Contractor's disqualification from bidding on projects not arbitrable: Ontario Superior Court

The contractor allegedly failed to meet the agreed project timelines

Contractor's disqualification from bidding on projects not arbitrable: Ontario Superior Court

The Ontario Superior Court of Justice has recently ruled that the Ministry of Natural Resources’ decision to disqualify its contractor from bidding on other government projects is not arbitrable.

The Ministry of Natural Resources contracted with HugoMB Contracting Inc. for work on the Tilden Lake Dam Project near North Bay in Lyman Township. HugoMB's bid won the Tilden Lake Dam project. The company had also previously won work for the Ministry on projects, including the Kenogamisis Dam projects in 2019. HugoMB was required to perform the work diligently and competently on or before February 14, 2020, and to complete the work no later than May 31, 2020. In exchange, the Ministry agreed to pay HugoMB up to $5,828,550.

However, the dispute started when the Ministry became dissatisfied with HugoMB's work because the company allegedly failed to meet the agreed timelines in the contract. The Ministry eventually terminated HugoMB's right to work on the Tilden Lake Dam.

HugMB subsequently submitted unsuccessful bids on various other Ministry projects, but the Ministry considered HugoMB's prior performance on contracts, including on the Tilden Lake Dam project, as one factor in its decisions not to award further contracts to HugoMB.  , The Ministry advised HugoMB that it would be barred from bidding on any Ministry projects for two years.

HugoMB triggered the arbitration clause in the Tilden Lake Dam contract to resolve its claims for compensation for additional costs it incurred and extra work it performed. HugoMB advanced seven claims for arbitration. The parties agreed that the six disputes fall within the scope of the arbitration agreement. However, they disagreed on whether the seventh claim falls within the arbitration agreement. Under this claim, HugoMB sought $4.1 million in damages because it was "improperly disqualified by the Ministry from bidding on further projects."

The arbitrator ruled that the seventh claim is arbitrable because there was a nexus between HugoMB's performance under the Tilden Lake Dam contract and the Ministry's decision to disqualify HugoMB from bidding on future contracts for two years. The arbitrator held that as the tender agreement contemplated that outstanding claims and matters, contractual and otherwise, may be arbitrated, he had jurisdiction over the dispute.

The Ministry applied to the court to decide whether the seventh claim was arbitrable, and the Ontario Superior Court of Justice ultimately ruled that it was not. The court considered three factors—the dispute's subject matter, the arbitration agreement's scope and whether the dispute falls within the scope of the arbitration agreement.

Subject-matter of the dispute

The court found that the subject matter of the dispute is whether, after delivering the notice of termination, the Ministry:

  • breached a duty of fair and equal treatment in the procurement process and improperly disqualified HugoMB's bids on other projects;
  • improperly barred HugoMB from tendering or being awarded any work for two years; and
  • unreasonably withheld a reference letter for HugoMB on a bit it submitted to Parks Canada.

Scope of the arbitration agreement

The court also explained that the scope of the arbitration provisions only extends to claims arising out of decisions made under the contract or actions taken to fulfill the terms of the contract. The court found the subject matter of the dispute does not fall within the scope of the arbitration provisions. The court said that the seventh claim relates to a series of decisions that the Ministry made after it delivered the notice of termination of HugoMB's right to continue the work. When the Ministry made the challenged decisions, HugoMB had no right to continue its work under the contract and only had the right to fair compensation for the work performed to that point. Those decisions challenged in claim #7 do not fall within the scope of the arbitration agreement, which the court has found to be limited to disputes directly linked to work performed under the contract.

Furthermore, the court found that the Ministry made the decisions in claim #7 challenges in reliance on rights that are completely external to the Tilden Lake Dam project. The Deputy Minister's decision to impose the two-year ban was explicitly based on her concerns with HugoMB's performance on the Tilden Lake Dam and Lake Kenogamisis Dam projects. The court also found that there is a different dispute resolution process for HugoMB's bids for other work.

The court further said that HugoMB was asserting rights that do not arise under the Tilden Lake Dam contract. It claimed damages for work that, on its theory, it would have performed under other tenders if it had successfully won them. The court concluded that HugoMB was not asserting its rights under the Tilden Lake Dam contract.

Finally, the court found that the disputes raised in claim #7 do not fit easily within the structure of the dispute resolution process laid out in the contract. Nothing in the Tilden Lake Dam contract's language indicates that the parties agreed that a claim like a claim #7 would be subject to arbitration.

The court ultimately concluded that claim #7 is not arbitrable, but HugoMB may still be able to pursue some or all of the disputes raised in claim #7 through an action in the Superior Court of Justice.

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