female lawyer in suit sitting at desk writing on paper with scales and gavel on desk

Recent litigation highlights the fact that the issue of incumbents in procurement can be controversial. Aside from creating a risk of challenge from unsuccessful respondents, as we see below, procurement professionals must remain vigilent to ensure that their relationship with the incumbent does not indavertantly cross the line into criminal conduct.

In R v Shum, 2018 ONSC 2981, Barney Shum was charged with making an opportunity for certain parties to defraud the Crown in relation to the supply of information technology (“IT”) services to Library and Archives Canada (“LAC”) pursuant to section 80(1)(b) of the Financial Administration Act. The Crown alleged that Mr. Shum’s conversations with Linda Graham at Microtime Inc (“Microtime”) gave Microtime an unfair advantage in the procurement process.

The background to this case concerns the stressful changes at Library and Archives Canada from 2007–2009. A large amalgamation led to LAC’s hope for developing an overarching IT system (“AMICAN”) to manage both the library and the archival holdings. At the same time, a second project – Trusted Digital Repository (“TDR”) – was ongoing in order to modernize how LAC managed its digital collections. Finally, a third project was considered with regard to physical item management: High Density Shelving (“HDS”). LAC’s internal IT branch did not have the necessary resources, and so LAC used the Government Online Supply Arrangement (“GOSLA”) system, managed by the Department of Public Works and Government Services (“PWGSC”), to deal with its procurement needs.

In January 2008, the company Microtime was awarded a contract to provide $10 million worth of IT consulting services to LAW. ITNet Ottawa Inc (“ITNet”) was jointly, with CGI information Systems and Management Consultants Inc, awarded part of the same contract for an additional $6 million. By the spring of 2009, Microtime had nearly reached its cap of $10 million, but ITNet had only used about $2 million of its $6 million allowance.

Meanwhile, in 2007 PWGSC introduced a new procurement system. Therefore, when LAC’s internal IT team wanted to issue a new RFP to ensure continuation of the consulting services, it had to use the new system rather than the older one with which it was familiar. Moreover, the internal IT branch faced record-high staff turnover in 2008 and 2009, along with consequent changes in priorities, management styles, and requirements for financial accountability.

Mr. Shum was the Director (Applications Management) at the internal IT branch at LAC, overseeing application development and maintenance within the branch and for the AMICAN project. He had worked at LAC since 1978, and his close working associate, Sylvie Béland, had worked there since the early 1980s. Ms. Béland reported directly to Mr. Shum, held the position of Acting Director in Mr. Shum’s department, and worked on the AMICAN project. By 2009, both felt stressed, overworked, and unappreciated by LAC’s higher management.

While there were many other parties in this highly complex situation, it is important to note that Microtime had had a significant presence at LAC since the late 1990s – a time by which both Mr. Shum and Ms. Béland were present. Both had a closer relationship with Ms. Graham of Microtime than they did with other consulting companies, including ITNet. ITNet was Microtime’s chief competitor with regard to LAC contracts.

To recap: by 2009, Microtime was quickly approaching its $10 million cap, Microtime’s competitor ITNet still had $4 million left of services to deliver, and LAC employees Mr. Shum and Ms. Béland had a close working relationship with Ms. Graham of Microtime.

Through the second quarter of 2009, the issue of how to allocate funds became contentious within the IT branch of LAC. Two other IT managers wanted the remaining Microtime funds to be split between two of the projects: AMICAN and TDR. Mr. Shum and Ms. Béland wanted a larger portion of Microtime’s remaining funds to be allocated to AMICAN because AMICAN had more Microtime consultants than did TDR. Unable to reach a decision, Mr. Shum elected to allocate enough funds to keep both projects going for the following six months in order to find more time to explore further funding options.

One option presented was to use up ITNet’s remaining funds by shifting work from Microtime consultants to ITNet consultants. However, Mr. Shum did not want to do this, as it would lead both to increased delay and increased costs. Instead, Mr. Shum wanted to use the new procurement system to quickly issue new task-based service forms (“TBSFs”) allowing incumbent Microtime consultants to have the opportunity to be proposed as resources. This made sense from an efficiency perspective, as consultants in the middle of a complex, ongoing project could stay on.

During March and April of 2009, Ms. Graham was regularly in contact with Mr. Shum and Ms. Béland, and she occasionally volunteered information regarding the financial constraints Microtime was facing while dealing with its consultants’ financial demands. At this time, the parties were also dealing with a steep learning curve in trying to use the new TBIPS procurement system. Eventually, more contracts were awarded to Microtime to allow most of its consultants to continue their work at LAC, but the overarching funding issue was not resolved.

Ms. Graham testified that at a lunch in Baton Rouge on April 23, 2009, Mr. Shum advised her that all of the Microtime funds from the original contract had been allocated to the end of September 2009 and that ITNet still had $4 million remaining. Ms. Graham testified that Mr. Shum told her that he thought that using ITNet’s funds would be the only way forward. Ms. Graham later reacted to this information by pursuing discussions with ITNet regarding what percentage it would charge if ITNet and Microtime had a pass-through agreement to bid Microtime’s consultants in an upcoming tender. The judge held that this was not inappropriate.

However, the judge held that Mr. Shum did cross the line when at the lunch he allowed Ms. Graham to share information about Microtime’s different rates for consultants and when he later used that information as a reason to adjust the timing of issuing a TBIPS in order to allow Microtime to find a partner with whom it could submit a bid under that TBIPS.

The judge also held that close communication continued between Ms. Graham and Mr. Shum and Ms. Béland through June and July, and that the three approached the task of ensuring that Microtime’s consultants worked on the AMICAN project as a joint effort. Ms. Graham received updates that other prospective vendors did not. Further, in August Ms. Béland emailed Ms. Graham at her home email address a document providing: a breakdown of the AMICAN project into four smaller projects; a list of the category and level of consultants required for each smaller AMICAN project; a list assigning incumbent Microtime consultants to each category. Ms. Béland, who testified that she felt pressured to send this document, regretted it immediately and told no one at LAC. Ms. Graham used this information to prepare Microtime’s bid.

While Mr. Shum testified that he had not instructed Ms. Béland to share this information with Ms. Graham, he also testified that he saw nothing wrong with her doing so.

The call for bids was issued in mid-August 2009 with a closing date of September 8, 2009. Seven pre-qualified vendors were invited to bid, including Microtime, ITNet, and – most importantly – a joint venture called ADRM/CNC, which was the company that would be bidding Microtime’s incumbent consultants (as per a financial arrangement with Microtime following the latter’s financial difficulties). Mr. Shum asserted that he did not know that Microtime’s incumbent consultants would be provided through this joint venture, but the judge flatly rejected this statement, as there was no other explanation for why ADRM/CNC would be invited by LAC unless someone who wanted the incumbents knew.

ADRM/CNC, who was LAC’s IT branch’s first choice, was the only vendor to submit a bid. Microtime prepared that bid, and all of Microtime’s incumbent consultants working on AMICAN were proposed in the bid. The judge held that Microtime easily submitted a strong bid because it had received so much advance notice and information from Mr. Shum and Ms. Béland. Mr. Shum and Ms. Béland were also two of the three evaluators who examined the bid. While there was no evidence of any impropriety of their part during that evaluation, the judge held that neither should have been technical evaluators on this bid.

Meanwhile, other people were beginning to notice that there might be problems – especially ITNet. Ultimately, LAC began an internal security investigation. On February 5, 2010, Mr. Shum was given a copy of the report and informed that he was suspended with pay and that he had to leave the building within ten minutes. He was told he had three days to respond to the report. He then retained an employment lawyer, and they prepared responses to the report. After months of negotiations, a settlement including a non-disclosure agreement was reached. Mr. Shum was reinstated, but not at the Library and Archives. In 2012 he moved to Health Canada where he stayed until his retirement in July of that year. He was hired back as a consultant, but that ended when criminal charges were laid in April 2014.

Ms. Graham and Ms. Béland both ended up pleading guilty to criminal charges. Ms. Béland pled guilty to a failure to report to a superior officer either a contravention of the Financial Administration Act or other Canadian revenue law or fraud against the government. Ms. Graham pled guilty to bid-rigging and testified against Mr. Shum as part of her plea deal with the Crown.

A number of allegations against Mr. Shum were made, many of which the judge dismissed. However, the crucial aspect in this case is that the Crown sought to charge Mr. Shum with what the judge called an ‘interface’ between the Competition Act and the Financial Administration Act (“FAA”).

(1) First Element of the Offence
Section 80(1) of the FAA creates an offence regarding the conduct of a person: “every officer or person acting in any office or employment connected with the collection, management or disbursement of public money.

(2) Second Element of the Offence
The necessary act for this offence is that the person is “making opportunity for any person to defraud Her Majesty.”

There is no doubt that Mr. Shum met the first element. However, the judge did consider the vagueness of the language of the second element. The wording of “making opportunity to defraud” is not defined in the FAA or in the Criminal Code, is not used in any other legislation in Canada, and has not been considered by the courts. After extensive analysis using principles of statutory legislation, the judge held that the Crown had failed to prove that necessary second element in the charges against Mr. Shum. Mr. Shum was found not guilty of both charges of making opportunity to defraud the Crown.

This case included many people, events, and complexities beyond the scope of this article, but we suggest reading the case itself as it is illustrative of how precarious – but crucially important – the roles of participants are in the procurement process. Procurement is only rarely brought into the realm of criminal justice, but the provisions of the FAA and other acts are critical to its practice. While Mr. Shum was eventually found not guilty, this case reads as a caution against blurring the boundaries of each party’s role – even with, as Mr. Shum and Ms. Béland had, the best of intentions.

Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.