As lawyers we are generally familiar with the concept behind a tender being a process to select the best product or service for a particular business need. Most of us will have at one time or another provided some input into legal contract terms associated with a tender. Often that is as far as legal involvement goes. As in-house lawyers we can add a lot more value.
In this article we are going to focus on several areas applicable to both issuers and responders of tenders, but with a focus towards issuers.
In order to maximise our value, we need to first think like a procurement professional and then overlay our legal training. In this article we are going to cover the five things you should be thinking about when involved in a procurement process.
First, let’s put ourselves in the shoes of procurement. A procurement professional is focused on achieving the best overall value. They are looking for the most technically suitable solution/service/product at the most competitive price and to achieve the best overall commercial outcome. It is not necessarily all about the cheapest product. Good procurement people want to create a competitive environment that will introduce commercial leverage right through the negotiation process to ensure the best commercial outcome (performance, price and contract terms).
As an in-house lawyer you can be a key contributor to business outcomes if you recognise during the procurement process that you can add value beyond just reviewing contractual purchasing terms.
The first thing you should consider when becoming engaged in a procurement process is what specific business outcome is trying to be achieved as there are different processes that can be used. The word “tender” is an amorphous term sometimes used to describe a response to an “RFX” process and sometimes used to describe the process itself. So if you hear the term “tender” you will need to inquire further as to the specific process being used as your approach and involvement may vary. There are a number of processes, but the main types of RFXs are:
Of all the things that can unravel an RFX process, a lack of defined or incomplete requirements is probably number one. Early in the process there is a need to make sure all relevant stakeholders are engaged so there are no gaps in the requirements. Also ensure the business has covered off any non-functional requirements, such as security, or infrastructure requirements.
Poorly written, not very clear or repetitive requirements can become problematic as this can lead to a lack of clarity in responses which in turn can give rise to misunderstandings around how a particular product or service will perform against the requirements. Lawyers are particularly good at drafting clearly and being concise and this skill can prove useful around requirements. While a little out of most in-house lawyer’s comfort zones, you could add value here by reviewing the requirements and providing editorial feedback to ensure the requirements result in clear responses and are easy to understand and evaluate.
A timely reminder of the need for good requirements is the troubled Queensland Health project. In July 2007 Queensland Health issued an RFP for a replacement payroll system which it awarded to IBM. The total value tendered for the project was AU$98 million. The project was plagued with issues and ultimately was estimated by a Commission of Inquiry to have cost taxpayers AU$1.2 billion. One of the key factors that contributed to the problems was the RFP did not contain detailed requirements. Due to the lack of detailed requirements, the Commission of Inquiry found that Queensland Health accepted IBM’s “incomplete, qualified and unsatisfactory scope [of work documents]”[i] as-is and with no questions. The Commission noted because of this, the project was “doomed” to failure from the start.
Trust is an important part of an RFX. It costs time and money to respond to an RFX, so if respondents feel they will not be treated fairly in the process they may either not participate or challenge the process if unsuccessful. This is commonly referred to as “probity”. Probity involves many things, but ultimately it is about fairness and due process, and therefore it is important to be clear about the process upfront with respondents. For example, in an RFP the business should be clear on deadlines for questions to be submitted, when submissions are due, when will demo/presentations likely take place, and importantly, when will a decision be made.
Respondents do not want to be used as “stalking horses” for a preferred bidder, so of particular importance to the probity of an RFX is the criteria that will be used to objectively evaluate responses. The criteria need to be decided and agreed between stakeholders internally and documented prior to the RFX being issued. It is important there is a weighting allocated to the various criteria and that this is adhered to when making a decision.
As a lawyer you can add value by ensuring the evaluation process is run impartially and fairly. Maintaining probity is particularly important in the public sector where additional government procurement rules apply. There have been several challenges in recent years to the probity of RFPs run by government departments.[ii] While ultimately unsuccessful, these challenges could have been avoided altogether if a more robust tender process had have been adhered to from the beginning.
RFXs can be complex processes involving many internal and external parties. A good governance process is vital to a successful RFX. RFXs are very onerous in time and resources for internal stakeholders who will need to evaluate responses and for respondents who need to prepare responses, so it is important to be respectful of the time and effort that is put in by parties. A good governance process will ensure internal stakeholders are aligned and quality and cooperative responses are provided by third parties involved in the process.
Generally, the procurement professional will be responsible for managing the overall governance process. In-house lawyers can add value by participating at various decision points and providing independent oversight to those areas of the RFX process that could be susceptible to giving rise to legal challenges in the future.
A good example of the need for effective governance is the National Grid USA (NGU) project failure. NGU supplies gas and electricity to New York and its surrounds. NGU issued an RFP in 2010 but by October 2012 NGU was dealing with an IT project that was three years behind schedule and experiencing budget overruns. It was eventually completed a further two years later at a budget overrun of around USD$200 million. In July 2014 an independent report was commissioned to identify the causes of the project issues. One of the key findings of the report identified “ineffective governance with little objectivity and minimal authority” across all aspects of decision making.[iii] Ensuring governance is effective during the RFP process not only ensures the tender process runs well but will support the successful running of any future projects arising from the RFP.
In addition to the contractual terms that will govern the procuring of goods or services, RFX terms are also required to govern the RFX process itself. These terms set out the process and indicative dates for submitting responses and for making a decision. In practice, these documents are often poorly written and overcomplicated. For some reason, most of the time, these documents do not get legally reviewed.
Of particular importance is to ensure that the terms provide maximum flexibility to change aspects of the process, particularly timeframes, as these sometimes slip for a variety of reasons.
The greatest legal risk around RFX terms for an issuer is that they will be held to be a binding process contract which can be breached and give rise to legal liability. RFXs have generally been regarded as an invitation to treat so no legal relationship is created until acceptance of the response by the issuer of the RFX. This position is not guaranteed and will be dependent on the RFX terms. In Prime Commercial Limited v Wool Board Disestablishment Company Limited (2006) 7 NZCPR 697 the NZ Court of Appeal noted the primary rule is that a tender process involves simply an invitation to treat, but this can be displaced to create a process contract if it can be demonstrated the necessary elements of offer and acceptance and intention to enter a binding contract are established.[iv]
As a consequence, in-house lawyers for issuers should carefully review the RFX terms to ensure that they are reflective of an invitation to treat and not an offer capable of acceptance. In addition, if key terms are intended to create contractual obligations (such as requiring the respondents to hold their tendered price for a period of time) these need to be clearly identified in the terms to ensure any binding terms are adequately ring fenced.
There are many other key elements to a good RFX process, such as maintaining a strong negotiating position during the process to obtain favourable purchase terms. However, the above five things are areas where an in-house lawyer can add value immediately in any RFX process.
John Steadman is a highly regarded in-house lawyer working for Chorus New Zealand and a former Head of Procurement and Head of Strategic Sourcing at Spark New Zealand. In addition to being a specialist in Telecommunications and IT law he has run significant RFX processes including Spark NZ’s 5G RFP for a new billion dollar mobile network and the RFP for Spark Sport. He has experience negotiating and contracting with multinational vendors including Apple, Microsoft, IBM, Google and Amazon. He is also a lecturer for the College of Law’s In-House Practice LLM (Applied Law) degree and teaches a paper on international business law as part of an MBA program. Connect with John via Linkedin
Nicola Goundry is a procurement professional with seven years’ experience in tenders, contract negotiation, supplier and stakeholder management, and governance from Canada and New Zealand, spanning across the energy industry, telco and financial services. Nicola also has further experience in logistics, HR and admin, which includes experience in the United Kingdom. Last year, Nicola made a transition within Westpac New Zealand to Product Management for Investments with a focus on KiwiSaver. Nicola holds a Bachelor of Supply Chain Management and International Business from Mount Royal University in Canada, and is currently working towards a Bachelor of Laws at The University of Auckland. Connect with Nicola via LinkedIn
[i] Hon R Chesterman, Queensland Health Payroll System of Inquiry, 31 July 2013 at para 2.14.
[ii] Attorney-General v Problem Gambling Foundation of New Zealand [2017] 2 NZLR 470; Lab Tests Auckland Ltd v Auckland District Health Board [2009] 1 NZLR 776.
[iii] NorthStar Consulting Group, A Comprehensive Management And Operations Audit Of National Grid USA’s New York Gas Companies (Case 13-0009) submitted to the New York Public Service Commission 25 July 2014, at I-4.
[iv] At [15]. See also the NZ Privy Council’s decision of Pratt Contractors Limited v Transit New Zealand [2005] 2 NZLR 433 and the Supreme Court of Canada’s decision in R v Ron Engineering and Construction (Eastern) Ltd [1981] 1 SCR 111.