Procurement and Contract Negotiations

Special presentation for: 2017 APICS Supply Chain Summit October 19, 2017 Vancouver, BC

Facilitator Introduction

Maureen A. Sullivan, BA, LLB

• Owner and President of NECI

• Curriculum developer for the PSPP and Signature Seminars

• An experienced litigator, mediator and dispute-resolution practitioner

• In-depth knowledge of procurement law, contracting issues, and negotiations

• Legal Editor and Publisher of The Legal Edge

“Let us never

negotiate out of fear. But let us never fear

to negotiate.” -JFK

Preliminary Comments

• Discussing negotiations DURING a competitive process

• Will look at both issuer (owner) and bidder (respondent) perspectives

• Use ITT, RFP interchangeably (“RFx”)

• Designed to help you maximize resources spent on these processes

• Will also discuss negotiations more generally

Key Distinction of Binding Competitive Contracting: Contract A and Contract B

Offer

Acceptance A

A

A

A

Offer

B Acceptance

Exercise: Trucking Troubles

Court Perspectives

Martel (SCC, 2000), reflecting on MJB (SCC, 1999)

• “the basic rationale of tendering…seeks to replace negotiation with competition”

Tercon (BCSC, 2006)

• “However new breeds of procurement model, called ‘hybrids,’ have both an element of negotiation and competition”

Double N (SCC, 2007)

• MJB case “makes clear that the tender documents control the contractual obligations of the parties to a tender…[and here] the documents clearly indicated that some measure of negotiation was anticipated.”

Negotiation Processes

• In general terms, what should suppliers watch for with negotiation rights in RFx documents?

• What do owners need to consider?

• Rocks to avoid?

How NOT to Handle Procurement Negotiations

Borshcherdt Concrete v Port Hawkesbury (2008, NSCA)

Borcherdt Concrete v. Port Hawkesbury (2008, NSCA), Continued

Issue:

• Did Owner breach its KA obligations, its implied duty of fairness? ‘Bid shopping’?

RFx clause:

• “The Owner reserves the right to reject any and all Tenders that, in its sole discretion, are not in [its] interests”.

• But, slow to reject, and RFX silent on Owner’s ability to go to third party, or take work in-house.

What do You Think the Outcome Will be?

Borcherdt Concrete v. Port Hawkesbury (2008, NSCA), Continued

Courts:

• Purchaser liable for breach of Contract A, duty of fairness (yes, this was bid shopping)

• Damages of $68K awarded (reduced on appeal to $44K)

Caution: Bid Shopping

“the practice of soliciting a bid from a contractor, with whom one has no intention of dealing, and then disclosing or using that in an attempt to drive prices down amongst contractors with whom one does intend to deal”

Double-N Earthmovers v. Edmonton (2007, SCC), para.56

Where do negotiations fit in

• Within Contract A

• Outside of Contract A

Within Contact A

• Must be defined as part of process

• Read RFx carefully as part of go/no go decision

• Follow submission requirements exactly

Weigh Risks

• Is negotiation process poorly defined?

• Is negotiation too wide open?

• What are the implications of building in a ‘risk premium’?

• Must follow submission and process requirements exactly.

Outside of Contract A

• Emerging trend to avoid Contract A

• If private owner, means no legal recourse if unfair

• Understand what is in and what is out of scope for negotiations

If public sector owner is unfair

• Have Judicial Review recourse

• Court will ‘review reasonableness’ of decision

• May set aside the decision or order remedial steps

• But will not award damages

Three Typical Options

1. No negotiations

2. Option to negotiate

3. Negotiations on specific items/terms

Possible fourth option: frontrunner will be invited to negotiate an agreement

Option 1: No Negotiations

• Why?

• The less there is to negotiate, the greater the competitive tension on price.

• Provides most certainty for bidders.

Option 1 Clause

Offer language on page signed/submitted with bids:

• “…hereby offers to perform the Services in accordance with the Contract Documents.”

Supporting clause in RFx Instructions:

• “Each Proposal submitted shall constitute an irrevocable offer, open for acceptance by the Owner from the Closing Time until 90 days later.”

Option 2: Option to Negotiate

• Why?

• Preserve flexibility.

• Is there a downside?

Option 2 Clause

• Same element as Option 1 – RFx sets stage for acceptance without negotiation

• But, RFx also includes a right to negotiate:

• “Owner reserves the right, in its sole and absolute discretion, to accept any Proposal without negotiation, or to enter into negotiations with any or all Bidders on…[insert scope of intended negotiations].”

As a bidder, what is 1 pro and 1 con of this approach?

Option 3: Negotiate Specific Items/Terms

• RFx defines scope of intended negotiations

Option 3 Clause

“The highest ranked proponent will be invited to enter into negotiations with the purchaser on the issue of:

• …who owns Intellectual property in the Work Product;

• …terms of the software license agreement between the parties;

• …other

In the event negotiations fail, the Owner may, at its discretion:

• Commence negotiations with the second highest ranked proponent, or

• Collapse this RFx and cancel the process.”

Should Depend on the Nature of the Project/Contract

High Simplicity/ Certainty

High Complexity/ Uncertainty

No Negotiations

Negotiation on Specific Items/Terms

Option to Negotiate

Regardless of Approach, Owners Still Need to Ensure Fairness

How?

Some Tips to Ensure Fairness

• Proper planning – what’s in and what’s out

• No fishing expeditions

• Transparent, well defined process

• Owner must follow process, treat respondents equally

• Use of fairness advisor/monitor may increase bidder confidence

Sequential versus Concurrent Negotiations

Sequential (UN’s Model Provision 17 Example)

Concurrent (NAFTA Article 1014 [4] Example)

Rank the bids Invite all compliant bidders to talk

Invite top-ranked bidders to talk Make amendments, typically to specs or scope

Give bidder reasonable time to form BAFO, BAFO ends talks

Compliant bidders re-submit to the amended solicitation terms (BAFO)

Can move to next-ranked bidder if BAFO not accepted

Other Considerations

• What is the project timeline?

• What if you can’t reach a deal?

• Do you have a BATNA?

• What skillset is needed?

Negotiation Skills

• The greater the reliance on negotiation, the higher negotiation skillset required

Interest-Based Negotiations

• Fisher and Ury “Getting to Yes”

• Explore the interests that lie behind the positions

• Uncover interests through open-ended questions

• Use interests to create options

• Leads to more integrative solutions – assumes a shared interest in expanding the pie

Thoroughly Prepare for Negotiations

Gather the Facts

Review the legal issues

Consider the personalities

Examine the underlying interests

Develop your BATNA

Prepare your Budget

Create an Agenda

Set the Stage

Fisher and Ury “Getting to Yes”

• “Most negotiations are won or lost, done well or done poorly, based on the strength of the preparation.”

• Bidders must weigh cost of participation in process against potential reward if successful.

• Is this opportunity too uncertain? Is the process too complex to justify the time spent participating? Given the market, what are our chances?

Concluding Thoughts

• Negotiation should never be a substitute for proper planning – watch for sloppy RFx

• Should define scope and process for negotiations

• The less negotiation, the more competitive tension on price

• Ask questions before closing if not clear

• Watch for RFIs, market sounding opportunities

Concluding Thoughts, Continued

• Whether public or private, owners must act fairly and in good faith, follow their declared process

• Bidders must weigh risk/cost of challenge – competitive process should not be undertaken lightly

• Consider SME negotiators

Questions, Comments?

Thank you!

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Maureen Sullivan, NECI

250-370-0041

inquiries@neci-legaledge.com

www.neci-legaledge.com