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
Related Topics
 
Related Articles
 
Related Video
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions