Australia: Conflicts and tendering processes for government contracts: Why inaction can be fatal

A variety of circumstances can give rise to a conflict of interest in a public university procurement or sale process. However, a conflict need not be, and often is not, fatal to the process. The key is that appropriate action is taken at the earliest opportunity to resolve the conflict.

A university conducting a tendering process might find it difficult to decide what the appropriate action is. Taking an overly cautious approach can result in a person being unnecessarily excluded from the process or elements of the process, whereas not taking sufficient action can cause irreconcilable damage and result in litigation, unwanted media attention or parliamentary scrutiny.

Similarly, a university tendering for a government contract also needs to be conscious of conflicts of interest, because not disclosing a potential conflict to an agency conducting a procurement or sale process can have an adverse outcome for a bidder.

What is a conflict of interest?

A conflict of interest arises when a person has interests that are, or seem to be, incompatible with one another. The most common example in a tendering process is a member of the evaluation team (or a family member) having a financial interest in one of the bidders, which could result in the evaluation team member making a financial gain if that particular bidder was selected. In such an instance, a question arises as to whether the evaluation team member is able to exercise their role in the evaluation process without being influenced by their personal interest.

Factors beyond financial motivations can give rise to a conflict of interest in a procurement or sale process. For example, the final decision maker might feel hostility toward one of the bidders for professional or personal reasons. Alternatively, a member of the evaluation team might be seeking, or even be offered, an employment opportunity with one of the bidders. This situation was recently considered by the Supreme Court of New South Wales, in determining an application for an interlocutory injunction brought by a prospective tenderer, that had been excluded from participating in the second stage of a procurement process: Karimbla Properties (No 50) Pty Ltd v State of New South Wales & Anor [2015] NSWSC 778.

Karimbla Properties v State of NSW

UrbanGrowth NSW, a state-owned corporation, conducted an expression of interest phase of a process for the sale of land (stage one). It resolved that a group of tenderers (including Karimbla, a company forming part of the Meriton Group) be invited to take part in the invitation to tender (stage two). On the same day that the Board of UrbanGrowth resolved to begin the formal tender process, one of UrbanGrowth's senior executives who had been heavily involved in the process resigned. UrbanGrowth later learned that the ex-employee had taken up a position with Meriton.

After considering several options, and meeting with Meriton executives, UrbanGrowth decided to exclude Karimbla from stage two on the basis that allowing Karimbla to continue would compromise the process. This was due to a risk that the employment of an ex-UrbanGrowth senior executive by Meriton could be viewed as a conflict of interest, or perceived as giving Karimbla an unfair advantage over other shortlisted tenderers.

Karimbla sought an interlocutory injunction to restrain the exchange of contracts for sale relating to the land, pending a final decision. Karimbla's challenge was based on an alleged breach of procedural fairness or, alternatively, an alleged breach of a contractual duty of good faith, said to be owed by UrbanGrowth to Karimbla under an implied process contract.

Justice Beech-Jones found there to be low prospects of Karimbla establishing a breach of an obligation by UrbanGrowth to afford Karimbla procedural fairness (if there even was such an obligation). His Honour also found there to be poor prospects of Karimbla establishing a breach of an implied process contract (the foundation of which was said to be shaky), or that but for those breaches, Karimbla would not have been excluded from stage two. This was based on His Honour's view that, regardless of Karimbla or its executives' intentions and whether any confidential information was actually disclosed, the fact that during the evaluation process a senior UrbanGrowth executive responsible for the evaluation commenced work with one of the bidders had the potential to undermine confidence in the process.

The key point is that even a perceived conflict of interest, whether or not it actually leads to an unfair advantage being obtained, can undermine confidence in a tendering process and taint the process.

The judgment also contains useful discussion of when a decision relating to a procurement or sale process will be amenable to judicial review, and when a process contract will be implied in such a process. Both of these are interesting and complex issues in themselves, but are beyond the scope of this article.

Dealing with a conflict

Not all conflicts of interest carry such a serious consequence. The public has a right to expect that any conflict that arises during a tendering process involving a public entity will be resolved having regard to the public interest, but that does not necessarily mean a person affected by a conflict automatically needs to be excluded. In deciding the appropriate action to take to resolve a conflict, issues to consider include:

  • The potential gravity of the conflict, could it result in confidential information or preference being unfairly or inappropriately given to a bidder?
  • Can the potential damage be prevented by the affected person giving a confidentiality undertaking or other mechanism?
  • Is an undertaking alone sufficient and is it reasonable to believe that the affected person won't be unduly influenced?

If you are bidding for a government contract, make sure you disclose any potential or perceived conflict to the agency seeking bids as soon as you become aware of it. This will allow the agency to consider the appropriate preventative action, rather than being required to go into damage control at the end of a process.

The appropriate resolution of a conflict of interest will depend on the particular circumstances and the action taken should be tailored to it. A conflict of interest—actual, potential or perceived—should never be ignored and action should always be taken to deal with the conflict as early as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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