COURT FILE NO.: 10-49755
DATE: 2013/09/04
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
GSI Environnement Inc.
Plaintiff
– and –
Corporation of the City of Ottawa
Defendant
AND BETWEEN:
City of Ottawa
Plaintiff (by Counter‑claim)
– and –
GSI Environnement Inc., Ace Ina Insurance
Defendant (by Counter‑claim)
Sally A. Gomery and Jenna Anne de Jong, Counsel for the Plaintiff
Geoffrey Cantello and Samantha Montreuil, Counsel for the Defendant
Geoffrey Cantello and Samantha Montreuil, Counsel for the Plaintiff (by Counter‑claim)
Sally A. Gomery and Jenna Anne de Jong, Counsel for the Defendant (by Counter‑claim)
COURT FILE NO.: 10-CV-48560
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
City of Ottawa
Plaintiff
– and –
EnGlobe Corp.
Defendant
Geoffrey Cantello and Samantha Montreuil, Counsel for the Plaintiff
Sally A. Gomery and Jenna Anne de Jong, Counsel for the Defendant
HEARD: May 6-7-8-9, 2013 (Ottawa)
REASONS FOR decision
BEAUDOIN j.
The Claims
[1] This is a trial of two separate actions: No. 10‑49755 and No. 10‑CV‑48560. In the first action, GSI Environnement Inc. v. the City of Ottawa, GSI Environnement Inc. (“GSI”) has a claim for unpaid invoices and the City of Ottawa (“City”) has a counter‑claim for breach of contract against GSI as well as a claim against Ace Ina Insurance on a performance bond. In the second action, the parties are City of Ottawa v. EnGlobe Corp. and the City’s claim is for payments due. EnGlobe Corp. (“EnGlobe”) and GSI are related corporations. Master Pierre Roger ordered these two actions to be tried at the same time. The claim against Ace Ina Insurance has been resolved.
Preliminary Remarks
[2] At the outset, I want to commend counsel for proceeding in the manner they have chosen. Other counsel might have sought to resolve these matters by way of motions for summary judgment. Having had the benefit of hearing all of the evidence, I am satisfied that neither party would have had any success, resulting in further costs and delay. Counsel wisely chose to cooperate; they agreed on a joint book of documents. They agreed that these documents would be admitted not only as to the proof of their authenticity but also as to the proof of their content. Moreover, they agreed that I could refer to any of the documents contained in these two volumes whether or not the specific document was referred to in evidence by any of the parties or the witnesses. In the end, a three‑day trial was all that was required and these trial dates were well in advance of any date that might have otherwise been obtained for a long motion.
Background
[3] These claims arise out of a Biosolids Beneficial Use Program Agreement (the “Agreement”) entered into on July 7, 2005 between GSI and the City, which required GSI to annually dispose of approximately 42,000 metric tons of conforming biosolids supplied by the City. These biosolids were generated from the Robert O. Pickard Environmental Centre (“ROPEC”). The contract was to terminate on December 31, 2009. GSI’s claim is limited to its invoices for the services it provided to the City for the months of October and November 2008. These invoices total $503,134.28 and the amount is not in dispute. GSI also claims the cost of carrying a performance bond in the amount of $58,483.00. Interest on these amounts is also sought. GSI acknowledges that it owes the City $72,187.20 for disposal costs with respect to biosolids delivered to the City’s Trail Road landfill site in May 2008, which would reduce its total claim to $563,532.59. This is the same amount sought by the City against EnGlobe. In its counter‑claim, the City seeks damages in the amount of $1,194,018.09 against GSI. The GSI’s costs of carrying the performance bond and the City’s calculations of its damages are in dispute.
Issues
• Was GSI required to receive and dispose of the City’s biosolids after November 28, 2008?
• What was the scope of the amendments to the Agreement in 2007?
• Is the City’s counter‑claim statute-barred?
• If the City’s counter‑claim is statute- barred, is it nevertheless entitled to an equitable set‑off?
The Relevant Terms of the Agreement
[4] Section 1.01(2) defines “conforming biosolids” as meaning “biosolids meeting the minimum criteria specified in Section 4.01.” Article 4.01 describes these as:
(1) “… biosolids that do not contain any foreign matter such as plastic or metal and that conform to the regulatory requirements for land application and composting of municipal biosolids specified in the following:
(a) The Nutrient Management Act (Ontario), and regulations thereunder;
(b) Class C2P3O3 of the Quebec Guidelines for the beneficiary fertilizing residuals February 2004, as modified from time to time; and
(c) Articles 3.1 through 3.4 of the Memorandum of Understanding between the City and GSI, dated June 21, 2002.
[5] GSI’s obligations are set out in Article 3. These require GSI to be available six days per week to manage the loading, hauling, unloading and beneficial use of approximately 42,000 metric tonnes of conforming biosolids per year, acknowledging that the quantity was approximate and was expected to increase over the life of the contract. GSI had to deliver the conforming biosolids to beneficial use sites and carry out land application of conforming biosolids produced at ROPEC, including the spreading and incorporation of biosolids on agricultural land. There are minimum annual land application targets with a minimum 30 percent of the land application to be in Ontario. GSI is required to provide annual reports listing the approximate amount of biosolids to be disposed of by each beneficial use method (e.g. composting, land application) and by location. Article 5 sets out fixed prices for hauling and beneficial use. These rates vary according to the disposal methods and location.
[6] Article 4 sets out the City’s obligations, which was to supply conforming biosolids. There is no issue that the Agreement specifically requires that all of the biosolids supplied by the City had to be “conforming”. This was a condition of the previous Memorandum of Understanding (“MOU”) between GSI and the City. In addition, GSI had to comply with the provisions with respect to performance security, namely, a performance bond.
The Case for GSI
[7] Georges Szaraz (“Szaraz “) is the Vice‑President of Management of Organic Waste for EnGlobe, the parent company of GSI. When he joined EnGlobe in 2008, he was aware of GSI’s Agreement with the City. At that time, Brian Brunetti (“Brunetti”) was GSI’s project manager and responsible for the Agreement. Szaraz was taken through the provisions of the Agreement as set out above. He indicated that it was important for the City to meet all of the criteria set out in the Agreement as it would be hard for GSI to attribute value for the solids it received. He went through the relevant developments that led to these claims.
[8] On February 22, 2007, Brian Brunetti wrote a letter to David Robertson (“Robertson”) who was then the Program Manager of Wastewater Treatment for the City. In his letter, Brunetti referred to an earlier meeting of January 26, 2007. He identified specific challenges that were impacting GSI’s ability to service its contract with the City, including the following:
(a) Amendments to the Quebec regulations which restricted Quebec land application of biosolids generated from the City of Ottawa, effective February 15, 2007 thereby terminating GSI’s Quebec land application program;
(b) Expectation of further regulation changes imposing a restriction on the Quebec receipt of biosolids requiring all biosolids to be received indoors thereby impacting GSI’s ability to receive biosolids at its L’Ange-Guardien composting facility (their primary facility servicing the contract) to two loads a day;
(c) No longer having Laflèche Environmental Inc. as a receiving facility – this having been historically used as a backup facility by GSI; and
(d) Potential loss of its Lachute composting centre as a receiving facility – this also having been used as a backup facility.
[9] The amendments to the Quebec regulations specifically targeted the Class C2P3O3 biosolids as defined by the Agreement. “C” refers to chemical contaminants; “P” refers to pathogens and “O” relates to odor. As a result of the waste treatment methods in place at ROPEC, the City’s biosolids were now classified as “out of category” and no longer met the O3 criteria and these biosolids could no longer be land applied in Quebec.
[10] Brunetti wrote that these challenges were further compounded by the fact that GSI had yet to secure a permitted biosolids transfer facility. He proposed to amend GSI’s contract with the City to implement a fixed rate of $60.00 per wet metric tonne for the 2007 operating year, the rate to be indexed in future years by the indexing formula reflected in the contract. He suggested that the rate adjustment would generate cost savings of approximately $45,000.00 to the City for the 2007 operating year and this would allow GSI greater flexibility to focus on increasing the land application program and targeting additional placement outlets. Brunetti added that GSI would bear the full financial risk of placing the biosolids, thus eliminating the need of negotiating annual penalties. Brunetti confirmed GSI’s intention to construct a biosolids transfer facility which would allow GSI to better service the contract.
[11] In a letter dated March 12, 2007, Ken Brothers, the Director of Utilities Services Branch, responded to Brunetti:
After consideration of the GSI proposed rate change and associated details presented in the proposed letter, I on behalf of the City of Ottawa accept the changes as proposed and recommend the changes be implemented. The City’s Supply Management Division will be asked to issue an amended purchase order for 2007 that recognizes the changes outlined in the GSI proposal.
These two letters are the only documents exchanged between the parties to amend the Agreement. No amended purchase order appears to have been issued.
[12] I was referred to an internal memorandum from Robertson to Ken Brothers dated February 19, 2007.[^1] In that letter, Robertson identified agricultural land application of biosolids as the beneficial use option that was the most sustainable and he recommended that the City accept the unit rate change proposed by GSI. He stated that the change will result in a cost reduction to the City and would provide GSI with a financial incentive to increase the quantities of biosolids applied to agricultural lands. Due to the existing contract rate structure and new regulatory restrictions, he expressed a doubt that GSI would be able to meet their existing contract obligations.
[13] Robertson pointed out that GSI could no longer apply the City’s biosolids to agricultural land in Quebec and could no longer dispose of the City’s biosolids at the Laflèche Environmental Inc. landfill site. He observed that these two conditions, as well as anticipated restrictions placed on receipt of biosolids at Quebec based compost facilities, would place significant pressure on GSI to expand their efforts to dispose of the City’s biosolids through agricultural land application in Ontario. He thought that the new proposed Fixed Rate of $60.00 per tonne would provide GSI with the needed incentive since there was an increased profit margin for agricultural land application in Ontario. He projected cost savings to the City over three years. He added that the City and GSI were actively pursuing the start of a biosolids transfer station that “is essential to ensuring all of the City produced biosolids can be beneficially used.”
[14] Thereafter, GSI continued to haul and dispose of the City’s biosolids notwithstanding the fact that these could no longer be used for land application in Quebec and they no longer met the C2P3O3 criteria and were no longer “conforming” as required by the Agreement. Szaraz was taken through a series of e‑mails commencing on March 27, 2008, from Brunetti to himself. By that time, GSI had lost its ability to work with Laflèche and it appeared that Laflèche was positioning itself to be the next successful bidder on the City’s biosolids contract. The Lachute facility was no longer receiving materials from GSI and the L’Ange‑Gardien composting site could no longer be used due to the threat of an injunction by local residents. He concluded an internal e‑mail by listing a number of options including, “speak to the client and advise them that we cannot fulfill our obligations under the contract.”
[15] On May 16, 2008, Szaraz was copied on an e‑mail from Rick Denyes (“Denyes”) to André Héroux, the President and Chief Executive Officer of GSI. In that e‑mail, Denyes refers to the brewing issue with the City’s biosolids contract and GSI’s lack of capacity to process this material. He indicates: “The reason as I am led to believe we cannot move product out to accommodate further volume is we have finished product budgeted at $0.00 value and it will cost us $8.00 to get rid of it.”
[16] He adds the following words:
[Georges], Denis and Arnold are seeking an angle which potentially will allow us to exit the contract without dragging on our $660,000 performance bond whereby the material is non-conforming. We have a lot at risk with a competitor waiting in the wings to pounce on this contract (Laflèche Environmental), and unseat us.
Sorry to drop unpleasant news the day before a weekend but it is critical timing as we are going to have to notify Ottawa no later than Tuesday of what our intentions are. We have been making plans for a storage facility which will eliminate the need for Bury but it will not be functional until September. We have run out of time on this one, a few more months and we were in the clear. This is the same issue we experienced last year with this contract [at L’Ange-Gardien] where we moved material out to accommodate volume with a cost to the Ontario group of 150K which I would be happy to do again to save face with our customer and get us through till fall.
[emphasis added]
[17] Szaraz was then taken to a letter dated July 30, 2008 wherein Brunetti proposed an increase in the fees paid by the City to GSI. That letter [approved by Szaraz] sets out:
Based on the regulatory changes in Quebec which have eliminated GSI’s ability to land apply the biosolids in Quebec and have further eliminated GSI’s ability to receive and process the biosolids outdoors at GSI’s Quebec‑based composting facilities. GSI will not have the necessary capacity to manage the additional anticipated volume once the Ontario land application season ends (November 30, 2008). Through proposed facility upgrades to our Gatineau composting facility, GSI can increase the in-vessel facility capacity to manage the stepped increase in volume. To accomplish this, GSI proposes to offset a portion of this capital expenditure by charging the City a premium of $17.98 per wet metric tonne for all tonnage managed in excess of 49,000 wet metric tonnes during calendar year for 2009.
[18] The letter asked the City to confirm its acceptance of the above premium by August 8, 2008. In the absence of an agreement, GSI advised that it would not be able to manage the additional anticipated volume. The City did not agree to the increase.
[19] Szaraz was then taken to a further letter from Brunetti to Stephen Forestell, Acting Program Manager of Wastewater Treatment, dated September 10, 2008. That letter provided the City with an update on GSI’s discussions and meetings with the Quebec’s Ministry of Sustainable Environment and Parks (“MSDEP”) with regard to its L’Ange‑Gardien composting facility, which was a primary outlet in managing the City‘s biosolids. MSDEP was requiring GSI to apply for a new Certificate of Authorization for the Facility. That letter further advised that the Municipality of L’Ange‑Gardien had filed an injunctive motion with the Quebec Superior Court to permanently close the facility.
[20] The letter went on to advise that GSI believed that it would be unable to receive City biosolids at the facility for the remainder of 2008 and possibly for all of 2009. It provided further notice that GSI would not be able to manage all of the City’s biosolids when the land application season ended in November. GSI concluded the letter by saying that it continued to explore potential contingency options.
[21] By response dated September 30, 2008, Dixon Weir, Director of Water and Wastewater Services Branch wrote to Brunetti stating that the City continued to rely upon the existing and signed contract between the City and GSI, dated July 7, 2005. He noted that Schedule F of the Agreement required GSI to look at the Lachute Composting Center in the event that L’Ange‑Gardien was not available, even if that option was at a greater cost to GSI. He said that the City was more than willing to work with GSI to resolve this matter in a manner but warned that the City might have no choice but to call upon its security if GSI did not perform its obligations under the contract.
[22] This was followed by a further letter from Brunetti dated October 17, 2008. In that letter, Brunetti indicated that GSI has identified a contingency capacity although several conditions were of an extremely time sensitive nature. GSI had negotiated a capacity of 25,000 to 30,000 metric tonnes with a New York State landfill operator. GSI had also identified a Quebec based third party composting facility located at approximately five to six hours from the City of Ottawa. GSI proposed to deal directly with Laflèche with respect to the Overflow Capacity Agreement that the City had with Laflèche. GSI added that it could dispose of up to 15,000 metric tonnes at GSI’s Bury composting facility. These options are set out in some detail.
[23] Brunetti concluded that all of these options were at a cost that exceeded the disposal rate of $62.75 per metric tonne. As a result, GSI proposed new rates based on the various possible applications. In the alternative, it proposed a new rate of $82.50 per metric tonne effective December 1, 2008 plus an additional $20.00 per metric tonne for all material destined for land application that required the use of the transfer station. He added that both scenarios were anticipated to create a net loss to GSI but that GSI wanted to preserve its relationship with the City and avoid unnecessary litigation. He proposed a further contract amendment. In order to pursue these options, Brunetti noted:
Therefore, it is essential that GSI receives a confirmation from the City by Friday, October 24th, 2008 that they are in agreement with this proposal and detailing the City’s preferred pricing approach so that GSI can secure the necessary capacity, the preferred pricing and authorize the transporter to commences the required permitting process to ensure there aren’t any delays in service.
[24] The City responded by e‑mail on October 28 from Forestell to Brunetti and he proposed a meeting to take place on November 5, 2008. Before that event, William A. Chalmers of the Toronto law firm of Aird & Berlis LLP directed a letter dated November 3, 2008 to Dixon Weir. He cited GSI’s letter of October 17, 2008 and raised for the first time that the City’s biosolids were non‑conforming in accordance with the Agreement. He advised that the City would be required to amend its Agreement so that GSI would continue to accept the City’s “non‑conforming biosolids” and that unless the City and GSI were able to resolve the matter, GSI did not intend to attend the planned meeting of November 5, 2008. The letter gave the City five business days notice to indicate its willingness to amend the Agreement.
[25] In a response dated November 6, 2008, Carey Thomson, Manager, Corporate and Commercial Law for the City took the position that the biosolids Agreement had been amended in 2007 to reflect the fact that the City’s biosolids were no longer acceptable for land application in Quebec and that a new price had been negotiated to address this changed condition and to allow GSI to realign its operations. He noted that GSI had not land applied in Quebec since 2007. He added that the recent correspondence from GSI and all communications between the City and GSI over the past few years had dealt with GSI’s own operational challenges and that non‑conformity has never been raised as an issue despite GSI’s attempts to seek an amendment to the Agreement to obtain higher prices. Thomson put GSI on notice that if it ceased to accept to manage the City’s biosolids, the City would take the position that GSI would be in breach of the Agreement and the City would have no choice but to take all necessary steps to ensure that the biosolids were hauled from the ROPEC site at GSI’s sole expense.
[26] Szaraz testified that the discussions between Brunetti and the City had always been limited to operational challenges. He claims that the Quebec regulatory changes were not specifically addressed in 2007 and that the amendment solely focused on the contract price, which allowed GSI more flexibility in disposing of the biosolids.
[27] A further Aird & Berlis letter dated November 7, 2008 disputed the City’s interpretation of what transpired in early 2007 and re-affirmed GSI’s position that the City had not been relieved of its obligation to provide conforming biosolids. That letter gave the City until the close of business on Monday, November 10, 2008 to ensure that it cured its breach, otherwise GSI would have no alternative but to stop accepting further biosolids from the City.
[28] By yet another letter dated November 11, 2008, GSI advised that the deadline has been extended to 5:00 p.m. Friday, November 14, 2008 to allow the parties additional time to find a solution. On November 17, 2008, Szaraz personally wrote to Weir. He repeated the problems set out in GSI’s earlier correspondence, namely, with the L’Ange‑Gardien composting facility, the challenges at GSI’s Lachute composting facility and he indicated that GSI had all placement options envisioned when entering into the Agreement with the City with the exception of the Ontario land application. This was very weather dependant and not legally permitted after December 1st until March 31st of the next year. Szaraz went back to GSI’s proposals of October 17, 2008. Finally, he proposed executing the remainder of the term of the Agreement on a cost basis. He concluded that if this proposed concept was something that the City found reasonable, it would require a response from the City by 5:00 p.m. on Wednesday, November 19, 2008 with a target date for the execution of the necessary amendments by no later than 5:00 p.m. on Friday, November 28, 2008. Weir responded on November 19, 2008, saying that the City was prepared to discuss these further proposals.
[29] I was then referred to a series of e‑mails between City personnel dated November 27, 2008. Those e‑mails refer to a meeting that took place on November 26 and deal with GSI’s latest proposals. These estimated the cost to the City to be a significant increase over the existing Agreement. There was a concern about GSI’s extreme difficulty in obtaining performance bonding and the City’s need for some form of security. GSI’s difficulty in finding a location to dispose of the biosolids beginning on Monday, December 1, 2008 was noted. It appeared that GSI was relying on the City being able to dispose of its biosolids at the Laflèche site. According to Szaraz, there was no agreement at this time and the “ball was in the City’s court”.
[30] On November 28, 2008, the City received a final letter from Aird & Berlis. That letter stated that in light of the discussions between GSI and the City, a further extension of time was being offered and gave the City until 5:00 p.m. that day to sign a letter indicating its acceptance of GSI’s terms. According to Szaraz, they had no other option because they had no other disposal options for the City’s waste after that date. GSI stopped hauling the waste after that time. The next day, on November 29, 2008, Thomson sent his letter declaring GSI in breach.
[31] Thereafter, Szaraz was taken through the calculation of GSI’s damages. GSI did have invoices for the bonding company for two years but not for 2009 and 2010. For 2006 and 2008, the amount was $20,240.00 each year. Szaraz testified that GSI paid the same amount for 2009 and 2010. In 2011, GSI obtained a letter of credit instead of a performance bond at a cost to GSI of $18,503.01.
Cross-examination
[32] In cross‑examination, Szaraz confirmed that financial restructuring was taking place when he joined GSI and he was taking over the GSI subsidiary because of financial problems.
[33] He was taken to Brunetti’s letter of February 22, 2007 where the four issues presenting challenges for GSI were set out. He confirmed that the biosolids from the City could no longer be applied directly to land in Quebec but that if they were heat dried, that would fix the problem. That would have cost $10,000.00 but he claimed that that was not GSI’s mandate. In his view, GSI’s only obligation was to manage conforming waste. Again, he was taken through the changes with respect to their other facilities. At L’Ange‑Gardien, they could continue to compost at that site in 2007 but not outside. This was not against Quebec regulations but local residents were complaining about odours and they were having a problem in Lachute as well. The City’s biosolids nevertheless continued to be “conforming biosolids” for all of these other purposes.
[34] He confirmed that land application was the cheapest cost for them. He also indicated that GSI would no longer have the Laflèche site but that this had nothing to do with the guidelines. In short, the changes to Quebec guidelines affected the first issue (land application in Quebec), and might eventually impact the second issue (composting at L’Ange‑Gardien), but had no bearing on the other two problems set out in Brunetti’s letter.
[35] Szaraz confirmed that GSI never constructed a transfer facility as it promised to do. He confirmed that the new pricing in 2007 gave more flexibility to GSI and that it could choose the disposal options and that it would now assume the risk. The price of $60.00 per metric tonne made it profitable to place the biosolids in Ontario. He was taken to the annual report dated February 2007. It disclosed that in 2006, only 684.55 tonnes of the City’s waste were land applied in Quebec. This represented 1.6 percent of the total biosolid waste hauled and disposed of by GSI. He confirmed that 98.3 percent of the waste disposed of by GSI was not affected by the regulation changes in 2007. He indicated that GSI was not concerned at that time because there was less pressure on disposal options. Some of those options, namely, Lachute and Laflèche, were later lost.
[36] Szaraz confirmed that GSI continued to receive the biosolids after February 2007 for 21 months even though they were no longer conforming biosolids. In his opinion, Brunetti’s letter proposing an amendment to the contract was not written from a legal point of view but from an operational point of view. In his mind, GSI was not dealing with the issue with non‑conforming waste but simply on how to apply the waste. He did not think of informing the bonding company because the biosolids never changed.
[37] When he arrived in 2008, GSI had less and less disposal opportunities for the City’s sludge. He was taken to the memo of May 16, 2008 and he was asked about the comment that he, Denis and Arnold were working on “an angle” that would allow them to exit the contract. He confirmed that GSI had concerns about the City making a claim against the bond. At that time, they were also worried about Laflèche who was a competitor and who no longer wanted to accept their waste.
[38] By December 2008, GSI would no longer have any ability to place biosolids in Ontario because the oncoming winter eliminated any possible land application. GSI had no idea where they would place the biosolids until March. He acknowledged that GSI’s proposal to send the biosolids to a landfill in New York was not a beneficial use and was not in line with its Agreement with the City. In July 2008 GSI still wanted to deal with the City and was proposing a premium for 2009. He was taken to the letter from Aird & Berlis dated November 3, 2008 which gave the City notice of non‑conforming biosolids. He could not recall telling the City anything about this before, although he did direct this letter be sent. He indicated that close to December 1st, GSI was under some pressure to find beneficial use for the City’s biosolids and GSI was seriously considering the option of stopping servicing the City as they did.
[39] Szaraz was also directed to the letter sent by Aird & Berlis on November 7, 2008 which gave the City five working days to respond. He was asked what he expected the City to do in that short period of time and he replied that he wanted the City to meet with GSI to come up with options and solutions. He admitted that there is no real expectation that the City could remedy its breach of supplying non‑conforming biosolids in five days. He said the five days notice was used to force a meeting. He was taken to his own letter of November 17, 2008 to Dixon Weir. Again, there was a new deadline and he was asked where the new November 28th deadline came from. He indicated that it was the last time that they could serve the City as there was no option after that date.
[40] In support of its case, the Plaintiff relied on the City’s responses to its notices to admit and answers from the transcript of the Examination for Discovery of Dixon Weir.[^2] Brunetti did not testify.
The Case for the City
Michel Chevalier
[41] Michel Chevalier (“Chevalier”) is currently the manager of Wastewater Services for the City. He started his job in September 2008. He described the ROPEC facility and that waste water treatment as a continuous process. The ROPEC facility has a maximum of two or three days of storage but it is critical that the waste be continuously hauled away. Any interruption in the removal of waste would stop the plant. When GSI stopped hauling, Laflèche was contracted to provide the City with services for up to two weeks. The City needed a contract to get them to the end of 2009 and the City solicited proposals. He said the City was surprised of being told that its waste was “non‑conforming”. There was a great deal of uneasiness about GSI’s proposal to send the City’s waste to a U.S. landfill and to provide that service on a cost‑basis given the variable exchange rate with U.S. funds.
[42] He ultimately selected Third High Farms (“THF”) as the successful candidate to replace GSI. THF had greater capacity to deal with the waste and it had a plan for 75 percent beneficial re‑use. In addition, THF had built a large storage facility in 2009. THF was known to the City because it had been hauling for GSI and the City had contacts with them every day.
[43] He was taken through the contract with THF, the fees paid and through the calculations of the City’s damages.[^3] These were $178,251.35 in contingency costs for hauling waste between November 29 and December 13, 2008. The costs to have THF complete the contract totalled $5,088,867.66. There was a claim for $21,000.00 for insurance for THF that the City agreed to pay as a result of a disagreement with THF. Chevalier then deducted the costs of what the City would have otherwise paid to GSI to arrive at a total claim of $1,194,018.09.
[44] In cross‑examination, he admitted that the City had not actually produced the invoices of its payments to THF. There was no document to support the City’s $21,000.00 insurance claim. He admitted that if the City had been in breach of the contract, it would have had to pay the same costs. He confirmed that the City first heard of the issue of non‑conforming biosolids in November 2008. He asked Scott Hall, a process engineer, to look into the issue of non‑conformity and agreed that biosolids were “out of category” for one use (land application in Quebec). He admitted that the latest letter from Aird & Berlis made it clear that GSI would terminate its services on November 28th.
David Thomas Robertson
[45] David Thomas Robertson was the Program Manager of Wastewater Treatment in 2007. He confirmed that the Quebec land application of biosolids in 2006 was 684.55 metric tonnes. He said that land application was an ideal use because it was a low cost disposal method. He was the City employee who dealt with Brunetti and he was taken to the correspondence of 2007 wherein GSI set out its problems meeting land application targets in Quebec. He indicated that he and Brunetti met on January 26, 2007 and he was expecting a proposal from GSI to amend the contract. He was taken to the four bullet points in Brunetti’s letter. He knew about the termination of the Quebec land application as a result of the change of Quebec regulations. He knew that there were complaints at L’Ange‑Gardien because of odours. He was aware that there had been a falling out between GSI and Laflèche. He had no knowledge about the problems with the Lachute site. He was taken to the negotiation on price. At $60.00 per wet metric tonne, this increased fees for land application in the contract and as this was a low cost disposal mechanism, GSI could achieve higher profits. This gave GSI more flexibility and this indeed was the proposal put forward by GSI.
[46] He was taken to his memo of February 19, 2007 where he commented that very little of the biosolids had been applied in Quebec in 2006. In the end, he recommended that the City accept GSI’s proposal.
[47] In cross‑examination, he confirmed that the amendment of the contract was favourable to the City under certain conditions. He confirmed that there was no suggestion from GSI that the City was in violation of its contract at that point in time. He maintained that the City was not in breach of its contractual obligations and he agreed that the City did not have to do anything other than to amend the price structure.
Stephen Forestell
[48] Stephen Forestell (“Forestell”) is the current Program Manager at the ROPEC Centre. He succeeded David Robertson. He did not recall any discussion with Brunetti; he knew that GSI was having difficulty getting rid of their biosolids in Quebec. He indicated that the City was more than happy to work with GSI. The first time the City heard about the non‑conforming issue was November 3, 2008. Eventually, haulers for GSI [THF] told him that they had been instructed by GSI to cease hauling for them as of 5:00 p.m. on November 28, 2008. He sought confirmation in writing. He said that trucks loaded prior to November 28th at 5:00 p.m. would still be received at GSI’s Bury composting site up until the end of business on Monday, December 1, 2008. In his view, GSI was still performing the contract because they still had the City’s materials to dispose of.
Dixon Weir
[49] Dixon Weir (“Weir”) is the General Manager of Environmental Services for the City of Ottawa. He was referred to his letter to GSI of September 30, 2008, where he reminded GSI of its obligations and of the City’s willingness to sit down with GSI and try to work out the problems. Brunetti provided a response on October 17, 2008 and that provided a basis for further negotiations. According to Weir, the City had three key concerns: (1) continuity of service; (2) the beneficial re‑use of biosolids; and (3) costs.
[50] The Aird & Berlis letter of November 3, 2008 was the first time that GSI raised the issue of non‑conforming biosolids that he was aware of. He said it was impossible for the City to comply and start delivering conforming biosolids within five days as proposed in the letter. The subsequent proposals received from Szaraz dated November 17, 2008 were reviewed. He noted the new deadline of November 19, 2008 that set target for the amendments to the contract on November 28, 2008 at 5:00 p.m. He felt that the City was still working with GSI. The City’s main concerns were that the City biosolids would be going to a landfill into the United States and the proposal would move risks from managing the contract to the City whereas in the original contract, the risks were with GSI and this was a fundamental change. On November 19th he sent a letter to Szaraz indicating the City’s interest in working with GSI and he tried to arrange a follow‑up meeting, which was set for November 26, 2008.
[51] That meeting took place but significant issues remained, namely, that GSI was having difficulty obtaining performance bonding and in finding some location to dispose of the City’s biosolids as of December 1st. Despite the November 28th deadline, Weir believed the City was still in negotiation with GSI.
[52] The November 28th letter from Aird & Berlis came next and Weir indicated this is not what the City was expecting. The bonding issue was not addressed and there was insufficient time for the City to respond. As a result, a letter was sent by Carey Thomson the next day declaring the GSI in breach.
[53] In cross‑examination, he agreed that the two letters of October 17th and November 17th from Szaraz had to be read in conjunction.
Positions of the Parties
[54] In argument, Ms. Gomery states that the City’s obligation to supply conforming biosolids was a fundamental obligation under the terms of its Agreement with GSI and she referred to the many provisions of the Agreement that addressed the issue of conforming biosolids, as well as in the preceding MOU. She argues that the only issue to be determined is whether or not that obligation was modified either by written amendment to the contract or by subsequent conduct. She submits that the only evidence with respect to the amendment is the exchange of correspondence between Brunetti and the City. While we do not have Brunetti’s evidence, Szaraz testified that the parties only focused on the operational challenges that had been caused by the amendment to the Quebec regulations and that there was no realization by either party on the impact of these regulations to the contract. In his evidence, Robertson agreed that the only amendment to the Agreement was to the contract rate.
[55] The issue then is whether or not the contract was amended by subsequent conduct. For the Court to rely on subsequent conduct there must be a finding of ambiguity and GSI argues that there was no ambiguity. Ms. Gomery says there is no evidence that anyone on either side consciously realised there was a problem with the contract in 2007.
[56] She maintains that GSI did not waive the City’s requirement to supply conforming biosolids. She relies on the decision of Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2. S.C.R. 490 at p. 500 [Maritime Life] where Justice Major wrote:
Waiver will be found only where the evidence demonstrates that the party waiving had (1) a full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them. The creation of such a stringent test is justified since no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration.
[57] She places particular reliance on an earlier decision of the Supreme Court of Sohio Petroleum Co. et al. v. Weyburn Security Co. Ltd., [1971] S.C.R. 81. In that case, the plaintiff Sohio continued to make lease payments to the defendant Weyburn who continued to receive them contrary to the terms of the lease. Weyburn then sought a declaration that the lease was at an end. The Court held that the Defendant was not estopped from relying on the term of the lease since both parties acted under a mistake that the lease was ongoing. GSI says that neither party paid any attention to the issue of whether the biosolids were “conforming” as required by the contract and that GSI was not precluded from relying on a fundamental term of its Agreement with the City.
[58] The Plaintiff argues that the City had benefited from the change in the contract and that the City cannot use estoppel or waiver as a means of amending the contract as the City had suffered no detriment. As for GSI’s reason for continuing to receive non‑conforming biosolids for 21 months, GSI submits that it was simply trying to make the contract work and was not operating in bad faith. Things came to a head in October 2008 and GSI had no choice but to rely on the terms of its contract with the City.
[59] GSI argues that even if it is wrong, the City’s counter‑claim issued on November 30, 2010 is clearly out of time. The letter from Carey Thomson dated November 29, 2008 put GSI on notice that the City claimed GSI to be in breach as of that date. Even if it is one day late, the limitation period has lapsed.
[60] On behalf of the City, Mr. Cantello argues that there was an amendment to the Agreement in 2007 and that the letter from Brunetti went beyond simply providing for a new contract price and that the letter in its totality has to be considered. He maintains that the blended rate was put forward to address all of the issues including the fact that the City’s biosolids did not meet specific criteria under Quebec regulations and the new arrangement shifted the full risk of placing biosolids to GSI. There had been seven different rates payable to GSI depending on their ultimate use. Two of those rates referred to land application in Quebec. The City says that an adverse inference can be drawn from Brunetti’s failure to testify. Although there is no property in a witness, the City was only advised on the eve of trial that Brunetti would not be called as a witness by GSI.
[61] Moreover, the 2006 report indicated that 1.67 percent of the biosolids had been used for land application in Quebec. Mr. Cantello says that, at best, the land application issue in Quebec was a $40,000.00 item in a multi‑million dollar contract. The Brunetti letter referred to bad management, the loss of Laflèche and the loss of Lachute. Szaraz testified that he was brought in to deal with those problems in 2008. There was a commitment to build a transfer facility that was not followed through. The parties continued to follow the contract and GSI continued to accept non‑conforming biosolids for 21 months. Moreover, Mr. Cantello refers to GSI’s memo of May 16, 2008 where GSI was looking for “an angle” to get out of the contract yet never once raised the issue of non‑conforming biosolids with the City until November 2008. He submits that by May 2008, someone at GSI was looking at the contract and considering its options and that there is a clear waiver from that point in time. Moreover, Mr. Cantello argues that these biosolids remained fully conforming as testified to by Robertson since there was no longer any land application in Quebec.
[62] As for the limitation period, Mr. Cantello argues that the various deadlines given by GSI left the City in some doubt and that it was reasonable to wait until December 1, 2008 to see if GSI would attend to haul waste. In the event that GSI is entitled to rely on the limitation period, the City argues that the City is still entitled to the remedy of equitable set‑off where no limitation period applies.
[63] The City’s main argument is that GSI could not repudiate the contract. The small quantity of waste affected by the new Quebec regulation did not constitute a fundamental breach by the City. In fact, many other factors were at play, none on which were affected by the fact that the City’s biosolids were “out of category” for land application. He relies on the Supreme Court’s decision in Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 where that Court noted the distinction between “rescission” and “repudiation” of a contract and expanded on the doctrine of fundamental breach at para. 50. In referring to an earlier decision,[^4] the Court stated:
The Court was called upon to consider the doctrine of fundamental breach, defined as a failure in the breaching party's performance of its obligations under the contract that deprives the non-breaching party of substantially the whole benefit of the agreement. Notwithstanding that in two separate minority reasons, Dickson C.J. (La Forest J. concurring) and Wilson J. (L'Heureux-Dubé J. concurring) concluded that the seriousness of the defects in the extraction boxes did not amount to a fundamental breach, both Dickson C.J. and Wilson J. discussed the legal consequences in the event that a fundamental breach had occurred. As to the circumstances in which the doctrine applied, Wilson J., at pp. 499‑500, noted that the distinction between a mere contractual breach and a breach that is more appropriately characterized as fundamental is the exceptional nature of the remedy; while the traditional remedy for contractual breach is the obligation to pay damages, a fundamental breach permits the non-breaching party to elect instead to put to an end all remaining performance obligations between the parties. Given the exceptional nature of the remedy, Wilson J. rightly noted that the purpose of the restrictive definition of a fundamental breach is to limit the remedy to those circumstances where the entire foundation of the contract has been undermined.
[64] The City also relies on Place Concorde East Limited Partnership v. Shelter Corp. of Canada Ltd., (2006) 211 O.A.C. 141, 270 D.L.R. (4th) 181 [Place Concorde] where the Court of Appeal outlined five factors to provide guidance in determining whether or not a breach is so substantial as to relieve an innocent party of any future performance of that party’s contractual obligations. These factors are as follows:
(a) the ratio of the party's obligation not performed to the obligation as a whole;
(b) the seriousness of the breach to the innocent party;
(c) the likelihood of repetition of the breach;
(d) the seriousness of the consequences of the breach; and
(e) the relationship of the part of the obligation performed to the whole obligation.[^5]
[65] The City argues that the non‑compliance of the City’s biosolids was dealt with when the contract was amended and the new blended price was created and GSI was not later entitled to repudiate the agreement.
Analysis and Conclusion
[66] I conclude that GSI was obligated to continue to receive the City’s biosolids after November 28, 2008 and it was not entitled to repudiate the Agreement. The contract between the parties had been amended in 2007 to address the issue of non‑conforming biosolids and, in the alternative there was no fundamental breach on the part of the City that would have entitled GSI to repudiate the contract.
[67] Having come to that conclusion, I do not propose to discuss the doctrine of waiver at length. If one considers the legal requirements of waiver as set out in Maritime Life, it is difficult to find evidence of a clear waiver as the parties seemed to be ignorant of the contractual implications of the Quebec regulatory changes until May 2008 when GSI was looking for “an angle” to exit the contract. As argued by the City, that is strong evidence that someone was looking at the contract and if necessary, I would conclude that waiver could be found then. An argument could be raised that GSI was aware of its legal position on an even earlier date as there is a series of internal GSI e‑mails in September 2007 where Pierre Filiatrault is looking for a copy of the contract because “Tony wants that MCT look at our legal position on this contract if we decide to exit”.[^6]
[68] The case law cited by GSI on waiver can be distinguished because there was no evidence in those decisions of an amendment of the original contract in issue. In this case, the parties agree that the contract was amended; the only issue being the scope of those amendments.
[69] This takes me to correspondence of 2007. There are two letters. I did not have the benefit of Brunetti’s evidence and I draw an adverse influence on his failure to testify and I assume that his evidence would not have assisted GSI’s case.[^7] Szaraz’s evidence is not helpful as he came on the scene much later in the chain of events and he was not present when either the original contract or the amendments were negotiated. Robertson agreed that the only effect of the amendment to the contract was to change the rate paid to GSI and while GSI relies on that answer, Robertson also testified that all of the City’s biosolids were “conforming”. This answer is correct if one accepts that the amendments effectively removed land application in Quebec. As such, his answer is not determinative.
[70] The 2005 Agreement is 17 pages in length and includes an additional 13 documents listed as Schedules. Brunetti’s letter of February 22, 2007 is short but it contains a number of critical points. First, he notes that it is a follow‑up to a meeting held earlier between himself and Robertson on January 26, 2007. We do not have Brunetti’s evidence of what was discussed on that date but we do have Robertson’s report to Ken Brothers. In his letter, Brunetti addresses the Quebec MDDEP Addendum 2 which terminated GSI’s land application program. The letter went on to propose the new blended rate and stated that it “will allow GSI greater flexibility to focus on increasing the land application and target additional placement outlets” and transferred the full financial risk to GSI, thereby eliminating the need of negotiating annual penalties. GSI’s focus on increasing land application had to be limited to Ontario since it could not do so in Quebec. This gave a higher profit margin to GSI. In the end, this meant that the non‑conformity of the City’s biosolids with respect to Quebec MDDEP Regulation 2 became irrelevant.
[71] The City’s response of March 12, 2007 accepting the new rate change reads:
After consideration of the GSI proposed rate change and associated details presented in the proposal letter, I on behalf of the City of Ottawa accept the changes as proposed and recommend the changes be implemented.
[emphasis added]
There is a reference to more than a change in rates paid to GSI. The full extent of those changes cannot be determined by a review of two letters.
[72] I conclude that there is an ambiguity as to the scope of the amendments and it is necessary to consider extrinsic evidence, as well as the conduct of the parties. Robertson’s memo to Ken Brothers makes specific reference to “new regulatory restrictions” that will impact GSI and clearly sets out that GSI can no longer apply the City’s biosolids to agricultural land in Quebec. He goes on to add that that restriction and other factors will place pressure on GSI to expand its efforts to agricultural land application in Ontario. The non‑conforming issue was essentially resolved by the new blended rate structure that gave GSI an incentive to place the biosolids in Ontario.
[73] Subsequent conduct can be relied on in order to resolve an ambiguity.[^8] In this case, GSI continued to receive and haul the City’s waste for a period of 21 months. This conduct and other evidence that GSI would be looking to increase land applications in Ontario can be relied on to establish that GSI was no longer insisting on the conforming biosolids condition of the contract with regard to land application in Quebec.
[74] In the alternative, I am satisfied that any breach of the contract by the City was not a fundamental one that would have entitled GSI to repudiate its Agreement with the City. In applying the five factors listed in Place Concorde, I find:
(a) the ratio of the party's obligation not performed to the obligation as a whole;
[75] The value of the lost land application in Quebec was less than 2 percent of the total volume of waste hauled by GSI in 2006; over 98 percent of the City’s biosolids remained “conforming”. The volume represented a $40,000.00 item in a multi‑million dollar contract.
(b) the seriousness of the breach to the innocent party;
[76] It was apparent that other issues were at play in GSI’s ability to perform the contract. Three out of the four critical factors listed in Brunetti’s letter were not impacted by the non‑conforming issue. In addition, GSI did not build a transfer facility as it promised. GSI was able to continue to haul the City waste for 21 months. In addition, the loss of outdoor composting, and the loss of the Laflèche and other sites were having a greater impact on GSI’s ability to perform its obligations. GSI did not raise the non‑conforming issue until a few weeks before it withdrew its services. Had it been a serious breach, one would have expected GSI to raise it much sooner.
(c) the likelihood of repetition of the breach;
[77] The “breach” was likely to be repeated but GSI had tolerated it for 21 months and gave the City five days to remedy the breach while fully acknowledging that this was an impossible task.
(d) the seriousness of the consequences of the breach;
[78] As noted above, the loss of the land application in Quebec was not critical in GSI’s performance under the contract. GSI was having many other problems that led to its inability to perform. GSI sought and was paid a different rate that provided it with an incentive to increase its land application uses in Ontario and compensated it for the loss of the land application in Quebec. A solution had been found to deal with the non-conforming biosolids issue.
(e) the relationship of the part of the obligation performed to the whole obligation.
[79] While the contract required the waste to be used beneficially and there were land application targets, there were no targets for Quebec. In fact, the contract required a minimum of 30 percent of the land application to be in Ontario. The land application in Quebec was a small part of the obligation.
[80] As a result, the City could insist that GSI continue to perform its obligations under the contract and could sue GSI for breach.
Is the City’s Claim Statute-Barred?
[81] The City’s counter‑claim was issued on November 30, 2010. Carey Thomson’s letter of November 29, 2008 is unequivocal in that the City declared GSI to be in breach of its Agreement as of that date and disclosed the City’s intention to seek damages. The two‑year limitation period set out in the Limitations Act 2002, S.O. 2002, c. 24, Sched. B applies to counter‑claims[^9] and old case law applying “special circumstances”[^10] is no longer available and I conclude that the City’s counter‑claim is out of time.
[82] That being said, the City is entitled to an equitable set‑off to deny any recovery to GSI. An equitable set‑off is a substantive defence to which a statutory limitation period is inapplicable. The requirements of equitable set‑off were set out by the Supreme Court of Canada in Telford v. Holt, [1987] 2 S.C.R. 193 at p. 212:[^11]
(1) A defendant must show some equitable ground to be protected from the plaintiff’s claim;
(2) That ground must go the root of the plaintiff’s claim;
(3) The claims must be so closely connected that it would clearly be unjust to allow the plaintiff to enforce payment without consideration of the cross‑claim;
(4) The claims need to arise from the same contract; and
(5) The claims need not be liquidated claims.
[83] Those requirements are met in this case. The claims arise out of the same contract and are so closely connected that it would be unjust to enforce the payments of GSI’s claims without consideration of the City’s counterclaim which goes to the root of GSI’s claim. The equitable ground can be found in the fact that GSI continued to perform its obligations under the contract for 21 months and then raised the issue of non‑conforming biosolids while giving the City no realistic opportunity to remedy the situation. GSI offered shifting deadlines and continually invited the City to negotiate but then delivered its final notice on the same day it withdrew its services. GSI had been quietly looking for a way to exit its Agreement since September 2007 without telling the City and the evidence strongly indicates that GSI was experiencing a number of problems unrelated to the “non‑conforming” issue. When the problem surfaced, GSI sought and was paid a compensating rate.
[84] I accept the City’s evidence as to the value of its counter‑claim as $1,183,018.09. The amounts paid to THF are in line with what GSI was seeking. I have not allowed for the $21,000.00 insurance claim as this appears to have been paid as a result of an issue between the City and THF. The counter‑claim amount can be fully applied to off‑set the claims put forth by GSI. The City’s claim against EnGlobe was commenced by notice of action on May 21, 2010. EnGlobe delivered and disposed of 12 loads of de‑watered sludge on May 22 and May 23, 2008 and was charged a total cost of $72,187.80, which sum remains unpaid. That claim is not statute‑barred. The City will therefore have judgment against EnGlobe in the amount of $72,187.80. In its Statement of Claim, the City sought interest on that sum in the amount of 1.5 percent per month, pursuant to the provisions of the Municipal Act. There were no submissions on this point.
[85] If necessary, the parties are to provide me with their written submissions on that issue of applicable interest and on the subject of costs as follows: GSI must provide me its written submissions within 20 days of the release of this decision; the City must respond 20 days later and the reply submissions from GSI must be delivered 10 days thereafter. Costs submission should not exceed five pages.
Beaudoin J.
Released: September 4, 2013
COURT FILE NO.: 10-49755
DATE: 2013/09/04
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
GSI Environnement Inc.
Plaintiff
– and –
Corporation of the City of Ottawa
Defendant
– and –
City of Ottawa
Plaintiff (by Counter‑claim)
– and –
GSI Environnement Inc.
Defendant (by Counter‑claim)
COURT FILE NO.: 10-CV-48560
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
City of Ottawa
Plaintiff
– and –
EnGlobe Corp.
Defendant
REASONS FOR decision
Beaudoin J.
Released: September 4, 2013
[^1]: That date appears to be in error since it makes direct reference to GSI’s letter February 22, 2007. [^2]: questions throughout - 13 questions 21-22, question 36, questions 47 to 51, questions 76 to 84, and questions 63 to 70. [^3]: Exhibit 6. [^4]: Syncrude Canada Ltd. v. Hunter Engineering Co., 1989 129 (SCC), [1989] 1 S.C.R. 426 (S.C.C.) [^5]: citing Weiler J.A. in 968703 Ontario Ltd.(c.o.b. Headline Industries) v. Vernon, 2002 35158 (ON CA), 155 O.A.C. 386, 58 O.R. (3d) 215 (C.A.) at para. 16. [^6]: Joint Book of Documents, Volume 1, Tabs 1-15, Tab 11. [^7]: Coscan Development Corp. v. Evercrete Ltd., [1994] O.J. No. 1382, 1994 CarswellOnt 3637 at para. 9. [^8]: Canadian National Railway v. Canadian Pacific Ltd., 1978 1975 (BC CA), 95 D.L.R. (3d) 242 (B.C.C.A.) at para. 10. [^9]: Attorney General for Ontario v. Palmer (1979), 1979 1633 (ON CA), 28 O.R. (2d) 35. [^10]: Joseph v. Paramount Canada’s Wonderland, 2008 ONCA 469, 90 O.R. (3d) 401; Chimienti v. Windsor (City), 2011 ONCA 16, 105 O.R. (3d) 72. [^11]: See also Pierce v. Canada Trustco Mortgage Co. (2005), 2005 15706 (ON CA), 197 O.A.C. 369 at paras. 37-40.