Do governments have to pay out on their contracts?

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In light of debates about the real cost of government contracts, including the $14-billion fighter jets and the $1-billion Ontario gas plant cancellation, it is worth noting what the principles are that govern government contracts.

In principle, the legislatures of each province and territory (Parliament federally) have to approve all appropriations to or payments from the government's big "one size fits all" bank account, the consolidated revenue fund. This is because of the provisions in the Canadian Constitution, and because of standing orders dealing with money bills in each jurisdiction. In practice, over time the legislative oversight of budgetary matters has weakened (mostly through changes to those same standing orders). These are dealt with through budgets presented first through the speech from the throne to maintain the fiction that all budgets are recommended by the Crown.

This raises an interesting constitutional question: Can the government of the day bind future legislatures to spend money through entering into contracts, whether they be collective agreements, or ordinary contracts to expend money over multiple years? The simple answer to this question is they should not be able to. The principle underlying this is that the government of the day should not, at least in theory, have the power to tell future elected representatives what budgets to pass or not pass or to bind them to do so.

The real answer is more complicated. For example, in the case of collective agreements Charter rights of union members trump the ability of the legislature to get out of these multi-year contracts in some situations. For other contracts though, much depends on the financial administration legislation in the jurisdiction involved.

Many provinces and territories (and the federal government) have a "get out of contract free" clause in their Financial Administration Act (like this one) that says something along the lines of "our obligation to pay you on any contract with you in any given year depends on the legislature approving appropriations sufficient to pay you." This is also usually a deemed clause in every contract with the government in those jurisdictions. Few (if any) of these have ever been used or tested in court.

Another issue is that any legislature has the power to pass legislation voiding a contract or voiding payment obligations on a contract (with the potential exception of collective agreements). We do not have property rights  or contract rights in the Charter, so legislative power is superior to obligations in a contract. This means that if they wanted to, the legislature could pass an act voiding payment obligations that were no longer politically favourable. The act could include provisions preventing any lawsuit on the cancellation. This is similar to the government power to expropriate without compensation which while available, is considered heavy-handed.

One reason this does not happen frequently is that it could raise the cost of doing business with the government. In theory, bidders on contracts would start building these risks into their prices, meaning the government would pay more -- if contractors felt that there was a real possibility of this happening.  On the other hand, government contracts are notoriously highly priced and typically lucrative anyway, so one view is that most companies would likely simply take the risk.

In any event, whenever you hear about a contract cancellation (or potential cancellation) causing damages to the government, it is important to know that the government, as long as it has the support of the legislature, could simply pass legislation to deal with the problem. In Ontario this would have been true of the gas plant cancellation. Ontario doesn't have the "out" clause in its Financial Administration Act, but separate legislation can be passed to deal with specific cases. 

Probably a worse sin than refusing to cancel contracts with (arguably unfair) legislative solutions is the habit of governments agreeing not to enforce clauses that deal properly with contract damages when they cancel them. For example, the Ontario gas plant contract had provisions limiting Ontario Power Authority's liability in the event of cancellation but according to the Ontario Auditor General's report it wasn't properly used. Governments also have a habit of failing to protect the public interest in settlement and contract enforcement discussions and therefore offering more than the contractors are actually entitled to, including through complicated and costly arbitration processes. One good example of this kind of issue is the decades-long federal saga with Sea King helicopters replacement.

The upshot of this is that we all pay more. We pay unfair sums of money to contractors. This happens all the time and in every government. The best we can do is hold them accountable for these overpayments when they come to light. The more interesting question is why does this happen so frequently, and what can be done to provide better oversight? The plight of the Parliamentary Budget Officer and the federal Auditor General's oversight of fighter jets is just one example of what a challenge this can be. The Charbonneau Inquiry in Quebec provides numerous examples of how corruption and intimidation can be a big factor in government procurement. Given that Canada has a potentially serious corruption problem, and out-of-date and inneffective access-to-information legislation, this is going to be one of the major challenges of this generation. 

This makes it all the more important to support our legislature's power to intervene and pass legislation where appropriate to deal with bad contract situations. After all, it is the legislature that we have the most direct access to through the elections process. It is also important that there not be a political backlash for frequent elections, because this prompts our representatives to approve unsavoury budgets to avoid triggering them. The cost of an election is small in comparison to four years of a legislature approving budgets that incur excessive costs on taxpayers. While recent examples in the U.S. show how these legislative powers over funding government programs can potentially be abused, they do continue to play an important role in protecting our democratic institutions.

Iler Campbell LLP is a law firm serving co-ops, not-for-profits, charities and socially-minded small business and individuals in Ontario.

Pro Bono provides legal information designed to educate and entertain readers. But legal information is not the same as legal advice -- the application of law to an individual's specific circumstances. While efforts are made to ensure the legal information provided through these columns is useful, we strongly recommend you consult a lawyer for assistance with your particular situation to obtain accurate advice.

Submit requests for future Pro Bono topics to probono@rabble.ca. Read past Pro Bono columns here.

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