LANSPLUS INC.
Determinations
Board File No: D89PRF6608-021-0006
IN THE MATTER OF:
A Complaint By LANsPLUS INC. of 302-151 Slater Street Ottawa, Ontario
Board File No: D89PRF6608-021-0006
AND IN THE MATTER OF:
The Free Trade Agreement Implementation Act, Part II, Sec. 15 S.C. 1988, Ch. 65.
18 January 1990
DETERMINATION BY THE BOARD
This complaint concerns a contract with Her Majesty the Queen as represented by the Department of Supply and Services (DSS) that was signed on June 15, 1989. This contract, worth $52,850., was awarded on a sole source basis to Phoenix Computer Centre of Ottawa, Ontario for the provision of "Micros and Peripherals" for the Department of External Affairs (DEA). A notice of the award was published in the November 1, 1989 issue of Government Business Opportunities (Vol. 1 No. 31). This notice indicated that the reason for the sole source contract was "D" or as described in Article V:16(d) of the Agreement on Government Procurement of the General Agreement on Tariffs and Trade (the GATT Code) which is incorporated in the Canada-United States Free Trade Agreement (the FTA):
"for additional deliveries by the original supplier which are intended either as parts replacement for existing supplies or installations, or as the extension of existing supplies or installations where a change of supplier would compel the entity to procure equipment not meeting requirements of interchangeability with already existing equipment."
BACKGROUND
The Complaint
On November 9, 1989 the Procurement Review Board (PRB or the Board) received a complaint filed pursuant to Section 15 of the Canada-United States Free Trade Implementation Act (the Act) by the Ottawa office of LANsPLUS INC. stating:
"That the Department of Supply and Services Canada did on June 15, 1989 award the above-mentioned contract [08009-9-6213/01-EJ] on a "sole source" basis, and by so doing did not provide to LANsPLUS INC. an equal and fair opportunity to bid on the solicitation."
The complainant also alleged that, besides the awardee, there were many other suppliers that could have supplied the equipment in question.
The remedy requested by the company is as follows:
"...if contract termination is not a viable solution, that LANsPLUS INC. be awarded compensation equal to twenty percent (20%) of the value of the awarded contract, that is, $10570.00, which is equivalent to the gross profit had LANsPLUS been awarded the contract at the same price."
The complaint met the criteria for "filing a complaint" (subsection 21(1) of the PRB Regulations) and met the requirements pertaining to the time limit for filing a complaint (section 23 of the PRB Regulations). The Board accepted the complaint for investigation because it met the criteria for acceptance (subsection 28(1) of the PRB Regulations). Pursuant to paragraph 16(1)(a) of the Act, the receipt of the complaint was acknowledged to the complainant, DSS was officially notified and they, together with the awardee, were sent a copy of the complaint. A notice was published in the Canada Gazette, Part I and Government Business Opportunities.
DSS filed the Governmental Institution Report (subsection 30(1) of the PRB Regulations) with the Board on December 4, 1989. A copy of the report was sent to the complainant, pursuant to paragraph 30(3)(a) of the PRB Regulations, who in turn filed comments (subsection 31(1) of the PRB Regulations) with the Board on December 13, 1989. The complainant's comments were forwarded to DSS, pursuant to subsection 31(2) of the PRB Regulations. Since the contract had already been awarded, the provisions of paragraph 16(1)(b) of the Act, dealing with the postponement of award, could not be considered.
The Investigation
The allegations of this complaint along with the government response to those allegations and the complainant's comments on the government response were investigated through interviews and the examination of files in both DSS and DEA. Mr. Keith Mulligan, a contracting officer who signed both the contract approval document and the contract, was interviewed on December 28, 1989. The original contract file was available for examination during that interview.
On January 2, 1990, Ms. M.E. Duncan, Deputy Director, (Office Automation) Information Systems Division of DEA was interviewed. She is the signatory of the memorandum presenting the DEA rationale for going sole source.
A number of individuals were contacted to confirm various statements made and contained in the documentation. These included Mr. Howard Delnick, LANsPLUS, Ottawa; Mr. Fred Aker, Phoenix Computer Centre, Ottawa; Mr. Peter Hyne, Remuera Corporation, Ottawa (formerly with the Trade Negotiation Office of DEA); Mr. Pierre Meloche, 3Com Canada Inc., Montreal; Mr. Jack Silverman, Contract Quality Assurance Branch, DSS; Mr. Mike Revoche, RVO Systems, Ottawa; Mr. Doug Panter, Department of Justice (formerly with the Trade Negotiation Office of DEA).
The report of this investigation, made to the Board by its investigative staff, contains a number of appendices relating to material and documents deemed relevant by them as part of the basis of that report. Particular reference is not made to all of these supporting documents in this determination, but they are available to the parties, as may be required, and, subject to the provisions of the Access to Information Act, to any other person.
Because the investigation produced sufficient information to enable the Board, in its opinion, to resolve the issues raised in this complaint, it was determined that no formal hearing was required in the present case. The Board, in reaching its conclusions, has considered the report of its investigative staff and has made its findings and determinations on the basis of the facts disclosed therein, the relevant portions of which are mentioned in this determination.
The Procurement
The Geneva Mission of DEA had a multi-station 3Com computer network system which is said to have been designed to be compatible with a system in the Trade Negotiation Office (TNO) of DEA in Ottawa. According to Mr. Peter Hyne, who was with TNO at the time the equipment was purchased for Geneva, three Canadian firms, RVO Systems, Computerland Inc. and Phoenix Computer Centre, bid on the contract to supply the original system. RVO was awarded the contract for the supply of the equipment worth $125,929. This contract was entered into by TNO, not through DSS. The number of bidders and their bids could not be confirmed from the documents examined in the TNO files.
The review of the TNO files revealed that Phoenix Computer Centre had contracts with TNO as both a supplier of equipment (not the equipment that was used in Geneva) and a provider of support. Contracts were examined that called for Phoenix to supply computer equipment and to provide remedial and preventative maintenance for the Phoenix and Olivetti computers at TNO.
On October 5, 1988, a telegram was received by the Information Systems Division of DEA stating that the Geneva Mission would require an expansion of their computer network to ensure the continued effective operation of the Mission.
On January 23, 1989, a further telegram from the Geneva Mission, outlining their requirements to complete the office automation system, was received by the Information Systems Division of DEA. It was determined within DEA in Ottawa that budgetary limitations would prevent the expansion during the 1988/89 fiscal year.
A third telegram dated March 6, 1989 from the Geneva Mission sought a `sitrep' (situation report) on the status of their earlier request. DEA made no contact with DSS at this point. Since no funds could be committed, it was believed by them that the procurement process could not begin.
A fourth telegram dated April 3, 1989 from the Geneva Mission identified the required equipment in detail but not in such a way as to dictate the manner of procurement (ie. neither "no substitute" nor "sole source").
On April 6, 1989, a meeting was held between representatives from DEA and DSS at which time DEA first indicated their desire to obtain this equipment from a specific supplier, namely Phoenix Computer Centre. The DSS representative requested a memo that would substantiate the necessity of purchasing the equipment on a sole source basis from Phoenix. This memo was provided on the same day.
The April 6, 1989 memo states the following reasons for using Phoenix as the supplier of the goods:
1. "This company...has continuing contact with our Mission in Geneva...to provide support in the resolution of hardware and network issues."
2. "...we consider it operationally essential to deal with one supplier when trying to diagnose and rectify problems..."
3. "We are not aware of any other source of this combination of skills and experience."
4. "For the same reason [of security] the company and individual supplying the hardware and telephone support should be Canadian with a security clearance. This company [Phoenix Computer Centre], which is a Canadian company with security-cleared staff..."
It should be noted that neither the requisition nor contract, both of which are unclassified, contains any service element or provision for security clearance of the company or company personnel. The investigation revealed the following:
1. The equipment to be supplied was composed of standard items and the 3Com equipment was capable of being supplied by nine firms in the National Capital Region in April of 1989.
2. DEA states that it has a facilities management contract with another contractor (Remuera) to provide support for two identical 3Com networks in Ottawa.
3. DEA states that the equipment in Geneva was installed and made operational by the resident network administrator who is a security-cleared Canadian citizen employed by the federal government and who, according to the Deputy Director of Office Automation at DEA, possesses the required expertise. She stated that Mr. Fred Aker, the principal of Phoenix Computer Centre, would be available to answer telephone inquiries relating to system problems but would not be required to go to Geneva to assist in the installation.
Actions by the Department of Supply and Services
On April 24, 1989, eighteen days after the first meeting between DSS and DEA, a formal requisition was received from DEA and allocated to the Office Automation, Services and Information Systems Branch (OASIS) of DSS. This requisition had all equipment specified on a "no substitute" basis with quantities and prices and had a note in the "special instructions box" that it was available from Phoenix Computer Centre. There was no requirement stipulated for security clearance or service. There is a handwritten note on the requisition, apparently initialled by the same person who approved the requisition, stating: "Urgent Requirement".
The requisition was assigned to a contracting officer and a procurement plan calling for the `sole sourcing' of the requirement was prepared. Under a section for sole source justification, the following statement was written:
"Customer has provided a valid justification for going sole source please see attach." [the April 6, 1989 memo from DEA to DSS]
This procurement plan was approved by the Acting Chief of EJ Section, OASIS, on May 31, 1989. Subsequently, a request for proposal (RFP) dated May 31, 1989 was issued to Phoenix Computer Centre with a closing date of June 5, 1989. DSS acknowledged that a source list check was not done because of their acceptance of the DEA sole source justification. In Appendix "A" of the RFP, under a proposed delivery/installation clause, there is a statement that "the equipment is urgently required."
A contract dated June 15, 1989 was issued to Phoenix Computer Centre for delivery of the required equipment to two separate locations within three weeks. Two items were to be delivered to DEA in Ottawa while the remaining were to be delivered to an overseas shipper, Lamoureux International, in Montreal. The contract was unclassified and, with the exception of a warranty clause, was strictly for goods procurement with no element of security, service or installation included. According to DEA, all goods have been received.
DSS published in the November 1, 1989 issue of Government Business Opportunities (Vol. 1, No. 31), approximately 139 days after the contract was signed, a notice of the award under the GATT/FTA Contract Award Section indicating the reason for sole source as "D" ["for additional deliveries by the original supplier which are intended either as parts replacement for existing supplies or installations, or as the extension of existing supplies or installations where a change of supplier would compel the entity to procure equipment not meeting requirements of interchangeability with already existing equipment"]. It should be noted that entities are required to publish the notice of contract award not later than 60 days after the award (GATT Code Article VI:1).
DISCUSSION
The Government Response to the Allegations
The DSS response to the allegations of the complaint dated November 28, 1989 was received by the Board on December 4, 1989. It was `signed-off' by the Assistant Deputy Minister, Supply Operations.
DSS agrees with the complainant that Phoenix Computer Centre "was not then, and is not now the sole supplier of this equipment". The internal DSS memo from the Director General, OASIS to the Corporate Secretary states "this was and is correct".
The memo explains that the justification for the sole source was:
"that the supplier in question had a depth of experience with the Local Area Network (LAN) system when it was in use in the Trade Negotiation Office (TNO) of the Department of External Affairs (DEA). During this time the supplier, Phoenix Computer Centre, as a result of a support agreement negotiated with External Affairs (TNO) became familiar with the complex wide area networking requirements of DEA."
It went on to state:
"When the necessity to expand the LAN by adding additional workstations became apparent, the choice of supplier was made on the basis of the only supplier at the time, known to be a supplier of 3 COM products and to have the experience in the installation and support of such networks and the necessary communications protocols to interface to the international network system of the DEA."
These statements are given in the context that the reference to experience and knowledge is about support and service and not goods; but do not appear to be relevant because the contract was for goods and not for services. DSS also refers to the original system being in TNO in Ottawa and being utilized in Geneva when TNO was disbanded. In fact, the equipment was procured by TNO directly for Geneva in April 1988 from RVO Systems of Ottawa.
The Urgency Issue
Urgency was never advanced in the formal justification for `sole sourcing' this contract although a reference to it appears in a handwritten note on the requisition and in a statement in the RFP. In the letter transmitting the government's response there is a statement that the "valid reasons for requesting the contract be "sole-sourced" to Phoenix Computer Centre...include: compatibility with existing equipment; and, the urgency of the requirement". In this respect it is noted that:
1. the implications and impacts associated with potential delays caused by a competitive procurement were not presented in any of the documentation examined;
2. the first request for equipment to supplement the existing system was contained in a telegram dated October 5, 1988.
Complete specifications of needed equipment, as set out by the Geneva Mission, were received in a telegram dated April 3, 1989; and
3. DEA did not contact DSS in relation to this planned acquisition prior to setting up the April 6, 1989 meeting. A properly substantiated requisition explaining the funding situation and, if applicable, the need for urgent handling could have been used to advance the procurement process, prior to the start of the 1989-90 fiscal year, up to, but not including, the awarding of the contract.
The Complainant's Comments on the Governmental Institution Report
The complainant's comments on the government's response to the allegations stress three main points. These points are supported by the evidence found during the investigation of this case. LANsPLUS stated the following:
1. "From our review of the documentation, it is clearly evident that External Affairs had two requirements. The first was for the supply and delivery of certain specific equipment, and the second was for the installation and support of the network. However, neither the original bid solicitation nor the final contract make any reference to anything other than the `supply, delivery and maintenance of equipment.' No reference is made to `support'."
2. "Any number of other vendors could have and would have supplied exactly the same 3Com equipment."
3. "Amongst the equipment we [LANsPLUS] presently support within the government, is equipment originally sold by LANsPLUS, as well as, equipment which was originally purchased from Phoenix Computer Center, as well as, a number of other vendors."
This contract was for the supply of goods. Mr. Pierre Meloche of 3Com Canada Inc. provided the names of nine firms in the National Capital Region that were "authorized" to sell 3Com products in April of 1989. If support experience was necessary, LANsPLUS had that experience and this was known to DSS. The investigation revealed the existence of at least two DSS support/service contracts with LANsPLUS for the Department of Industry, Science and Technology. The dates of these contracts were June 29, 1989 and November 1, 1989.
FINDINGS
1. DSS signed a contract dated June 15, 1989 with Phoenix Computer Centre for the provision of data processing equipment worth $52,850. The goods have been delivered.
2. The contract was issued on a sole source basis for the following reason (as published in Government Business Opportunities, Vol. 1, No. 31, November 1, 1989):
"for additional deliveries by the original supplier which are intended either as parts replacement for existing supplies or installations, or as the extension of existing supplies or installations where a change of supplier would compel the entity to procure equipment not meeting requirements of interchangeability with already existing equipment."
3. DSS did not investigate the possible use of alternative suppliers.
4. The DSS justification for `sole sourcing' was based on a memorandum, dated April 6, 1989 from DEA to DSS. DSS summarized the "valid reasons for requesting the contract be "sole- sourced" to Phoenix Computer Centre" as "compatibility with existing equipment; and, the urgency of the requirement."
5. The DEA memo referred to in point 4 concentrates on the compatibility of equipment, support and security. There is no reference to urgency.
6. The equipment to be supplied in the contract was standard (the only non-Canadian specification was that the power requirements were for European electrical supply) and was available from other suppliers.
7. The equipment required was for the extension of a 3Com network system in Geneva which was originally supplied under a TNO contract (worth $125,929) with RVO Systems of Ottawa in April 1988. Phoenix Computer Centre was not "the original supplier" of the system.
8. No evidence was found or presented that indicated the selection of a different supplier "would compel the entity to procure equipment not meeting requirements of interchangeability with already existing equipment."
9. The contract contains no installation, service or support element with the exception of the following warranty clause :
"The equipment detailed in Appendix "B" shall be provided with one (1) year ON-SITE (in Canada) RETURN TO DEPOT (outside Canada) warranty, covering parts and labour, after date of acceptance."
10. The resident Canadian (security-cleared, federal government employee) network administrator in Geneva was to perform the installation. No one from the supplier would be in Geneva to assist although it was understood that they would be available to respond to telephone inquiries.
11. The contract has maintenance clauses as follows:
"MAINTENANCE:
The provision of maintenance services may be the subject of a separate contract(s) following expiration of warranty.
MAINTENANCE AVAILABILITY:
The contractor guarantees to make available, maintenance for the material detailed herein, for no less than a five (5) year period from contract date.
MAINTENANCE OPTION RENEWAL:
The contractor is to advise the Crown in writing of any rate changes at least ninety (90) days prior to the expiry of any contract."
12. The contract is unclassified and contains no clause about the security of the company or company personnel.
13. According to DEA, they have a facilities management contract with Remuera Corporation of Ottawa to provide technical support/service for two other identical network systems located in Canada.
14. Treasury Board and DSS policy statements are clear with respect to the handling of sole source procurements under the Canada-United States Free Trade Agreement.
15. There is no reason given why DEA Headquarters requested that the equipment be supplied on a "no substitute" basis, given the description of the requirement in the April 3, 1989 telex from Geneva. Since the issue of "no substitute" was not raised in the complaint this matter was not pursued further.
16. Publication of the notice of contract award occurred approximately 139 days after the contract was signed. Article VI:1 of the GATT Code, which forms part of the Free Trade Agreement, requires that the notice be published not later than 60 days after the award of a contract.
CONCLUSIONS ON THE MERITS
The findings noted above clearly indicate that the allegation made by LANsPLUS in its complaint is valid. Specifically, by the use of single tendering without sufficient justification, DSS failed to provide all potential suppliers equal opportunity to be responsive to the requirements of the procuring entity in the tendering and bidding phase. Although the use of single tendering is not prohibited by the Agreement, the reason selected:
"for additional deliveries by the original supplier...where a change of supplier would compel the entity to procure equipment not meeting requirements of interchangeability with already existing equipment;"
is clearly invalid in this case. The justification published in Government Business Opportunities for going sole source is inconsistent with the facts, since Phoenix Computer Centre was not the original supplier. That justification was intended to protect the government in proper cases from having to go to a different supplier - but is irrelevant in this case because they were selecting a different supplier anyway.
As well, the items purchased were standard and available from more than one other additional supplier. It appears therefore, that this procurement should have been competed. Indeed, this would have been the recommendation of this Board to the governmental institution if the complaint could have been raised in sufficient time to make that remedy possible. Although budget restrictions within DEA appear to have prevented contract award in FY 1988-89, a competitive procurement could have been advanced to the point at which the contract could have been awarded as soon as funds became available.
While the complainant is the prevailing party, the Board does not agree with the request for compensation because the complainant did not suffer the direct loss of profit but rather the loss of the opportunity to bid on a procurement and the potential to profit therefrom. There is no certainty that the company would have been successful had there been a competition.
However, since they have been successful in establishing the points raised in this complaint, the Board will award the complainant reasonable costs relating to the filing and proceeding with the complaint.
The Issue of Notice When `Sole Sourcing' Contracts
This complaint has raised another issue upon which the Board wishes to comment pursuant to paragraph 19(b) of the PRB Regulations.
Treasury Board and DSS policy statements (which also incorporate the GATT Code and FTA requirements) specify in what limited circumstances sole source procurements are permitted.
It should be remembered that one of the obligations in the Free Trade Agreement (Article 1305.4) is that "Each Party shall provide sufficient transparency in the procurement process to ensure that the bid challenge system operates effectively." This is not adequately provided for when other potential suppliers are, through the manner in which the procedures are complied with, left unaware of the contract opportunity until long after the contract has been awarded and perhaps performed.
The GATT Code specifies that for sole source procurements, details of the contract must be published not later than 60 days after contract award. In this instance, the fact that notice was published 139 days after award rather than "not later than" 60 days did not, by itself, make the position of the complainant any worse. The problem lies not in the lack of a timely notice of contract award, but in the lack of any requirement for a publication of proposed procurement in `sole source' cases. If this were to be done it would provide the kind of transparency routinely required for competitive procurements under the GATT Code and the FTA. In this case, there was sufficient time between the receipt of requisition and the award of contract to publish a Notice of Proposed Procurement, thereby permitting other potential suppliers to come forward to test the rationale for `sole sourcing'. The Board concludes that had that been allowed to happen, a competitive procurement could have taken place.
It is generally accepted that a governmental institution must be allowed to procure on an urgent basis when necessary and to go "sole source" if that is the only way to meet the urgency.
The GATT Code does provide for sole source procurement for reasons of urgency, defined as follows:
"...insofar as is strictly necessary when, for reasons of extreme urgency brought about by events unforeseeable by the entity, the products could not be obtained in time by means of open or selective tendering procedures."
It may perhaps be argued that to insist upon notice before contract award or contract performance in these cases would defeat the objective of urgency. However, `urgency' is only one of five reasons given in the GATT Code for justifying `sole sourcing' or `single tendering' (GATT Code, Article V, Section 16). None of the other reasons would necessarily be thwarted by a pre-award or even pre-performance notification. To fail in this regard is effectively to remove remedies Parliament intended to be available to potential suppliers. Moreover, it removes from the purview of this Board the possibility of examining the justification for `sole sourcing' in sufficient time to apply remedies.
DETERMINATION
The Board has determined on the basis of its investigation that this procurement by the Department of Supply and Services did not comply with the requirements referred to in Section 17 of the Free Trade Agreement Implementation Act, in that it did not "provide all potential suppliers equal opportunity to be responsive to the requirements of the procuring entity in the tendering and bidding phase".
The Board has also decided:
1.that it will not recommend that compensation be awarded to the Complainant either on the basis requested in the complaint, or at all; and
2.to award the Complainant reasonable costs relating to the filing and proceeding with the complaint.
Finally, the Board recommends, pursuant to paragraph 19(b) of the Procurement Review Board Regulations, that the Department of Supply and Services:
1. review the extent to which all contracting officers at all levels understand their responsibilities with respect to reviewing and accepting justification for single source tendering and
2. review its policies and procedures with respect to publishing notices of single source procurements in light of the Board's observations with a view to increasing transparency of the procurement process and ensuring that the bid challenge system operates effectively.
Gerald A. Berger
_________________________
Gerald A. Berger
Chairman,
Procurement Review Board of Canada
Initial publication: August 27, 1997