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Home  »  News  »  Reserve Rights in Public Procurement – Not a Silver Bullet
Reserve Rights in Public Procurement – Not a Silver Bullet
Howard Grant (President, PPI Consulting Limited) and Ira Bridger (Associate) - 9/26/2012

PPI Approach

At PPI, our procurement management professionals are not just interpreters of established rules; we are ongoing pioneers in giving meaning to the role of fairness in public procurement.

Where PPI is engaged early in the procurement planning process, we assist clients in developing constructive, workable methods for establishing reserve rights that are aimed at turning interests in common into common interests.

In our view, an assessment of reserve rights begins at the strategic planning stage of any major or complex public procurement initiative.

We understand that the reservation of rights is an important legal step, particularly in the context of risk management. However, the appropriate definition of reserve rights is an equally important step in establishing and maintaining fairness and open competition.

Our processes focus on, and maximize considerations of, fairness in managing the business outcome issues that are faced by both purchaser and supplier. It also avoids a patchwork of provisions that could cumulatively result in disincentives to attracting quality bidders.

Reserve rights relative to risk management considerations include:

  • Determining the comparative bidding market conditions and interests.
  • Maintaining the importance of receiving quality bids in achieving good business outcomes.
  • The appropriate application of reserve rights across various contract categories, acquisition or operational phases, technology renewal considerations, etc.
  • Assessing ongoing reserve rights relative to evolving / phased investment management conditions.
  • Maintaining historical norms for the stewardship of public funds while providing an appropriate degree of flexibility in administrative practices that can meet dynamic procurement conditions.

Reserve rights relative to fairness considerations include:

  • Developing and maintaining a mutual understanding of the basic rights and responsibilities of both public and private sector interests.
  • Assessing the issues and management considerations in extending the application of extended reserve rights to:
    • privately financed infrastructure or complex service delivery projects
    • multiple sub-contractors or supplementary suppliers.
  • Applying fairness norms as a means of coordinating and reinforcing themes of equity and fairness in the definition and application of reserve rights.
  • Precluding the misuse of additional reserve rights, i.e. when no legal provisions exist which specifically govern such administrative practices.
  • The appropriate use of reserve rights in balancing stewardship and liability issues where there are expectations of shared risks and responsibilities such as in public-private partnering arrangements.

We feel that it is also important that mutual learning about the impact of reserve rights from both risk and fairness management perspectives take place during the Requests for Expressions of Interest or Requests for Information stages of the procurement process.

Once reserve rights are established within the formal Request for Proposals, any further oversight of their application is simply a matter of process monitoring.

Background

In the public sector, Purchasers retain particular rights and responsibilities in their procurement processes that are designed around historical norms for the stewardship of public funds. These are generally referred to as ‘reserve rights’ - a common usage phrase that can refer to any legal rights or prerogative. Reserve rights are also sometimes referred to as ‘privilege clauses’.

The application of reserve rights can range from limiting various forms of liability; the acceptance or rejection of proposals or alternative proposals; evaluation methodologies; use or disclosure of proprietary information; ownership and/or use of intellectual property (IP); determination of non-conformance to terms and conditions; rules for resolution of disputes; and the extension of these reserve rights to sub-contractors - to the exclusion of costs incurred by Bidders in the preparation and presentation of their proposals; or for costs related to delays in contract award or administrative approvals.

On a broader level reserve rights can also be applied to the design of a procurement initiative that is linked to socioeconomic development, treaty obligations, or environmental management objectives.

Current & Emerging Practices

Significant changes to public procurement practices began in 1981 when the Supreme Court of Canada (R. [Ont] v. Ron Engineering, [1981] 1 S.C.R. 111) recognized that the tendering process creates a preliminary “Contract A” (i.e. “The principal term of contract A is the irrevocability of the bid, and the corollary term is the obligation in both parties to enter into a contract (contract B) upon the acceptance of the tender.").

A considerable body of experience, legal precedents and administrative practices has since emerged related to the appropriate use of reserve rights during the selection and award phases of a procurement initiative. As recent as 2007 for example, The Supreme Court of Canada in the Double N case (Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, 2007 SCC 3) ruled on the scope of an owner's obligation to treat all bidders/tenderers fairly during the tender process and a tenderer's ability to challenge an award of the contract where there are non-compliance issues in the successful bid. The Court ruled that "the bidding process, by contract, is fully protected by an obligation that all bids receive equal treatment”.

Such developments have put a unique stamp on public procurement in Canada in terms of pre-contract award responsibilities (i.e. reserve rights) related to stated values of fairness, openness and accountability.

They have also resulted in more positive recognition and understanding among public sector managers of pre-award responsibilities when soliciting private sector participation.

Paralleling these developments, public procurement approaches and/or practices have also evolved over the past decade in response to new forms of public-private contracting and service relationships and this has led to new issues of fair dealing relative to Contract A. Innovative approaches to financing, building and operating services have also required new considerations in the application and management of reserve rights

In our opinion, the ‘evolution’ of Contract A has been a positive development in public procurement that continues to improve the integrity of the process for the full range of procurement approaches.

Balancing Public & Private Sector Interests

PPI maintains that the primary objective of any procurement is to achieve a good business outcome.

To date, there is little summarized research or published discussions that could help in describing best practices that can be used to develop suitable provisions and parameters for the use of reserve rights from a fairness, risk, and economic or administrative efficiency perspective. It would be a mistake to assume that new questions that are arising around reserve rights have already been answered in law. There is also little uniformity in the use of reserve rights across public procurement activities in various jurisdictions.

It is important to note that, apart from the application of statutory requirements, the use of additional or supplementary ‘reserve rights’ in public procurement planning is generally thought of in the context of risk management considerations or administrative efficiency - in favour of the Purchaser.

Despite the collective body of legal precedents and administrative practices referred to above, issues arising from the application of reserve rights are not often thought of, first and foremost, in the context of ‘fair’ or ‘balanced’ procurement solicitation processes that could have significant impacts on business outcomes.

How to balance public & private sector interests in establishing “reserve rights” in both the solicitation and formal contract stages of a procurement initiative should be carefully assessed in the context of this objective.

From a strategic planning perspective, the challenge for public sector managers is how to uphold a balanced approach that emphasizes both legislative and administrative responsibilities while still attracting leading companies in their field to respond to requests for proposals (RFPs). A procurement initiative that sets out overly restrictive reserve rights to the public purchaser runs the risk of taking away or diluting the private sector’s interest in responding to RFPs. As a result, the number of responses to RFPs from quality bidders may fall short of expectations on the part of the public sector. In particular, complex procurements such as design/build or multi-year roll outs for real property construction or service infrastructure development are more sensitive to reserve rights. For example, subsidiary rights related to the use of technical data, embedded software, software upgrades, or intelligent business systems development may be in conflict.

Private sector suppliers recognize that public sector contracts are laden with bureaucracy and paperwork—including the bidding process and contract formation. However, they also recognize that good business outcomes depend on the development of collaborative working relationships between the public and private sector where ‘fairness’ with respect to both Purchaser and Supplier becomes an integral part of the procurement process. Hence, it is inappropriate to misuse or establish additional reserve rights in a manner that imposes unnecessary costs and risks on suppliers or leads to strained relationships. For example, it is inappropriate for a Purchaser to use a reserve right to take all the time it chooses to respond to proposals received in response to an RFP without follow-up communication of the reasons for delay. Such delays and the lack of communication are often viewed by the private sector as a lack of understanding or indifferent bureaucratic or political position relative to maintaining the values of fairness that underlie good working relationships.

Thus, understanding the supplier perspective is a strategic consideration that can directly affect the quality of bid submissions and overall business outcome. Prescribing overly restrictive reserve rights in RFPs without consultation also runs the risk of precluding or diluting valuable input from suppliers. On large projects, meaningful collaborative relations with suppliers are an important element of achieving a good business outcome, such as access to innovation in processes, technologies, financing, or business model renewal, in order to create business value (particularly in the case of public-private partnering-based RFPs). Overly prescriptive reserve rights that form an overwhelming set of pre-conditions and technical instructions at the RFP stage could limit the ability to actually ‘partner’ with the private sector.

In response to these conditions, the challenge for the private sector is to appropriately assess the full range of risks and opportunity costs associated with accommodating reserve rights set out in the bidding process as well as the maintenance of reserve rights as conditions in subsequent formal contract requirements. Safeguarding commercial confidential information vis a vis Freedom of Information laws is one such contemporary management issue.

An Untested New Development – “Not a “Bidding Contract” or a Tender” sometimes called “Non-contract A”

We are now seeing the emergence of a disclaimer being used in public tendering that states that the call for proposals is “Not a “Bidding Contract” or a Tender”. This is clearly an effort to circumvent or dispel any contractual obligations on the part of the Purchaser during an RFI/RFP process, i.e. to subvert Contract A and revert to conditions in use at a time prior to 1981.

Conversely, this reserve right for the Purchaser will allow Bidders to walk away from their proposals without penalty if they view emerging terms and conditions, evaluation methods or other inherent risks of going forward as being untenable.

It is not clear how the application of this condition, which is largely discretion without accountability on the part of the Purchaser, will be met by the supplier community. Whether or not this clause can be sustained in this form has yet to be challenged. From a legal perspective, there are already differing schools of thought and perspectives on the merits and risks of this approach.

We express no view on the legality of either course. However, from a fairness perspective, it is our view that attempting to abandon the long standing approach that is Contract A and which now represents considerable integrity as a primary component of the procurement process is a regressive one.

This approach may also have significant implications on maintaining a mutually beneficial working relationship between public and private sector interests. On large scale, complex projects the private sector will now face increased risk of expending considerable costs and efforts in responding to Requests for Proposals without the benefit of any redress that may be afforded under Contract A.

For further commentary on this issue see: Reserve Rights – ‘Not a Contract A” - Get Out of Jail Free Card

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