Canada: Procurement Blues: Well-Run Process Did Not Avoid Fraud

Last Updated: June 26 2017
Article by Lisa R. Lifshitz

Sometimes even when you do things right, things can go horribly wrong.

This was never more true than in the recent Ontario case of Business Development Bank of Canada v. Experian Canada Inc. where the Business Development Bank learned the hard way that even the most well-run procurement process cannot prevent fraud.

Seeking to replace its existing commercial lending software system, BDC issued a detailed request for information in early 2008. Experian Canada Inc. and Experian Information Solutions Inc. (collectively Experian), responded to BDC's request and was eventually chosen on the basis that Experian's solution allegedly had the "best fit for BDC's needs." BDC signed a software development, implementation, license and support agreement on March 27, 2009 whereby Experian agreed to provide a new commercial lending software system based on Experian's existing relationship lending suite.   

The RLS implementation and business relationship failed completely, and BDC terminated the agreement on Nov. 19, 2009. BDC sued Experian, seeking damages for fraudulent misrepresentation and breach of contract (including millions in incremental costs and loss of net economic benefits caused by the delay in implementing the new system), and punitive damages for deliberately misleading. Experian counterclaimed for damages, i.e. the monies that BDC owed it under the agreement that remained unpaid. In the interim, BDC created its own lending system through a combination of custom software and commercially available software that was implemented in June 2014.  

The basis of the case involves the considerable dichotomy between what BDC thought it was purchasing from Experian and what Experian actually intended to deliver. BDC claimed that it had selected Experian because of its written and oral representations regarding RLS. RLS was supposedly a proven, mature "out of the box" technology used by over by 1,100 financial institutions, including two non-US banks. With a broad customer install base, BDC understood RLS would be maintained and evolve as a whole for all customers using the product so that BDC would receive upgrades such as bug fixes and future releases in the normal course (Experian claimed the product had two releases per year, one functional and one for bug fixes). Experian's own response to the RFI claimed the "base code" of RLS already contained much of the critical functionality required by BDC, complying with the 700 requirements BDC had requested in its RFI. Additional BDC requirements would be met by configuring the RLS base code and certain (minimum) customization. Experian represented that it had the skill and experience to implement RLS in BDC's environment in accordance with BDC's timelines.

However, the court found the actual facts to be quite different, as follows:

  • While Experian did have a base version of RLS that had been installed at two international banks, it was in the process of developing a new version of its lending software, RLS 5.1, which was not fully tested (it was later revealed to be extensively bug-ridden). Experian did not reveal that it had responded to BDC's RFI on the basis of the new version of its RLS software, not its production version. BDC's own employees confirmed they expressly did not want to purchase untested "bleeding edge" software because it was deemed too risky in the lending area, BDC's "bread and butter," but this is exactly what Experian had planned to make available to BDC based on its responses to the RFI.  Experian's answers to the technical questions in the RFI in which Experian gave itself high scores led BDC to believe it had an existing product but at the time no customer was using RLS 5.1 as it was not a completed product or actually deployable at the time.
  • Experian blatantly claimed its existing software typically met "85 per cent of the client's needs — 15 per cent customization" and stated its software had an 81 per cent functional fit with BDC's requirements. Since there was no "as is" version of RLS 5.1, this was completely untrue. BDC later calculated that the actual functional fit of the Experian software was only 46 per cent and had they known this BDC would not have selected Experian.
  • Experian gave BDC a demonstration of its software in May 2008. BDC was impressed with the software, although Experian later revealed it was not clear what it actually showed to BDC's employees during the demonstration.  However, the demonstration helped seal the deal. At no time did Experian distinguish between the software that they were demonstrating and the lending software actually in use by their existing clients.
  • Unknown to BDC, in November 2008 Experian was in the process of developing a version of RLS for the National Australia Group of Europe, an international bank operating in the United Kingdom. Experian made a business decision to stop its development work for BDC, instead focusing its resources on the software for NAGE. Experian planned to use some of the NAGE code as a base product for BDC, assuming that in the meantime elements of the agreement relating to the fit/gap analysis phase could be pursued. BDC found that it was practically impossible to conduct a meaningful fit/gap analysis as Experian had not even provided a base "vanilla version" of its software, further delaying the project.  Even worse, the NAGE software under development by Experian was found to be full of bugs, which meant that it could not be used for the BDC implementation, separate and apart from the question the two implementations had different requirements.

Ultimately BDC terminated the agreement on November 19, 2009 after Experian advised it would charge BDC $13.09 million to implement the promised software, taking an additional 18 months to deliver a product that would meet all of BDC's requirements.

Red flags

BDC's RFI included detailed requirements, a separate vendor questionnaire background document that explained how vendors should interpret the RFI questions and BDC had asked the three short-listed vendors to assess their own products, conducted demonstrations, held workshops and had ongoing discussions with their selected vendor. Could BDC have reasonably done anything different?  For the most part, the red flags appeared after BDC had signed the agreement, but some of Experian's behaviour should probably have made BDC pause.

No documentation

As early as February 2009 BDC had requested that Experian provide it with a user manual for the software, which should have been easy if Experian actually had an existing base product. However, since Experian was in fact still in the process of actually drafting the RLS 5.1 manual, Experian repeatedly stalled on this ask and told BDC that they could not review the manual until after the agreement was signed. Thereafter, BDC continued to press with no avail and surely this should have been a neon sign that Experian refused to meet this most basic request.

No sandbox/No escrow

Under the agreement BDC was obliged to immediately pay Experian license fees for the so-called "base product" while Experian worked on formal specifications to customize it to meet BDC's specific requirements by June 2009. Experian was supposed to deposit into escrow the source code for the base product five days after BDC signed off on these formal specifications. After executing the agreement, BDC reasonably asked Experian to provide it with a "vanilla" or "sandbox" version of the RLS software as a base version so that BDC could get started on data conversion, look at the RLS database and help with change management efforts. Experian refused to provide this or any code even after repeated BDC requests made over many months.  Experian finally admitted to BDC that there was no base code in June, 2009, months after agreement signature.

Salvation: The limitation of liability clause  

Thanks to some skilled lawyering on the part of BDC's counsel, the agreement contained a limitation of liability clause that did not exclude or restrict liability "resulting from fraud." The clause also contained language that stated contact damages were limited to direct damages only, excluding losses caused in any way by acts, omissions or misrepresentations (but excluding "any fraudulent or negligent misrepresentation" committed in connection with the agreement). Justice Glenn Hainey ultimately found that the limitation of liability clauses did not apply to BDC's claims based on Experian's fraudulent misrepresentations and breach of contract and therefore did not preclude or limit any damages award on these grounds.

Smoking emails  

It certainly didn't help Experian's defense that various employees and executives left a smoking internal email trail where they admitted they pulled critical resources away from BDC to source the NAGE deal, that their own software code was "garbage" and "riddled with bugs and issues" and that it could not be used as a "stable starting point for BDC."

Resolution

Based on the egregious facts in this case, it comes as no surprise that the court ultimately concluded Experian made fraudulent misrepresentations regarding its software and capabilities to BDC in order to induce BDC to choose Experian as its winning vendor. The court also found BDC had wasted 15 months in its goal to implement a more efficient lending software because it would never had entered into the agreement had it known what software Experian could actually deliver. Concluding that Experian had breached the agreement with BDC, Hainey therefore allowed BDC's claim for damages arising from Experian's fraudulent misrepresentations and assessed damages in the amount of $44,447,416 plus pre-judgment and post-judgment interest, signaling that Ontario courts have no sympathy for fraudulent vendors that seek to abuse fair procurement processes.

Canadian Lawyer Online - IT Girl Column

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lisa R. Lifshitz
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.