On April 1, 2015, the Act to Ensure Mainly the Recovery of Amounts Improperly Paid as a Result of Fraud or Fraudulent Tactics in Connection with Public Contracts (Act) received assent following its unanimous adoption by Quebec’s national assembly on March 24. The Act, which was inspired by solutions implemented in Holland, seeks to strengthen integrity in public contracts and procurement processes.
The Act is of public order. Its objective is to facilitate the recovery of sums improperly paid due to fraud or fraudulent actions committed in the course of the tendering, awarding or management of public contracts. To implement this objective, the Act:
- Provides for a reimbursement program (Reimbursement Program), giving the opportunity for offending companies or individuals to be rehabilitated on a voluntary basis;
- Adopts exceptional measures to facilitate proceedings against those who are not availing themselves of the Reimbursement Program (Extraordinary Measures); and
- Establishes a fund for public contracts (Fund) to finance activities carried out within the framework of the implementation of the Act.
The details of the Reimbursement Program will be finalized following a consultation process to which all interested parties will be entitled to participate. Upon completion of this process and finalization of the Reimbursement Program, the Extraordinary Measures—ancillary to the Reimbursement Program—will come into force. Both processes create exceptions to ordinary law and, as a result, are intended to be temporary measures implemented for a period of five years to ensure the rehabilitation of public procurement processes and reinforce the integrity and transparency needed to regain the confidence of the public therein.
The Act also amends other legislative provisions including an Act Respecting Contracting by Public Bodies (LCOP) by removing five of the seven criteria which previously would automatically require the Autorité des marchés financiers (AMF), Quebec’s market regulator, to refuse to issue or revoke an authorization to contract with public bodies, and by amending one of the two objective criteria remaining so that it solely applies to natural persons. As of April 1, 2015, the AMF is only mandated to automatically refuse to issue an authorization to contract with the public sector to an enterprise if one of its officers, directors or a majority shareholder (in the latter case, if it is a natural person holding at least 50 per cent of the voting rights attached to the company’s shares) has been convicted in the last five years of one of the offences listed under Appendix I of the LCOP.
The five criteria for automatic refusal/revocation that were removed by the Act have become factors that the AMF may consider when determining whether or not an enterprise meets the high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract.
These changes to the LCOP respond in part to comments and criticism made respecting the lack of flexibility in the application of the pre-certification regime created by the large number of automatic grounds for refusal. Since the adoption of the LCOP, many observers have expressed their wish that all the conditions for automatic refusal or revocation of an authorization would be removed; the AMF and Permanent Anti-Corruption Unit (UPAC) having the resources and sufficient expertise to assess each situation on its own merits. These observers have also emphasized the need to further circumscribe the AMF’s discretion and publish all its decisions to refuse/revoke authorizations in order to enhance the transparency of the process. However, the Act has not made such changes to the LCOP.
The Act finally allows companies/individuals registered under the Register of Enterprises Ineligible for Public Contracts (RENA) to submit, at any time, a request for authorization to the AMF if their registration on the RENA is for reasons other than the refusal or the revocation of an AMF authorization. The Act thus implements an exception to the period of up to five years prohibiting an enterprise listed on the RENA to conclude public contracts. It also removes the automatic registration on this registry of any contractor who has been convicted of one of the offences provided for in LCOP but to whom, notwithstanding such offence, the AMF has issued an authorization or has not revoked an existing authorization or whose request for authorization is being considered by the AMF. The two aforementioned measures also apply to holders of restricted construction licences and to the issuance of such licences.
SCOPE OF THE ACT
As previously mentioned, the Act is public policy. Its scope is broader than the current scope of the AMF authorization regime which, subject to certain exceptions, currently and only applies to public construction and services contracts and subcontracts of C$5 million and more.
Furthermore, although the bill originally introduced in 2013 by the previous government limitedly concerned the construction field, the Act applies to any and all categories of public contracts whether entered into by the government, municipal bodies, public bodies in the sector of health and social services or education, or by Crown corporations.
The Reimbursement Program and the Extraordinary Measures also aim at any enterprise or natural person who “has, in any capacity, participated in fraud or fraudulent tactics.” This choice of words means that both the commission of such fraud or tactics and the participation thereto, whether by act or omission, which occurred during the tendering or awarding process of a public contract, or in the course of the management of its performance, are relevant irrespective of scope, severity or gravity.
However, ambiguity remains as to the applicability of the Act to public-sector employees and elected officials since under section 10 although reference is made to “any person,” which would appear to include individuals of the public sector, but other provisions of that section and in the Act seem to be directed only to the private sector. On that note, the Act could have been more specific by expressly mentioning public-sector employees and elected officials in order to avoid any future interpretation as to its scope and clarify the extent of the liability of government agents or employees and elected officials thereunder.
VOLUNTARY REIMBURSEMENT PROGRAM
Designed as a mode of alternative dispute resolution and inspired by the principles of out-of-court settlements, the Reimbursement Program, once established, will facilitate civil remedies against contractors of the public sector or public-sector employees or elected officials who have participated in fraud or fraudulent tactics by allowing such persons to voluntarily reimburse “some” of the money unjustly paid in the context of public procurement. The Reimbursement Program and Exceptional Measures are available to the parties to civil proceedings for damages caused to a public body by fraud or fraudulent tactics that are pending on April 1, 2015. It is indeed possible for such parties, on application made to a judge in chambers, to stay the proceedings to the extent in respect of the defendant, his agreement to voluntarily participate in the Reimbursement Program; and, for the public bodies, as plaintiffs, if they indicate their intention to pursue their recourse under the Extraordinary Measures, once in force.
The objective of the Reimbursement Program (as well as the Extraordinary Measures) is to avoid costly and lengthy litigation by allowing people wishing to redeem themselves to benefit from a certain amount of confidentiality and obtain a discharge for future claims respecting the public contracts relevant to the Reimbursement Program (without ruling out the possibility of a criminal prosecution).
Thus, by agreeing to participate in the Reimbursement Program, anything said, written or agreed upon is confidential and cannot be admitted in evidence in subsequent litigation (except if the Minister of Justice (Minister) and the party involved agree otherwise). In addition, such information will not be disclosed to third parties as the Act expressly excludes such information from the public documents that can be accessed by the public pursuant to the Act Respecting Access to Documents Held by Public Bodies and the Protection of Personal Information. Furthermore, no recourse in warranty or recursory action will be permitted against a person who has been granted a discharge under the Reimbursement Program or the Extraordinary Measures. A discharge granted under the Act therefore settles all future civil legal consequences regarding the relevant acts.
Despite the confidentiality granted by the Act, it should be noted that some information pertaining to the Reimbursement Program will be disclosed within six months following the end date of the Reimbursement Program in a report to be prepared by the Minister. The information will be limited to the names of the companies or individuals and the identity of the public bodies that participated in, or were involved in, the Reimbursement Program and to the total amount of the reimbursement made thereunder. It is expected that this disclosure, as limited as it is, may deter companies that do business elsewhere in Canada or in the world to participate in the Reimbursement Program, since the information made public could be prejudicial to their future business relationships and potentially tarnish their professional reputation.
The Reimbursement Program will be managed by a director who will act as an impartial mediator and whose liability will only be incurred if he acts in bad faith in the performance of his function. This program director will be appointed by the government and not appointed upon the approval of two-thirds of the members of the national assembly, as proposed in a rejected amendment to avoid any possible partisanship.
It is the Minister and not the public bodies themselves that will be entitled to transact and grant a discharge for the public contracts brought under the Reimbursement Program. As of April 1, 2015 and until the end date of the Reimbursement Program, public bodies are prohibited from independently transacting with their contractors without the consent of the Minister on pains of nullity of the resulting transaction. They are also barred from independently seeking redress from their contractors for fraud or fraudulent tactics without the Minister’s assent. In this latter case, the Minister will only grant such permission if the recourse contemplated by the public body does not adversely affect the objectives of the Reimbursement Program.
The precise scope of the intervention and participation of public bodies to the Reimbursement Program are yet to be determined and leave a certain measure of discretion to the government. During the consultation that preceded the adoption of the Act, several government agencies had expressed the wish to be able to fully participate in the Reimbursement Program and collaborate with the Minister throughout its process. They asked, to limited avail, that specific rules or principles governing this participation be specifically provided for in the Act. As adopted, the Act only specifies that a public body’s involvement in the Reimbursement Program will include its participation in a vote on a settlement proposal made by a contractor or natural persons with all the other public bodies concerned thereby. This provision suggests, without clearly and expressly providing therefore, that a settlement proposal will not necessarily be limited to a particular public contract or a particular fraudulent act or reprehensible tactic, but may include a proposal of settlement for all public contracts obtained by an enterprise as a result of fraud and deceptive maneuvers and possibly respecting all fraudulent acts and tactics to which it participated.
Any sum recovered under the Reimbursement Program or the Extraordinary Measures will be apportioned between the Minister and public bodies involved according to rules which will be implemented by regulation. This apportionment will, however, have to be proportionate to the amounts paid by the public body for the relevant public contract.
Additional details pertaining to the Reimbursement Program and its procedures or rules are not yet available. The program will be published shortly in draft form and its completion will be effected in a participatory manner by allowing all interested parties to submit comments thereon within a prescribed time period.
It will be important for enterprises and government agencies to get involved in the consultation process in order to ensure that the Reimbursement Program will incentivize and be attractive to those who have bent the rules by permitting that they acknowledge responsibility and appropriately compensate the government for, but civilly settle once and for all, their past indiscretions without prejudicing their future dealings. Thus, the success of the Reimbursement Program will depend on whether or not the interested parties adhere to its principles.
Conceived as the counterpart of the Reimbursement Program, the Exceptional Measures are non-recurring measures derogating from ordinary law that purport to apply to persons contemplated by the Act who choose not to take advantage of the Reimbursement Program. These Exceptional Measures are not yet in force since the details of the Reimbursement Program and its related rules have not yet been determined.
The main objective of the Exceptional Measures is to induce companies and natural persons that have committed fraud or fraudulent tactics or participated thereto in any way in the context of public contracts to participate to the Reimbursement Program, by rendering the Exceptional Measures little attractive and a defence to the resulting claims unappealing. To do so, they allow the government to quickly and efficiently be compensated through applications heard and decided by preference, via the enactment of several legal presumptions and the implementation of extended statutory limitations.
Similarly to the Reimbursement Program, Exceptional Measures only provide for monetary compensation for damages suffered by public bodies, as a result of collusion and corruption, and does not extend to the cancellation or voiding of public contracts awarded (including during their performance) following such fraud or tactic. Financial compensation may, however, not always adequately address situations of fraud or fraudulent maneuvers.
Although requested by some commentators, a contractor of the public sector against whom a final decision has been rendered in application of the Exceptional Measures will not be automatically registered on the RENA; rather the rules set forth in the LCOP governing RENA registration will remain applicable.
At the difference of the Reimbursement Program, it is the public bodies themselves—and not the Minister—that will have priority in bringing a claim under the Exceptional Measures. The Minister’s role is auxiliary; he will not act on behalf of a public body in such a claim unless such body does not act promptly within a reasonable amount of time granted by the Minister.
A claim under the Exceptional Measures is instituted before a court of justice, which has exclusive jurisdiction, unless an application is made by a public body against one of its own employees only. In such a case, the body or the person exercising the relevant adjudicative functions, such as a grievance arbitrator for public employees who are party to a collective agreement, retains its authority.
Exceptional Measures are characterized by the imposition of certain legal presumptions that facilitate the public body’s burden of proof, such as:
- A rebuttablepresumption of causalconnection betweenthe misconductand the damage sufferedby the public body. Upon the public body establishing the occurrence of a fraud or fraudulent tactics (according to the standard of the balance of probabilities), the public body does not have to prove the causal link between the wrongful act and the damage suffered. This presumption is a response to comments made by public bodies that damages in the context of fraud are difficult to quantify or determine.
- A presumption pertaining to the quantum of the damage suffered. Once the fraud or fraudulent tactic has been established, the resulting damage is presumed to be of the amount claimed by the public body to the extent that such amount does not exceed 20 per cent of the total amount paid for the applicable public contract. The presumption no longer applies above this 20-per-cent threshold and the public body will have to demonstrate that the damage suffered is greater than such amount through the normal rules of evidence. The amount of damages claimed bears interest from the date of acceptance of the work by the public body rather than the date on which final payment for such work is made by the public body, which seems more suited to construction contracts than to service contracts or even supply contracts involving sequential performance. If the court allows an action under the Act, an additional lump sum of 20 per cent of any amount granted for injury is added to the damages awarded by the court to account for the Exceptional Measures’ administrative fees, bearing interest from the date on which the action is introduced and not, as is generally the case, from the date of the court’s decision. This discretionary amount will not necessarily correspond to the expenses actually incurred in the implementation of the Act and removes all discretion a court usually has in this regard.
- A presumption of liability of the directors and officers. The liability of the directors and officers, in function at the time of the wrongdoing, is presumed. In respect of a director, the presumption only applies if he knew or ought to have known of the fraud or fraudulent tactics committed. However, the presumption can be rebutted if the directors and officers are able to demonstrate that they were not in office at the time of the commission of the wrongful act or if they prove that “they acted with the care, diligence and skill that a prudent person would have exercised in similar circumstances”.
These presumptions depart from the rule set forth under Article 316 of the Civil Code of Québec, which in respect of fraud, to hold the directors or officers of a legal person liable, requires proof of participation to the wrongdoing or the derivation of personal profit therefrom.
It is important to note that the Act does not contain a definition of “officer” and one may wonder whether the definition developed by the AMF as part of the public contract authorization process or the narrower one set forth under Quebec’s Business Corporations Act will be retained.
Unless waived by the public body concerned, the responsibility of the enterprise and any person whose participation in the fraud or fraudulent tactics is established is joint and several, irrespective of the degree of fault, responsibility, guilt or participation to or in the prohibited act or the harm caused.
Of note, the Act does not expressly stipulate whether this joint responsibility extends to employees of, or other individuals working in, the public sector or elected officials who participated in the fraud or the fraudulent tactics. The Act appears to allow for such extension—or at least there are no restrictions set forth therein—based on the reference to “the enterprises and natural persons referred to in this section are solidarily liable for the injury caused, unless such liability is waived by the public body,” which persons in turn include “any persons.” No apportionment of responsibility according to the degree of participation or guilt is to be found in the Act despite several requests to this effect during the consultation process which preceded the adoption of the Act.
Furthermore, the Act does not contain provisions respecting the management of the situation where, in respect of a given fraud or fraudulent tactics, certain of the persons presumed or found liable wish to participate in the Reimbursement Program while others refuse.
The Act also introduces exceptions to the statutory limitation for civil remedies and these Exceptional Measures are retroactive. Indeed, these Exceptional Measures apply to action for damages caused by fraud or fraudulent tactics during a period beginning 20 years before their entry into force, and an action under the Act may be filed within five years of that date. As mentioned in the introduction, the Exceptional Measures will take effect once the details of the Reimbursement Program will be finalized. In addition, any action previously dismissed because the plaintiff’s right was prescribed may be reinstituted within the same five-year time limitation, thus contravening the res judicata principle.
Many criticisms were voiced against the possibility of allowing claims for facts dating back to 20 years and a reduction to 10 years has been proposed. The arguments raised include the fact that the professional obligation to maintain records and other information of some professional orders, such as engineers, are generally limited to 10 years and that going back that far in time could in practice deprive a defendant of the benefit of a full and complete defence as there might be little or no evidence still available from 20 years ago to overturn the severe presumptions described above.
Finally, the Act facilitates the collection of debts resulting from court orders allowing proceedings under the Exceptional Measures. For enterprises and individuals of the private sector, a claim instituted by a public body under the Act confers such public body a lien on any and all of the assets of the defendants without, however, granting a right to follow on the assets sold after the commission of fraud or fraudulent tactics. The registration of such a lien will need to be authorized by a judge in chambers. It will be granted only if the public body’s claims appear to be well-founded and if the absence of such registration would jeopardize the recovery of the debt. This lien and its registration do not depend on the obtaining of a final judgment. For employees of a public body or elected official found liable pursuant to a claim instituted under the Act, it will be possible for the execution of the final judgment to seize any value accrued or any benefit paid or granted to these individuals pursuant to a pension plan.
It will be interesting to follow the application of these Extraordinary Measures to both the private and public sectors. The extent to which these Extraordinary Measures derogate from ordinary law, the implementation of unmodulated presumptions, the joint and several liabilities of persons having participated in the reprehensible act and the extension of the statutory limitations irrespective of gravity or the particular circumstances of a given situation justify their temporary nature. In addition, it will be important to ensure that such provisions are not applied arbitrarily. The Reimbursement Program is of particular importance in these circumstances, and the involvement of the relevant stakeholders in developing its details, which we expect are impending, is essential.