranked proponent:
… DCC unilaterally terminated negotiations with Zenix and began negotiations with the next ranked proponent. Contrary to what would have been reasonable to expect under the terms of paragraph 3.3 of the RFAP, DCC unreasonably decided that its negotiations with Zenix had reached an impasse on the issue of price, such that it meant that the negotiations had failed. DCC reached that conclusion before ever communicating to Zenix what constituted the maximum budgeted amount authorized by DND — the very object of the negotiations.
… The Tribunal believes that it is only after communicating this information to Zenix and having sought a final response from Zenix in this regard that DCC could have reached the conclusion that the negotiations had failed.
The Tribunal found this procedural irregularity to be a serious breach of the procurement rules and awarded the complainant lost profits, a remedy that is recognized under Canada’s federal statutory remedies regime.
The government appealed. While in its March 2008 decision in Zenix Engineering Ltd. v. Defence Construction (1951) Ltd., Canada’s Federal Court of Appeal upheld the Tribunal’s ultimate finding, the Court of Appeal disagreed with the Tribunal’s determination that the government was under a duty to disclose its budget during negotiations, finding that this would impede the government’s bargaining strength during contract award negotiations. The Court of Appeal found that neither the RFP rules nor the trade treaty rules called on the government to disclose its bottom-line budget:
In my view, a proper contextual interpretation of paragraph 3.3 of the RFAP is that in order for the applicant to award the contract, there must be an agreement between the negotiating parties on the maximum amount to be paid for services. It is quite sensible and typical of commercial negotiations that there be an agreement between the parties on the maximum amount to be paid before awarding a contract. Article 506(6) of the AIT requires that evaluation of the tenders follow the criteria outlined in the tender documents. I find that neither the RFAP itself, nor Article 506(6) of the AIT requires that the applicant disclose DND’s budget limits to Zenix. Such a reading would prevent the applicant from being able to use its competitive advantage to obtain the optimum value for DND, which is an object of the competitive tendering process.
I would not, however, preclude such a situation from ever occurring. If a clause of the tender documents clearly required the applicant to disclose its budget limit, then under the AIT or NAFTA Articles discussed, the applicant would be required to abide by it. However, such a requirement would require clear language in the RFAP, as it is counter to the very nature of a competitive bidding and negotiated procurement process.
In my view paragraph 3.3 of RFAP is clear in not requiring the applicant to disclose its budget limit while negotiating, and the CITT had no basis or justification for making such a finding.
While the Court of Appeal preserved the government’s right to retain some bargaining leverage and not disclose its bottom-line budget during contract award negotiations, it ultimately agreed with the Tribunal’s prior ruling and found the government liable for improperly cancelling those negotiations without giving the top-ranked proponent the opportunity to make a final offer.
