Doing business with the government certainly has its advantages, with the assurance of being paid, on time, being only one of them. In addition, securing a contract with the Crown or one of its agencies will likely enhance your company’s reputation, ensure certain level of prestige and most likely lead to other opportunities as well. However, failing to ensure compliance with certain legal requirements when contracting with the Crown may have costly and negative consequences.

In Ontario, the Financial Administration Act (the “FAA”) provides that a ministry or a public entity shall not enter into any financial arrangement, commitment, guarantee, indemnity or similar transaction that would increase, directly or indirectly, the indebtedness or contingent liability of the Province of Ontario, unless a written approval is obtained from the Minister of Finance. Failing to comply with the foregoing may result in the transaction being deemed unenforceable and not binding!

To begin with, it must be determined whether a prospective contracting party is indeed a “public entity” in the first place, and the answer is not always instantly obvious. The FAA defines a “public entity” as a Crown agency, or a corporation that is owned, operated or controlled by the Crown, or any other board, commission, authority or unincorporated body of the Crown, and “ministry” is defined as a ministry of the Government of Ontario and includes a board, commission, authority, corporation and any other agency of the Government of Ontario. Names of certain entities certainly give an impression of Crown agency relationship, yet are deemed not to be so in their governing legislation, and vice versa. Few examples may demonstrate this fairly well. Metrolinx (formerly the Greater Toronto Transportation Authority) is a Crown agency within the meaning of the Crown Agencies Act.

This is specifically provided in the Metrolinx Act and as such, the approval would be required if one contracts with Metrolinx in such a manner that would directly or indirectly increase indebtedness or contingent liability of the Province.

In contrast, the Ontario Power Generation Inc. (OPG) and Municipal Property Assessment Corporation (MPAC) are both specifically deemed not to be Crown agencies, pursuant to their respective statutes, namely the Electricity Act and the Municipal Property Assessment Corporation Act, respectively. As a result, no approval is required under the FAA in such situations.

The statutory provision setting out the approval requirement is purposefully worded in an extremely broad way and is designed to cast a wide net over the transactions entered into by the Crown agencies. After all, the rationale for this provision in the first place was to prevent the ministry officials to enter into contracts, on their own accord, that are not commercially reasonable or otherwise favourable to the Province.

Once again, either direct or indirect increase of indebtedness or contingent liability is addressed. For example, in a commercial leasing context, a guaranty and indemnity given by a Crown agency with respect to tenant’s obligations under a lease would directly increase the Province’s contingent liability, and hence an approval is required in such instance. However, many other lease provisions would indirectly increase indebtedness or contingent liability. One example would be the additional rent, as the ultimate intent is for the landlord to be indemnified on account of certain costs. If a contract truly has very simple terms and clearly does not directly or indirectly increase indebtedness or contingent liability, then no approval is required.

The issue of the requisite approval will first appear during the negotiation of the contract.

The ministries have been known to use the necessity of the approval as a bargaining chip, where the negotiating argument made to a contracting party is that a certain provision of the contract will “simply never be approved by the Minister of Finance” and hence cannot be incorporated into the draft agreement. This general statement is simply not true as the Minister of Finance will most certainly approve any commercially reasonable provisions (although what is “commercially reasonable” has somewhat narrower interpretation than what is often the case with private sector where parties may agree to all kinds of provisions simply to secure a deal). As an alternative, rather than simply rejecting a contractual provision, the Minister of Finance may approve it subject to certain terms and conditions. Another concern, at negotiation, is that obtaining the approval in order to finalize the contract may simply take too long. This too should not be a major concern if the ministry in question does its due diligence, obtains all relevant information and negotiates the contract diligently and on commercially reasonable terms. If so, the approval should be available within weeks.

Contracting parties (including the Crown agencies themselves) may view the requirement to obtain the approval from the Minister of Finance as an “obstacle” in securing and finalizing the deal. In the past, attempts were made by both sides to come up with “creative drafting” or “novel” ways of structuring the deals so that the contract would appear not to increase indebtedness of the Province, or its contingent liability. All such attempts must be avoided, as the contract may ultimately be found to indirectly do so, despite its creativity. If so, the risk of the contract being deemed unenforceable is simply not worth the effort.

The FAA also provides that the approval is not required if the transaction belongs to a class that was already approved by the Minister of Finance in writing. It appears that the exemptions mentioned in the FAA are used as an “after the fact” remedy so that the government can retain desirable contracts where no approval was obtained in the first place. To ascertain whether the Minister of Finance has approved a class of transactions for a specific ministry, that ministry should be contacted directly.

The FAA also states that every agreement providing for the payment of money by the Crown is deemed to contain a provision stating that the payment by the Crown of moneys that comes due under the agreement shall be subject to (a) an appropriation to which that payment can be charged being available in the fiscal year in which the payment becomes due; or (b) the payment having been charged to an appropriation for a previous fiscal year. As a result of this provision, it is no longer an option to sue a Crown corporation for breach of contract if the money was not appropriated to pay for goods or services covered by the contract. The provisions described above have not been interpreted by the courts. However, in light of the discussion above, the logical conclusion would be that if the approval was required and not obtained, the contract is unenforceable to begin with, and it makes no difference whether the funds involved where subject to an appropriation or not.

Final issue to keep in mind is that a simple representation by a Crown agency to the effect that the necessary approval was obtained is not sufficient. Again, the statute is clear that unless the approval is actually obtained, the contract may not be binding. Therefore, as part of the proper due diligence, obtaining at least a certified copy of the approval is absolutely critical. As a matter of fact, once issued, the Minister of Finance will provide two or more original approvals to the ministry or Crown agency so that the approval can be readily distributed to any relevant contractual party.

By Faruk Gafic
Faruk Gafic practices in the areas of corporate /commercial law, commercial real estate and leasing with McLean & Kerr LLP, a law firm based in Toronto.

The content of this article is intended to provide general information for the reader and is not intended as advice or an opinion to be relied upon in relation to any particular circumstance. For specific applications of the law to a particular set of circumstances, the reader should seek professional advice.