I. Introduction
On January 17, 2024, the Superior Court of Québec clarified the duty of good faith owed by public bodies at every step of the tendering process in Ricova Services v. City of Montréal,[1] a case that stemmed from a critical pricing error by the bidder.
II. Facts
In March 2017, the City of Montréal (the “City”) issued a public tender for the collection of recyclable materials in five boroughs, including Côte-des-Neiges–Notre-Dame-de-Grâce (“CDN/NDG”).
The tender documents included a table outlining key information for each borough, such as the number of serviced addresses, annual tonnage, average number of trucks, collection days, and frequency.
Shortly after issuing the tender documents, the City realized it had made an error, mistakenly attributing data for the Lasalle borough to CDN/NDG. To rectify the error, the City issued Addendum No. 1 (the “Addendum”), which provided the corrected data for CDN/NDG.
In April 2017, Ricova Services Inc. (“Ricova”) bid on four boroughs, including CDN/NDG. However, Ricova based its calculations on the original tender documents, overlooking the corrected data provided in the Addendum. As a result, Ricova’s bid price was substantially lower than its competitors.
Despite this significant pricing discrepancy,[2] the City awarded the CDN/NDG collection contract (the “Contract”) to Ricova.
The Contract took effect in December 2017, and Ricova struggled from the outset.
It soon discovered that it had under-allocated collection trucks for the borough, resulting in monthly losses of $70,000 to $100,000.
In January 2018, Ricova’s president requested an emergency meeting with the City, claiming that the municipal estimates were flawed. However, it soon became clear that Ricova had in fact made the mistake. The parties met several times to try to find a solution, but failed to agree on a price adjustment or fulfillment of the original Contract terms.
They then explored a third option: restarting the tender process. The City was willing to consider this, provided that Ricova continue to provide services in the meantime. These discussions continued, and in February 2018, Ricova sent notice of termination for the Contract. The City replied that the termination would only take effect when the new contractor’s agreement began.
In April 2018, the City relaunched the tender process and awarded the contract to Derichebourg Canada Environment Inc. (“Derichebourg”). However, this new contract could not be finalized until August 2018. Meanwhile, Ricova continued to struggle to fulfill its obligations, leading the CDN/NDG borough to impose penalties. Ricova contested these penalties, but the City offset them by withholding equivalent amounts from payments owed to Ricova under other contracts.
Eventually, the CDN/NDG borough brought in municipal workers to address Ricova’s service gaps and there was talk of awarding a temporary contract at Ricova’s expense. In July 2018, the City informed Ricova that it had awarded a temporary contract to Derichebourg, pending City council’s approval of the new collection contract. On August 21, 2018, the City approved the new contract and formally terminated its Contract with Ricova.
In October 2018, Ricova demanded payment for services provided in the other boroughs. The City’s response stated that it had withheld the cost of the penalties and municipal workers, the difference in cost between Derichebourg’s temporary contract and Ricova’s original agreement, and the difference between Ricova’s original bid and the new contract with Derichebourg.
In total, the City withheld $1,182,178.18, consisting of $98,394.73 from Ricova’s performance bond and $1,083,783.45 from its other contracts.
In May 2019, Ricova initiated legal proceedings, seeking to cancel the imposed penalties and recover the amounts withheld for municipal workers and from its performance bond. It also claimed repayment of the damages retained by the City, representing the difference between Ricova’s original bid and Derichebourg’s two contracts, minus the amount already withheld from the performance bond.
III. Issues in Dispute
- Did the City act in good faith when awarding the Contract to Ricova?
- Did the City uphold its duty of good faith in managing the Contract after discovering Ricova’s error?
- What damages, if any, can the City claim?
IV. Superior Court Decision
1. Good faith in awarding the Contract
The Court began by explaining the concept of error in contracting. It distinguished between excusable and inexcusable bidding errors, noting that an inexcusable error does not invalidate consent unless it involves fraud.
The Court held that an inexcusable error may be deemed excusable if the other contracting party breaches its duty of good faith. This includes failing to disclose relevant information.
In this regard, the Court notes that the duty to disclose lays two complementary obligations on contracting parties: a positive duty to disclose for one party and a corresponding duty to inquire for the other.
Relying on three prior decisions,[3] the Court observed that a client who knowingly contracts with a bidder who has made an error, with the intention of exploiting the situation, acts in bad faith. This conduct may justify annulment of the contract, even where the error is inexcusable, although such cases are rare.
Applying these principles to the present case, the Court held that Ricova’s failure to account for the Addendum in its bid constituted an inexcusable error. It pointed out that the tendering process aims to ensure sound management of public funds and procurement of the best services at the best price. It emphasized, however, that this objective is not achieved by automatically accepting the lowest bid, as neither the City nor its citizens benefit from a bidder being forced to fulfill a contract that was awarded based on an error.
The Court found that Ricova’s error was not readily apparent, particularly given the company’s history of aggressive bidding, but that the City should still have looked into the substantial difference between Ricova’s bid, competing bids, and the City’s own estimate, especially given the flawed initial tender call. However, this did not relieve Ricova of the consequences stemming from its inexcusable error.
The Court also found that the City did not accept Ricova’s bid with the intention of exploiting the situation or taking advantage of the company’s error. As a result, although the error remained inexcusable, it did not justify Ricova’s unilateral termination of the Contract. The Court explained that contractors may only terminate a contract for a serious reason, and that an inexcusable error does not meet this threshold.
2. Good faith in managing the Contract after discovering the error
The Court found that by late 2017 or January 2018, the City was aware of Ricova’s error and its consequences, including monthly losses of $70,000 to $100,000, insufficient resources, and inadequate labour to perform the work, all of which placed Ricova in a precarious position.
Citing the Supreme Court’s decision in Churchill Falls,[4] the Court first established that good faith does not require contract renegotiation when unforeseen circumstances arise. A party is under no obligation to revise the agreement simply because the other party encounters difficulties. The Court then emphasized the duty of collaboration and cooperation between the parties, which requires them to seek solutions when problems arise. It also stressed the duty of disclosure, which obliges each party to inform the other of events that affect the performance of the contract, and the duty of consistency, which prohibits a party from acting in contradiction to expectations expressed to its contractual partner during their relationship.
In light of these principles, the Court examined the City’s conduct in managing the Contract, focusing on:
- the delay in awarding the new contract
- the penalties for late or delayed collection
- the hiring of municipal workers and the interim contract awarded to Derichebourg
- the claim for the price difference between Ricova’s bid and the new contract with Derichebourg.
a) Delay
The Court found that the City did not breach its duty of good faith regarding the delay in awarding the new contract. The contract had to be approved by the Commission and City council, which took time. Notably, the delay between the decision to reissue the call for tenders in January 2018 and the contract award in August 2018 was similar to the timeframe for the 2017 tender process.
b) Penalties
The Court declined to order that the penalties imposed on Ricova be reimbursed. Although Ricova did its best under challenging circumstances, it had to accept responsibility for its own inexcusable error. Furthermore, Ricova must bear the consequences of breaching its commitment to fulfill the Contract until a new one was awarded. Despite assurances to the City that it would honour the Contract during the transition period, Ricova failed to do so.
c) Municipal workers and temporary contract
The Court also ruled that the City’s costs for hiring municipal workers and awarding a temporary contract were justified. From the start, the City had made it clear that these costs would be claimed from Ricova. The City never waived these claims or led Ricova to believe they would not be pursued. The Court found that these expenses were warranted due to Ricova’s failure to meet its obligations during the transition period.
d) Price difference and amounts withheld
Conversely, the Court ordered the City to reimburse Ricova $1,079,604.68, the price difference between Ricova’s Contract and Derichebourg’s bid in the second call for tenders.
The Court found that the City’s conduct led Ricova to believe it would be released from its obligations once the new contract was approved.
In February 2018, Ricova contacted the City to confirm this understanding. The City’s response did not mention that Ricova would be liable for the difference between its erroneous bid and the new contract price if the contract were re-tendered.
In March 2019, the City acknowledged receipt of Ricova’s notice of termination, stating merely that the termination would only take effect when the new contractor’s agreement began and that it expected Ricova’s full cooperation in fulfilling its obligations. Again, there was no indication that the City intended to claim damages if the new tender resulted in a higher price.
Although communication continued, the City did not mention the possibility of damages from termination until July 2018, and even then, the extent of liability remained unclear. It wasn’t until October 2018, when Ricova sent the City a notice for outstanding amounts on other contracts, and the City responded that it had withheld payment to offset its own costs, that Ricova realized it would be held liable for damages.
The Court ruled that although the Contract permitted payment withholdings, the City’s conduct was abusive. By requiring Ricova to work without payment on contracts unrelated to the dispute, while aware of its substantial monthly losses ($70,000 to $100,000 for seven months), the City fell short of the minimum standards of good faith. The Court emphasized that this conclusion was even more justified since Ricova was not informed that a withholding would be applied.
The Court also determined that the City had breached its duty of good faith by creating false expectations for Ricova, lacking transparency, and allowing a false sense of security to persist.
The Court ultimately ruled that the City had incurred some inconvenience, but no damages, from the termination, because preventing a city or its citizens from benefiting from a contractor’s error does not constitute actual harm.
Conclusion
The Court upheld Ricova’s claim for reimbursement, but only for the damages incurred for the price difference between the original Contract amount and the contract resulting from the second call for tenders. Consequently, the Court ordered the City to reimburse Ricova $1,088,576, the amount that it had withheld by offsetting payments due under other contracts.
This decision underscores the importance of good faith in contract performance, including the obligation to avoid creating false expectations. Public bodies cannot lead contractors to believe they will not claim price differences after contract termination and re-tendering, only to make such claims later, a practice the Court deemed calculated opportunism.
This judgment has been appealed, and the decision of the appellate court is pending.
[1] Services Ricova inc. c. Ville de Montréal, 2024 QCCS 80.
[2] Ricova’s bid was $2,828,848.35. The next lowest bid was $4,595,453.66.
[3] Confédération des caisses populaires et d’économie Desjardins du Québec c. Services informatiques DecisionOne, [2004] R.J.Q.69 (C.A.); Société québécoise des infrastructures (Société immobilière du Québec) c. C. & G. Fortin inc., 2014 QCCA 730; Ville de Salaberry-de Valleyfield c. Construction NRC inc., 2021 QCCA 844.
[4] Churchill Falls (Labrador) Corp. v. Hydro Québec, 2018 SCC 46.
