Test your understanding of fairness to all bidders with this recent Canadian International Trade Tribunal (CITT) case.

On October 10, 2013, the RCMP issued a Request for a Standing Offer (RFSO) for ethyl alcohol standards, used in testing for levels of alcohol consumption. The RFSO estimated the total quantity of ethyl alcohol standards that the RCMP intended to purchase as follows:

  • Initial Period: 10,000 packages [each package = six bottles]
  • Option year 1: 7,000 packages
  • Option year 2: 3500 packages
  • Option year 3: 3500 packages

 

The RFSO required bidders to quote firm unit prices and total yearly prices on the basis of these quantities. The firm unit prices were to include all applicable taxes, duties and charges, including freight charges to various RCMP destinations across Canada, but it did not specify how the total yearly quantities would be spread across RCMP detachments.

“Annex ‘B’ Basis of Payment” made clear that the evaluated price for each bid would be derived by adding the total prices per year for each of the years of the RFSO. The responsive offer with the lowest evaluated price would be recommended for the RFSO.

One bidder, Alcohol Countermeasures Systems Corp. (ACS), contacted the RCMP by email on November 18, 2013 to ask: “Would the RCMP be able to provide an approx. shipment size to each of the locations specified in Annex D. This is required since shipping to remote locations such as Whitehorse can cost a lot more than major urban cities.” (In its filing, the RCMP alleges that ACS here also wrote that, “An approximate yearly usage would be sufficient.”)

While this request came after the period for questions and answers anticipated in the RFSO had passed, the RCMP contracting officer replied to ACS on the same day: “[B]ecause this is a Standing Offer Agreement [the RCMP is] unaware of approximately how many packages each destination may request throughout the year. One way you can estimate the shipping charges is that the bigger divisions will always order more than the smaller divisions up north.”

ACS submitted its bid on November 19, 2013. Its financial offer was based on quantities per destination pro-rated to their populations. The solicitation closed on November 20.

On January 29, 2014, the RCMP advised ACS that its bid had not been chosen since it did not offer the lowest evaluated price, and that the RFSO had been awarded to DAVTECH Analytical Services Inc., the incumbent supplier.

On February 6, 2014, ACS objected, by phone, to the RCMP that the RFSO process was unfair, because the RCMP had not released quantities for the various shipping addresses. In response, the RCMP conducted an internal review of the procurement process and informed ACS, on February 7, 2014, that no unfair practices were found, and that the results of the procurement would stand.

ACS filed a complaint with the CITT on February 18, 2014. ACS contended that, by not releasing approximate quantities for each relevant destination, the RFSO unfairly favoured the incumbent supplier, which allegedly had historical knowledge of the quantities shipped to each RCMP detachment, including remote detachments, thus allowing it to attribute freight charges more accurately to its cost structure. Because of the weight of ethyl alcohol standards, ACS argued that shipping charges could contribute as much as 20 percent to the total price, and that multiple shipments to remote locations could have a very important impact on total costs.

As a remedy, ACS requested that the RFSO be cancelled, and that a new RFSO be issued, based solely on the cost of ethyl alcohol standards, excluding any shipping costs. If shipping costs were to be included, ACS requested that all potential suppliers be given historical information for shipping quantities for the previous three years, to enable them to fairly participate in the procurement. ACS did not request its complaint costs, but it did ask that the award of any contract in relation to the RFSO be postponed until the CITT’s final determination.

Was ACS right? Was the incumbent supplier given an unfair advantage?

Click below to view the answer.

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In PR-2013-041, A Complaint by Alcohol Countermeasure Systems Corp., the CITT came down firmly on the side of ACS.

The RCMP made two arguments. First, it contended that ACS became aware of the grounds of its complaint when it requested information on November 18, 2013 on historical yearly usage, and that by filing its complaint in February 2014, ACS had missed the filing time limit (10 working days).

ACS countered that it had been diligent throughout the process, and that its complaint was filed on time.

The Tribunal agreed. Nothing in the email exchange of November 18, 2013, indicated that ACS had at that time turned its mind to the issue of incumbent advantage. Contrary to what is alleged by the RCMP, on November 18, ACS did not request an estimate of past yearly usage for each RCMP detachment. ACS only asked that the RCMP provide estimated quantities for the years of the RFSO.

In the Tribunal’s view, the RCMP’s November 18 answer supports the view that ACS did not know, and could not reasonably have known, of its ground of complaint at that time. The contracting officer’s suggestion of how ACS might estimate the shipping charges was basically a methodology for ACS to determine the quantities per destination for the purposes of preparing its financial offer. ACS followed that suggestion. In effect, the RCMP on November 18 reasonably addressed any concerns that ACS may have had with respect to the pricing mechanism of the RFSO.

Second, the RCMP argued that historical knowledge of the quantities delivered to various RCMP detachments did not provide the incumbent supplier with an unfair advantage, because that information was not relevant in the preparation of a successful bid.

At the time, the RCMP was phasing out the use of ethyl alcohol standards and transitioning to dry gas standards. However, because RCMP detachments across Canada were at various stages of the transition, it was impossible for the RCMP to predict the approximate yearly usage for each detachment. Therefore, the RCMP held that historical usage information was not helpful and could even have been misleading to potential suppliers when predicting future usage, given the large number of unknown variables. So the RCMP argued that all potential suppliers, including the incumbent, were in the same position and had to make an “educated guess” about the frequency and quantity to be delivered to RCMP detachments across the country, including those in remote locations.

The RCMP added that the government is not obligated to take measures to reverse any legitimate and natural advantage that an incumbent supplier might have during a solicitation. It also argued that the obligation to provide a level playing field does not absolve potential suppliers of relying on their own skills to acquire any additional information that they feel may be useful when developing a competitive bid. Lastly, the RCMP stated that, given the sheer weight and volume of ethyl alcohol standards, a supplier’s ability to take into account logistics and transportation when designing its pricing model was an important part of the service for which the RFSO was tendered.

ACS countered by arguing that the RCMP not only structured the RFSO to include shipping costs, which clearly required past usage information from which to make predictions, but also withheld information regarding the transition to dry gas standards, as that was not mentioned in the RFSO at all. As such, the incumbent was doubly advantaged. ACS also observed that, to the extent that detachments that had transitioned or were already transitioning to dry gas standards were also the most remote ones (with the highest shipping costs), the impact on total pricing could be “monumental.”

The CITT agreed with ACS, finding that the RCMP’s RFSO pricing mechanism had advantaged the incumbent supplier by not including any historical information about the volume and distribution of shipments of ethyl alcohol standards, or about the transition to dry gas standards. As ACS had pointed out, historical usage information remained a relevant factor for predicting future usage, especially for those detachments that had not yet started or were not very advanced in the transition to dry gas standards. In addition to the extent that remote detachments were already advanced in the transition, the CITT accepted ACS’s argument that knowledge of this information could have greatly affected forecasted future freight costs and bidders’ cost structures.

The Tribunal recognized that the RCMP may not have been in a position to establish its future needs with certainty in the context of the transition to dry gas standards, but nonetheless, it was fully obligated under the trade agreements to formulate the RFSO in a way that would not discriminate among bidders. At the very least, the RCMP was obligated to provide as much information as possible when setting the terms of the RFSO, including the fact that the transition was underway, to help all bidders.

Accordingly, the CITT found the RCMP in breach of the trade agreements, which uniformly forbid discrimination among potential suppliers, based on the central premise of any fair and transparent procurement system that each and every supplier must be given all the information necessary to submit a responsive tender.

The CITT recommended that the RCMP cancel the RFSO and the standing offer issued thereunder to DAVTECH, and that it issue a new solicitation on the basis of non-discriminatory requirements, including all relevant information.

ACS did not request any costs with respect to this complaint process, so none were awarded.

Reprinted from The Legal Edge Issue 107, July-September 2014

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