Canada: Ville De Sherbrooke v. Sherax Immobilier Inc.: The Superior Court Issues A Reminder Of The Importance Of The Obligation To Inform And The Obligation Of Collaboration In Connection With A Public-Private Partnership Contract
Litigation and Dispute Resolution Bulletin

Introduction¹

On November 30, 2021, the Superior Court, the honourable Charles Ouellet, J.S.C., presiding, allowed, in part, the claim in damages made by a contractor that alleged it had been the victim of various faults committed by the City of Sherbrooke in the negotiation and performance of a contract for the design, construction and management of an indoor soccer centre.² In its decision, the Superior Court affirmed the importance of the client's obligation to provide information at the pre-contract stage and the obligations of collaboration and loyalty in the performance of the contract. The judgment offers valuable guidance regarding the interpretation of these principles in connection with a public-private partnership contract awarded through a tender process.

Summary of the Facts

In October 2005, the City of Sherbrooke (the "City") issued an invitation to tender for a contract for the design, construction and management of an indoor soccer centre (the "Centre") and lobby (the "Contract"). The construction of the Centre arose out of a political desire on part of the municipal council to promote sports activities and respond to the pressure brought to bear on the City by organizations whose mandate was to oversee soccer playing within their jurisdiction.

The tender documents stated, "for information purposes," that the City and its recognized organizations would need to reserve the field at the Centre for 4,943 hours a year.

In addition, the tender documents provided that the City and its recognized organizations would have priority for reservations at the Centre and guaranteed that the revenue from rentals of the Centre originating from the City and the community and school organizations within its jurisdiction would be at least $400,000 during the first ten years of the Contract.

AXOR Group Inc. ("Axor") was the only bidder for the project and was awarded the Contract in March 2006. On October 13, 2006, Axor assigned the Contract to one of its subsidiaries, Sherax Real Estate Inc. ("Sherax").

In the fall of 2007, the City disclosed to the executives of the various organizations the value of the grants it would be providing to them for rentals of the Centre, which were quite insufficient to enable them to pay for the 4,998 hours already rented. In the days that followed, the number of hours reserved fell from 4,998 to 1,456.

Moreover, after the Contract was awarded, the City built an artificial turf soccer very close to the Centre, for use by everyone free of charge, thereby creating a direct competitor for the Centre.

From 2007 to 2020, the target of 4,943 rental hours per year was never reached. Over the years, the City made slight increases to the organizations' budget to reach the minimum $400,000 guaranteed under the terms of the tender, but nothing more.

It is in this context that Axor and Sherax brought a claim in damages against the City for lost earnings over the 13 years in which the Centre had been in operation, totalling $3,003,862. Among their allegations, they accused the City of breaching its obligation of good faith and of violating its obligation to inform and its obligations of collaboration and loyalty by failing to provide them with adequate information and by failing to collaborate with them on renting the Centre, going so far as to directly compete with it.

In defence, the City asserted that its only obligation was to guarantee the successful bidder annual rental revenue from reservations by its recognized organizations and school organizations totalling $400,000 over ten years, as stipulated in the tender documents. In addition, it argued that the rental requirements stated in the tender documents were for information purposes only and that the viability of the project was the responsibility of the contractor.

Judgment

The Court set out its reasoning in detail and ultimately concluded that the City had breached its obligation to inform Axor/Sherax since it had never intended to grant the additional funding needed to enable the community organizations to cover the cost of the reservations relating to the requirements set out in the Contract.

In the opinion of the Court, the wording of the tender documents implied that the City would provide the organizations with financial support to cover the Centre's needs in terms of hours of use, particularly because the City and its organizations enjoyed priority for reserving the Centre and managed reservations themselves.

In addition, it was shown that the community organizations expected to receive additional grants to enable them to cover the costs of renting the Centre, given that their funding largely depended on grants provided by the City. The evidence introduced at trial showed that the City had never intended to grant its organizations additional funding beyond what would be necessary to reach the $400,000 minimum revenue threshold provided by the Contract.

The Court found that the City had accepted Axor's bid without informing Axor that it intended to limit its financial contribution to the organizations to the $400,000 minimum threshold provided by the Contract, although it was aware of the impact of that decision on the financial viability of the project and although that information was crucial to Axor, which would not have agreed to the Contract if it had been informed of the City's intentions.

Moreover, the Court concluded that the City's choice, shortly after signing the Contract, to build an artificial turf soccer field with public access free of charge near the Centre, and its failure to take into account the other contractual party's complaints regarding that situation, constituted a breach of its contractual obligation of collaboration and loyalty.

The Contract imposed an obligation on the City not to compete with the other contractual party, particularly since the purpose of the Contract was to establish a partnership between the City and Axor/Sherax for operating the Centre.

The Court rejected the City's argument that the effect of the expression "for information purposes" was to relieve it of all liability in connection with the estimate of the rental hours required by the City and the community organizations given in the tender documents, since:

The Court also was not persuaded that the City's liability should be limited because of a clause providing that it guaranteed minimum rental revenue of $400,000 during the first ten years of the Contract. On that point, the Court held that the City was seeking to have the guarantee clause play the role of a limitation of liability clause, when its language provided no such limitation for damages resulting from contractual faults committed by the City.³

For these reasons, the City was ordered to pay Sherax $2,686,492.28 plus interest and the additional indemnity commencing on the date the claim was filed. Note that a notice of appeal was filed on January 18, 2022. As of the date of this bulletin, the Court of Appeal has not ruled on the outcome of this case.

1. the City knew that the estimated hours would not materialize without assistance that it did not intend to give;
2. that estimate was not really "incorrect" given that the reservations had been made before the City's organizations were informed that they would not be receiving additional funding to enable them to reserve the soccer fields at the Centre for their requirements as stated in the tender.

Key Points

This judgment confirms several important principles that had been established in the case law and the literature regarding the scope of the obligation of good faith in connection with a fixed-price contract between a municipality and a contractor.

First, the obligation of good faith as codified in articles 6, 7 and 1375 of the Civil Code of Québec must govern the parties' conduct at all stages of their contractual relationship.⁴ In the case of a fixed-price contract, this obligation includes the client's obligation to provide the contractor not only with the information it actually has, but also with any information that it should have that is essential to an adequate assessment of the project risks and to the proper performance of the work. Quoting the judgment in Janin Atlas inc. c. Hydro-Québec,⁵ the Court noted that the purpose of this obligation is to avoid the client being able, through fault or dishonesty, to bias the risk analysis process that the contractor must carry out.⁶

The Court also concluded that the City could not rely on a clause in the contract to limit its liability, since the obligation of good faith is a matter of public order⁷ and it was impossible to exclude or limit its liability for intentional faults.⁸

The obligation of collaboration means that each party to the contract may seek to achieve its personal objectives but not at the expense of the common objective that is the fundamental justification for entering into the contract.⁹

The Court also noted that the obligation to inform and the obligations of collaboration and loyalty are more intense in a partnership contract like the one in this case.¹⁰

In conclusion, this judgment affirms the importance of the obligation to inform and the obligations of collaboration and loyalty, particularly in connection with a partnership contract between a public body and a private contractor for carrying out a complex project calling for ongoing collaboration between the parties. In addition, it provides confirmation of the fact that it is rarely possible to shelter behind a clause in a contract to avoid liability for a breach of the duty of good faith which must govern the parties' conduct at all stages of the contractual relationship.

Footnotes