SUPERIOR COURT OF JUSTICE - ONTARIO
RE: 2708266 Ontario Inc. o/a Nelli Construction, Applicant
AND:
The City of Toronto, Respondent
BEFORE: W.D. Black J.
COUNSEL: Marco Drudi, for the Applicant
Michelle A. Wright and Molly Lowson, for the Respondent
HEARD: October 4, 2022
Endorsement
Overview
1This application relates to a bid by the applicant, 2708266 Ontario Inc. (“Nelli”), in response to a Request for Tenders (“RFT”), issued by the City of Toronto (the “City”), for a sewer and watermain (“S & W”) project (the “Project”).
2Nelli asserts that it submitted the lowest priced compliant bid for the Project, which required the City to award Nelli the contract for the Project.
3Nelli also maintains that the City’s disqualification of Nelli’s bid and the subsequent retendering of the Project was based on an unfair and flawed interpretation of the requirement for a bidder to show relevant past experience and qualifications. Nelli argues that it had the necessary experience and qualifications and that the City’s conclusion to the contrary is unsustainable.
4The City’s position is that Nelli’s bid was not compliant, and that the City’s exercise of discretion to cancel the RFT, clarify the experience requirements, and issue a new tender was prudent and appropriate in the circumstances.
5The City points out that its discretion is wide, that it made its decisions in good faith and not capriciously, and that in any event, the provisions of the RFT do not permit Nelli’s claim for damages.
Relevant Facts
6The facts are not particularly in dispute.
A. Nelli, Ralph and Gio
7Nelli is an S & W contractor operating in the Greater Toronto Area.
8Its principal, Raffaele Giovannelli (“Ralph”), owns a majority of shares in Nelli and is a director. His three sons are also directors and officers of Nelli. Nelli employs five operators and 11 skilled laborers.
9Ralph has over 35 years of experience in the S & W industry. The vast majority of those years were spent at Gio Contracting Inc. (“Gio”), a corporation incorporated by Ralph and his two brothers, the business of which involved working on S & W projects.
10At a point in Ralph’s tenure at Gio, his sons joined him there and they worked with Ralph, including on a number of S & W projects for the City. It is uncontested that Ralph and his sons have over 50 years of collective experience in the S & W industry, primarily doing work for the City.
B. Ralph and Sons Depart Gio and Form Nelli
11Commencing in 2019, there was a shareholder dispute at Gio between Ralph and his two brothers. This led to Gio’s parting with Ralph and termination of the employment of Ralph’s three sons, along with 10 other operators and laborers.
12In the wake of that shareholder dispute, ultimately settled in 2021 on the basis of Ralph’s brothers purchasing his Gio shares, Ralph and his sons incorporated Nelli and hired all 10 terminated former Gio employees.
13In the result, Nelli, while a new company in the S & W industry, had in its management and employee ranks considerable S & W experience, including on multiple projects for the City.
C. The RFT for the Project
14The City published the RFT for the Project on June 24, 2021.
15Among other items, the RFT required bidders to submit a bid bond as security for execution of the eventual contract and to submit an “Experience and Qualifications Form”.
16In satisfaction of the “bid bond”, Nelli entered into a Surety Agreement with Zurich Insurance Company Ltd. No issue is raised about the nature or sufficiency of this security.
D. RFT Requirements for Experience and Qualifications
17While various clauses of the RFT come into play in this matter, the key provisions on which the dispute turns are those related to bidders’ experience and qualifications, and the definition and interpretation of “Affiliated Person” in the initial version of the RFT.
18Section 1.9.4.2 of the RFT provides that:
If a Supplier [in this case Nelli] is relying upon past experience of an Affiliated Person (defined below), the City reserves the right to verify the nature of the corporate relationship and its relevance to the Project. If, in the City’s sole and absolute discretion, it is determined that a Supplier is relying on an Affiliated Person’s past experience and a transfer of the Affiliated Person’s experience cannot be demonstrated as relevant to the Project, then the Bid will be declared non‑compliant and not be considered for acceptance.
19The definition of “Affiliated Person” was contained in the City’s Procurement By-Law (City of Toronto, by-law No 960-2016, To amend City of Toronto Municipal Code Chapter 195, Purchasing (7 October 2016)), in clause 195-2.1, as follows:
Affiliated Person – Everyone related to the supplier including, but not limited to employees, agents, representatives, organizations, bodies corporate, societies, companies, firms, partnerships, associations of persons, parent companies, and subsidiaries, whether partly or wholly-owned, as well as individuals, and directors, if: (A) Directly or indirectly either one controls or has the power to control the other, or (B) a third party has the power to control both.
20The Procurement By-Law also confirms that for a competitive procurement, the City’s goal is to secure the “Best Value”, described as achieving the optimal balance of performance and cost, represented by the highest ranking bid, being the lowest cost bid meeting technical specifications and supplier qualifications.
21As noted above, Nelli submitted a bid bond (the Zurich Insurance Surety Agreement) and a Pricing Form specifying a price for the Project of just under $5 million.
22In the “Experience and Qualifications” section, Nelli’s references largely comprised watermain construction projects that Ralph had worked on for the City while at Gio.
E. Initial Bid Results
23On July 19, 2021, the City posted unofficial bid opening results showing that Nelli was the lowest bidder. The second lowest bidder, 2489960 Ontario Inc. (“248”), had a bid price of slightly more than $500,000 higher than Nelli’s bid.
24Nelli’s evidence is that based on this preliminary indication, it began allocating resources to prepare for the Project contract’s scope of work.
25Consistent with the unofficial bid opening results, the City wrote to Nelli on September 2, 2021, advising that “Your firm has submitted the lowest bid in conformance with the Tender Requirements.” On the same day, Nelli also received a “Bid Award Panel Contract Award” in which the City’s Chief Procurement Officer (“CPO”), recommended that the Panel grant authority to award the Project contract to Nelli with an expected start date to be on the date of the award and completion date of July 1, 2022.
26Nelli points to these events to assert that “Clearly the City had no issue with the experience of Nelli to perform the work.”
F. The Complaint
27On September 10, 2021, however, the CPO sent an email to Nelli advising that “We have received a dispute with respect to your experience qualifications. We will reach out to you, as necessary, as we review this dispute.”
28The City did, as contemplated, request additional information about Ralph’s involvement on past City projects and Gio’s role. Nelli provided the additional details requested in an exchange of correspondence between the parties in mid-September of 2021.
G. City’s Conclusion re Complaint and Nelli’s Response
29On September 23, 2021, the City wrote again to Nelli and advised of the City’s determination that there was no “affiliate relationship” between Nelli and Gio and that “there has been no legal transfer of Gio’s experience and qualifications to Nelli” and that, as such, the City was declaring Nelli’s bid to be non-compliant.
30There then ensued a further exchange of correspondence between Nelli’s counsel and the CPO, in which Nelli’s counsel asserted that Nelli’s bid was in fact compliant with the Experience and Qualifications requirements and met the definition of “Affiliated Person” in that connection. Nelli’s counsel pointed out, among other things, that the Toronto Municipal Code, Chapter 195 related to Purchasing, defines a “Supplier” as “a person or group of persons that provides or could provide goods and services”, and that Gio (or presumably any corporate entity), was merely a name under which the people performed the work.
31Nelli’s counsel also argued that there was no instruction in the RFT to include evidence of a legal transfer document to be included as part of an Affiliated Person’s past experience and that Nelli independently met the Experience and Qualifications requirement, based on Ralph’s past experience and his conformity with the Affiliated Person’s definition by virtue of his role as a Director/Shareholder of Nelli.
32Counsel asked rhetorically:
Is the City suggesting that if Ralph Giovannelli kept shares/control in both companies concurrently, the City will accept his qualifications and experiences but as soon as he disengages from the former company, his knowledge, skills and experience are no longer applicable? As a taxpayer of the City, I trust that is not the case.
33The City was unmoved. In response to Nelli’s counsel’s initial missive, the CPO wrote (as part of an October 12, 2021 letter):
The corporate entity, Gio Contracting Inc., was the one that entered into a contract to perform work and gained the corporate work experience by completing that work. Corporate work experience is only capable of being transferred to another corporate entity under limited circumstances such as a merger, sale, acquisition or formation of a subsidiary/parent corporate arrangement. It is not able to be transferred to a completely separate company with no legal ties to the company that gained the work experience in the first place.
Ralph Giovannelli may have acquired some work experience in his personal capacity as a result of working on the 3 reference projects while he was at Gio Contracting Inc., but that experience would have been gained in his personal capacity. Nelli does not acquire corporate work experience as a result of Ralph becoming a director and/or shareholder and bringing his personal work experience with him. While there may be some benefit acquired by Nelli as a result of appointing Ralph to be a Director of Nelli (as a result of Ralph’s personal work experience) that appointment does not amount to a transfer of corporate work experience to Nelli.
34During argument I asked the City’s counsel to confirm that this meant, as a matter of policy, that if hypothetically Gio’s “sewer and watermain division” (appreciating that there likely is no such division but inventing it for purposes of testing the City’s position) was acquired by a another entity by way of a hostile takeover - thereby meeting the legal transfer requirements cited by the City in the CPO’s October 12, 2021 letter – then the hostile acquiror in that scenario would meet the RFT’s experience requirements. The answer was necessarily affirmative. I expressed a concern that that scenario would count as experience for purposes of the RFT, whereas the voluntary departure of an experienced cadre of S & W experts, (Ralph, his sons, and the 10 other experienced operators and laborers to form a new entity), would not meet those same requirements.
35It seemed and seems to me, that “corporate experience” is something of a fiction. Even allowing for corporate structures and procedures geared to undertaking particular kinds of projects, the work in each and every case is delivered by people, not corporations in the absence of people. Surely it is the experience of those people, under whatever corporate banner, that is relevant.
H. Change in City’s Position – Decision to Cancel and Reissue RFT
36While the City maintained its adamant insistence on its proposed interpretation of Affiliated Person in the near term following the initial exchange with Nelli’s counsel, the City’s subsequent actions and its position on this application bespeak an acknowledgement of uncertainty and a corresponding softening of the initial hard line drawn in the CPO’s initial correspondence.
37That is, as set out in paragraph 19 (and elsewhere) in the City’s factum, the City says that “through the process of investigating Nelli’s experience, the CPO recognized that bidders could have been confused with respect to what was required to meet the RFT’s experience requirements”. The City also allows (in paragraph 37 of its factum), that Ralph “may be an ‘affiliated person’ with Nelli given his role as an employee and shareholder.” It maintains, however, in the same paragraph, that “it does not follow that his prior personal experience as a former employee and shareholder of Gio transfers Gio’s experience completing projects to Nelli”.
38The remedy chosen by the City, in light of this acknowledged uncertainty, and related acknowledgement that Ralph may in fact meet the “affiliated person” definition, was to cancel the RFT and to reissue it with provisions clarifying the experience requirements.
39The reissued RFT was issued in November/December of 2021.
I. “Clarifications” for New Tender Not Benefitting Nelli
40The clarification provisions of the reissued RFT did not enhance Nelli’s prospects of success in the RFT. In fact, the clarifications made Nelli’s chances definitively worse, to the point that Nelli chose not to bid on the reissued RFT.
41That is, in the revised RFT, section 1.9.4.1 provided that “(t)o be clear, the Experience and Qualifications are for the Supplier itself and not its individual employees, directors or shareholder… .”
42Section 1.9.4.2-1.9.4.4 of the revised RFT removed the term “Affiliated Person” and substituted the term “Affiliate”, and in s. 3.13.1 the City defined “Affiliate” as follows:
For the purpose of this RFT [Affiliate] means an affiliated body corporate organization, company, firm, partnership, joint venture, parent company and subsidiary, whether partly or wholly-owned, as well as individuals, and directors if: A Directly or indirectly either one controls or has the power to control the other, or B. A third party has the power to control both.
43In s. 1.9.4.2 the City also made “transfer” a defined term and defined it to mean:
A written agreement identifying that a knowledge transfer has occurred such as a merger, amalgamation, corporate sale or other transactional document.
44The City made it clear that Nelli’s (original) bid would have been declared non-compliant, effectively undermining any proposed re-submission of a further bid from Nelli.
J. 248 is Awarded the Project
45On December 2, 2021, with Nelli removed from the bidding process within the revised RFT, 248 was announced as the successful bidder with a total base bid of $4,760,000.
Agreement that Matter can Proceed as an Application
46There is no disagreement between the parties that, given that the forgoing facts are agreed, the matter can properly proceed as an application. I agree.
47There also does not appear to be disagreement that one aspect of the analysis that I must undertake is to determine whether a contract came into existence based on Nelli’s initial bid in the context of the original RFT.
48I note that, as discussed below, the City’s position, notwithstanding that it makes an argument on the issue of whether or not a contract was formed, asserts that this analysis is irrelevant in the circumstances of this case inasmuch as the City had an appropriate basis to and did in fact properly exercise its right to cancel the initial RFT and to reissue a revised RFT. It notes that Nelli submitted no bid in the context of the revised RFT and accordingly has no basis for complaint.
49Noting this position, I start nonetheless with the discussion of whether or not there was, in the context of the original RFT, a contract formed between Nelli and the City.
Nelli’s Argument re Contract A
50Nelli suggests (and the City implicitly agrees), that the context for this part of the analysis is the series of cases from the Supreme Court of Canada establishing the framework of “Contract A” and “Contract B”.
51Under this framework, originally promulgated by the Supreme Court in The Queen (Ont.) v. Ron Engineering, 1981 CanLII 17 (SCC), [1981] 1 S.C.R. 111, Contract A comes into existence when a contractor submits a compliant bid in response to an owner’s invitation to tender.
52The terms and conditions of Contract A are governed by the terms and conditions of the call for tenders (in this case the RFT), which typically includes a provision that if the owner accepts the contractor’s bid, the contractor will be obliged to enter into the construction contract – Contract B.
53Nelli notes that if its bid was compliant, then a Contract A came into existence.
54Following on Ron Engineering, the Supreme Court of Canada has further refined the law of tender through its decisions in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619 and Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860. Those two decisions have confirmed the following principles:
(a) There is an implied term in Contract A to treat all bidders fairly and equally;
(b) There is an implied duty not to give one bidder an unfair advantage over another;
(c) A privilege clause reserving the right not to accept the lowest bid or any bids at an owner’s absolute discretion does not exclude the obligation to treat all bidders fairly; and,
(d) If an owner awards Contract B on the basis of considerations or criteria that are undisclosed or extraneous to those identified in the tender documents, an owner is in breach of its obligations under Contract A.
55Nelli notes that on the question of whether or not a bid is compliant, the Supreme Court of Canada and the Court of Appeal for Ontario have adopted and consistently applied the test of “substantial compliance” as opposed to “strict compliance”, and that in assessing substantial compliance, Courts use an objective standard (and are not concerned with mere irregularities).
56Against this backdrop, Nelli argues that Ralph’s prior experience with Gio is properly taken into account in the Experience and Qualifications assessment, that Nelli’s bid was thus compliant, and that a Contract A was formed.
57Nelli notes:
(a) Pursuant to s. 1.9.4.2 of the RFT – Experience and Qualifications – the City was expressly given the right to verify whether Suppliers were relying on the experience of an “Affiliated Person”, demonstrating that the relevant experience need not be attributed solely to a Supplier (here Nelli), but can include the experience of the Affiliated Person;
(b) As an officer, director and shareholder of Gio, Ralph administered the projects referenced in Nelli’s bid (as well as many other projects) and, as a current officer, director and shareholder of Nelli, Ralph meets the definition of Affiliated Person in the original RFT.
58Nelli fairly recognizes and allows that whether or not Nelli’s bid was compliant comes down to which party’s interpretation - of Affiliated Person for purposes of the Experience and Qualifications requirements of the original RFT - prevails.
59In urging its own interpretation, Nelli relies on guidance from Courts on the interpretation of statutory language.
60It begins by referencing the Court of Appeal for Ontario’s emphasis in CropLife Canada v. Toronto (City) (2005), 2005 CanLII 15709 (ON CA), 75 O.R. (3d) 357 (C.A.), that the approach to interpreting municipal by‑laws is one of large and purposive construction.
61To similar effect, the Supreme Court of Canada in Rizzo & Rizzo Shoes Ltd., Re, 1998 CanLII 837 (SCC), at para. 21 said:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
62Nelli argues that the overarching purpose of the Procurement By-Law is articulated and captured in paragraph B under Article 1, which describes the goal to “maintain the integrity of the procurement process by ensuring that, whenever possible, competitive methods of procurement will be used to obtain the best value for the City.”
63Nelli notes that this statement reflects twin purposes: to ensure a fair and transparent procurement process; and to encourage competition in order to obtain the best value for the City.
64Nelli argues that this is consonant with the Court of Appeal for Ontario’s comments, in Rankin Construction Inc. v. Ontario, 2014 ONCA 636, 325 O.A.C. 201, at para. 43, that:
Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process. And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible.
65The ordinary meaning of the words at issue, says Nelli, contemplate that:
(a) Nelli can rely on the past experience of an Affiliated Person. In other words, and clearly, and contrary to the City’s position, Nelli is not limited to its own corporate experience;
(b) An Affiliated Person can be anyone related to the Supplier (here Nelli), including employees, as well as individuals and directors provided that one indirectly or directly controls or has the power to control the other (and Ralph is a 55% shareholder);
(c) The City does not have the discretion to determine whether a person qualifies as an Affiliated Person; and
(d) The Affiliated Person’s experience must be relevant to the Project. The City does maintain discretion with respect to whether the Affiliated Person’s experience is relevant to the Project. In this regard, the three projects referenced in Nelli’s bid were all City jobs successfully performed by Ralph. There is no doubt that Ralph was considered experienced and competent as evidenced by the fact that, prior to the complaint by 248, the Award to Nelli was to be confirmed.
66On this latter point, Nelli maintains that the relevance of the projects described in Nelli’s bid is not (and cannot be) seriously in dispute. The City reviewed and conducted its own due diligence on those projects prior to advising Nelli that it was the successful bidder. The only issue ultimately raised by the City is the transferability of that experience to Nelli.
67Moreover, says Nelli, whereas Nelli’s interpretation of s. 1.9.4.2 of the RFT and the definition of Affiliated Person meet the “ordinary meaning” criteria and can be read harmoniously with the purpose and object of the Procurement By-Law, the City’s interpretation runs afoul of the purpose and object of the By-Law.
68First, if the City’s interpretation stands, it would effectively eliminate from competition newly formed corporate entities, featuring persons with decades of experience on relevant projects, disentitling such entities from participating in the procurement process unless they have a “legal relationship” with an affiliated corporation.
69The City’s affidavit (from the CPO) effectively confirms this observation, saying:
As a result of the City’s consideration of the above factors, affiliated suppliers may be relied upon if the bidding supplier will have the same infrastructure and teams undertake the work and there is a legal relationship between the companies demonstrating transfer of capabilities to verify that the required experience qualifications are met. The movement of individuals between companies is not enough to satisfy these requirements.
70Put another way, past experience of employees, directors and officers that move to or start a new company does not count. That same past experience of those same individuals only counts if established in an entity pursuant to a “legal transfer”.
71Nelli urges the Court to consider the implications – from a broader policy perspective and having regard to the stated purpose of the Procurement By-Law – of this interpretation. “If accepted” says Nelli:
It will lead to a consolidation in the construction industry reducing the number of competitive Bidders, invariably leading to a decrease in competition and an increase in costs to the City and its taxpayers. Moreover the City’s approach would result in a scenario similar to an oligopoly, a state of limited competition, in which the market would be shared by a small number of companies.
72Nelli’s second related point is that increased competition will lead to lower costs for the City and its taxpayers, noting that lowering costs is a key factor and criterion in assessing what constitutes the “Best Value” for the City. Putting it starkly, Nelli asserts that Nelli’s interpretation will result in the Best Value for the City and its taxpayers, and the City’s interpretation will not.
73Based on these submissions, Nelli concludes that its bid was compliant, and that a Contract A was formed.
The City’s Argument re Contract A
74In its submissions on this issue, the City takes a rather narrower approach.
75It says that Nelli does not suggest that as a corporation it had the experience required by the RFT.
76With respect to Ralph, the City insists that it does not follow that his prior personal experience as a former employee and shareholder of Gio transfers Gio’s experience completing projects to Nelli. It says that whereas normally a transfer of experience between corporate entities would be demonstrated through a merger, corporate sale, acquisition or similar transaction, here the evidence shows that there was no shared or transferred experience between Gio and Nelli given the acrimonious terms on which Ralph and the others left Gio.
77It also argues that once it was clear that Nelli was relying on Ralph’s personal experience managing projects completed by Gio rather than by Nelli, the City was entitled to exercise its discretion to conclude that Nelli did not meet the experience requirements of the RFT and that therefore its bid was not compliant.
Observations and Conclusions re Contract A
78I pause here to observe that as a general proposition, this position may be fair. However, it is noteworthy in my view that the evidence in the record does not show that the City assessed the experience per se or found that experience wanting; rather, it only went so far as to conclude that the experience was at Gio rather than Nelli. Its exercise of “discretion” appears to rest entirely on that foundation, and not, for example, on any perceived deficiencies in the nature and/or extent of Ralph’s on-the-ground experience.
79I should also note at this juncture the consolation offered by the City that Nelli’s alleged lack of experience would not disqualify it from all tenders. It says that for small projects, the City relaxes the Experience requirement such that a fledgling company like Nelli could compete for those smaller jobs and, if successful, gradually and organically build up the experience necessary to compete for larger projects.
80I suspect that there is in fact little consolation for Nelli in knowing that the extensive experience of its personnel in numerous large projects like the one at issue here, while not counting for large and lucrative work, would not be an impediment to starting from scratch and conceivably working on smaller projects.
81With respect to this aspect of the matter, I have no difficulty in upholding Nelli’s position.
82In my view, it is myopic and counterproductive for the City to suggest that it will only consider extensive relevant experience if that experience was gained within a pre-existing corporation, or captured in a specific corporate transaction. While of course the City retains discretion to assess the actual experience in issue, the corporate roof under which the experience is housed should not, in my view, be a determinative factor on its own.
83I find that the City’s interpretation is in fact at odds with the language of the RFT, and at odds with common sense and the overriding objectives of the Procurement By-Law.
84I find that a Contract A was formed.
Did the City Breach Contract A?
85There is next the question as to whether or not the City breached Contract A when it refused to enter into Contract B with Nelli, and instead cancelled and reissued the RFT.
Nelli’s Argument re Breach
86Nelli makes a number of points in this vein.
87It states first that allowing the City to avoid its liability for a flawed and arbitrary interpretation of the RFT and Procurement By-Law by simply cancelling and reissuing a revised RFT, will wreak havoc in an industry that relies on the transparency and integrity of the tender process.
88In that regard, it notes that as the Supreme Court of Canada has confirmed in M.J.B., an owner is in breach of the terms of Contract A if it considers criteria that are extraneous or not disclosed in the RFT when it makes a decision with respect to Contract B.
89Nelli argues that in this case there is no mention of a requirement of “legal transfer” of experience or qualifications, nor any description of what “legal transfer” entails. When the City added an additional criterion to s. 1.9.4.2 of the RFT requiring Nelli to demonstrate a “legal transfer” of Gio’s experience through a “merger, corporate sale, acquisition or similar transaction” it added, Nelli says, a requirement that is not only undisclosed and extraneous, but one that is also arbitrary.
90Accordingly, Nelli asserts, when the City unilaterally imposed the criterion of “legal transfer” and then cancelled the RFT on that basis, it breached Contract A.
91Nelli characterizes the City’s breach as fundamental in nature, following this Court’s guidance in Urbacon Building Groups Corp. v. Guelph (City), 2014 ONSC 3641, 25 M.P.L.R. (5th) 40, (in turn quoting from the Supreme Court of Canada’s decision in Syncrude Canada Ltd. v. Hunter Engineering Co., 1989 CanLII 129 (SCC), [1989] 1 S.C.R. 426, at para. 148, which itself cites from Lord Diplock’s well known speech in Photo Production Ltd. v. Securicor Tpt. Ltd., [1980] A.C. 827 (H.L.)), describing fundamental breach as occurring “where the event resulting from the failure by one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract”.
92Applying that guidance to the facts of this case, Nelli says that refusing to enter into Contract B with Nelli in accordance with Contract A, the City deprived Nelli of substantially the whole benefit of Contract A (being to enter into Contract B).
93Nelli argues that the City’s breach of the contract, and specifically its flawed interpretation of the experience and qualifications requirements, was self-evidently the cause of damages to Nelli. It says it is clear in the record that but for the City’s late-breaking and incorrect interpretation of those requirements, Nelli was going to be awarded Contract B.
94Nelli goes further, maintaining that in its conduct in this setting, the City has strayed from the good faith required of a contracting party as laid out in the Supreme Court of Canada’s decisions in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 9 M.P.L.R. (6th) 1.
95For the reasons urged above, Nelli argues that the City acted arbitrarily, and not reasonably, in its interpretation of the experience and qualifications criteria. In terms of the exercise of discretion, Wastech dictates that to find a breach of the duty to exercise discretionary powers in good faith, a party must be found to have exercised its discretion unreasonably, meaning in a manner that is not connected to the underlying purposes for which the contract grants that discretion.
96Nelli says that the process employed by the City was arbitrary, and did not follow its own procedures as outlined in the Procurement By-Law
97In that regard, Nelli notes that Article 9 of the Procurement By-Law provides for limited circumstances in which the City can cancel a solicitation (an RFT).
98Specifically, the CPO can only cancel a solicitation based on his own opinion where “the integrity of the solicitation process has been compromised due to a material breach of the process as disclosed in the solicitation”.
99Nelli observes that there is no suggestion in the record, and in particular in the communications between Nelli’s counsel and the CPO, that the integrity of the process was compromised by a material breach in the process disclosed in the RFT.
100In the absence of such basis for the CPO to cancel the RFT of his own accord, Nelli notes that steps were therefore required under Article 10 of the Procurement By-Law, dealing with the “post bid dispute process”.
101In such circumstances, argues Nelli, if the CPO is unable to resolve the dispute through consultations with the supplier, the CPO is obliged to refer the matter to “the Controller or their designate(s) for an impartial review”.
102As such, argues Nelli, it is clear that if the matter cannot be resolved by the CPO in consultations with 248 (the party raising the dispute here) then he cannot unilaterally cancel the RFT (in the absence of evidence of material breach or compromise of the integrity of the process) and must refer the issue to the Controller for an impartial review.
103Under Article 10 of the Procurement By-Law, the Controller – defined in the By-Law as a person appointed to the management position of Controller in the City’s administrative organization and who has also been appointed as a deputy treasurer under s. 138 of the City of Toronto Act, 2006, S.O. 2006, c. 11, Sched. A – has the authority, as an impartial arbitrator, to cancel the RFT.
104Nelli points out that, contrary to this referral contemplated and required by Article 10, the record is replete with evidence from the CPO himself that it was the CPO alone who made the decision to cancel the RFT.
105In sum, then, relative to this portion of the argument, Nelli submits that:
…the City breached its duty of good faith when it employed an arbitrary process resulting in the cancellation of the RFT. The City exercised its discretion in a manner that is not connected to the underlying purposes of the discretion granted by the RFT. Therefore, in addition to being entitled to its damages as a result of breaches of the RFT, Nelli is entitled to damages as a result of the City’s breach of its implied duty to act in good faith.
106I will return to the question of damages below.
City’s Argument that It Had a Broad Discretion to Cancel the RFT
107The City, in response to Nelli’s arguments on this front, notes as an initial matter its broad discretion to cancel an RFT.
108It argues that it did not make the decision to cancel the RFT lightly (since that decision lengthened the timelines for the completion of the Project that had been approved and budgeted). It says it did so because of “potential confusion with respect to the experience requirements”.
109The City agrees that the relevant consideration, as set out in the Procurement By-Law (within “Chapter 195” as the City labels it in its submissions), is that the CPO is authorized to cancel any solicitation, inter alia, where “in the opinion of the [CPO] the integrity of the solicitation process has been compromised due to a material breach of the process as disclosed in the solicitation”.
110In this case, the City says the CPO found that “the integrity of the solicitation had been compromised due to a material breach of the process because of potential lack of clarity for bidders surrounding the experience requirements.” More particularly, the City says that when it found that Nelli was “not in compliance with the experience requirements” instead of awarding the contract to the next lowest bidder, which by implication the City maintains it could have done, “the CPO determined that the best course of action would be to cancel the RFT and reissue with provisions to clarify the experience requirements”.
111The City argues that this was a reasonable decision, and points, as authority for that proposition, to this Court’s decision in ASI Group Ltd. v. Toronto (City), 2017 ONSC 3385, 67 M.P.L.R. (5th) 270.
112In that case, after bidding had closed on an RFQ for diving inspection services for the City’s water treatment facilities’ systems and structures, the City learned, based on a complaint from an unsuccessful bidder, that there had been a disparity, between and among bidders, in terms of their access to important information relative to the work to be performed. In that context, bidders who had prior knowledge of the City’s water treatment facilities based on past involvement with those facilities had an unfair advantage over those who did not know, and could not access that information.
113Justice Henderson, in that circumstance, noted the City’s “general authority” to cancel an RFQ, and found that the City’s decision to cancel and reissue the RFQ “made good sense” once it became aware of the concerns about lack of equal access to information. His Honour found that by cancelling in that scenario the City treated the bidders fairly and equally.
114The details driving Henderson J.’s decision are set out in particular at paragraphs 45-50 of the decision.
115In brief, His Honour found that, based on the unequal access to relevant information, some bidders had a competitive advantage over others in the bidding process. Justice Henderson also referred with approval to Hackland J.’s decision in Glenview Iron & Metal Ltd. v. Smiths Falls (Town), 2012 ONSC 5378, in which Hackland J. had found re-tendering of a project to be a reasonable course of action in circumstances in which, among other issues, Smiths Falls had essentially embraced a policy change to favour “green” technology during the currency of a bidding process to select a supplier for the collection and disposal of the Town’s garbage. In upholding Smiths Falls’ decision to cancel and re-tender the bid, His Honour found, at para. 22, “no evidence that the Town in the course of considering and ultimately cancelling this bid, could reasonably be found to have acted in bad faith”.
116Likewise, argues the City, it acted in good faith in its investigation of Nelli’s bid and assessment of its experience and, once it “realized there was potential for confusion among bidders with respect to how the RFT experience requirements applied” made a good faith decision to cancel the RFT, re-tender the bid, and clarify the experience requirements.
117As such, the City argues, the decision to reissue the RFT was squarely within the City’s authority and discretion. The terms of the RFT gave the City “sole and absolute” discretion to cancel and reissue an RFT and, again, the CPO formed the opinion that the integrity of the solicitation process had been compromised due to a material breach of the process.
Discussion of Arguments re Breach
118While this encapsulation of the events sounds laudable, there is actually no evidence on the record of confusion on the part of any bidders.
119This is not a circumstance in which any other bidders were materially disadvantaged by a disparity of available information or a change in City policy leading to an unlevel playing field.
120Moreover, the “material breach”, even if one could be identified on this record, would have to be one, in order to justify a cancellation, that compromised the integrity of the tender process.
121The only issue here, which was between Nelli and the City, was as to the proper interpretation of the experience requirements, and specifically whether or not the undisputed experience of Nelli personnel while at Gio should count as experience in the context of this bid.
122There is simply no evidence that this somehow made the process unfair (to anyone other than Nelli), or compromised the process’ integrity. Having already found that the City’s purported interpretation of the experience requirements, that they only “count” if transferred via a recognized corporate mechanism, is unsound, I cannot see, in the absence of evidence of confusion on the part of other bidders or some inherent unfairness in the rules of the process or unfair change in those rules, how there is a legitimate basis for the cancellation and re-tender.
123There is also no evidence that the “clarification” provided with the re-issued RFT had an impact on anyone but Nelli, nor evidence that any other bidder’s proposal changed as a result of the clarification. While 248 opportunistically changed its price within the re-issued RFT, and thus secured the contract for the Project, there is no suggestion in the record that the “clarification” mattered to, or changed the bid details of anyone other than Nelli.
124Counsel for the City repeated in submissions that all that is required as a basis for the proper exercise of the City’s discretion is a “municipal purpose”. Even assuming that is the case, I do not find a municipal purpose here; there is no apparent benefit to the taxpayers of the City arising from the City’s insistence that people’s experience can only be counted if amassed and housed under one type of roof and not another.
125In short, and notwithstanding the City’s appropriately wide discretion to ensure the fairness and integrity of its process, I do not find that it had a basis on this record to cancel and reissue the RFT.
126One suspects that what motivated the City here was a desire to guard against perceived risk of litigation with 248, and that the City believed it could foreclose that risk, and create an appearance of fairness by way of a “do over”. Whatever the reason, though, in my view the City’s approach here was misguided and unfair to Nelli.
127That still does not end the matter.
Claim for Damages and Effect of Limitation of Liability Clause
128In subsection 3.3 of the RFT there is a very robust limitation of liability clause in favour of the City, as follows:
i. subsection 3.3.1 states that the City will have no liability to any bidder or prospective bidder for damages including direct, indirect, special or punitive damages, or for loss of profits loss of opportunity of loss of reputation arising out of or otherwise related to the RFT, participation of any bidder in the RFT process, the provision and availability or lack of availability or accuracy of the City Online Procurement System, or the City’s acts or omissions in connection with the conduct of the RFT process, including the acceptance, non-acceptance or delay in acceptance by the City of any bid.
ii. Subsection 3.3.3 states that each bidder agrees that if the City is found liable, in any way whatsoever, for any act or omission in respect of the RFT, the total liability of the City to any bidder and the aggregate amount of damages recoverable shall be no greater than the bidder’s cost of preparing the bid.
129I raised with Nelli’s counsel the question of how, in the face of this broad limitation of liability, Nelli can claim damages (beyond at most a recovery of its costs). The answer was that Nelli relies on Iacobucci’s J. decision, speaking for a unanimous Supreme Court of Canada, in M.J.B.
130Specifically, in formulating the framework for damages in that case, Iacobucci J. confirmed that the appropriate measure of damages in this setting is expectation damages and, inasmuch as both parties knew that if the respondent awarded Contract B to a non-compliant bid, then one of the tenderers who submitted a compliant bid would suffer the loss of Contract B and that this tenderer could be the appellant. This entitled the appellant, Iacobucci J. held, to damages in the amount of the profits it would have realized had it been awarded Contract B.
131Nelli argues that, pursuant to M.J.B. there is an implied obligation on the City, in accordance with the presumed intentions of the parties, to accept a compliant tender. It argues that the City in fact accepted its bid and found it to be compliant at the outset, that therefore the City was obliged to enter into Contract B with Nelli, and that the failure to do so gives rise to Nelli’s entitlement to expectation damages, here as in M.J.B. the profits Nelli would have realized had it been awarded Contract B.
132Finally, it argues that the implied obligation on the City to award Contract B to Nelli is, as a matter of public policy, “outside” the exclusion created by the limitation of liability clauses in s. 3.3 of the RFT.
133While I am sympathetic to Nelli’s plight, and as set out above, I believe the City breached Contract A, and improperly failed to award Contract B to Nelli, and while I have found the City’s position to be untenable from a policy perspective, I am hardpressed to see how Nelli can avoid the wide purview of the limitation of liability provisions built into the RFT.
134There is no suggestion that Nelli was unaware of, or raised objections to, the scope of the limitation of liability clauses going into the tender. I appreciate that it may be unrealistic for a supplier to do so, but it seems clear that all bidders are taken to know and accept the presence and operation of these provisions.
135Nelli is not unsophisticated nor, as I have found, a stranger to the City’s tender process.
136From a public policy perspective, I do see the benefit to the City’s taxpayers of a firm and effective limitation of liability as a means of discouraging litigation on the part of unsuccessful and disgruntled bidders.
137While this of course does not give the City unlimited license to act arbitrarily and capriciously in running its tenders, it does give the City relatively wide protection from missteps and even honest mistakes in running and overseeing the many tenders that it operates on a year over year basis.
138The words of the limitation of liability are clear, and there is no suggestion before me that Nelli did not know about or did not understand this language in the RFT.
139As such, somewhat reluctantly, I am inclined to uphold their effect.
140That said that same language allows for the possibility, even if a claim for expectation damages is firmly prohibited, that an aggrieved party may, if the city is found liable “in any way whatsoever” recover that bidder’s cost of preparing the bid.
141Given my findings about the City’s conduct in this matter, I am also inclined to find that this is an appropriate case for Nelli to recover its costs of preparing the bid.
142Having stated my inclinations relative to the effect of the limitation of liability clause, I think it is also fair to observe that neither party particularly briefed nor spent much time in their written submissions (in particular) on the question of the effect of the limitation of liability clause.
143For example, while it appears that the leading case on the issue of potentially setting aside a contractual limitation of liability clause is the Supreme Court of Canada’s decision in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, and in particular Binnie J.’s dissent in that case, neither party has referred to that authority nor various cases following from it on this point (Rankin Construction; and Chuang v. Fogler Rubinoff, 2022 ONCA 440).
Request for Additional Submissions
144In the circumstances, given the importance of that issue (having regard to my other findings above), I ask that the parties provide me with their written submissions, not to exceed seven pages in length, on the enforceability of the limitation of liability clause in this case. Subject to hearing from counsel about timing concerns or constraints, I ask that counsel exchange and file their respective additional submissions within two weeks of the date of release of this decision. If, having read their written submissions, I require oral submissions I will contact counsel to make the necessary arrangements.
Costs
145On balance, regardless of my pending conclusion on the impact of the limitation of liability clause, I also find that Nelli is entitled to its costs of this motion.
146The parties have both provided costs outlines. Their respective numbers are not far apart, and appear entirely reasonable to me. It appears that Nelli’s calculated costs are in fact slightly lower than those of the City.
147I award costs of this motion to Nelli on a partial indemnity basis in the amount of $12,774.26, inclusive of disbursements and HST, payable within 30 days of the date of release of this decision.
W.D. Black J.
Date: November 7, 2022