The Mother Of All Tender Cases Revisited: Three More Issues

The last article about the decision of the Superior Court of Ontario  in Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034 considered the impact of that case upon the Contract A  –  Contract B principles of tender law.  There are many more interesting issues which emerge from that case.  This article considers three more issues.

The first issue is:  What Standard of review should be applied by the Court to the procurement authority’s decision? Should that decision be over-ruled if the court considers it to be incorrect; or only if it is unreasonable; or only if it was made in bad faith or fraudulently?

The second and third issue concerns the Court’s entitlement to review the procurement decision in the first place.  Was the Court’s authority excluded by federal legislation?  And was a prior decision in this case on this point res judicata and binding on the court?

The fourth issue related to how the plaintiff’s damages should be awarded.  The Open Windows Bakery decision of the Supreme Court of Canada directs that damages for breach of contract are to be calculated according to the least burdensome way for the defendant to perform the contract. But what does this mean in the context of a tender or procurment? That issue will be addressed in my next article about this very interesting case.

The background

The facts were set out in my last article on this case.  Mr. Justice Annis took 1194 paragraphs to set forth the facts, so this article provides just a brief synopsis. The dispute arose in relation to a 2004 RFP by the Canadian government for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid the 2002 RFP showing zero as the ceiling cost for the PMS service, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider knew that few individuals used the PMS service.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified number of projected users of the PMS service, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS services.

These facts about the 2002 and 2004 procurements were discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The Trial Judge’s decision

As discussed in the prior article, the trial judge found that the Crown breached the express terms of the contract applicable to the invitation to tender, and also breached the implied term that it would conduct the tender fairly.  In addition, the trial judge addressed the following three issues which are of importance to construction and procurement law.

Standard of Review

One of the important issues in tender cases is:  what standard of review should the court apply when considering the sponsor’s evaluation of the tender proposals? Should the sponsor’s decision to accept one tender and reject the others be overturned: if the court believes that the sponsor was incorrect in its assessment; or must the court apply a higher standard and find that the sponsor acted unreasonably before it interferes; or must the court apply an even higher standard and only interfere if the sponsor acted fraudulently, in bad faith, by mistake or unconscionably?

The trial judge appears to have applied a two part test. For those parts of the sponsor’s assessment which were based on its expertise, he concluded that a standard of reasonableness should be applied; for those parts of the assessment where the sponsor’s employees had no expertise or had acted improperly (due to clear error, conflict of interest, or obvious preference for one bidder), a standard of correctness should be applied.  The trial judge rejected the Crown’s submission that he must find fraud, mistake, bad faith or unconscionability before he could review the tender assessments made by the Crown, finding that such a standard was “overly deferential” to the sponsor and not supported by the case law.

These distinctions between the various standards of review are useful.  Often the standard of review may be the decisive factor in whether the court will interfere with the sponsor’s assessment of the bids.  The trial judge’s reasons for using the correctness standard when the conduct of the sponsor’s decision-makers does not deserve respect, but otherwise the standard of reasonableness, provide a nuanced approach to the standard of review.

The Court’s Jurisdiction

The Crown asserted that the court had no jurisdiction to deal with the plaintiff’s claim because the  Canadian International Trade Tribunal Act and the Canadian International Trade Tribunal Procurement Inquiry Regulations  had established a statutory code for procurement disputes falling within the jurisdiction of the Canadian International Trade Tribunal, and that the present dispute fell within the Tribunal’s jurisdiction. The Crown submitted that the statutory code operated to oust the jurisdiction of the Superior Court, such that the action must be dismissed.

The trial judge rejected this submission.  He noted that this submission had been made to the court by way of a motion to dismiss earlier in the action, and that motion had been dismissed.  Accordingly, the trial judge held that the issue was res judicata.  But the trial judge went on to agree with the motion judge’s decision.  He held that there would have to be very clear language in the statute before the court’s jurisdiction was ousted, and there was nothing in the legislation that expressly did so.

The trial judge also expressed some horror that the court’s jurisdiction could be usurped in this kind of case. He said

“The fundamental difference between a court like the Superior Court of justice and the CITT involves the capacity to determine facts. It would frankly be unthinkable for any judicial body, but a trial court to hear a matter such as this one.

 If I may resort to a Proustian sentence to make the point: this matter involves facts extending over several years [and the trial judge continued in one sentence for seventeen lines concluding] …and everything else that goes with a trial in which factual findings are fundamentalto the ultimate decision that teams of lawyers have spent thousands of hours working on.

I cannot imagine more inappropriate circumstances in which to advance an argument that the jurisdiction of the Superior Court should be ousted because Parliament intended that cases of this nature should be resolved before the CITT.

This is not intended to be disrespectful towards the CITT, but it is clearly not a fact-finding quasi-judicial institution. Matters of contract, tort and remedies resulting therefrom are generally fact driven. One cannot replace a trial court with an administrative tribunal, unless the tribunal takes on the general characteristics of the trial court, such as has happened in many respects in labour law. But there is nothing in the constitution and procedures before the CITT that suggests it has either the capacity or the experience to make factual determinations, unless of a fairly rudimentary nature…..

 In matters of procurement, there is an obvious need in some cases for recourse to a judicial institution whose primary responsibility is the finding of facts in the pursuit of justice. I consider this to be a strong policy argument supporting the conclusion that Parliament could not have intended to exclude the Superior Court’s jurisdiction in this area without the clearest words to that effect.”

The private sector may well share the judge’s concern that the review of government procurements exclusively by government appointed tribunals is no way to ensure independent justice. The private sector may well wish to be vigilant to ensure that Parliament and the provincial legislatures do not try to shut off recourse to the courts arising from government procurements.

Res Judicata 

 Res judicata was considered by the trial judge twice in his reasons.

First, he held that the earlier decision of the motions judge, that the role of the Canadian International Trade Tribunal (CITT) did not oust the jurisdiction of the court, was res judicata on that issue. Nevertheless, he agreed with that decision and arrived at the same conclusion.

Second, the trial judge concluded that the unsuccessful proceedings by Envoy before the CITT were not determinative of Envoy’s rights.  Again, that issue had been raised by the Crown before the motion judge on its earlier motion, and had been dismissed.  That made the earlier judge’s decision res judicata on the issue.

In addition, the trial judge considered this issue on its merits and concluded that the earlier proceedings before the CITT were not definitive for two reasons.

First, the “intervening circumstances” showed that the proceedings before the CITT “bear no relationship to those argued before and ultimately determined by the Court.” Moreover, the trial judge said that he would exercise his discretion to not apply the doctrine of res judicata having regard to the refusal by the CITT to allow any inquiry into the allegations raised by Envoy and the subsequent discovery by the Auditor General of the facts relating to PMS.

The reasoning of the trial judge can be a useful starting point for any litigant facing the issue of res judicata arising from a tender.  The decision could be that of a government tribunal, but it could also be that of the engineer or architect on the project.  If the issue is whether that decision is binding on the parties by reason of res judicata, or whether the court should exercise its discretion to relieve against the application of that doctrine, then reference to the Envoy Relocation Services decision may be useful.

Quantifying Damages: The Open Window Bakery Decision

Time and space do not permit this article to review the trial judge’s consideration of the Open Window Bakery decision of the Supreme Court of Canada to the calculation of the plaintiff’s damages.  The issue may be crucial in tender and procurement law. It will be addressed in the next article.  In all, it will take three articles to fully digest the issues raised in this Mother of All Tender Cases.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 1, paragraph 1(f)

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders  –   Res Judicata  –  Standard of Review  –  Jurisdiction of the Court

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                       May 16, 2013

Playing Offence, Not Defence, In International Arbitrations

What is the best way to protect the authority of international commercial arbitrations?  Is a party obliged to “play defence” and not ask the courts of the seat of the arbitration to interfere until after arbitration proceedings are commenced?  Or can a party “play offense” and ask those courts to take jurisdiction before any arbitration proceedings begin?  That is the issue which the UK Court of Appeal addressed in AES-Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC.

The Background

The dispute related to a 20 year concession agreement between the owner and operator of a hydro-electric facility in Kazakhstan.  The original owner was the Republic of Kazakhstan.  Both the original owner and the original operator had assigned their interests to companies to which each of them was related and those companies were the parties to this English proceeding.  The companies were both Kazakhstan companies and the concession agreement was governed by Kazakhstan law.

The concession agreement contained an arbitration clause which was governed by English law.  It provided that all disputes were to be settled by ICC arbitration to be conducted in London, England.

The owner had brought previous litigation in the Kazakhstan court.  In that litigation, the Kazakhstan Supreme Court held that the arbitration clause was unenforceable under Kazakhstan law.  The operator appeared in the Kazakhstan court to contest the jurisdiction of that court.  When that court held that it had jurisdiction, the operator made submissions on the merits but at all times it contested the jurisdiction of the Kazakhstan courts.

The operator brought an application in the UK courts for a declaration that any claim arising out of the concession agreement (except tariff matters) had to be determined in accordance with the arbitration clause of that agreement.  It also sought an injunction restraining the owner from bringing any such proceedings in the Kazakhstan courts.  At the time of the application, there was no court of arbitration proceeding in existence or contemplated under the concession agreement.  The UK court of first instance granted the declaration but not the injunction and the owner appealed.

The “Just and Equitable” Principle

The UK Court of Appeal upheld the jurisdiction of the UK courts to hear the application and grant the declaration.  It did not do so based upon the general UK arbitration statute, the Arbitration Act, 1996 (the “1996 Act”).  It held that section 44 of the 1996 Act only allowed the court to grant interim injunctions in the case of urgency, or with the tribunal’s or the parties’ agreement.  None of those circumstances existed in the present case. Indeed, the operator conceded that it could not rely on section 44 in the present circumstances.

Instead, the operator relied upon the general declaratory jurisdiction of English courts found in section 37 of the Senior Courts Act.  That section authorized the court to grant an injunction if it is “just and equitable” to do so.  This authority is also found in section 101 of the Ontario Courts of Justice Act and in the judicature or procedural statutes of most common law jurisdictions.  Accordingly, the decision in Kamenogorsk is of general application in Canada and elsewhere.

One would have thought that the legislature’s policy and intention regarding anti-suit injunctions or declarations to enforce arbitration clauses would be found in the arbitration home statute, in this case the 1996 Act.  That statute did not authorize the English court to take jurisdiction to grant an anti-suit injunction or declaration in these circumstances.  If that is so, why should the court reach out to the general authority of the court to grant the declaration?

Two Reasons for “Playing Offence”

The UK Court of Appeal gave two reasons for taking jurisdiction:

First, the UK courts would, sooner or later, have to deal with the jurisdictional issue.  Accordingly, it should do so in the absence of an existing or threatened arbitral proceeding, and notwithstanding the “competence-competence” principle which appears to direct a contrary conclusion.

Second, the profound policy of UK law is to uphold arbitration proceedings.  None of the surrounding circumstances displaced the application of that policy.

The “sooner or later” principle was stated by Lord Justice Rix as follows:

“This analysis, in my respectful opinion, usefully underscores the wider picture about the autonomy of the parties and the jurisdiction of arbitrators with power to investigate their own jurisdiction: namely that, sooner or later, the question of substantive jurisdiction is likely to come before the court.  Where parties differ as to a matter as fundamental as whether they have agreed any contract, or any contract containing an arbitration clause, it is most unlikely that one or other of them will rest content with the decision of arbitrators as to either their jurisdiction or as to the parties’ rights. For one or other party is saying that there is simply no agreement that arbitrators can resolve their disputes. In such circumstances, the issue of jurisdiction is likely to come before the courts sooner or later, and when it does, it will have to be decided by the court from first principles and in the light of facts which, whatever the investigation by the arbitrators, are yet to be determined on the evidence by the court.”  (underlining added)

This reasoning is based on the profound and dynamic relationship between an arbitral tribunal and the courts of the seat of the arbitration.  The “competence-competence” principle usually means that the arbitral tribunal should be the first to exercise its jurisdiction.  Yet, ironically, it is not wrong for the court of the seat of the arbitration to first assume jurisdiction and issue such a declaration because the court’s exercise of that power is in aid of the arbitral tribunal exercising its authority and because, one way or another, the jurisdictional issue must come back to the court of the seat of the arbitration if one party objects to that jurisdiction.

Accordingly, Lord Justice Rix said:

I do not with respect agree …that it is in all circumstances necessary for a party who wishes to raise with the court an issue of the effectiveness of an arbitration clause first to commence an arbitration…. In my judgment, at any rate in a case where no arbitration has been commenced and none is intended to be commenced, but a party goes to court to ask it to protect its interest in a right to have its disputes settled in accordance with its arbitration agreement, it is open to the court to consider whether, and how best, if at all, to protect such a right to arbitrate. Whether it will assist a claimant at all, and if so, how, is a matter for its discretion: but it would to my mind be an error of principle and good sense for the court to rule that as a matter of jurisdiction, or even as a matter of the principled exercise of its discretion, it has no possible role in the protection and support of arbitration agreements in such a context.

The second principle is that the UK courts will uphold the arbitral regime against virtually all other incursions into that regime.  It is on this basis that the Court of Appeal ended its analysis:

In those circumstances, it is hard, in my judgment, to see any reason why, as a matter of jurisdiction, there should be any difficulty about the English court providing a remedy to preserve and support the right of the operator to arbitrate.. …The demand that the operator commence an arbitration solely in order to put before an arbitral tribunal an issue of substantive jurisdiction which it is to be presumed the owner would repudiate, very probably by standing aloof from the arbitration, and which, in all practical terms, could only be definitively settled by the court, seems to me to be far-fetched and unrealistic, to be creative of unnecessary expense and delay, and to put the operator under unnecessary risk that further proceedings in the Kazakhstan courts would be to its prejudice, as well as to the prejudice of the agreed process of arbitration.  None of that promotes any of the principles upon which the [Aribration Act] 1996 is founded, as set out in its section 1.  It would seem to me to be the antithesis of the principles of that Act for this court, in such circumstances, to refuse, as a matter of jurisdiction or principle, a request for assistance in the form of an anti-suit injunction.

Pro-Actively Protecting the Arbitral Regime

This judgment is a ringing endorsement of the entitlement of the courts of the seat of the arbitration to take matters into their own hands to preserve and protect the arbitral regime.  Perhaps the fact that London is the seat of many international arbitrations is a strong motive for the UK courts to adopt such a policy.  But the 1996 English Act is based on the principles of the UNCITRAL Model Law.  So the policy should be equally applicable to other common law jurisdictions.

Clearly, if the courts of countries which are not the seat of the arbitration “play offence” and issue conflicting declarations and injunctions, it would play havoc with the arbitration regime. There must be one and only one court system which exercises this supervisory “sooner or later” jurisdiction, and that is the court system of the seat of the arbitration.  For those who need the pro-active intervention of that court system to protect an arbitral regime, the Kamenogorsk decision is a powerful pronouncement.

Arbitration  –  International Commercial Arbitration  –  Declaratory Relief  –  Jurisdiction of the Court

AES-Ust-Kamenogorsk Hydropower Plant LLP v. Ust-Kamenogorsk Hydropower Plant JSC [2011] EWCA Civ 647

Thomas G. Heintzman O.C., Q.C.                                                                          February 12, 2012