Date: Sat, 10 Sep 2005 18:46:30 -0400

From: David Cheifetz

Subject: Law of Contract and unconscionability

Jason,

I apologize in advance for the length of this reply.

Gottardo is another example of an appellate court not being careful enough in both what it does say and it what it doesn't, about issues it thinks it doesn't have to deal with.

Gottardo makes it necessary to ask (in Ontario) ask: when the court is asked to enforce (relieve against) the performance of a contract, when will it be unconscionable, unfair or unreasonable to irreparably damage/destroy a business as the result of the enforcement or relief from enforcement? Or, more to the point when is it not?

TTC v Gottardo may or may not be problematic for tender law. It opens a can of worms (in Ontario, at least) on the broader question of the scope of the power to decline to enforce otherwise valid contracts or terms of a contract on the basis of unconscionability because it makes a broad statement about the power without any indication of the parameters of the statement.

Gottardo should also be understood as another example of a case where, for some reason, an appellate court didn't accept consequences necessarily flowing from underlying facts as found by the trial judge but it couldn't validly alter the findings of fact. So it chose to ignore the uncomfortable facts.

If you take the case literally, it means that a financial mistake which, on the evidence "cause severe and irreparable financial hardship" is not sufficient to trigger the courts power to decline to enforce contracts (or contractual terms) for "unconscionability": that it's not unconscionable to do so or not unfair or unreasonable to do so. I use the alternatives because we still don't have an SCC answer as to which formulation is the description of the power - although those of us in Ontario have been told by the CA (accepting Waddam's view) that in practice there's not likely to be a significant difference. The SCC's most recent statement (as sparse as it is) is still Hunter Engineering v Syncrude [1989] 1 SCR 425 and as good a discussion as any of the case, for those who don't know it (or remember it) is Robert Flannigan's "Hunter Engineering: The Judicial Regulation Of Exculpatory Clauses" [1990] 69 Canadian Bar Review 514.

The facts of Gottardo are simple. There was an addition mistake of $557,000 on the Gottardo bid at $4.81 .million. It should have been $5,368,492.40. The TTC was advised of the mistake after the tenders were opened but before it accepted the Gottardo bid. Nonetheless, the TTC accepted the bid. Gottardo, of course, refused to perform so the TTC awarded the contract to the next lowest bid - about $434,000 higher - then claimed on the Gottardo bid bond put up by G's insurer, CGU. So, there was no change of position, reliance, etc. by the TTC. And, one more telling fact: undisputed, uncontradicted evidence that "if the TTC took action against the bid bond, it would cause severe and irreparable financial hardship to Gottardo.

[The TTC initially claimed the entire bond - 532K, not just the 434,000 difference - but no doubt that was for good motives: no doubt, it had in mind the interest of Toronto's citizens.]

The trial judge held that if Contract A came into existence Gottardo was entitled to rescind. Here are the operative paragraphs from the trial reasons:

69 I have found that Gottardo made an honest and inadvertent mistake that was communicated to the TTC after the deadline for submitting tenders but on the same day and before the TTC had accepted the bid or had changed its position in reliance on the bid. The mistake is as to a fundamental term of Contract A, namely it represents the price of performing seven enumerated items in the price schedule. On that basis, the court is entitled to entertain the request for rescission.

71 In my view it would be unfair and unjust to enforce Contract A for these reasons:

(a) This case is not fundamentally about the integrity of the public bidding process. Rather, it is fundamentally about the interpretation of the Instructions to Tenderers the drafting of which was wholly in the control of the TTC.

(b) I have found that Gottardo made an honest and inadvertent mistake. It is not a situation, as suggested by Lee, of a contractor saying: oh guess what, I don't want this for whatever reason. Gottardo had a logical explanation.

(c) From December 20th when Gottardo's letter was received by the TTC, officials rejected his request out of hand. There is no evidence that any consideration was given by TTC that perhaps its own contractual language distinguished it from the legal position on which it relied. Instead, on the recommendation of its staff, TTC "snapped at it";

(d) The evidence of Gottardo is consistent with what he said in his December 20th letter, namely that if the TTC took action against the bid bond, it would "cause severe and irreparable financial hardship". Mr. Gillott took the position that that evidence ought not to be accepted without corroboration. However, there was no cross-examination on that part of Gottardo's evidence. There is no reason not to accept it and I do;

(e) The "commercial advantage" argument appears to be based on the decision of the trial judge in Ron Engineering where he described the "brinkmanship with the sub-trades", a practice "obviously" for the benefit of the tenderer. The Supreme Court of Canada did not comment on that argument. I agree that the tenderer reaps some advantage from the "brinkmanship with the sub-trades". But it is ultimately the owner who benefits from the highly competitive bidding which is generated in the typical public tender process, the rules for which are established by the owner. The fact that Gottardo may have achieved some "commercial advantage" over its competitors does not mean that it is disentitled to equitable relief;

(f) there was no fraud or misrepresentation or other act on the part of the TTC which induced or contributed to the mistake on the part of Gottardo. But as pointed out above, the threshold is not the conduct of the offeree. The threshold is the effect on the offeror.

72 In this alternative scenario, if Contract A was created, the TTC is not entitled to enforce it. Gottardo is entitled to rescission.

While there was no evidence as to what the financial hardship might have been, we can make an astute guess. Gottardo Co. and its principals jointly guaranteed the bid bond so that the 434,000 that CGU had to pay would ultimately come out of the Gottardo/principals' pocket(s).

Here's how the Ont CA dealt with the rescission defence. The italics of the 3rd and 2nd last sentence are mine.

[32] The trial judge's reasons make it clear that the mistake was unilateral and that there was no fraud. The trial judge, however, found that since the mistake was honestly made and inadvertent and because enforcement would cause Gottardo financial hardship, she would grant rescission. With respect, I do not agree. In my view, there are no unique circumstances in this case which distinguish it from Ron Engineering and which would operate so as to entitle the tenderer to have the contract rescinded. While it is conceded that some financial hardship will flow from enforcement of the contract, this is not sufficient to warrant rescission. The burden imposed on Gottardo by the enforcement of the contract freely entered into is not so grossly disproportionate so as to make enforcement of it by the courts unconscionable. In the circumstances, there are simply no grounds for equitable intervention.

Anybody care to speculate what "grossly disproportionate" means? Disproportionate to what? How much financial burden would have been sufficient? The practical destruction of Gottardo or its principals? The only "burden" that would be imposed on Gottardo would be a financial burden, so the 3rd last sentence can't mean that financial consequences are never enough of themselves; only that they weren't enough here. The undisputed evidence (last I checked the law, the CA isn't supposed to reverse unchallenged findings of fact that could be correct just because it doesn't like the "smell" of the finding) was that Gottardo would suffer "severe and irreparable financial hardship" - look at para 71(d) of the trial judgment quoted above. On what basis does the CA call that only "some financial hardship?" Or did the CA consider the trial finding hyperbole? Why wasn't that sufficient to trigger the remedy of recession under the CA's formulation in para 72, unless the CA meant to say that even irreparable financial hardship isn't enough. But that isn't what the paragraph says.

How much financial hardship would have been enough to trigger unconscionability? Bear in mind there was a bid bond which applied - the judgment was jointly against Gottardo and the insurer CGU - so the only reason Gottardo might have had any financial hardship is if it or its principals guaranteed the bond so had to repay the insurer. And the consequences of CGU calling on the guarantee, as it no doubt would.

Anybody care to speculate what law the CA panel looked to for the decision that enforcement of Contract A wouldn't be unconscionable? It couldn't have been Ron Engineering at the SCC, because that issue wasn't discussed.

The CA could well wrong in the blanket assertion that "there are no unique circumstances in this case which distinguish it from Ron Engineering and which would operate so as to entitle the tenderer to have the contract rescinded" so long as we're prepared to concede that SCC decisions after Ron Engineering could be relevant. I'm not certain what the CA meant by "unique circumstances" but I'd hazard a change in the law is relevant, even if not "unique". Ron Engineering was decided in 1981. The SCC's last word, in the contract context, on the scope of the "unconscionability" doctrine is 1989's Hunter Engineer v Syncrude. Hunter isn't discussed in Gottardo at either level. Ultimately, the unconscionability principle (whatever it comes to mean) will control the recission remedy. The CA even used the telling phrase "so as to make enforcement of it [the contract] unconscionable".

The amount of the error in Ron Engineering was about $750,000 on a $2.75M bid which should have been about $3.5 if the addition was right so the mistake was about 21% of the contractor's correct estimate. Gottardo's error was "only" a bit more than 10% of its estimate - $557,000 on about $5.38M. So, if we assume that the SCC said in Ron Engineering that a 20% difference was not sufficiently disproportionate, of itself, to render enforcement unconscionable so as to permit rescission, then the CA was right in stating " there are no unique circumstances in this case which distinguish it from Ron Engineering" etc.

There are at least two problems with that conclusion. The first is that the on Ron Engineering doesn't have any discussion of the rescission remedy or unconscionability and it predates Hunter Engineering. So the CA couldn't have found its "unconscionability" law in Ron Engineering and that new law could require a change in the result. The second is that there's nothing in the SCC decision that mentions financial hardship to Ron Engineering, probably because the deposit forfeited was "only" $150,000.

Now those of us who practice in Ontario have try to guess what the Ont CA thinks about the scope of the unconscionability power as a ground for declining to enforce an otherwise valid contract or term in a contract. Does this mean that, the next time the Ont CA has to consider the SCC's decision in Hunter Engineering we have TTC v Gottardo as a hint that in Ontario it's Wilson J. 's unfair, unreasonable in application rather than Dickson's J's unconscionability? Since it's really only Wilson J's version that looks to the time of the contract's performance, rather than it's making, for the relevant criteria. Or was it Dickson J's test with the CA saying that it was prepared to assume that contract B - the construction contract - could not have been performed except at some amount of meaningful (though not necessarily sufficient) financial hardship. I appreciate that Waddams says they're practicably the same (and the Ont CA has approved this comment). I beg to differ.

Regards,

David

-----------------

David Cheifetz
Bennett Best Burn LLP
Toronto, Canada

----- Original Message -----
From: Jason Neyers
Sent: Saturday, September 10, 2005 8:31 AM
Subject: ODG: The Law of Tenders

Dear Colleagues:

Those of you interested in the Canadian law of tenders, will be interested in the Ont. CA's decision in Toronto Transit Commission v. Gottardo Construction Limited which deals with contract A and the effect of mistake and rescission.

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