Select for Confidential

To / Destinataire

Mayor and Members of City Council

File/N° de fichier:

From / Expéditeur

M. Rick O’Connor, City Solicitor

Subject / Objet

Procurement and Grants Policies – Litigation Exclusion

Politiques d’approvisionnement et de subventions – exclusion du litige

ACS2008-CMR-LEG-0026

Date: November 10, 2008

BACKGROUND

Earlier this year, City Council inquired about the ability of the City of Ottawa to temporarily suspend both business relationships and grants to persons or organizations engaged in litigation with the City. The purpose of this memorandum is to provide both a legal opinion, as well as guidance, on the City of Ottawa’s ability to initiate a litigation exclusion to its Procurement Policy that would prohibit vendors and suppliers of goods, services or construction who have legal actions pending against the City from doing business with it while such matters are unresolved. In addition, this exclusion could also prohibit persons, associations and not-for-profit organizations from applying for grants under various City programs while any lawsuit by such person, association or organization was still pending against the City.

RESPONSE

Having reviewed the relevant federal trade agreements and provincial legislation set out below, it is suggested that there exists sufficient legal authority to enact a litigation exemption with respect to the City’s procurement and grants policies.

LEGAL AUTHORITY

a) Trade Agreements:

By way of background, it should be noted that Canada currently is a party to a number of trade agreements, namely: (1) the North American Free Trade Agreement (“NAFTA”); (2) the World Trade Organization Agreement on Government Procurement (“WTO-AGP”); and, (3) the Agreement on Internal Trade ("AIT."). As an aside, the Canada-Korea Agreement on procurement of Telecommunications Equipment was rescinded in 2005. Although negotiations are ongoing for a new Agreement between Canada and Korea, as of the date of this memo, no such agreement has been concluded.

With the exception of the Canada-Korea Agreement, the balance of the above-noted agreements require the Federal Government of Canada to maintain an independent bid challenge authority. Parliament has implemented these agreements into Canadian legislation to ensure that the procurements covered by these agreements are conducted in an open, fair and transparent manner and, where possible, in a way that maximizes competitiveness. The Canadian International Trade Tribunal has been designated as the bid challenge authority for contracts involving the Federal Government.

Although NAFTA came into force in Canada on January 1, 1994, the Federal Government has not extended its coverage to provinces and municipalities. Similarly, the WTO-AGP that came into force on January 1, 1996 is limited to Federal departments and agencies and, consequently, provincial or municipal governments are not included under it.

With respect to the AIT that came into force on July 1, 1995, it is an agreement among the federal, provincial and territorial governments of Canada. The AIT is intended to reduce and eliminate barriers to the free movement of persons, goods, services and investments within Canada and to establish an open, efficient and stable domestic market. Parties to the AIT have been working toward removing existing inter-provincial trade barriers, preventing the establishment of new barriers and harmonizing inter-provincial standards.

The AIT is founded on six general principles, intended to prevent governments from erecting new trade barriers and reducing existing ones, namely: (1) non-discrimination (i.e. establishing equal treatment for Canadian persons, goods, services and investments); (2) right of entry and exit; (3) no obstacles to trade; (4) limiting adverse impacts arising from legitimate trade objectives; (5) eliminating barriers caused by differences in standards and regulations across Canada; and, (6) ensuring transparency to promote information being fully accessible to all interested parties. In so far as the AIT is concerned, it could be argued that such a litigation exclusion is supportable pursuant to the fourth principle of the agreement, namely: that it is a legitimate trade objective with limited adverse effects intended to promote harmonious and effective business relationships between the City and prospective vendors and suppliers of goods, services or construction to it.

Finally, there is some legal authority to suggest that the AIT also applies to municipal governments. Nevertheless, since it currently does not have a practical enforcement mechanism set out within it with effective consequences, it arguably constitutes a political accord, rather than an adjudicative code, among the federal, provincial and municipal governments in Canada.

b) Provincial Legislation:

In addition to the trade agreements, reference must also be made with respect to Ontario’s Discriminatory Business Practices Act (the “Act”), which applies to all “persons” (including municipalities) in the province. As stated in Section 2, the Act’s purpose is: “to prevent discrimination in Ontario on the ground of race, creed, colour, nationality, ancestry, place of origin, sex or geographical location of persons employed in or engaging in business” [emphasis added].

The Act has broad application and is only subject to only three exceptions: (1) the withholding of services or employment in the course of a lawful labour dispute; (2) a discriminatory business practice sanctioned by the Government of Canada; and, (3) a discriminatory business practice directed towards a province or territory other than Ontario that is sanctioned by it.

In essence, the Discriminatory Business Practices Act does not prohibit discrimination on the basis of pending or existing legal actions against another party. Consequently, such a policy could be justified as a lawful form of discrimination in business practices that is not currently prohibited. More specifically, the limited prohibition would only be in effect while a legal action by a prospective vendor or supplier was pending and unresolved against the City. Since this party would always have control over the prosecution or continuation of such a legal action, it arguably could make an informed decision on the merits of pursuing such a course of action in the first place or, alternatively, maintaining it. Further, based on the current shortfalls of the AIT with regard to effective remedies for complainants, the City could take a measured risk by relying upon the fourth principal noted above without having to worry about significant adverse consequences in the event of a successful challenge to the proposed policy.

Finally, in the case of grants, the City is not subject to the above considerations and has more latitude in setting the eligibility requirements for such grants. Pursuant to Subsection 107(1) of the Municipal Act, 2001, the City has the broad authority to provide grants on any terms that Council considers appropriate. Furthermore, as the proposed litigation exemption in the area of municipal grants would not appear to conflict with other provincial or federal legislation, it would require the enactment of a policy by Council to bring about the desired change.

LITIGATION EXCLUSION IN OTHER MUNICIPALITIES

A brief review of various municipalities in Ontario has revealed that the use of such litigation exclusions in either procurement policies or tender documents was not unusual. In this regard, the following municipalities have implemented some form of litigation exclusion in either their respective purchasing policies or tender documents:

1. City of Windsor;

2. City of London;

3. City of Brantford;

4. Regional Municipality of Niagara;

5. Regional Municipality of Waterloo;

6. City of Kitchener;

7. City of Sarnia;

8. City of Hamilton;

9. City of Greater Sudbury;

10. City of Brampton;

11. District Municipality of Muskoka;

12. City of Oshawa;

13. Municipality of Chatham-Kent; and

14. Town of Markham.

A similar search for such a provision for grants policies revealed that all eight municipalities that provided responses indicated that they did not have a policy related to prohibiting grants to organizations currently involved with litigation with the municipality. A summary table presenting the results of the practices of other municipalities in respect to litigation exclusion for procurement and grants policies are attached as Document 2 and Document 3 respectively.

SUPPLIER PERFORMANCE PROVISIONS

As noted above, a litigation exclusion considers whether the person or organization is engaged in a legal action against the City at the time the City initiates the procurement process. Conversely, a supplier performance provision of a purchasing by-law operates differently in that it considers whether the person or organization has entered into contracts with the City in the past and performed poorly.

Pursuant to City of Ottawa Purchasing By-law No. 50 of 2000, the City Treasurer may, in consultation with the City Solicitor, prohibit an unsatisfactory supplier from bidding on future contracts. Such a prohibition applies to suppliers that in the past have failed to meet contract specifications, terms or conditions, and/or health and safety requirements. The relevant provisions of the Purchasing By-law have been attached as Document 1.

The City has rarely taken the significant step of removing the ability of a vendor to compete for future municipal contracts. However, what takes place on a more routine basis, is Supply Management, along with the operational branch, engages in a meaningful debate with the vendor intended to clarify expectations, communicate potential outcomes, and leverage the City position as a major local consumer to encourage suppliers to improve service levels, and meet contractual obligations.

FINANCIAL IMPLICATIONS

While receipt and consideration of this memorandum by Council has no financial implications, implementation of such a policy may result in an increase in costs to the City. In effect, such a prohibition against doing business with persons or companies litigating with the City has the potential to decrease the pool of available service providers. Furthermore, in the absence of a detailed file review of those persons or organizations litigating with the City, it is difficult to assess the overall impact of such a policy on the City’s Procurement Policy or its various grants programs.

In some instances, the City may wish to conduct business with an entity that, due to extenuating circumstances (e.g. the need to preserve legal rights in the face of a limitation period), has initiated litigation against the City. Council may choose to address this concern by retaining the discretion to accept a bid where the City Treasurer, in consultation with the City Solicitor, are satisfied that the litigation will not impact the ability of the parties to further engage in reasonable business relations.

NEXT STEPS

In the event that Council enacts a litigation exclusion, the City must ensure that it does not act in bad faith. In essence, there must be solid commercial reasons for adopting the litigation exclusion including saving on costs associated with engaging in relations with parties that are prone to litigation and avoiding the risk of breaching confidentiality when dealing with parties against whom the City is engaged in litigation. Conversely, the City must be careful not to initiate the exclusion in order to punish a particular individual or organization that will foreseeably be adversely affected. For these reasons, Council should ensure a fair and open process leading up to the exclusion’s enactment, including consultations with the Business Advisory Committee, Business Improvement Areas, and the Arts, Heritage and Cultural Advisory Committee, among others.

Finally, a litigation exclusion would affect only applications for grants and procurement processes initiated subsequent to Council having passed a Motion that amends the Purchasing By-law and directs City Staff to revise relevant purchasing and grant documents. In effect, there is no legal authority for Council to make such a policy change retroactive.

This is for the information of Council.

Original Signed By

M. Rick O’Connor

City Solicitor

MRO/pc

Attachments: Document 1 – Provisions of City of Ottawa Purchasing By-law No. 50 of 2000

Document 2 - Summary of Municipalities with a Litigation Exclusion Policy for Procurement

Document 3 - Summary of Municipalities with a Litigation Exclusion Policy to Deny Grants

Document 2

Summary of Municipalities in Ontario with a Litigation Exclusion Policy for Procurement

Sixteen municipalities in Ontario were contacted in August of 2008. The purpose of this research was to explore whether other municipalities in Ontario have by-laws, policies, or practices related to prohibiting businesses that are currently in litigation with them from bidding on and obtaining municipal contracts.

Of the sixteen municipalities contacted, eight municipalities have adopted a lawsuit prohibition by-law or policy applicable to bidders interested in bidding on municipal contracts for goods, services or construction. Six of the sixteen municipalities have no such policy or by-law but have inserted lawsuit prohibition clauses into purchasing / tender documents. Two of the sixteen municipalities have neither inserted clauses into purchasing / tender documents nor adopted a lawsuit prohibition by-law or policy.

#	MUNICIPALITY	RESPONSE	COMMENTS FROM THE MUNICIPALITY
1.	City of Windsor	By-law	Purchasing By-law
2.	City of London	Policy	Purchasing Policy
3.	City of Brantford	By-law	Municipal Code
4.	Regional Municipality of Niagara	By-law	Procurement By-law
5.	Regional Municipality of Waterloo	By-law	Purchasing By-law
6.	City of Kitchener	Policy	Council Policy
7.	City of Sarnia	Policy	Policy
8.	City of Hamilton	Policy	Policy in place on Sep 5, 2007 (unable to verify current status)
9.	City of Greater Sudbury	No By-law/ Policy	Tender documents contain lawsuit prohibition clause
10.	City of Brampton	No By-law/ Policy	Purchasing documents contain lawsuit prohibition clause
11.	District Municipality of Muskoka	No By-law/ Policy	Tender documents include broad past performance clause
12.	City of Oshawa	No By-law/ Policy	Tender documents include lawsuit prohibition clause
13.	Municipality of Chatham-Kent	No By-law/ Policy	Tender documents include lawsuit prohibition clause
14.	Town of Markham	No By-law/ Policy	Purchasing documents include lawsuit prohibition clause
15.	City of Sault St. Marie	No By-law/ Policy	No lawsuit prohibition clause inserted into documents
16.	City of Toronto	No By-law/ Policy	No lawsuit prohibition clause inserted into documents

Research of Ontario municipalities re Procurement and organizations in litigation with the municipality 15/09/08

Document 3

Summary of Municipalities in Ontario with a Policy to Deny Grants to Organizations in Litigation with the Municipality

Thirteen municipalities in Ontario were contacted in September of 2008. The purpose of this research was to explore whether other municipalities in Ontario have policies related to denying municipal funding to organizations currently in litigation with them.

Eight of the thirteen municipalities contacted responded to the request for information. As identified in the table below, none of the 8 municipalities that responded has a policy that denies funding to organizations in litigation with the municipality.

#	MUNICIPALITY	RESPONSE	COMMENTS FROM THE MUNICIPALITY
1.	City of Windsor	Does not have such a policy	Stated this has not been an issue as of yet.
2.	City of London	No response
3.	Regional Municipality of Niagara	Does not have such a policy	Stated that perhaps they should consider such a policy.
4.	Regional Municipality of Waterloo	Does not have such a policy	Stated that perhaps they should consider such a policy.
5.	City of Kitchener	Does not have such a policy	Stated this has not been an issue as of yet.
6.	City of Sarnia	No response
7.	City of Hamilton	Does not have such a policy	No comments made.
8.	City of Greater Sudbury	Does not have such a policy	Stated that perhaps they should consider such a policy.
9.	City of Brampton	No response
10.	District Municipality of Muskoka	No response
11.	City of Oshawa	No response
12.	Municipality of Chatham-Kent	Does not have such a policy	No comments made.
13.	Town of Markham	Does not have such a policy	No comments made.

Research of Ontario municipalities re Grants and organizations in litigation with the municipality 11/09/08

M E M O / N O T E D E S E R V I C E

BACKGROUND

RESPONSE

LEGAL AUTHORITY

City of Ottawa Purchasing By-law No. 50 of 2000

City of Windsor

Regional Municipality of Niagara

Document 3