Federal debarment of contractors that violate federal contracting rules is sharply on the rise. The recent Integrity Framework[1] issued by Public Works and Government Services Canada is fuelled by a desire for government accountability in an age of unprecedented government spending. Contractors must be keenly aware of this heightened level of government scrutiny regarding the performance of public contracts and have a practical approach in place to deal with alleged violations. The consequences of debarment are significant and include the right of the government to terminate the contract for default and to demand the immediate return of any advance payments made. The government also has the right to pursue whatever other remedies are available to it, including to sue for damages that it may incur as a result of the termination.

The federal government uses debarment to ensure that contracts are awarded only to “reliable and dependable” contractors. In simple terms, debarment amounts to a government-wide ban. Federal departments are prohibited from doing business for a period of 10 years with an individual contractor that has engaged in improper conduct. Although, debarments are not intended to be punitive, for contractors whose livelihoods are even somewhat dependent on federal contract performance, debarment is not only undesirable but can be tantamount to professional and financial ruin.

Unlike in other jurisdictions, Canada’s debarment regime is not codified under any particular statute or regulation but rather is a policy[2] administered through a series of certifications and standard terms and conditions given by the bidder or contractor in its proposal or contract with the government.[3]

10-Year Ban

A contractor may be debarred from participating in government procurements for 10 years from the date when the contractor or its affiliate has been convicted of an “integrity offence.” Integrity offences include bribery of Canadian and foreign public officials, extortion, tax evasion, bid-rigging, forgery, fraudulent manipulation of stock exchange transactions, insider trading, falsification of books, money laundering and acceptance of secret commissions.

Canada’s debarment regime is implemented by way of a series of certifications provided by the bidder in federal government solicitation documents and resulting contracts. The bidder or contractor, as the case may be, must certify in its bid (or contract) that neither it, nor any member of its board of directors or any of its affiliates has a conviction or been discharged of any of the following integrity offences during the previous 10 years:

  1. paragraph 80(1)(d) (false entry, certificate or return), subsection 80(2) (fraud against Her Majesty) or section 154.01 (fraud against Her Majesty) of the Financial Administration Act;
  2. section 121 (fraud against the government and contractor subscribing to election fund), section 124 (selling or purchasing office), section 380 (fraud against Her Majesty or section 418 (selling defective stores to Her Majesty) of the Criminal Code;
  3. section 119 (bribery of judicial officers, etc.), section 120 (bribery of officers), section 346 (extortion), sections 366 to 368 (forgery and other offences resembling forgery), section 382 (fraudulent manipulation of stock exchange transactions), section 382.1 (prohibited insider trading), section 397 (falsification of books and documents), section 422 (criminal breach of contract), section 426 (secret commissions), section 462.31 (laundering of proceeds of crime) or sections 467.11 to 467.13 (participation in activities of criminal organization) of theCriminal Code;
  4. section 45 (conspiracies, agreements or arrangements between competitors), section 46 (foreign directives), section 47 (bid rigging), section 49 (agreements or arrangements with federal financial institutions), section 52 (false or misleading representation), section 53 (deceptive notice of winning a prize) of the Competition Act;
  5. section 239 (false or deceptive statements) of the Income Tax Act;
  6. section 327 (false or deceptive statements) of the Excise Tax Act;
  7. section 3 (bribing of a foreign public official), section 4 (accounting), or section 5 (offence committed outside Canada) of the Corruption of Corruption of Foreign Public Officials Act; or
  8. section 5 (trafficking in substance), section 6 (importing and exporting), or section 7 (production of substance) of the Controlled Drugs and Substance Act.

Bidders and contractors must provide a complete list of names of all individuals who are currently their directors. When requested, the contractor must provide the government with a Consent to a Criminal Record Verification (PWGSC-TPSGC 229) form for directors or owners. As part of the criminal records verification, persons may be required to provide fingerprints or further proof of identity to complete the verification process.

The contractor must diligently update, by written notice to the contracting authority, the list of names of all individuals who are directors of the contractor during the entire period of the contract (or standing offer or supply arrangement).

Contractor’s Liability for Non-Compliance

A bidder that is unable to provide the certifications will be “debarred” or disqualified from the bidding process.

If, during the term of the contract, the contractor or its affiliate is convicted of an integrity offence, the government has the right to terminate the contract for default, set aside the standing offer and terminate any call-ups or cancel the supply arrangement and terminate any resulting contracts. The government also has the right to demand the immediate return of any advance payments made and to pursue whatever other remedies are available to it, including the right to sue for damages that it may incur as a result of the termination.

In cases in which the conviction or act relates to an individual who is currently a director of the contractor and the individual resigns or is dismissed from the board of directors within a reasonable period of time, the government may continue the contract, standing offer or supply arrangement with heightened scrutiny, subject to other default conditions.

If, during the term of a contract, concerns emerge about the contractor, the government retains the right to conduct an audit or procurement review to verify the presence of irregularities.

After 10 Years

Once the 10-year period has passed, in order to be eligible to do business with the government, contractors are required to have adequate compliance measures and controls in place to avoid the reoccurrence of the activity that resulted in the conviction.

Who Is Affected

Clearly a contractor that has been convicted of an integrity offence cannot solicit or enter into any contract with the government during the 10-year period of the ban. However, the debarment extends to the affiliates of the contractor. The definition of affiliates is broad and includes parent companies, subsidiaries, sister companies and directors, provided that they have control of each other or are under the common control of a third party. Indicia of control include interlocking management or ownership, identity of interests, family members, shared facilities and equipment or common use of employees.

Therefore, if the parent, subsidiary or sister company of the contractor has been convicted of an integrity offence during the 10-year period, the contractor is ineligible to solicit or enter into contracts with the government.

Similarly, a director who controls or possesses the power to control the contractor, its parent, subsidiary or affiliate and who has been convicted of an integrity offence will render the contractor ineligible to participate in a solicitation or contract. In other words, only one convicted director is required to render the contractor ineligible to conduct business with the government.

Convictions of Foreign Affiliate

The contractor must also certify that within the past 10 years, neither it nor its affiliates have been convicted of any foreign offence that Canada deems to have “similar constitutive elements” to the listed Canadian integrity offences. Foreign contractors must certify that they have not been convicted of foreign offences similar to the Canadian offences. Similarly, Canadian contractors must obtain confirmation from their foreign affiliates that they have not been convicted of foreign offences similar to the integrity offences. This may result in a situation in which a Canadian contractor remains debarred by Canada for a 10-year period as a result of a foreign conviction against a foreign affiliate even though the Canadian contractor was not involved in the foreign offence. Further, this will have an impact on contractors in Canada with subsidiaries and sister companies operating in jurisdictions with a high risk of corruption.

Subcontractors

The contractor must ensure that all subcontracts include integrity provisions that are “no less favourable to Canada” than the provisions that are included in its contract with the government. In this way subcontractors are now indirectly required to comply with the integrity provisions, and contractors are responsible for ensuring this compliance. Bidders are encouraged to give early consideration to the integrity terms that are to be included in their subcontracts and to ensure that subcontractors can meet those requirements.

Limited Exception

The government has retained for itself the right to enter into a contract with an otherwise non-compliant bidder when it is in the “public interest” to do so, which includes when no one else is capable of performing the contract or for reasons related to emergency, national security, health and safety or economic harm.

Conclusion

Debarment for 10 years is a harsh penalty that can have devastating and long-lasting effects on a contractor. Though a contractor can hedge against violations by establishing and implementing a well-rounded ethics and compliance program, the practical realties of today’s post-Charbonneau hyper-sensitive enforcement environment dictate that mistakes can happen and, when they do, the government will likely come calling.

Contractors can avoid or minimize exposure by taking the following proactive measures when legitimate concerns or potential issues arise:

  • Conducting a thorough internal investigation as soon as potential violations are known or suspected;
  • Self-reporting to the government, under certain circumstances, on a voluntary basis; and
  • Preparing a complete and thorough assessment of all possible legal defences and equitably mitigating factors, including whether a public interest exemption applies.

In sum, a robust ethics and compliance program combined with a practical legal strategy will assist contractors in navigating the rough seas associated with this new debarment regime in Canada.