Emerging Legal Issues In State Contracts

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Emerging Legal Issues In State Contracts

• Joan Sullivan, OSC Director of Contracts
• John Dalton, OSC Associate Counsel

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DISCLAIMER

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This Session Is Intended to Cover the Following
Topics

• Grant Procurements open to For Profits.
• Revenue and Barter contracts.
• Banding/Substantially Equivalent.
• Authority to Reject and Rebid.
• Waiver of mandatory requirements.
• Advance publication - substantial compliance.
• Lowest price evaluations for service
  procurements.
• Debriefings.

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Grant Procurements Open to For-Profits

• Historical Perspective
• Prior to the Procurement Stewardship Act,
  competition was statutorily required only for
  commodities, construction, and printing
  contracts.
• No statutory requirement for competition for
  services contracts - but some form of competition
  administratively required by OSC.
• Most grant applicants were NFPs or
  municipalities.
• Grants were generally awarded pursuant to a less
  structured award process.

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Grant Procurements Open to For-Profits

• 1995 Procurement Stewardship Act
• For first time statutory requirement for
  competitive process for all procurements, except
  where otherwise provided by law.
• Services must be procured competitively.
• Services does not include contracts approved
  in accordance with State Finance Law Article
  11-B (Prompt Contracting and Interest-Payments
  for Not-for-Profit Organizations).
• Article 11-B covers organizations incorporated
  pursuant to or otherwise subject to the
  not-for-profit corporation law and charities
  (i.e., IRC 501c3).

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Grant Procurements Open to For-Profits

• Developments since 1995
• Proliferation of for-profit corporations and
  municipalities participating in grant programs.
• State agencies continuing to award grant
  contracts by a less structured process.

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Grant Procurements Open to For-Profits

• Issue
• What requirements apply to grant procurements
  open to for-profit organizations and/or
  municipalities?

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Grant Procurements Open to For-Profits

• Legal Analysis
• Services means the performance of a task or
  tasks.
• Grants are generally contracts for the provision
  of services.
• SFL 163 requires best value competitive
  evaluation for services contract awards.
• NFPs are excepted for-profits and
  municipalities are not.
• Therefore, grant awards to for-profits and
  municipalities are generally covered by PSA.

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Grant Procurements Open to For-Profits

• Possible Resolutions
• Short Term
• If the grant program is governed by a
  comprehensive statutory award scheme, then that
  statute may be interpreted as preempting SFL
  163, depending on statutory language.
• Long Term
• Development of procurement and evaluation
  methodologies recognizing the unique nature of
  grant programs.

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Grant Procurements Open to For-Profits

• Questions

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Revenue and Barter Contracts

• Recent Developments
• Increasingly, agencies are entering into barter
  contracts and other contracts that combine
  elements of traditional revenue contracts and
  traditional contracts for the procurement of
  goods or services.

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Revenue and Barter Contracts

• Issue
• Must the State agency comply with PSA (or other
  procurement statute) in letting these contracts?

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Revenue and Barter Contracts

• Statutory Framework
• Procurement Stewardship Act applies to
  procurements for commodities, services, and
  technology.
• Other procurement statutes (e.g., Public
  Buildings Law, State Printing Law) cover other
  enumerated types of procurements.
• BUT no statute specifically addresses the
  selection of a contractor for revenue contracts.

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Revenue and Barter Contracts

• Legal Analysis
• Ultimate question is whether the transaction is
  the purchase or procurement of goods or
  services. See Matter of Signacon v. Mulroy, 32
  NY 2d 410 (1973).
• The term purchase is not defined in SFL Article
  11.
• In determining whether an arrangement is a
  purchase/procurement, must examine the total
  character of the undertaking and determine
  whether failing to apply procurement laws would
  frustrate legislative objectives. See Matter of
  Exley v. Village of Endicott, 51 NY 2d 426
  (1980) Citiwide News v. NYCTA, 62 NY 2d 464
  (1984) and Matter of Diamond Asphalt Corp. v.
  Sander, 92 NY 2d 244 (1998) .
• Therefore, must review on case-by-case basis to
  determine whether the transaction is
  fundamentally a transaction for the acquisition
  of goods or services by the State (with
  incidental revenue benefits to the State) or
  fundamentally a revenue contract (which
  incidentally may result in goods or services
  flowing to the State).

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Revenue and Barter Contracts

• Practical Application
• Safest approach comply with PSA (or other
  procurement statute).
• If agency concludes PSA (or other procurement
  statute) need not be followed, the safest
  approach is to consult with OSC before
  procurement activity commences.

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Revenue and Barter Contracts

• Questions

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Use of Banding/Substantially Equivalent

• Recent Development
• Occasionally an agency establishes an evaluation
  methodology whereby proposals are evaluated and
  final scores are grouped together in
  predetermined bands. The winning proposal is
  then selected from those in the highest band.

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Use of Banding/Substantially Equivalent

• Issue
• To what extent is the banding approach
  appropriate?

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Use of Banding/Substantially Equivalent

• Statutory Framework
• PSA requires that commodities be awarded based on
  lowest price.
• PSA also requires that services and technology be
  awarded based on best value.
• SFL 163(10)(a) states that when two offers are
  found to be substantially equivalent, price shall
  be the basis for determining the award
  recipient.
• SFL 163(7) requires that agencies establish
  evaluation criteria in advance of the initial
  receipt of offers.

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Use of Banding/Substantially Equivalent

• Legal Analysis
• An award of a service contract must be made to
  the responsive and responsible offeror providing
  best value.
• The offeror receiving the highest combined score
  for its technical and financial proposals is, by
  definition, the best value offeror, except
  where one or more other proposals are
  substantially equivalent.
• A band of top-rated proposals can only be created
  where it is reasonable to determine that all
  proposals in that band are substantially
  equivalent.
• The range of substantial equivalence is an
  evaluation criterion that must be established in
  advance of receipt of initial proposals.
• Once a range of substantial equivalence is
  established, the award must be made to the
  offeror providing the lowest price.

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Use of Banding/Substantially Equivalent

• Questions

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Authority to Reject and Rebid

• Recent development
• Agencies have proposed that procurements be
  terminated through the rejection of all bids
  where the sole basis for the agencys proposed
  action was
• A desire by the agency to avoid the necessity of
  a responsibility determination with respect to an
  apparent winning offeror.
• A desire by the agency to avoid a threatened bid
  protest which, on its face, was spurious.

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Authority to Reject and Rebid

• Issue
• What are the restrictions, if any, on an agencys
  authority to reject and rebid?

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Authority to Reject and Rebid

• Statutory and Common Law Framework
• SFL 163(9)(d) allows for all offers to be
  rejected.
• Case law requires that there must be a rational
  basis supporting a determination to reject all
  offers. Matter of Conduit Foundation Corp v
  Metropolitan Transportation Authority, 66 NY2d
  144 (1985) Matter of LaCorte Electrical
  Construction v NYS Dept of Social Services, 243
  AD2d 1029 (3d Dept, 1997).

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Authority to Reject and Rebid

• Legal Analysis
• Agencies have wide discretion to reject and rebid
  where they determine that such action is in the
  best interest of the State.
• To justify its determination, an agency need only
  show a rational basis.
• A desire to avoid a responsibility determination,
  by itself, cannot be considered a rational basis.
• The threat of a spurious bid protest, by itself,
  cannot be considered a rational basis.

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Authority to Reject and Rebid

• Questions

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Waiver of Mandatory Requirements

• Recent Developments
• Increasingly, we are seeing procurements where
  agencies impose numerous, and, in many cases,
  apparently inconsequential, specification
  requirements which are denominated as mandatory
  requirements.
• In some cases, after proposals are opened,
  agencies realize that such mandatory
  requirements would eliminate all bidders or
  significantly reduce the competitive field.
• In these cases, the agencies, rather than rebid,
  desire to waive these unmet mandatory
  requirements.

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Waiver of Mandatory Requirements

• Issue
• In these circumstances, to what extent may an
  agency waive such mandatory requirements?

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Waiver of Mandatory Requirements

• Statutory and Common Law Framework
• SFL 163(9)(b) provides that a solicitation must
  prescribe the minimum specifications or
  requirements that must be met in order to be
  considered responsive.
• SFL 163(2)(b) requires a clear statement of
  product specifications, requirements or work to
  be performed and that procurement process
  promote fairness.
• An agency may reject any bid that fails to comply
  with the literal specification requirements, but
  may waive a deviation which is minor or
  non-substantial that is, it is not material.
  See LeCesse Bros. v. Town Board of the Town of
  Williamson, 62 AD2d 28 (4th Dept, 19780 affd,
  46 NY 2d 960 (1979).
• An agency must reject a bid which contains a
  material variance or omission from the bid
  specifications. See Progressive Dietary
  Consultants v. Wyoming County, 90 AD2d, 214 (4th
  Dept, 1982).
• A variance is material or substantial when it
  would impair the interests of the procuring
  agency, place the successful bidder in a position
  of unfair economic advantage, or place other
  bidders or potential bidders at a competitive
  disadvantage. Cataract Disposal, Inc. v. Town of
  Newfane, 53 N.Y.2d 266, 440 N.Y.S.2d 913 (1981)
  Fischbach Moore v NYC Transit Authority, 79
  A.D.2d 14, 435 N.Y.S. 2d 984 (2nd Dept. 1981)
  Application of Glen Truck Sales Service, Inc.
  v. Sirigano, 31 Misc.2d 1027, 220 N.Y.S.2d 939
  (1961).
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Waiver of Mandatory Requirements

• Legal Analysis
• Agencies can only waive these mandatory
  requirements if they are not material.
• To do so agency must document that change does
  not disadvantage any bidder or potential bidder.
• Where agency has denominated a requirement as
  mandatory, the fair process required by the PSA
  requires that bidders and potential bidders be
  entitled to rely upon agency characterization of
  requirement as mandatory.
• As a result, a mandatory requirement will be
  presumed material and therefore not waivable
  except where agency can document that inclusion
  of the mandatory requirement did not cause any
  qualified potential bidder to refrain from
  submitting a proposal, and did not otherwise
  disadvantage any bidder or potential bidder.

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Waiver of Mandatory Requirements

• Practical Advice
• Review specifications for the terms must
  shall and mandatory
• Make sure you really mean it!!!
• Understand the ramifications of vendors not
  meeting the requirements.

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Waiver of Mandatory Requirements

• Questions

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Advance Publication Substantial Compliance

• Recent Developments
• In a number of recent procurements, agencies have
  inadvertently failed to publish in Contract
  Reporter.
• But, in these procurements, agency has published
  notice in other forums, and in some cases
  provided actual notice to all potential bidders.

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Advance Publication Substantial Compliance

• Issue
• Can OSC approve the contracts in these
  situations?

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Advance Publication Substantial Compliance

• Statutory Framework
• Economic Development Law 142 and 143
  generally require agencies to publish notice of
  contract opportunities - generally in the
  Contract Reporter.
• Economic Development Law 144 provides that
  Comptroller may grant exemptions under defined
  circumstances.
• Economic Development Law 145 provides that
  Comptroller may not approve a contract which has
  not been published or exempted from publication,
  BUT also provides that Comptroller may also
  approve where Comptroller determines that there
  has been substantial compliance with sections
  142 and 143.

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Advance Publication Substantial Compliance

• Legal Analysis
• Purpose of publication requirements is to provide
  constructive notice to potential bidders.
• Actual notice is superior to constructive notice.
• Therefore, where all potential bidders have
  received actual notice, there has been
  substantial compliance.
• Even where there has not been actual notice,
  where notice has been published in locations
  where parties interested in the procurement would
  be expected to inquire or search, such
  publication may constitute substantial
  compliance.

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Advance Publication Substantial Compliance

• Cautionary note
• Substantial Compliance is a safe harbor to be
  used in a storm. Dont rely on it on sunny days.
• Always plan on publication in Contract Reporter.

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Advance Publication - Substantial Compliance

• Questions

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Lowest Price Evaluations for Services Procurements

• Recent Developments
• In a number of cases, we are receiving service
  contract awards which were made solely on the
  basis of lowest price.

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Lowest price Evaluations for Services Procurements

• Issue
• Under what circumstances may an agency award a
  contract for services on the basis of lowest
  price alone?

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Lowest Price Evaluations for Services Procurements

• Statutory and Common Law Framework
• SFL 163 (10) requires that contracts for
  services be awarded on basis of best value.
• SFL 163 (1)(j) defines best value as a
  methodology which optimizes quality, cost and
  efficiency, among responsive and responsible
  offerers.
• In Transactive Corporation v. New York State
  Department of Social Services, 236 AD2d 48, 53
  (1997) affd on other grnds, 92 NY2d 579 (1998)
  the court stated that a best value award requires
  a cost benefit analysis but did uphold an award
  which was made on the basis of price since in
  that case it was satisfied that a cost benefit
  analysis had occurred.

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Lowest Price Evaluations for Services Procurements

• Legal Analysis
• Awards of service contracts must reflect a
  cost-benefit analysis.
• Generally a cost-benefit analysis requires an
  evaluation of both the price and technical merits
  of the proposals.
• There are cases where an award ultimately made on
  the basis of price alone may reflect a cost-
  benefit analysis -- where qualitative and
  efficiency requirements have been so fully
  defined in the specifications that there is
  little room for technical variances between
  proposals which will have any value to the
  procuring agency. For example
• where the services are of a routine and
  non-technical nature such that there is little
  room for meaningful variations among responsive
  offerors such as trash removal
• where agency has established detailed technical
  requirements which leave little if any room for
  meaningful variations among responsive offerers
• where an agency is using a competitive range
  consistent with Transactive.

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Lowest Price Evaluations for Services Procurements

• Variation
• May agencies award service contracts using a
  methodology where price is given little or even
  no value?
• OSC believes it is highly doubtful that an award
  of a service contract where price is given zero
  value could be regarded as reflecting a best
  value (cost-benefit) analysis.
• Where price is given very low value (less than
  20) OSC will look for agency justification.
• Further, where price is given a very low value
  agency may find itself boxed-in where a very
  highly scored technical proposal thus becomes the
  best value, but is too expensive.
• In such a situation, agency will have only 2
  choices
• Award to highest-ranked/very expensive offeror
  (agencies should attempt to negotiate price
  reduction) or
• Reject and rebid.

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Lowest Price Evaluations for Services Procurements

• Questions

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Debriefings

• Recent Developments
• On occasion, agencies refuse to provide bidders
  with a debriefing concerning the award.
• Some agencies refuse to provide any information
  to a bidder prior to approval of the contract by
  OSC in some cases, refusing to even tell the
  vendor that it has been found non-responsive.

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Debriefings

• Issues
• What is an agencys obligation with respect to
  debriefings?
• What information, if any, can an agency disclose
  to an unsuccessful vendor, and when?

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Debriefings

• Procurement Guidelines
• The Procurement Guidelines issued by the NYS
  Procurement Council provide in Section VII (A)(1)
  that debriefing should be offered to non-winning
  bidders but should be limited to the evaluation
  results of the bidder being debriefed.

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Debriefings

• Legal Analysis
• A bidder must be advised when it is found
  non-responsive or non-responsible particularly
  where the bidder being disqualified would
  otherwise appear to be the winning bidder.
• Agencies should debrief losing bidders, at
  least as to their own proposals.

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Debriefings

• Questions
• ?