Ability to Obtain Public Contracts Denied to “Rogue” Businesses

Since 2009, the government of Québec has made repeated efforts aimed at strengthening measures to prevent and combat corruption in the awarding and performance of contracts between the public and the private sectors. The Act to prevent, combat and punish certain fraudulent practices in the construction industry and make other amendments to the Building Act¹ and the Anti-Corruption Act² are the most recent examples.

Through the adoption of those laws, the legislature has effectively created new regulatory powers under the Act Respecting Contracting by Public Bodies³ (the “Act”) that allow the government to restrict access to the public-sector market for goods and services by firms convicted of certain offences.

The government confirmed and began to exercise those new powers with the adoption of the Regulation respecting the register of enterprises ineligible for public contracts and oversight and monitoring measures⁴ (the “Regulation”) which took effect on June 1, 2012.

It is worth reviewing some aspects of this new regulation.

Purpose and inherent limitation of the register

The intention behind the Register of Enterprises Ineligible for Public Contracts (the “Register”) is to ensure the probity of firms doing business with the public sector, by weeding out those convicted of certain offences.

This is of course a worthy objective, but achieving it is limited by the government’s ability to prosecute and convict firms – and their executives – suspected of committing those offences. The government is evidently counting on the dissuasive effect that the prospect of such sanctions will have on firms seeking to do business with the public sector.

Targeted offences

The Regulation targets a variety of offences, based on their nature, and the number of times they have been committed, that will entail ineligibility to obtain public contracts. For each offence or group of offences, the duration of the ineligibility period is specified. The offences involve a wide variety of illegal business practices, such as bribing public officials, fraud, racketeering, etc.

Some public-procurement related offences already targeted by existing anti-collusion measures are also on the list of offences entailing inclusion in the register. These are conspiracies, agreements or arrangements between competitors, as well as bid-rigging, under the Competition Act. And as expected, the Regulation also targets business in breach of their tax obligations.

Apart from offences under taxation laws themselves, our attention was also caught by those involving the attestation from Revenu Québec required by regulations under the Act. In particular, pursuant to the penal provisions introduced in 2011 by the Regulation respecting construction contracts of public bodies⁵, when a general contractor has accumulated five convictions for failing to obtain a copy of the attestation from Revenu Québec from a sub-contractor or for failing to forward the list of its subcontracts, the general contractor will be entered on the Register and thus ineligible to obtain or perform public contracts. These offences specifically concern those responsible for managing public contracts, as they are in a position to observe and flag this type of non-compliance.

Finally, it should be noted that, in accordance with section 21.2 of the Act, a firm can find itself entered on the Register if an “associate” is convicted of an offence specified in the Regulation. The definition of “associate” includes a director or officer of the firm, as well as a person holding shares carrying more than 50% of the voting rights attached to its shares that may be exercised under any circumstances. In the case of a general, limited or undeclared partnership, a partner or any other officer of the partnership is an “associate” for the purposes of the Act. This definition is thus aimed at thwarting any circumvention of the Act’s provisions through a reorganization.

In its comments on Bill 35, the Association de la construction du Québec has criticized this provision, calling it dangerous and unfair, and adding that by making a business guilty by association, the fact of being the director of a firm holding a restricted licence and of another firm as well, contaminates the latter firm, which ipso facto contaminates its other directors, who then contaminate other firms on whose boards they sit. In the Association’s view, in a context where businesses must increasingly come together and work as a consortium, the provision as currently drafted is potentially very harmful.

Time will tell whether this assessment is correct.

If you insist on doing business with a company on the register

For contracts not yet completed, a public entity that wants to have its contract completed by the original contractor, despite the fact that the latter has been entered on the Register, must obtain the authorization of the minister responsible.

The minister responsible must make the authorization subject to certain conditions, including that the contractor submit, at its own expense, to oversight and monitoring measures specified in the Regulation. These measures may require tighter cost controls and/or an audit of the contractor’s finances. Their implementation is seen to by an “accredited person” who meets the requirements specified in the Regulation⁶.

In order to enter into a new contract with an ineligible contractor, the public entity must once again obtain the authorization of the minister responsible. The authorization will only be granted in the special cases described in paragraphs 2 to 4 of section 13 of the Act (only one possible contractor, confidentiality concerns, overriding public interest). The contractor must also submit to the oversight and monitoring measures mentioned above, again at its own expense.

If the public entity finds itself in an emergency situation as specified in paragraph 1 of section 13 of the Act, the chief executive officer of the entity must authorize the contract with the ineligible contractor and so inform the minister responsible within 30 days⁷.

Conclusion

The effectiveness of this type of system depends not only on the government’s ability to prosecute and convict “rogue” firms, but on the diligent use of the Register by the public entities concerned.

In that regard, sections 21.8 and 21.11 of the Act require public entities to consult the Register in order to ensure that neither the bidders nor the successful bidder are entered on the Register, or that their ineligibility period has expired if they are. We recommend that the Register be consulted immediately upon bids being received, in order to avoid wasting time and energy on ineligible bids by contractors listed in the Register, or contractors with “associated persons” on the Register, whose ineligibility period has not expired.

Finally, kudos to the Secretariat of the Conseil du trésor for getting the Register up and running in time for the coming into force of the Regulation. This makes it that much easier for public-procurement managers to apply this umpteenth legislative and regulatory measure, which has definitely increased their responsibilities in managing public contracts.