In early June, Prime Minister Justin Trudeau told 1,600 municipal
leaders gathered at the Federation of Canadian Municipalities (FCM)
annual conference and trade show in Winnipeg that his Liberal government
fully intended to go ahead with $120 billion in funding on
infrastructure projects over the next decade, as he had promised during
the 2015 election campaign.
He also pledged to let local authorities decide which projects should be built. “We shouldn’t tell you whether you need light rail or subways, better bridges or better climate-resilient infrastructure,” he said.
That message was “music to local government leaders’ ears,” said Edmonton Mayor Don Iveson, who chairs the Big City Mayors’ Caucus hosted by FCM.
It was also likely well received in the offices of lawyers who work on infrastructure deals and to the companies anticipating the opportunity to bid on a myriad of projects constructing or upgrading facilities such as hospitals, highways and waste-treatment plants.
Many of the anticipated projects will be public-private partnerships (known as P3s), although Infrastructure and Communities Minister Amarjeet Sohi told the Globe and Mail in November 2015 that the Liberal government will no longer require cities and provinces to “look first at creating public-private partnerships before getting funding for major infrastructure.” Under the previous Conservative government, all infrastructure projects worth $100 million or more had to undergo a costly P3 screening.
All procurement bidders, however, will be subjected to some form of rigorous screening. This is especially true in Québec, which has imposed strict new requirements for companies bidding on P3 projects in the wake of the Commission of Inquiry on the Awarding and Management of Public Contracts in the Construction Industry (better known as the Charbonneau Commission), which probed corruption in the management of the province’s public construction contract.
“There is now a more stringent compliance requirement as a result of Charbonneau,” says Mathieu Dubord, a partner in the Montréal office of McCarthy Tétrault LLP. “The AMF [Autorité des marchés financiers, which regulates the province’s financial markets] was awarded the right to manage a very detailed screening process that [bidders] have to go through just to secure authorization allowing them to be able to bid on public contracts and P3s. And it equally applies whether you’re based in Québec, another province or any jurisdiction in the world.”
Since December 2012, an AMF authorization has been necessary on all construction contracts with a value of $5 million or more. For service contracts and subcontracts entered into pursuant to a call for tenders, the threshold, as of November 2015, was reduced from that amount to $1 million.
“The AMF verifies whether the applications are complete and compliant, before forwarding the information to UPAC, the anti-corruption squad,” the government said in a news release in June 2015. UPAC then performs an audit and provides the AMF with an opinion on the bidder, either positive or negative.
Dubord says lawyers must ensure potential bidders are aware that getting AMF approval takes some time, “although it’s much faster than when it first came out and everyone was applying.” He has seen “a number of clients having issues because they were a little late in realizing that they required that authorization just to get into the competition. Some didn’t [act] in time and they had to withdraw.”
To further complicate the bidding process in Québec, each municipality can impose its separate conditions for obtaining a chance to bid for work in that jurisdiction. “The City of Montréal, for example, has its own requirements in addition to getting an AMF,” says Dubord. “So clients have to be aware of what they need to do business with a local authority, which may have its own rules that could be different or even more stringent than those of the AMF.”
No matter the locale, all P3 participants in Canada have a legal obligation to adhere to a duty of fairness and honesty during the procurement and all other stages of a project. This requirement was first established in a 1981 Supreme Court of Canada ruling, R. (Ont.) v. Ron Engineering and Construction (Eastern) Ltd. It stipulated that when an owner issues a tender document or an RFP, even prior to opening any of the submissions, it has entered into what is referred to as “Contract A” with each bidder (once a winning bidder has been selected, what’s referred to as “Contract B” comes into effect). Over the years, most litigation in the P3 area has evolved out of a bidder believing the owner had breached Contract A’s fairness doctrine.
In 2014, the Supreme Court took Ron Engineering a step further. In Bhasin v. Hrynew it decided there is a “general duty of good faith in contractual performance,” says Matt Mulligan, a partner in the Vancouver office of Bull, Housser & Tupper LLP. “Before that case, generally in contract law it was always implied that there was a duty of fairness or good faith, that all bidders had to be treated evenly, that sort of thing.” Now that onus is clearer, he says, although Mulligan believes Bhasin will not change the landscape that much because owners have understood for some time that they had to comply with that duty.
At the time of the decision, however, Neil Finkelstein of McCarthy Tétrault LLP in Toronto, counsel for Harish Bhasin, the plaintiff who won the case, said, “I think this is the most important contract case in 20 years. We’re going to find another series of jurisprudence arising out of this case over time about how far this duty of good faith and duty of honesty goes.”
Howard Krupat, a partner at DLA Piper in Toronto, tends to agree with Mulligan that the effect of Bhasin is yet to be determined. “The question that derives from Bhasin is whether it’s something different from [existing requirements].”
Krupat notes that since Bhasin, which doesn’t specifically refer to tendering and construction, “there have been a few lower-court decisions that have talked about Bhasin in the combination of the tendering and construction context.”
He gives the example of a case called Combined Air Mechanical Services v. Computer Room Services Corp. CRSC had named Combined Air as its mechanical contractor on a design/build project of HVAC systems for the computer systems of Hydro One. After CRSC won the bid it subcontracted the mechanical services to another, less expensive, company. Combined Air sued CRSC for lost profit and was awarded just over $500,000. “This is an example of a case that shows the willingness to import Bhasin into the tendering law realm,” he says. “I could see that having an impact on construction and P3 projects.”
Two recent appeals, both heard at the same time in the Supreme Court of the United Kingdom, might also have an impact on P3s. “The ruling could be a game changer,” says Jane Sidnell, a partner in the Calgary office of Rose LLP.
The November 2015 decisions involved an £85 parking ticket (the recipient felt it was “unfair and disproportionate”) and, in the other, more than US$44 million assessed against a co-owner of a company for having breached two covenants governing the sale of his company to another party. He claimed the covenants constituted penalty clauses and weren’t enforceable.
The combined rulings – one against the parking ticket recipient; the other in favour of the man who breached the covenants – changed the UK’s law relating to liquidated damages (the “pre-estimated” amount parties, including in Canada, determine during the creation of a contract outlining compensation for breaches such as failing to meet performance deadlines) and penalty clauses.
The consequence of the twin rulings, says Sidnell, is that “they took out this huge body of law that’s existed since the beginning of time [a 1915 ruling] and said that’s not the rule [for penalties] any more. All you have to do now is have two things: a reasonable commercial basis [for your claim] and that it can’t be extravagant, exorbitant or unconscionable. That’s the test.”
Canadian firms and lawyers, she says, need to be aware that decisions made in the UK Supreme Court “can be persuasive for Canada. I can’t imagine our Supreme Court talking about liquidated damages and not mentioning this decision.”
A more onerous legal consideration affecting the P3 procurement process is a set of rules, known as the Integrity Regime, that were first tabled by Public Works and Government Services Canada, the federal government’s procurement arm, in 2012. These rules, which have been contentious and amended several times over the past few years, govern the eligibility of suppliers to do business with the government.
In April 2016, Public Works announced further amendments, which included the imposition of “an onerous new reporting requirement that when submitting a bid, suppliers provide a certified list of all foreign criminal charges and convictions with regard to the supplier, its affiliates and its subcontractors,” according to an article posted on Bennett Jones LLP’s website. “The penalty for providing a false or misleading certification is automatic ineligibility to enter into procurement contracts [debarment] for ten years.”
The new ethical standards mean that companies must be aware “of whether or not your or your sister’s sister company that operates out of – pick a jurisdiction in the world – has been charged under the Competition Act, under the Criminal Code or broken any other applicable rules, such as collusion, of which there have been a number of cases in Europe involving large construction companies or their affiliates,” says Greg Southam, a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP. He believes, however, that bidders have accepted the new rules as a reality of doing P3 business. “I think in the last two or three years people in Canada have become more aware, more attuned to these requirements.”
Southam, who does P3 work in Canada and the US, says that Canada “has done a really good job of creating a certain and sound market for procurement infrastructure through the P3 model. The US is more susceptible to time extensions and litigation. You just don’t see that stuff often in Canada.”
He says the procuring agencies have been especially adept at “paving the way, in advance, before projects come online.” For those wanting to find a clear and even road towards the federal government’s infrastructure money, that’s good to know.
He also pledged to let local authorities decide which projects should be built. “We shouldn’t tell you whether you need light rail or subways, better bridges or better climate-resilient infrastructure,” he said.
That message was “music to local government leaders’ ears,” said Edmonton Mayor Don Iveson, who chairs the Big City Mayors’ Caucus hosted by FCM.
It was also likely well received in the offices of lawyers who work on infrastructure deals and to the companies anticipating the opportunity to bid on a myriad of projects constructing or upgrading facilities such as hospitals, highways and waste-treatment plants.
Many of the anticipated projects will be public-private partnerships (known as P3s), although Infrastructure and Communities Minister Amarjeet Sohi told the Globe and Mail in November 2015 that the Liberal government will no longer require cities and provinces to “look first at creating public-private partnerships before getting funding for major infrastructure.” Under the previous Conservative government, all infrastructure projects worth $100 million or more had to undergo a costly P3 screening.
All procurement bidders, however, will be subjected to some form of rigorous screening. This is especially true in Québec, which has imposed strict new requirements for companies bidding on P3 projects in the wake of the Commission of Inquiry on the Awarding and Management of Public Contracts in the Construction Industry (better known as the Charbonneau Commission), which probed corruption in the management of the province’s public construction contract.
“There is now a more stringent compliance requirement as a result of Charbonneau,” says Mathieu Dubord, a partner in the Montréal office of McCarthy Tétrault LLP. “The AMF [Autorité des marchés financiers, which regulates the province’s financial markets] was awarded the right to manage a very detailed screening process that [bidders] have to go through just to secure authorization allowing them to be able to bid on public contracts and P3s. And it equally applies whether you’re based in Québec, another province or any jurisdiction in the world.”
Since December 2012, an AMF authorization has been necessary on all construction contracts with a value of $5 million or more. For service contracts and subcontracts entered into pursuant to a call for tenders, the threshold, as of November 2015, was reduced from that amount to $1 million.
“The AMF verifies whether the applications are complete and compliant, before forwarding the information to UPAC, the anti-corruption squad,” the government said in a news release in June 2015. UPAC then performs an audit and provides the AMF with an opinion on the bidder, either positive or negative.
Dubord says lawyers must ensure potential bidders are aware that getting AMF approval takes some time, “although it’s much faster than when it first came out and everyone was applying.” He has seen “a number of clients having issues because they were a little late in realizing that they required that authorization just to get into the competition. Some didn’t [act] in time and they had to withdraw.”
To further complicate the bidding process in Québec, each municipality can impose its separate conditions for obtaining a chance to bid for work in that jurisdiction. “The City of Montréal, for example, has its own requirements in addition to getting an AMF,” says Dubord. “So clients have to be aware of what they need to do business with a local authority, which may have its own rules that could be different or even more stringent than those of the AMF.”
No matter the locale, all P3 participants in Canada have a legal obligation to adhere to a duty of fairness and honesty during the procurement and all other stages of a project. This requirement was first established in a 1981 Supreme Court of Canada ruling, R. (Ont.) v. Ron Engineering and Construction (Eastern) Ltd. It stipulated that when an owner issues a tender document or an RFP, even prior to opening any of the submissions, it has entered into what is referred to as “Contract A” with each bidder (once a winning bidder has been selected, what’s referred to as “Contract B” comes into effect). Over the years, most litigation in the P3 area has evolved out of a bidder believing the owner had breached Contract A’s fairness doctrine.
In 2014, the Supreme Court took Ron Engineering a step further. In Bhasin v. Hrynew it decided there is a “general duty of good faith in contractual performance,” says Matt Mulligan, a partner in the Vancouver office of Bull, Housser & Tupper LLP. “Before that case, generally in contract law it was always implied that there was a duty of fairness or good faith, that all bidders had to be treated evenly, that sort of thing.” Now that onus is clearer, he says, although Mulligan believes Bhasin will not change the landscape that much because owners have understood for some time that they had to comply with that duty.
At the time of the decision, however, Neil Finkelstein of McCarthy Tétrault LLP in Toronto, counsel for Harish Bhasin, the plaintiff who won the case, said, “I think this is the most important contract case in 20 years. We’re going to find another series of jurisprudence arising out of this case over time about how far this duty of good faith and duty of honesty goes.”
Howard Krupat, a partner at DLA Piper in Toronto, tends to agree with Mulligan that the effect of Bhasin is yet to be determined. “The question that derives from Bhasin is whether it’s something different from [existing requirements].”
Krupat notes that since Bhasin, which doesn’t specifically refer to tendering and construction, “there have been a few lower-court decisions that have talked about Bhasin in the combination of the tendering and construction context.”
He gives the example of a case called Combined Air Mechanical Services v. Computer Room Services Corp. CRSC had named Combined Air as its mechanical contractor on a design/build project of HVAC systems for the computer systems of Hydro One. After CRSC won the bid it subcontracted the mechanical services to another, less expensive, company. Combined Air sued CRSC for lost profit and was awarded just over $500,000. “This is an example of a case that shows the willingness to import Bhasin into the tendering law realm,” he says. “I could see that having an impact on construction and P3 projects.”
Two recent appeals, both heard at the same time in the Supreme Court of the United Kingdom, might also have an impact on P3s. “The ruling could be a game changer,” says Jane Sidnell, a partner in the Calgary office of Rose LLP.
The November 2015 decisions involved an £85 parking ticket (the recipient felt it was “unfair and disproportionate”) and, in the other, more than US$44 million assessed against a co-owner of a company for having breached two covenants governing the sale of his company to another party. He claimed the covenants constituted penalty clauses and weren’t enforceable.
The combined rulings – one against the parking ticket recipient; the other in favour of the man who breached the covenants – changed the UK’s law relating to liquidated damages (the “pre-estimated” amount parties, including in Canada, determine during the creation of a contract outlining compensation for breaches such as failing to meet performance deadlines) and penalty clauses.
The consequence of the twin rulings, says Sidnell, is that “they took out this huge body of law that’s existed since the beginning of time [a 1915 ruling] and said that’s not the rule [for penalties] any more. All you have to do now is have two things: a reasonable commercial basis [for your claim] and that it can’t be extravagant, exorbitant or unconscionable. That’s the test.”
Canadian firms and lawyers, she says, need to be aware that decisions made in the UK Supreme Court “can be persuasive for Canada. I can’t imagine our Supreme Court talking about liquidated damages and not mentioning this decision.”
A more onerous legal consideration affecting the P3 procurement process is a set of rules, known as the Integrity Regime, that were first tabled by Public Works and Government Services Canada, the federal government’s procurement arm, in 2012. These rules, which have been contentious and amended several times over the past few years, govern the eligibility of suppliers to do business with the government.
In April 2016, Public Works announced further amendments, which included the imposition of “an onerous new reporting requirement that when submitting a bid, suppliers provide a certified list of all foreign criminal charges and convictions with regard to the supplier, its affiliates and its subcontractors,” according to an article posted on Bennett Jones LLP’s website. “The penalty for providing a false or misleading certification is automatic ineligibility to enter into procurement contracts [debarment] for ten years.”
The new ethical standards mean that companies must be aware “of whether or not your or your sister’s sister company that operates out of – pick a jurisdiction in the world – has been charged under the Competition Act, under the Criminal Code or broken any other applicable rules, such as collusion, of which there have been a number of cases in Europe involving large construction companies or their affiliates,” says Greg Southam, a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP. He believes, however, that bidders have accepted the new rules as a reality of doing P3 business. “I think in the last two or three years people in Canada have become more aware, more attuned to these requirements.”
Southam, who does P3 work in Canada and the US, says that Canada “has done a really good job of creating a certain and sound market for procurement infrastructure through the P3 model. The US is more susceptible to time extensions and litigation. You just don’t see that stuff often in Canada.”
He says the procuring agencies have been especially adept at “paving the way, in advance, before projects come online.” For those wanting to find a clear and even road towards the federal government’s infrastructure money, that’s good to know.
Lawyer(s)
Gregory G. Southam
Firm(s)
Davies Ward Phillips & Vineberg LLP
McCarthy Tétrault LLP