Procurement Best Practices: Legally Defensible Strategies For Handling Shoddy Suppliers
Municipal, Land Use and Development 2014/10/17 - Michael Letourneau
Municipalities deal with large numbers of suppliers and contractors. While most of them are reliable and provide good value-for-money, inevitably, there are some who do shoddy work or provide substandard supplies. When this happens, the usual responses are to discuss the problem in the hope that the supplier fixes the problem, reduce the amount payable to them (either by negotiation or through court action), or simply cease doing business with them. While a private company can simply cease doing business with any supplier that underperforms, municipalities have a duty to procure goods and services through processes that require all suppliers to be treated fairly and equally. In order for a municipality to refuse to grant contracts to a known shoddy supplier, there must be formal, transparent procedures in place allowing for this. Without such protection, you risk being found liable to pay compensation to the shoddy suppliers whose bids you rejected. This risk is best managed through performance standards for suppliers, “flexible format” procurements, or preferably, both.
Formal procedures which identify and document any deficiencies created by a shoddy supplier, and which then communicate them to the supplier can provide municipalities with some protection. While it is tempting to simply ignore or reject further bids from that supplier, the supplier may respond by alleging that your municipality uses “hidden” evaluation criteria that unfairly disadvantage them. On that basis, the supplier can bring a lawsuit against your municipality seeking both a damage award and their legal costs. Even with insurance covering those amounts, your municipal staff would still be put to time and expense in responding to the lawsuit. Simply including a clause in your procurement documents reserving your right not to award a contract to suppliers who have previously supplied sub-standard goods or services may not protect against these lawsuits. The supplier must be promptly and clearly informed that they have supplied unsatisfactory goods or services, and why this is so. To do this, you need to establish performance standards that all suppliers will be assessed on and procedures to document the assessment and to inform suppliers where they have not met those standards.
Performance standards for any one procurement need not be overly complicated, but need to reflect your municipality‘s needs in that procurement. For example, where a project has engineering specifications, the work can be assessed against those specifications. Once you have established performance standards, you must evaluate and record each supplier’s performance against them. Details of all deficiencies found should be recorded. You can then decide what steps you will take with that supplier, from requesting rectification of the deficiencies, to imposing special conditions on future contracts with them, to refusing to grant them further contracts. You should communicate your decision, along with your reasons for it (including the list of deficiencies) to the supplier in writing. You may also want to consider giving the supplier an opportunity to appeal a decision, especially if the decision is to not to do business with them. If the supplier goes to court to challenge your decision, the court more inclined to uphold your decision if you provided them with reasons and a chance for an effective appeal.
Another way to deal with problematic suppliers is to structure your procurement in a “flexible format” such as a negotiated RFP. In a negotiated RFP, the procurement decision is not based solely on the written submissions from the bidders. Instead, you short-list suppliers with the most favourable responses to your RFP. You then negotiate with one or all of those suppliers to find the one that gives your municipality the best value-for-money, and terminate negotiations with those that don’t. Using such an approach still allows a shoddy supplier to submit a bid, but also allows you to negotiate the imposition of strict performance standards, additional oversight, or penalties for poor performance.
Dealing with shoddy suppliers can expose municipalities to unnecessary legal liability. Indeed, if your municipality is not careful, it can wind up spending a good deal of time and money in dealing with legal actions from such suppliers. This risk, however, can be managed by carefully developing procurement, evaluation, and notification processes that address deficiencies and treat all suppliers, good and bad, fairly. If your municipality plans to develop these processes as part of its overall procurement strategy and carefully applies them to all its procurements, you can manage not only those shoddy suppliers you know about now, but also those you just haven’t yet met.
Micheal Letourneau is a lawyer with Sorbara, Schumacher, McCann LLP, one of the largest and most respected regional law firms in Ontario.
* * This article is intended only to inform and educate. It is not legal advice. Be sure to contact a lawyer to obtain legal advice on any specific matter.