June 17, 2019

Owners of large-scale projects: it’s not a free-for-all!

In a warning issued to the clients of large-scale projects, the Court of Appeal reiterated that there are limits to the use of one’s privileged economic position … and to the exploitation of another’s precarious financial situation.

A party in a significantly advantaged economic position compared to its co-contracting party must exercise great caution in the way it exploits that advantage.

This past May, the Court of Appeal rendered judgment in Hydro-Québec c. Construction Polaris inc. on the limits of negotiation tactics that may be used in the presence of unequal economic power. It also took the opportunity to make additional comments on the notion of “distorting lens,”  recently addressed by the Supreme Court in Matte-Thompson v. Salomon.

But first, a summary of the facts is in order.

The services of Construction Polaris were retained by Hydro-Québec for the construction of a section of an access route to the Romaine hydroelectric development site. From the beginning of the contract, Polaris had to fulfil unforeseen conditions of performance, placing it in a precarious financial position. Lacking liquid assets, in February 2011, Polaris claimed $18 million from Hydro-Québec so that it could continue the work. During the negotiations, Polaris agreed to open its books to allow the government corporation to confirm that the financial situation was critical and threatened the completion of the work.

The negotiations between the parties culminated on May 25, 2011, when a meeting between Hydro-Québec and Polaris was held to finalize what Polaris understood to be temporary financing of $4 million. Rather than the financing contemplated, Hydro-Québec suggested that Polaris’s entire claim, now totalling $24 million with 40−45% of the work to be performed, be settled for $10 million in exchange for a release covering past, present and future claims. Facing bankruptcy and confronted with a two-hour ultimatum by Hydro-Québec, Polaris accepted and signed an agreement.

It should be noted, however, that at trial, Hydro-Québec indicated that there was a debate on the true scope of the agreement regarding future claims.

The judgments at first instance and on appeal

Polaris then filed an action in the Superior Court for $63 million against Hydro-Québec. The case management judge first split the proceeding so that the issue of the validity of the agreement could be decided first. In a detailed judgment, Michel A. Pinsonnault J. set aside the agreement, finding that Polaris’s consent was vitiated by the fear of serious injury, that is, its inevitable bankruptcy. In Pinsonnault J.’s view, Hydro-Québec’s bad faith was obvious in the circumstances.

Hydro-Québec appealed the decision. It submitted that the judge erred in law in concluding that it was in bad faith. According to Hydro-Québec, that conclusion was the result of an assessment of the evidence through a “distorting lens” because it was not open to the judge to infer that Hydro-Québec’s advantage was obtained in bad faith on the basis of Polaris’s precarious financial situation.

The Court of Appeal rejected that argument.

Recalling the teachings of Clément Gascon J. in Salomon, the Court first reiterated that the notion of “distorting lens” cannot be used to justify a new assessment of the evidence by an appellate court. The presence of bad faith on the part of Hydro-Québec is a question of fact, or of mixed fact and law, and there was nothing indicating that the judge made a palpable and overriding error that would justify reviewing that decision. The Court of Appeal nevertheless suggested that there were several elements of proof to support Pinsonnault J.’s conclusion of bad faith: the short time period provided to respond to the offer, the lack of notice regarding the scope of the meeting, and the requirement of a release for future claims concerning a project that in large part remained to be completed. The Court of Appeal upheld the judgment setting aside the agreement.

Three players, three lessons

First, on the merits, the Court of Appeal suggested that a party in a significantly advantaged economic position compared to its co-contracting party must exercise great caution in the way it exploits that advantage. In this regard, institutional clients (for example, public and para-public bodies, cities and municipalities) should take due note not to exceed the limits established by Pinsonnault J.

This decision also confirms that lawyers seeking to base their appeals on the notion of “distorting lens” are not exempt from identifying a reviewable error. Indeed, the Court Appeal acknowledged the comments of Gascon J. in Salomon, suggesting that this concept cannot be used to circumvent the standards of appeal established in Housen v. Nikolaisen.

Finally, the Court of Appeal indirectly addressed the splitting of the proceeding as a case management tool, suggesting that it should be ordered only sparingly. The Court indicated that the splitting had raised several difficulties, including in regard to the limits of the evidence that could be admitted at that stage. Although it can save judicial resources, splitting the proceeding sometimes leads to complications resulting in even greater expenditures of these same resources, contrary to the spirit of the guiding principles of procedure.