Lawyer using magnifying glass to examine a breach of contract

YOU BE THE JUDGE: Breach of Contract or Acceptable Innovation? 

This article was published in The Legal Edge on October 19, 2016

As with all municipalities, the Town of Orangeville in Ontario wrestles with the best way to treat and dispose of its sewage. Biosolids, the more solid elements of waste material, are particularly hazardous and must be disposed of in a safe and environmentally prudent fashion.

Until 2010, the Town had depended on two interrelated companies (Region of Huronia Environmental Services Ltd. and Graillen Holdings Inc., collectively referred to as “ROHES”) to transport biosolids from the Town’s Water Pollution Control Plant to the ROHES-owned storage facility. From there, the biosolids were spread on farm fields as fertilizer, under careful environmental regulation.

Two separate events occurred in 2010 that led to this litigation. The Town and ROHES entered into negotiations about the possibility of the Town purchasing the biosolids storage facility owned by ROHES, and they executed an Agreement of Purchase and Sale in July 2010, with a closing date of March 31, 2011. After a few drafting rounds, the parties agreed on the following termination rights in the Agreement of Purchase and Sale:

“This Agreement is terminable at the election of the Purchaser in the event that by [closing date] it has not been satisfied in its sole discretion, with the results of its due diligence inquiries and searches and investigations of the financial impact and economic viability and advisability and/or the warranties and covenants of the Vendor contained herein including without limitation of the foregoing its enquiries with respect to zoning and Official Plan Compliance, Ministry of Environment Approval and compliances, the status and transferability of the Certificate of Approval under which the cells are operated, the terms and conditions of any contracts/leases/agreements to be assumed by the Purchaser following closing, its soil and environmental testing.”

Notably, the underlined wording was among the final changes requested by the Town and agreed to by ROHES.

The second pivotal event came on August 5, 2010, when the Town issued a tender, because the contract with ROHES was coming to an end. The call for tenders was for the collection, haulage, storage and/or disposal of biosolids from the Town’s plant.

Only ROHES and Entec Waste Management Inc. submitted bids. Rather than basing its bid on the traditional haulage, storage and spreading method of biosolid disposal, Entec’s bid proposed a “dewatering process,” whereby the biosolids would be mechanically pressed to remove as much water as possible. The remaining “dewatered cake” could then be disposed of in a variety of ways, including landfill, incineration and composting. The 2010 tender specifically anticipated and allowed for an option to bid based on this dewatering process. The tender also included the standard privilege clause, that “the lowest or any tender will not necessarily be accepted.”

On September 7, 2010, the Town Council awarded the 2010 tender to Entec, obviating the need for offsite biosolid storage. The Town then exercised its termination rights under the Agreement of Purchase and Sale with ROHES, claiming the return of its $250,000 deposit.

ROHES refused and brought this litigation, claiming breach of the Agreement of Purchase and Sale, as well as breach of Contract A in the tender process for accepting a non-compliant bid from Entec. The Entec bid did not include a signed copy of the pre-bid health and safety checklist and signing page, or the signed Contractor Safety Agreement. While clearly important documents, the Town alleged that there was no specific mandatory requirement to submit the safety documents until after contract award. As it turned out, Entec did not submit the safety documents until August 2011.

ROHES claimed damages under both claims, and the matter proceeded to the Ontario Supreme Court on June 03, 2016. Three main questions were posed in the litigation:

  • Did the Town improperly invoke the termination clause in the Agreement of Purchase and Sale with ROHES, thus wrongly breaching the agreement?
  • Did the Town breach Contract A by awarding the tendered contract to a non-compliant bidder (Entec)?
  • If so what damages, if any, is ROHES entitled to under each of these claims?

See below for the answer.

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In the case of Graillen Holdings Inc. v Orangeville, 2016 ONSC 3687, the Ontario Supreme Court examined each of the three questions in turn.

1. Did the Town improperly invoke the termination clause in the Agreement of Purchase and Sale with ROHES, thus wrongly breaching the agreement?

In noting that there are limitations to the exercise of “sole discretion” governed by the overarching duty to perform contractual obligation in good faith, the Court referred to the Supreme Court of Canada decision in Bhasin v. Hrynew, 2014 SCC 71, concluding that “Bhasin is authority for the proposition that a contractual discretion exercisable by one party to a contract can never be unfettered; it must always be controlled by the organizing principle of good faith.”

In this case, the termination clause in the agreement contained very broad discretion and included the words “without limitation of the foregoing” when it cited the specific examples. On a proper and fair reading of the termination clause, the Court concluded that the language used in the Agreement of Purchase and Sale permitted the Town to exercise a right of termination, saying that, “[I]n good faith and for proper considerations, the Town reached the conclusion that there was no need to proceed with the purchase, and it thus exercised the right of termination.”

2. Did the Town breach Contract A by awarding the tendered contract to a non-compliant bidder (Entec)?

The tender documents contained a variety of requirements, including the forms to be submitted by bidders, information on the cost of the bids, and the methods of biosolid disposal that were being proposed, and – most importantly for this case – the agreement of bidders to the tender terms and conditions. One of nine documents that bidders were required to submit was the Agreement to Tender Terms and Conditions, which states that, “I/We further declare that I/We have carefully examined … all Specifications, Agreement to Tender Terms and Conditions, Tender Terms and Conditions … ” In other words, by signing that document, bidders agreed to the terms and conditions.
The “Health and Safety Handbook” itself contained this language:

“Upon submission of its bid, the contractor will enclose a signed copy of the pre-bid Health and Safety Checklist and signing page and a signed copy of the Contractor Safety Agreement. These signed documents indicate that the contractor has read the policy and accepts its terms and conditions in whole and has considered health and safety in its bid.”

The Town argued that, by signing and enclosing the Agreement to Tender Terms and Conditions, Entec had complied with the spirit and intent of the tender call – it had agreed that it had read the policy, accepted the terms and conditions, and considered health and safety – so the bid was compliant. But the Court disagreed.

Considering the tender documents as a whole, the Court found that submission of the “Health and Safety Handbook” was an integral part of Contract A. The Entec bid, therefore, was non-compliant and had been accepted in breach of Contract A.

3. If so what damages, if any, is ROHES entitled to under each of these claims?

Having found that the Town breached Contract A by accepting a non-compliant bid, the Court then turned its mind to damages. As procurement professionals know, in order to recover damages for loss of profits, a claimant must establish that, but for the breach of contract, it would have been awarded the contract.

The Court posed the question as follows: “[H]ave the plaintiffs proven, on a balance of probabilities, that the Town would have awarded the 2010 Tender to ROHES if the Entec bid had been disqualified, as it should have been?”

Considering that the dewatering system solved the Town’s biosolids storage problem and saved the need to spend $7 million acquiring a storage facility, the Court concluded that it is more likely than not that the Town would have refrained from awarded the tender to either bidder and would have issued a new tender soliciting compliant bids on the dewatering process.

The standard privilege clause reserving the right to not award to the lowest or any bidder would have enabled the Town to cancel its process and reissue. Therefore, even though the Town breached Contract A by accepting a non-compliant bid, ROHES was not entitled to damages for loss of profits it would have earned, had it been awarded the contract. And because the Town had properly exercised the termination rights in the Agreement of Purchase and Sale, no damages were payable under that claim.

The Final Ruling

As a result of these findings, both claims by ROHES were dismissed, and the Town’s counterclaim for return of its $250,000 deposit was granted, along with prejudgment interest on that amount. The parties were left to resolve the issue of Court costs and, failing agreement, were given directions for returning the matter to the Court.

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Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.