Procuring through a distributor: Set expectations early!

When procuring goods our clients are sometimes faced with purchasing a good through a third party distributor rather than directly from the manufacturer of the good. An indirect purchase through a distributor can be problematic from a contractual perspective if the distributor is not willing to take full responsibility for all aspects of providing the relevant good (e.g., the delivery, performance, installation, and maintenance of the good, as applicable). Distributors sometimes attempt to avoid providing all of the product representations and warranties that would routinely be provided by a manufacturer of goods. A distributor may be hesitant to provide warranties on a good that it has neither manufactured nor tested itself.

In some such situations, a distributor may seek to share the risks related to the supply of a good by requesting that the purchaser enter into separate agreements with each of the distributor and manufacturer. The agreement with the distributor would identify such things as the products being purchased, pricing, and delivery terms, while the agreement with the manufacturer would address such things as product warranties, specifications, and service or maintenance terms. In our experience one of the primary difficulties of a two contract approach in this type of arrangement is that, unless the risk allocation terms of the two contracts are very carefully drafted and responsibilities are clearly delineated, the result could be that the purchaser is unclear as to which party is responsible for which obligations and risks. If something goes wrong, a purchaser could find itself in a situation in which all parties are pointing fingers at each other because the relevant contracts do not provide sufficient clarity as to which party bears responsibility for a particular type of damage.

The best case scenario from a purchaser’s perspective is for the purchaser to enter into only an agreement with the distributor, rather than agreements with both the distributor and manufacturer. This agreement with the distributor will require the distributor to take full responsibility for all risks related to the good and its supply to the purchaser. If the distributor wants the manufacturer to share responsibility for the good, then the distributor can enter into a separate agreement with the manufacturer to allocate risk between the distributor and manufacturer. This agreement would be separate and apart from the purchase agreement between the purchaser and distributor.

One solution that DDO has used to help avoid debate about what contractual arrangements will be utilized when purchasing through a distributor is to address this issue at the request stage of a procurement. If a purchaser requires, as a condition of participation in its RFP (or other requesting document, as applicable), the distributor to agree that it will be directly accountable to the purchaser for all risks and obligations related to the provision of the required good, then the purchaser can avoid having to negotiate this aspect of the contractual arrangements at a later stage in the procurement process. In this way we find that we can avoid some headaches related to a purchase through a distributor.

Drafting Research Funding Agreements

Innovations in health care are often the result of research and development initiatives. Such initiatives cannot be carried out without funding. Many broader public sector organizations that carry on health-related research in Ontario rely heavily on:

  • partnerships with private sector corporations; and
  • charitable donations from philanthropic individuals and organizations,

to fund their research activities.

If your broader public sector organization receives funds from corporate partners or charitable donors, then you should ensure that the agreements, through which your organization receives such funds, are properly drafted. If not drafted with some forethought, your organization could agree to contractual obligations that conflict with its legislative or regulatory requirements.

For example, a corporate partner that is providing funding to a public hospital for a research initiative may expect that the hospital will utilize the funder’s brand of equipment to carry out the research. However, the purchase of equipment by a public hospital in Ontario must be carried out in compliance with the Broader Public Sector Procurement Directive. A hospital cannot purchase a significant piece of equipment without abiding by fair and transparent procurement processes, unless the procurement falls within an exemption or circumstance of non-application under applicable procurement regulations.

If created with care, a funding agreement could be drafted in a manner that allows a purchasing organization to satisfy conditions imposed on the funds by a funder, while still allowing the purchasing organization to be in compliance with its procurement (and other regulatory) obligations. DDO would be happy to provide advice on options for drafting your organization’s funding agreements.

The Broader Public Sector Interim Measures – Mandatory or Voluntary Compliance?

The Interim Measures, effective March 18, 2019, were released by the Ontario Government to centralize the Ontario Public Service and broader public sector (“BPS”) purchasing and supply chains. It is part of the government’s plan to transition to a centralized procurement model and is applicable to hospitals, school boards, universities, colleges and post-secondary institutions, children’s aid societies and shared services organization/group purchasing organizations.

This blog focuses on the impact of the Interim Measures on BPS organizations, based on information available to us.

What are the Interim Measures?  

New procurements of goods and services valued at $25,000 or higher are subject to the Interim Measures, which request BPS organizations to use an existing Vendor of Record (“VOR”) arrangement where possible and appropriate; and ensure all new contracts have a term not exceeding two years, including any extensions. “New procurement” is broadly defined and includes any new RF[X], new limited tendering, new piggyback or extension of any existing contract beyond the current term.

Does your organization have to comply with the Interim Measures?

Funding ministries will inform BPS organizations on whether compliance with the Interim Measures is mandatory or voluntary. In order for it to be mandatory, there must be a legislative authority for the funding ministry to provide direction to the BPS organization – and the funding ministry must clearly exercise that legislation authority. For voluntary compliance, there is either no legislative authority available or legislative authority has not been exercised.

So, how will your organization know if compliance with the Interim Measures is mandatory or not? You will have to ask yourself the following questions:

  • What does your cover letter from the funding ministry say?
    • Check the cover letter and materials provided by your funding ministry to see if it explicitly states whether the requirements are mandatory or voluntary. The covering letter may state that compliance is expected as opposed to required.
    • Does the cover letter refer to any legislative authority to issue a directive to your organization?
  • Does your Ministry have legislative authority to provide directive to your organization to comply with the Interim Measures?
    • For example, for hospitals, the Interim Measures are not mandatory as the Ministry of Health and Long-Term Care does not have the legislative authority to issue procurement directives to the hospitals. Only the Management Board of Cabinet has the authority under the Broader Public Sector Accountability Act.

So, if compliance is voluntary, what does that mean for your organization? Even if the Interim Measures are voluntary, we recommend that BPS organizations should try to comply with the Interim Measures where they can in order to demonstrate that they are good “BPS citizens”.  Remember that BPS organizations still have to comply with the BPS Procurement Directive.

If you are unsure about whether your organization has to comply with the Interim Measures, feel free to reach out to DDO’s procurement team:

Kathy O’Brien – kobrien@ddohealthlaw.com

Michael Gleeson – mgleeson@ddohealthlaw.com

Pamela Seto – pseto@ddohealthlaw.com

 

Conducting Supplier Debriefings

The Broader Public Sector Procurement Directive entitles unsuccessful proponents participating in a procurement valued at $100,000 or more to a supplier debriefing. A debriefing is an opportunity for a proponent to:

  • discuss with the purchaser the strengths and weaknesses of the proponent’s submission in relation to the evaluation criteria of the procurement;
  • ask questions related to the procurement process; and
  • provide feedback on how the procurement process and the purchaser’s practices could be changed or improved.

A purchaser must include in the documents that initiate a procurement details about supplier debriefings, including the process by which a proponent can request a debriefing. A purchaser must provide proponents with at least 60 days following contract award notification to request a debriefing.

A debriefing should be a process that allows both the purchaser and a proponent to gain valuable input from the other. However, if not conducted properly, a debriefing could lead to additional questions or process-related challenges from a proponent, which would likely mean greater costs being incurred by the purchaser for staff time and legal fees.

To ensure that your organization carries out debriefings efficiently, effectively, and in keeping with applicable regulatory and contractual obligations, your debriefing processes should be formalized to ensure consistency and your staff should be educated on restrictions imposed by applicable procurement requirements and contractual obligations.

DDO is experienced in helping our clients to:

  • establish straight-forward and effective processes for addressing debriefing requests;
  • ensure that their staff are up-to-date on current legislative and regulatory requirements related to debriefings;
  • create an agenda for debriefings that will allow for consistency across debriefings and contribute to the (a) equitable treatment of proponents and (b) transparency of the process;
  • formalize document management and record-keeping procedures for debriefings;
  • train procurement staff on leading a debriefing and on identifying questions that are out of scope of a debriefing; and
  • educate staff on the confidentiality obligations that a purchaser owes to the proponents in a procurement process.

If you are interested in DDO providing your organization with advice on debriefings, or if you have any specific questions related to debriefings, please do not hesitate to reach out to me: mgleeson@ddohealthlaw.com

Educating Your Procurement Team

“An ounce of prevention is worth a pound of cure.”

One good way to help your organization avoid claims related to a procurement process is to provide some simple training to your staff members who will be participating in the procurement process. In many cases your internal evaluation team will include individuals for whom procurement is not an everyday part of their jobs. These staff members will likely be unaware of the basic principles, rules, and processes with which your organization must carry out its procurement activities.

DDO believes that there is significant value in educating your internal procurement team on such things as:

  • conflicts of interest;
  • treatment of incumbent vendors;
  • the dangers of politicizing procurement decisions;
  • confidentiality;
  • communication with proponents during the procurement process;
  • process transparency; and
  • equal treatment of vendors.

If your staff are unfamiliar with the above-listed ideas, which are essential for a properly run procurement process, a staff member could unwittingly put your organization in breach of applicable procurement rules. Such a breach could force you to re-do the relevant procurement process and put your organization at risk of a legal claim brought by an unhappy proponent.

DDO can help you to create simple and efficient tools to ensure that your procurement team has knowledge of (or, as applicable, are simply reminded of) essential procurement rules prior to their participation in a procurement process.

Contact me: mgleeson@ddohealthlaw.com

 

Beware the Scope of the CFTA

If your organization is a broader public sector organization that is subject to the procurement requirements of the Broader Public Sector Procurement Directive (the “Procurement Directive”) and the (still relatively new) Canadian Free Trade Agreement (“CFTA”), then please take note that the CFTA applies to certain procurements that the Procurement Directive does not.

The Procurement Directive requires organizations to maximize the value that they receive from “public funds”. In the Broader Public Sector Accountability Act, which is the Ontario legislation under which the Procurement Directive came into force, the term “public funds” is defined, subject to certain exclusions, as follows:

“public money of the province of Ontario that is provided by the Government of Ontario or an agency of the Government of Ontario, directly to any authority, board, commission, committee, corporation, council, foundation or organization through a grant or transfer payment or other funding arrangement, and, in the case of a school board, includes money received by the school board from taxes levied under the Education Act for school purposes.”

Based on this definition, the source of funds used for procuring a good or service is relevant to whether the Procurement Directive would apply to the procurement of such good or service. For example, if a public hospital were to purchase goods using funds that were received through charitable donations or that were proceeds from revenue-generating aspects of its activities, that purchase would not be subject to the requirements of the Procurement Directive because it would not involve the expenditure of public funds.

The CFTA, which came into effect just over a year ago (July 1, 2017), does not include a similar reference to public funds and, therefore, is not limited in application only to procurements involving such funds.

The CFTA does include an exemption related to the source of funds for a procurement, but the exemption is far more limited than an exemption for all procurements using non-public funds. The relevant exemption states that the procurement chapter of the CFTA does not apply to “procurement of goods or services financed primarily from donations that require the procurement to be conducted in a manner inconsistent with this Chapter”. In other words, in order for a procurement carried out using donated funds to be exempt, the donated funds would have to have been received by the purchasing organization under a condition that specifically required that the funds be used in a manner that conflicts with the procurement requirements of the CFTA. In our experience, the attachment of such a condition to donated funds would be unusual.

How can we help you?

DDO encourages broader public sector organizations to review their procurement policies to ensure compliance with the requirements of the CFTA. The public funds issue described above is just one of several issues on which the CFTA differs from the Procurement Directive. If you would like help in ensuring that your procurement policies are up to date, please do not hesitate to contact me: mgleeson@ddohealthlaw.com