Court File and Parties

COURT FILE NO.: CV-22-676633 DATE: 20230113 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

READ: December 8 and 9, 2022

Endorsement

Overview

[1] This endorsement follows from my endorsement of November 7, 2022 in this matter.

[2] In that endorsement, I found that the Respondent City of Toronto (the “City”), improperly failed to award the “Contract B” at issue to the Applicant (“Nelli”).

[3] However, I also noted the very broad and robust limitation of liability clause (the “LL Clause”) included in the City’s Request for Tender (“RFT”), and expressed the preliminary view that I was “hard-pressed to see how Nelli can avoid the wide purview of the limitation of liability provisions built into the RFT”.

[4] In fairness though, neither party particularly focused, during the argument of the motion or in their respective written submissions, on the question of the effect of the LL Clause. Given the importance of that issue, I felt it would be best to allow the parties an opportunity to make more fulsome submissions on that point.

[5] Both parties have done so, and this endorsement sets out my decision on the issue.

Starting Point: Tercon

[6] Nelli observes at the outset of its submissions that the question to be answered is whether the LL Clause withstands the scrutiny of the three-pronged analysis required under the Supreme Court of Canada’s seminal decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69. Nelli adds that the Court should also consider recent developments on the duty of good faith as outlined in the Supreme Court’s 2021 decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 D.L.R. (4th) 1.

[7] The City agrees that Tercon is the important first touchstone.

[8] The three-pronged Tercon test to which Nelli refers is found in the dissenting judgment of Binnie J., embraced as the appropriate analytical approach by Cromwell J. writing for the majority.

[9] At paras. 122-123 of Tercon, Binnie J. wrote:

[122] The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract. If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties” (Hunter, at p. 462). This second issue has to do with contract formation, not breach.

[123] If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.

First Issue: Does the Exclusion Apply?

(A) Nelli’s Position

[10] With respect to the first “prong”, Nelli argues that the LL Clause does not apply to the circumstances at hand.

[11] It argues that “nothing within the LL Clause absolves the City from liability if it breaches its obligation to enter into Contract B with Nelli”. To clarify, Nelli says that “put differently, the LL Clause deals with liability and damages stemming from the RFT process, and not with respect to the City’s obligation to enter into Contract B with Nelli”.

[12] Nelli builds this argument by referencing the three circumstances contemplated by the LL Clause for which the City is afforded protection.

[13] First, Nelli points to the definition of “This RFT” within the LL Clause, which is “this RFT Package in its entirety, including all documents listed in Section 1.3 and Addenda that may be issued by the City”. Nelli argues that nothing within the RFT itself covers the City’s obligation to enter into Contract B.

[14] Second, Nelli notes that the LL Clause covers “Participation of any such Person in the RFT Process.” In this regard, Nelli argues that the RFT process ended when Nelli was advised that it had submitted the lowest compliant bid and that Contract B would be forthcoming. It says that the LL Clause is not applicable to the post-RFT process, the phase in which the City was obligated to enter into Contract B.

[15] Third, Nelli notes the language in the LL Clause applying to “The City’s acts or omissions in connection with the conduct of this RFT process, including the acceptance, non-acceptance or delay in acceptance by the City of any Bid.” Nelli asserts that the issue here is not the acceptance or non-acceptance of Nelli’s bid, inasmuch as the City accepted Nelli’s bid and told Nelli so. Nelli again maintains that the issue here deals with the post-acceptance/post-RFT process period, and that the protective language does not assist the City in this phase.

(B) City’s Position

[16] The City’s response on this aspect of the argument also begins with Tercon, and Binnie J.’s pronouncement that the Court has no discretion to refuse to enforce an applicable limitation of liability clause unless the applicant can point to some “paramount consideration of public policy sufficient to override the public interest in freedom of contract and defeat what would otherwise be the contractual rights of the parties”. I will return to the public policy considerations below, but will focus initially on the “contractual rights” at issue.

[17] On that score, the City says that the LL Clause must be read and considered in the context of the RFT as a whole. It references specific subparagraphs and then points to the language in section 3.3 that precludes liability for any items – “all possible claims” (in s. 3.3.2(b)) - “arising out of or otherwise relating to the RFT”.

[18] The City argues that the plain meaning of these phrases makes it clear that the ambit of protection under the LL Clause is “broad enough to encompass issues arising during or after bidding or when the contract for the RFT work is awarded”.

[19] Nelli, anticipating this very argument, says:

The City may suggest that its obligation to enter into Contract B “arises out of” the RFT or the process…. [I]f the City truly wanted to exculpate itself from all damages arising out of its failure to enter into Contract B…then it was incumbent on the City to employ language that was unequivocal and all-encompassing…. The LL Clause does not mention [Contract B], any express and/or implied obligation on the part of the City to enter into [Contract B] or the exclusion of liability should it fail to do so.

[20] With respect, in my view this submission demands precision to an unrealistic degree.

[21] The LL Clause at issue is and is clearly intended to be very broad. In fact, it is demonstrably broader in scope than the limitation of liability clause the Court was considering in Tercon. The Tercon clause provided that “no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP”. That clause was found to be insufficiently broad to cover the breach in issue, as the contract was awarded to an ineligible bidder, which was outside the scope of the clause (as the premise underlying the RFP process was absent).

[22] The additional language in the LL Clause, capturing and precluding liability for anything “arising out of or otherwise related to the RFT” or “in connection with the conduct of the RFT process”, casts the net considerably wider, and effectively forecloses liability even for, as Nelli alleges is the case here, “post-bid” conduct. In my view it cannot fairly be said that the City’s failure to award Contract B to Nelli does not “arise out of or otherwise relate to” the RFT process.

Second Issue: Good Faith

(A) Nelli’s Position

[23] Nelli’s second main argument is that the LL Clause does not apply to the duty of good faith.

[24] Nelli fairly notes at the outset of its submission on this issue that I made no explicit finding in my November 7, 2022 endorsement that the City breached its duty of good faith.

[25] It argues, though, that in finding that the City exercised its discretion unfairly, my decision is equivalent to finding that, pursuant to Wastech, the City breached its duty to exercise its discretionary powers in good faith.

[26] In particular, Nelli cites and relies upon the Supreme Court of Canada’s elaboration in Wastech of this duty by providing:

(a) Discretionary powers under a contract must be exercised reasonably and in a manner connected with the purpose for which the discretion was granted;

(b) A party will be in breach of this duty where it exercises contractual discretion “unreasonably” and in a manner that is not consonant with its underlying purposes, an example of which is “where the exercise of discretion is capricious or arbitrary;

(c) This duty can be breached even if the duty of honest performance is not; and

(d) Parties cannot contract out of this duty.

[27] Nelli argues that the broad discretion on which the City relies here is tethered to preserving the integrity of the process, and ensuring fairness. It says that “despite this, the manner in which the City exercised its discretion actually eroded the integrity and fairness of the RFT process”.

[28] Indeed, Nelli goes further to allege that not only did the City exercise its discretion in a manner out of keeping with maintaining integrity and fairness, but that its conduct went so far as to undermine those ideals.

[29] Nelli concludes this submission by noting that the City cannot contract out of the duty of good faith, and that therefore the LL Clause has no application to the breach of the duty to exercise discretionary powers in good faith.

(B) City’s Position

[30] The City argues that Nelli’s argument on this issue misses the mark. It points out that, at its highest, I found that the City made a mistake (in its interpretation of the relevant provisions) and that the mistake resulted in unfairness to Nelli, but that there is no evidence, nor any finding by me that the City made its decisions in bad faith.

[31] Again I find that on balance, the City’s submission is apt. It is clear, and indeed as noted, Nelli concedes that I did not make an explicit finding that the City breached its duty of good faith. While there is some force to Nelli’s submission that if the City breached the duty of good faith, the LL Clause ought not to apply (since the City cannot contract out of its duty of good faith), there must be a finding of a breach of that duty before liability can flow, and I made no such finding here.

Third Issue: Public Policy

(A) Nelli’s Position

[32] Lastly, Nelli argues that, notwithstanding that it concedes that the LL Clause is not unconscionable, the Court should nevertheless refuse to enforce the LL Clause (assuming it applies), because there is an overriding public policy requiring a fair and transparent process. It asserts that if the Court upholds the LL Clause, it would effectively allow the City to say it embraces fairness and transparency to the public while in reality acting contrary to those principles.

(B) City’s Position

[33] The City points out that the onus is on Nelli to prove that the Court should refuse to enforce the clause for public policy reasons, and that Courts have consistently held that this is a high threshold (see Mega Reporting Inc. v. Yukon (Government of), 2018 YKCA 10, 428 D.L.R. (4th) 619).

[34] In essence, the City argues, persuasively in my view, that limitation of liability clauses are not inherently unfair, and the parties’ right to contract on terms they consider appropriate should not lightly be interfered with. Absent some paramount consideration of public policy, says the City, the public interest in freedom of contract should prevail. As Binnie J. put it in Tercon, at para. 117:

The residual power of a court to decline enforcement exists but, in the interest of certainty and stability of contractual relations, it will rarely be exercised…. [and] “should be only invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds.”

Discussion re Policy Issue(s)

[35] In my opinion, this is not such a case. The City fairly emphasizes that the LL Clause is also a prudent contractual term to limit financial risk and to support the construction of important infrastructure in circumstances in which the City issues over $2 billion worth of procurement contracts each year through hundreds of separate contracts.

Potential Award of Damages Limited to Costs of Preparing Bid

[36] As noted in my initial endorsement, subsection 3.3.3 of the RFT contemplates limiting damages, if the City is found liable in any way (where subsection 3.3.1 does not apply), to the costs of preparing the applicant’s bid.

[37] However, having found above that subsection 3.3.1 does apply, it follows that the City is not liable to Nelli.

Costs

[38] That said, as noted in my earlier endorsement, the costs of the application were and are payable to Nelli by the City in the amount provided in that endorsement.

W.D. Black J. Date: January 13, 2023