Much like the amendments to the Canadian International Trade Tribunal Act Regulations which were not subject to public consultation, federal government suppliers are once again caught unaware by regulatory amendments delivered as a fait accompli by the government.
The Government Contracts Regulations (GCRs) are a little known set of regulations tucked away in the Financial Administration Act. They have garnered little to no attention outside of the government as most of the GCRs apply only to public servants.
However, the GCRs will no longer toil in obscurity. Amendments to the sections of the GCRs were quietly implemented this June. The amendments of particular concern for suppliers involve the implementation of deemed declarations for every government contract. Suppliers must now declare that they have not "committed an act or engaged in an activity" that would constitute an offence in relation to specified sections of the Criminal Code, Corruption of Foreign Public Officials Act, Competition Act and Financial Administration Act. If these declarations are determined to be "false", their contract can be terminated for default and any advance payments must be returned.
This approach is troubling. The government's stated objective - to increase confidence in the procurement system - has arguably trumped the greater societal objective of maintaining confidence in the Canadian legal system. Government bureaucrats have been granted quasi-judicial authority - absent the requirement for fairness and natural justice - to invoke punishment not only in advance of proof of the crime but without ever having to prove a crime was committed.
If a government bureaucrat should take a notion that a supplier conducted itself in a manner that could be off-side the law, the government is not required to disclose the evidence upon which such decision is based, nor is the government required to provide the supplier with any notice of its decision or an opportunity to meaningfully respond to the allegations before the contract is terminated. A supplier, having done nothing wrong at all, will not only lose the benefit of its contracts, but can face further sanctions, such as those available under the Vendor performance corrective measure (VPCM) Policy, in light of the fact that the supplier's contracts have been terminated not just for default, but for default of declarations related to indictable offenses.
No public consultations were conducted with respect to the declarations. Suppliers were not provided with an opportunity to understand the government's concerns or identify the impact of this amendment.
Perhaps such ramifications were not the intention of the amendment. However, absent the presence of appropriate controls (particularly those that already otherwise exist to ensure one is innocent until proven guilty), the foundation of the effort to build trust in the public procurement system may be eroded.
What are the GCRs?
The GCRs, issued under the Financial Administration Act, have been in place since the mid-80s. For the most part, the regulations operate as "indoor management rules", establishing the basic requirements for soliciting bids or entering in to contracts that government contracting authorities must meet. Certain types of contracts and a specified list of government entities are exempt from these requirements.
In contrast, section 18 of the GCRs applies to all solicitations and contracts that provide for payment of any money by the government. Prior to the amendments that are discussed in this Bulletin, there existed two declarations in the GCRs that were deemed to be included in every government contract. These declarations were objective in nature - suppliers knew the exact parameters of the declarations they were providing. Suppliers declared that they had not been convicted of an offence listed under section 750 (3) of the Criminal Code or paid a contingency fee to a consultant lobbyist to gain the benefit of the contract (Lobbying Act).
Government solicitations and contracts did not expressly refer to the GCR declarations. Rather, the language of the declarations were replicated, in full (or using equivalent wording), in the Standard Acquisition Clauses and Conditions and the template solicitation documents . In other words, the fact that suppliers were not notified of the GCR declarations was for the most part an issue of form over substance. Suppliers were not in a "gotcha" scenario because the declarations formed part of their contract. They could rely upon the "Entire Agreement" provisions of their contracts as clearly setting out the parameters of their business relationship with the government.
The new GCR declarations are only currently found within the regulations themselves. Unless a supplier is monitoring this obscure set of regulations, it will be unaware of the changes.
Why Were the GCRs Amended?
The Regulatory Impact Analysis Statement (RIAS) accompanying the GCR amendments provides a cryptic and less than clear explanation of these amendments - claiming that these new terms will increase confidence in the procurement system by providing contracting authorities with a "legal" way to cancel a contract with a supplier who has "subverted the rules". The RIAS also claims that these amendments will have no impact as long as one is "law abiding".
As discussed below, these amendments do have an impact - most particularly on law abiding suppliers who seek to understand the context of the rights provided to the government and the potential ramifications. There already exists a variety of other mechanisms, such as the Ineligibility and Suspension Policy, (that industry was consulted on) that address concerns with those who "subvert the rules". These new declarations add yet another element of complexity to government contracting, and their structure leave a plethora of questions unanswered.
What have the Amendments Done?
As noted, the original section 18 deemed declarations were objective. The parameters were clear - a conviction or contingency payment for the award of a contract would result in termination of the contract for which the declarations were provided.
The new declarations are subjective and unlimited. Suppliers are deemed to have declared that, throughout the bid solicitation process and up to contract award, they have not engaged in "acts" or "activities" that would constitute an offense under the specified provisions of the Criminal Code, Financial Administration Act and the Competition Act.
The amendments to Section 18 are silent as to what an "act" or "activity" is; the government's burden of proof (eg. evidence) to determine what "would" constitute an offense; how a declaration is determined to be "false" when there is no admission of guilt, charge or conviction required; and who, in the end, is authorized to make this determination.
Notwithstanding the fact that all of the offenses listed in the declaration are indictable offenses with the potential for significant fines and/or imprisonment, no burden of proof need be met by the government. Indictable offenses are not parking tickets, but the process envisioned by the amendments has not addressed that point.
The individual determining whether a declaration is "false" is basing the decision on speculation - if the necessary evidence is obtained, if charges laid and if a conviction obtained, then the declaration is false.
Unlike the Eligibility and Suspension Policy, which deals with suppliers who are actually convicted of an offense, there is no process in place under the GCRs to require that a supplier be provided notice or an opportunity to present an argument (or even protest its innocence) before the supplier is deemed to have defaulted under a contract and the contract is terminated. There is no requirement that an actual conviction materialize at any point in time. The supplier is unable to answer the case against it because the government does not have make a case to invoke its rights.
The reputational and operational impact in such situations is potentially profound.
What Does this Mean for Government Suppliers?
These new deemed declarations apply to all contracts let by any government institution - even those which are currently excluded from the application of the Ineligibility and Suspension Policy. The declarations remain "evergreen". If at any time a declaration is determined to be "false" (in the hypothetical), a supplier will be deemed to be in default of their contract and agrees that in addition to any other remedies available against them, the contracting authority can terminate the contract and they must immediately return any advance payments.
Until the government clarifies how these deemed declarations are managed (particularly, how a declaration is determined to be "false" absent a standard of proof and what right a supplier has to defend itself), it is crucial that suppliers seek clarification as to how the government intends to implement and manage this additional layer of supplier assessment and whether a right to procedural fairness and certainty will be provided.
Suppliers bidding for any federal government contracts will need to familiarize themselves with the offenses covered by the new declarations and confirm that they have in place the necessary due diligence, risk management and corporate compliance programs to ensure ongoing prevention, assessment, identification, management and resolution of corporate behaviour risks, and that their D&O insurance has sufficient scope to cover this new risk. Suppliers should review government vendor performance policies that apply to their contracts to determine how a default termination will impact their other contracts.
Suppliers should seek to negotiate contract terms that re-establish the principles of natural justice - provisions that require the government to provide the "evidence" from which this speculative determination is made, to receive notice in advance of contract termination, and to afford suppliers the ability to respond to such determinations. In addition, suppliers should also seek provisions which address instances where a supplier is never charged or convicted of the listed offenses including instances where the speculative decision is determined to be wrong. This is particularly important as vendor performance management policies typically provide contracting authorities with additional rights of recourse if a supplier has had a contract terminated for default (such as being placed on a supplier blacklist or being ineligible to bid on future contracts).
Other Amendments to the GCRs
The threshold for non-competed service and construction contracts has been increased from $25,000 to $40,000. This change has been identified as an inflation adjustment (the last threshold increase was in 1996). The threshold to compete a contract for goods remains at $25,000.
This increase in the threshold is identified as reducing costs to businesses, as they will not be required to submit bids in a competitive environment. While the costs to prepare a bid may be reduced in this situation, it will only benefit the supplier selected by the government to receive the contract. Even single suppliers (eg. sole source contracts) must still provide a response to the requirements for the work and that responds to the government's requirements, including financial and technical information, security clearance applications etc. If more than one potential supplier is invited to bid on a non-competitive contract, bid preparation costs will be incurred as the two suppliers are still "competing" against each other for the work. If these low dollar value contracts are not made publicly available for competition, it is unclear how small businesses, who typically compete for contracts at these values, will be aware that the opportunities exist. A concurrent policy change to address this shift is perhaps forthcoming.
Clearing Up Confusion and Modernization
Wording changes have been made to other sections of the GCRs, including: redefining printing contracts as service contracts in alignment with Canada's trade agreements; and expanding the list of contracting authorities who may execute contracts for legal services.