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Why "Buy Local" May Not Be a Good Thing

5 minute read

Buy Local Provisions give rise to the following problems and issues when implemented in either a Purchasing Policy or through RFP purchasing procedures:

  1. Difficulties associated with defining “local businesses”;
  2. The duty of fairness to all bidders in the RFP process, how Buy Local Provisions complicate compliance and claims associated with contravention of that duty;
  3. Trade Agreements;
  4. Insurance coverage issues for claims arising; and
  5. The economic and/or financial impact of Buy Local Provisions.

Each of these items are dealt with separately:

Defining Local Businesses in Buy Local Provisions

It is difficult to define what constitutes a “local business”. Publicly available information includes the names and addresses of the company's head office, Directors and Officers. However, that information is often out of date. As well, Directors and Officers of a company are not always the owners of the business. Shareholder information for private companies is not available to the general public. Consequently, it is not always clear whether the Directors, Officers and Shareholders truly reside within one community or another. Furthermore, there will certainly be situations where companies employ people in the subject municipality but also throughout other jurisdictions. All of these factors introduce ambiguity as to what constitutes a local business. Ambiguity can be managed through well-drafted Purchasing Policies and well-drafted RFP provisions. However, these provisions must be drafted in advance and must be applied to many situations.

Ambiguity arising from what constitutes a local business does have material implications for any municipality. This ambiguity may lead to disputes about what bidders or vendors are entitled to preferential treatment under the RFP or the Purchasing Policy. Municipalities are required to strictly follow their own Purchasing Policy By-Laws and are required to strictly follow the criteria set out in their RFPs. The difficult task of defining a local business within such RFPs and Purchase Policy By-Laws can lead to disputes between bidders and between groups of bidders and the subject municipality.

Duty of Fairness

All municipalities are obliged to conduct transparent, open and fair procurement. Public procurement processes are generally held to a higher standard than private procurement processes. The Courts clearly value the principles of transparency, openness and fairness.

Once an RFP is issued, the subject municipality has a contractual duty of fairness and good faith to all compliant bidders. This does not prevent a municipality from structuring its tender documents in a way that recognizes that not all potential suppliers will be treated equally. However, it does mean that each compliant bid must be evaluated strictly in accordance with the criteria set out in the bid documents. If undisclosed factors are considered but are not set out in the RFP documents, there can be legal liability for the municipality.

This duty of fairness becomes more complicated when Buy Local Provisions are included in either Purchasing Policies or RFP documents. The discretionary and ambiguous nature of Buy Local Provisions can result in disputes as to what business is eligible for preferential treatment. Disputes arise from time to time, even when work is awarded strictly in accordance with the bid documents. Buy Local Provisions make litigation more likely.

No Insurance Coverage for Procurement Claims

Most municipal insurance policies do not include coverage for claims arising from the public procurement process. As a result, the cost of any claims that arise (whether they have merit or not) must be covered by ratepayers. There is no question that Buy Local Provisions make such claims more frequent. Ratepayers will be responsible for the cost of defending these claims plus any damages ultimately awarded.

Agreement on Internal Trade

The Agreement on Internal Trade (“AIT”) is an agreement between the provinces and the federal government. It is intended to minimize trade restrictions and trade barriers within Canada. AIT has provisions to cover procurement by municipalities, municipal organizations, school boards and publicly funded academic, health and social service entities.

AIT prohibits procurement policies and practices that differentiate between suppliers of goods or services based upon the geographic location in Canada or that discriminate on the basis of province of origin of goods, services, construction materials or the suppliers of goods. It does not prohibit discriminatory treatment of suppliers or goods from jurisdictions outside Canada.

While AIT may currently not be widely enforced, there is a concern municipalities' Buy Local Provisions will be subject to prosecution for violating AIT.

Economic Implications

The economic impact of Buy Local Provisions is not a legal issue. However, we are concerned Buy Local Provisions have two (2) long-term results:

  1. Fewer bidders will participate in the procurement process, particularly bidders from outside the jurisdiction; and
  2. Local bidders will be less likely to sharpen their pencil.

The reasons are self-evident. Less suppliers willing to bid will result in less competition and higher prices over the long-term. This will likely be a greater problem for smaller municipalities. Larger municipalities generally have a larger business community (and more preferred bidders). If a smaller municipality is purchasing goods or services where there are few local suppliers able to provide the service, the danger is those suppliers would effectively name their price.

Buy Local Provisions introduce legal issues and increase the risk of lawsuits that are otherwise avoidable. They complicate RFPs and Purchasing Policy By-Laws. Further, Buy Local Provisions do not represent a policy that delivers the best possible value for ratepayers. For the reasons set out in this letter, we believe Ontario municipalities should think carefully before including Buy Local Provisions in their RFPs and Purchasing By-Laws.

There has been much discussion in Ontario's municipalities about whether local businesses should be preferred when municipalities make purchasing decisions (often referred to as “Buy Local Provisions”). Buy Local Provisions are sometimes included in Purchasing By-Laws and Requests for Proposals (“RFP”), take many forms and define local businesses in different ways. However, the primary characteristic is local businesses are conferred preferred status over other bidders when the municipality purchases goods and services or undertakes projects.

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David M. Woodward

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