Court File No. 10-49352 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: FRIENDS OF LANSDOWNE INC.

Applicant - and CITY OF OTTAWA Respondent -andOTTAWA SPORTS AND ENTERTAINMENT GROUP Intervener APPLICATION UNDER section 273 of the Municipal Act, 2001, S.O. 2001, c.25.

FACTUM OF THE APPLICANT

SACK GOLDBLATT MITCHELL LLP Barristers and Solicitors 30 Metcalfe Street, Suite 500 Ottawa, Ontario K1P 5L4 Tel: 613-235-5327 Fax: 613-235-3041 Steven Shrybman LSUC#: 20774B Fay Brunning LSUC#: 29200B Colleen Bauman LSUC # 53347J Lawyers for the Applicant

TO:

BORDEN LADNER GERVAIS LLP Barristers & Solicitors World Exchange Plaza 1100-100 Queen Street Ottawa, Ontario K1P 1J9 Tel: 613-237-5160 Fax: 613-230-8842 Peter K. Doody LSUC#: 224235 Katherine Sangster Lawyers for the Respondent

AND TO:

FRASER MILNER CASGRAIN LLP Barristers & Solicitors 1420- 99 Bank Street Ottawa, Ontario K1P 1H4 Tel: 613-783-9600 Fax: 613-783-9690 K. Scott McLean LSUC#: 16455G Lawyer for the Intervener

Table of Contents
PART I - NATURE OF THE APPLICATION............................................................................... 1 PART II - THE FACTS ............................................................................................................... 2 A. B. C. THE PARTIES .................................................................................................................... 2 LANSDOWNE PARK.......................................................................................................... 3 THE DESIGN COMPETITION ............................................................................................ 4 i. ii. iii. iv. The Lansdowne Live/OSEG Plan.............................................................................. 9 The Deloitte Report ................................................................................................. 12 Stadium Needs Analysis ......................................................................................... 13 SS&E v. OSEG ....................................................................................................... 13

D. THE APRIL 22, 2009 APPROVALS DIRECTING STAFF TO NEGOTIATE A PARTNERSHIP AGREEMENT WITH OSEG TO REDEVELOP LANSDOWNE PARK............. 15 E. SEPTEMBER 2009 REPORT TO COUNCIL THE FIRST ITERATION OF THE LANSDOWNE PARTNERSHIP PLAN...................................................................................... 17 i. ii. iii. iv. F. G. H. Steps Taken To Implement Councils Decisions Of April 22, 2009 .......................... 18 Compliance With City Procurement Rules............................................................... 19 Resolutions ............................................................................................................. 20 The Auditors Report ............................................................................................... 21

NOVEMBER 2009: APPROVAL IN PRINCIPLE OF THE LPP.......................................... 23 JUNE 2010: APPROVAL OF THE LANSDOWNE PARTNERSHIP PLAN ........................ 24 THE LANSDOWNE PARTNERSHIP PLAN (LPP) .......................................................... 25 i. ii. iii. iv. (a) (b) (c) (d) (e) (f) (g) v. vi. The Commitment and Obligations of the City Under the LPP .................................. 25 The Commitment and Obligations of OSEG under the LPP .................................... 27 The Closed System and the Waterfall ..................................................................... 28 The Presentation And Review of the LLP Financial Scheme................................... 30 The Importance of Independent Financial Review................................................... 30 The Failure to Accurately Present Critical Elements of the LPP Financial Scheme . 32 The Return of OSEGs Additional Equity ................................................................. 32 The Value of the Citys Funding Equity................................................................... 34 The Claim to Revenue Neutrality............................................................................. 35 Allocation of Tax Revenues..................................................................................... 36 Avoided Cost........................................................................................................... 40 The Auditors Report of June 2010........................................................................... 41 Review by Rosen & Associates Limited .................................................................. 44

PART III - STATEMENT OF QUESTIONS:.............................................................................. 45 PART IV - ISSUES AND THE LAW ......................................................................................... 46 A. B. SECTION 273 OF THE MUNICIPAL ACT: QUASHING BY-LAWS FOR ILLEGALITY...... 46 THE CITY HAS FAILED TO ACT IN GOOD FAITH .......................................................... 50 i. Overview:................................................................................................................ 50

ii. Role of City Council and Staff and the Requirement That They Act in Good Faith... 50 iii. The Meaning of Bad Faith: ...................................................................................... 52 iv. The City has Exhibited a Lack of Good Faith:.......................................................... 55 v. Failure to Ensure Councils Directives were Carried Out: ........................................ 55 vi. Failure to Ensure that Councils April 22, 2008 Conditions Regarding the Lansdowne Park Proposal Were Implemented .................................................................................... 58 vii. Failure to Present LPP in a Candid, Frank or Impartial Manner............................... 62 viii. Failure to Ensure the Accountability and Transparency of the Operations of the Municipality....................................................................................................................... 70 ix. Failure to Exercise Due Diligence by Determining Value for Money: ....................... 72 x. Arbitrary or Unfair Conduct...................................................................................... 77 xi. Conclusion on Lack of Good Faith and Due Diligence............................................. 79 C. THE CITY HAS VIOLATED ITS OWN PROCUREMENT BY-LAWS ................................. 79 i. ii. iii. iv. v. vi. (a) (b) (c) (d) vii. viii. D. Overview:................................................................................................................ 79 Public Procurement................................................................................................. 80 Exceptions to the Competitive Procurement Process Should be Narrowly Interpreted: 85 The Receipt of the Unsolicited OSEG Proposal in October 2008 was Unlawful....... 86 The OSEG Proposal is Not Exempt Under s. 22 of the Purchasing By-law ............. 90 Other Untendered Procurement Contracts .............................................................. 93 Stadium Project Management Agreement............................................................... 93 Urban Park Project Management Agreement .......................................................... 94 Parking Construction Management Agreement ....................................................... 95 Parking Management Agreement............................................................................ 95 Procurement and International Trade Law .............................................................. 96 Conclusion: ............................................................................................................. 97

THE CITY HAS ILLEGALLY BONUSED OSEG................................................................ 97 i. Overview:................................................................................................................ 97 ii. The Prohibition on Bonusing ................................................................................... 98 iii. Bonuses Accorded by the City to OSEG ............................................................... 102 iv. The Lease of City Facilities and Property to OSEG Are Bonuses.......................... 104 (a) The Stadium Lease ............................................................................................... 105 (b) The Commercial Lease ......................................................................................... 106 v. The Assistance Provided to OSEG to Reimburse it for the Costs of Acquiring and Operating the CFL and OHL Sport Franchises are Bonuses........................................... 107 vi. The Citys Investment In the Urban Park ............................................................... 110 vii. Municipal Tax Revenue and Avoided Costs Cannot be Regarded as a Concomitant Obligation of OSEG that Provides a Benefit to the City ................................................... 111 viii. Conclusion on Bonusing........................................................................................ 115

PART V - ORDER REQUESTED ........................................................................................... 117

Court File No. 10-49352 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: FRIENDS OF LANSDOWNE INC. Applicant - and CITY OF OTTAWA Respondent - and OTTAWA SPORTS AND ENTERTAINMENT GROUP Intervener

APPLICATION UNDER section 273 of the Municipal Act, 2001, S.O. 2001, c.25.

FACTUM OF THE APPLICANT PART I - NATURE OF THE APPLICATION 1. This case raises fundamental legal issues about transparency and accountability in the exercise of democratic municipal government authority. It concerns the obligation of the City of Ottawa to conduct itself in accordance with principles of good faith and due diligence, to use its powers to serve the public interest not private purposes, and to ensure that the decisions of City Council and actions of City staff reflect these principles. 2. This case is also about the redevelopment of one the Citys most valuable public assets Lansdowne Park and a proposal to convert a substantial portion of the Park to private and commercial uses. It is about decisions by City Council to make major commitments of public funds, assets and lands to a development plan that has proceeded without the

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benefit of transparent, fair and accountable procurement process to seek out the best ideas for the redeveloping this landmark property, and assure Ottawa residents of value for money. 3. Finally, this case is about an exceedingly complex public private partnership scheme under which a substantial proportion of the revenues that will be generated by the redevelopment of Lansdowne Park will flow to the Ottawa Sports and Entertainment Group (OSEG), a consortium of developers and sports entrepreneurs, to reimburse this private entity for the costs of acquiring and operating Canadian Football League and Ontario Hockey League franchises. It is about long term leases for public lands and facilities at nominal rents, untendered contracts for services, and the assignment of valuable rights for little or no consideration. 4. The Applicant asserts that in each of these respects the City of Ottawa acted illegally by i) failing to act in good faith and with due diligence; ii) violating its procurement by-laws and rules and the requirement of s. 270 of the Municipal Act that it establish and maintain such rules; and iii) by assisting a commercial enterprise, OSEG, by granting bonuses contrary to s. 106 of the Municipal Act.1 PART II - THE FACTS A. 5. THE PARTIES Friends of Lansdowne is a volunteer group founded in early 2009 in response to the Citys decision to abandon the Lansdowne Design Competition and proceed with one redevelopment plan proposed by OSEG. Since that time Friends of Lansdowne Park has become a city-wide coalition that includes people from every community in Ottawa. As such, it works closely with and is supported by community associations from across the

2001, S.O. 2001, c.25. Para. 4 of the Affidavit of Gary Sealey, sworn September 3, 2010, Applicants Record, Vol. 1, Tab 2, p. 25.

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City including the Glebe CA, Kanata-Beaverbrook CA, Centretown Citizens CA, Old Ottawa East CA, Old Ottawa South CA, Manotick Village CA, New Edinburgh Community Alliance, Overbrook CA, and Riverview Park CA) as well as the Rural Council of OttawaCarleton and the Federation of Citizens Associations. Friends of Lansdowne is incorporated under the laws of the province of Ontario. 6. The Respondent, the City of Ottawa is a municipal corporation incorporated by the City of Ottawa Act, 1999, S.O. 1999, c.14, Sch. E, and a municipality as defined by the Municipal Act, 2001, S.O. 2001, c.25. 7. The Intervener, Ottawa Sports and Entertainment Group formally known as Lansdowne Live is a general partnership registered under the Business Names Act (Ontario)2 From its inception, four Ottawa businessmen, Roger Greenberg, William Shenkman, John Ruddy and Jeff Hunt have been the principals of various companies that comprise the OSEG partnership.3 Hereinafter, OSEG includes references to both Lansdowne Live and Ottawa Sports and Entertainment Group. B. 8. LANSDOWNE PARK Lansdowne Park is a 37.5 acre site (the Site or the Lansdowne Site) located in heart of the City of Ottawa and is one of the most important pieces of public property in the City. The Site is bounded on two sides by the Rideau Canal, which is listed by the United Nations Educational, Scientific and Cultural Organization (UNESCO) as a World Heritage Site. The Site is home to Frank Clair Stadium, the Civic Centre Arena, the Coliseum Building, the Aberdeen Pavilion, and the Horticulture Building. The land was

Para. 11 of the Affidavit of John Moss, sworn December 23, 2010 (Moss Affidavit), Record of the Intervener, OSEG, p. 4. 3 Para. 28 of the Affidavit of Kent Kirkpatrick, sworn December 20, 2010 (Kirkpatrick Affidavit), Respondents Record, Vol. 1, Tab A, p. 10.

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purchased by the Ottawa Agriculture Society in 1868 and ever since has played a central role in the history of the City.4 9. The Aberdeen Pavilion and the Horticulture Building are designated heritage buildings. The Aberdeen Pavilion is a designated National Historic Site, being the only large-scale exhibition building in Canada surviving from the 19th century. It is protected by a heritage conservation easement held by the Ontario Heritage Trust. The Horticulture Building is designated as a heritage building by the City of Ottawa under the Ontario Heritage Act, R.S.O. 1990, c. 0.18.5 10. While it is often described as a City jewel, a number of facilities on the Site have fallen into disrepair and have been neglected for several years.6 C. 11. THE DESIGN COMPETITION On September 14, 2007, the process for revitalization of Lansdowne Park began at the City of Ottawa, with a report to the Planning and Environment Committee (PEC) 7, which recommended that staff prepare a report for Council outlining a process for seeking proposals to redevelop Lansdowne Park. Consequently, Nancy Scheppers, Deputy City Manager was given that mandate by PEC. 12. Two weeks later, on September 28, 2007, Roger Greenberg, a prominent land developer, and others announced, at a press conference at Lansdowne Park, that they were talking with the CFL about acquiring a franchise for an Ottawa team.8 13. The Federation of Citizens Associations (FCA), an umbrella group representing about 30 community associations from across the City, responded to this announcement by calling
4 5

Exhibit 1 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 1, pp. 63-64. Para. 4 of the Affidavit of Elizabeth Ballard, sworn September 30, 2010 (Ballard Affidavit), Applicants Record, Vol. 2, Tab 4, p. 191. 6 Para. 5 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 192. 7 Exhibit 1 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 1, p. 63. 8 Para. 7 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 192.

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for discussions concerning the future of Lansdowne Park to be conducted in an open and transparent public forum and not behind closed doors.9 14. In October and November 2007, the GCA solicited public input on the future of the Site through an online survey open to citizens living anywhere in the City and held a well attended public dialogue for its own community which attracted considerable media coverage. It was clear, at the time, that there was a high degree of community interest in the redevelopment of the Site.10 15. City staff prepared a report (Design Competition Report)11 dated November 1, 2007 that was presented to PEC on November 13, 2007, and subsequently to City Council on November 28, 2007 and Council. At its meeting on November 28, 2007, City Council approved, with only two abstentions, the recommendation of the PEC that it, inter alia,
Initiate a design competition process for Lansdowne Park based on the Rights to Develop approach outlined in this report, contingent on the approval by the Planning and Environment Committee and Council of the final Design Brief;

16.

The approach adopted by the City at that time called for public consultation first, to develop a Design Brief, followed by a two-stage process. During Stage I, all eligible competitors were to be invited to submit documents that expressed their interest in the competition. All submissions were to be evaluated by a competition jury that would select a short-list of competitors to be invited to move on to the next stage. In Stage II, the shortlisted competitors would be given the opportunity to develop and submit their detailed design proposals for the site. To ensure that the winning scheme could actually be implemented, all short-listed teams would submit a detailed pro forma of their proposal that would be independently audited. The winning design would then be announced, and its proponents given the right to develop the land and negotiate with the City for the

Para. 7 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 191. Para. 10 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 193. 11 Exhibit 2 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 2, p. 67.
10

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transfer and/or long-term lease of the lands, with terms tied to performance and development requirements.12 17. The Rights to Development approach was described this way in the report approved by Council on November 28, 2007:
In addition to producing the design vision as outlined above, all short-listed proponents are required to supply a detailed financial pro forma which confirms that their vision can be built as described and illustrated, and that it provides a financial return to the City and to the proponent. This provides some assurance to the City that in exchange for development rights, the design concept will be realized. The winning submissions proponents receive the right to develop the land and negotiate with the City for the transfer and/or long-term lease of the lands; terms are tied to performance and development requirements. This approach tends to be most common when some or all of the works will be transferred out of public control, whether via sale or long-term lease.13

18.

The staff report to Council also highlighted the benefits of determining the future of LP through a competitive process.14

19.

According to the schedule approved by Council, the design competition was to conclude by December 2008. As a first step, Council was to approve a Design Brief by early March of 2008.15 The Design Brief would include information about the vision, competition goals and objectives, findings from the public consultation, background information and other material.16

20.

In accordance with Councils direction, City Staff initiated the design competition in early 2008 with a public consultation process. That process included three open public consultations, and online consultations. Hundreds participated and were advised that information collected in the public workshops and online surveys would be used to help

12 13

Exhibit 2 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 2, pp. 72-75. Exhibit C to the Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 230. 14 Exhibit C to the Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 228. 15 Exhibit C to the Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 230. 16 Exhibit C to the Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 238.

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create the Design Brief for the Competition which would be presented to Council that April.17 21. However, through the spring and summer of 2008, no further steps were taken to carry the Design Competition forward. As described further below, during this period a number of meetings and other exchanges were taking place between representatives of the consortium that would become OSEG and city staff and Larry OBrien, who was then the Mayor, concerning OSEGs interest in redeveloping Lansdowne Park.18 22. City staff did not return to Council with the Design Brief that April, nor subsequently, as they had been directed to do. Rather, on May 16, 2008, in a memo to the Mayor and Members of Council, the Deputy City Manager advised that the timing of the competition has been delayed because the introduction of a conditional CFL franchise has raised a number of questions including whether the franchise was tied to the Site, for at a press conference convened in March that year, a principal of what would become OSEG is reported to have stated that the CFL franchise granted the group was conditional upon the revitalization of dilapidated Frank Clair Stadium at Lansdowne Park.19 23. That memo, from the Deputy City Manager also provided a brief account of the Design Lansdowne public consultation process20, and reported the following views as having been expressed; Public ownership and control of the entire site needs to be maintained; The amateur sports, arts and culture uses at a city-wide level currently offered at Lansdowne are important; The Aberdeen Pavilion is a key feature and its protection is essential;

17 18

Para. 14 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 194. Paras. 18-22 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 195-196. 19 Exhibit D to the Ballard Affidavit, Applicants Record, Vol. 2, Tab D, p. 245. 20 Exhibit E to the Ballard Affidavit, Applicants Record, Vol. 2, Tab E, p. 249.

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The UNESCO World Heritage Status of the Rideau Canal and the public functions of the National Capital Commissions canal-side pathways are important, and redevelopments should enhance these features; All elements of the site should achieve the highest levels of sustainability; The 67s and community uses of the Civic Centre are important community assets; It is unclear whether or not Ottawa requires a professional sports stadium; Redevelopment of the site should not be contingent on professional sports; The time frame established for the competition process is too rushed; There is very strong apprehension about the rights to development model; Fixing the stadium in exchange for development rights to the site is unacceptable; and A slight majority of participants favour retention of the stadium.

24.

On June 27, 2008 in a memo from City staff, members of the Citys PEC were advised that the Design Lansdowne competition had been put on hold until mid-fall 2008 pending a review of the conditions of Frank Clair Stadium and the Shenkman business plan/CFL proposal. No details of the Shenkman plan were provided to the PEC at that time.21

25.

The Auditor General subsequently pointed out, that the unilateral decision by the City Manager to suspend the Design Competition without providing a report to Council or seeking its approval was improper, and the City Manager subsequently apologized.22

26.

The City Manager also points out, however, that having learned of the staffs failure to carry out its instructions, Council did nothing to require a report, or otherwise take steps to initiate a debate about its previous and outstanding direction through the summer months and the early fall of 2008.23

21 22

Exhibit F to the Ballard Affidavit, Applicants Record, Vol. 2, Tab F, p. 305. Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1450. 23 Paras. 23 & 46 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 8 & 16.

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27.

The fate of the design competition was raised at Council for the first time on October 22, 2008.24 However the motion to immediately resume that competitive process was subsequently tabled and ultimately defeated by Council on April 22, 2009.25

28.

No subsequent or other steps were taken by the City to carry out the Design Competition or any other competitive process to solicit redevelopment plans for Lansdowne Park. Instead, at its meeting on April 22, 2009, City Council agreed to proceed by way of sole source procurement with OSEG for that plan. These approvals are described more fully below.26 i. The Lansdowne Live/OSEG Plan

29.

As noted, during roughly this same period of time, a group of private developers and sports entrepreneurs, or their agents, were meeting with the Mayor and senior City staff to promote their own proposal for the redevelopment of Lansdowne Park. Initially formed under the banner Lansdowne Live, this group would subsequently become the Ottawa Sports and Entertainment Group, or OSEG (both incarnations of this consortium are referred to herein as OSEG).27

30.

Thus during the summer of 2007, media accounts reported that private discussions were taking place at the time between the Mayor and members of OSEG about the possibility of bringing a CFL franchise back to Ottawa, and these talks included discussion of the potential use of Frank Clair Stadium as venue for such a franchise.28

24

Para. 27 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 10 and Exhibit 11 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 11, p. 109. 25 Para. 46 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 16 and Exhibit 27 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 27, p. 430 26 Para. 18 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 195. 27 Paras. 18-22 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 195-196. 28 Exhibit A to the Ballard Affidavit, Applicants Record, Vol. 2, Tab A, pp. 209 - 210.

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31.

On March 25, 2008, OSEG announced in the media that it had been granted a CFL franchise, conditional upon a deal to revitalize Frank Clair Stadium. The following was reported by the Ottawa Citizen:
Ottawa If the most valuable real estate in football lies inside the 10 yard lines, a revived Canadian Football League franchise for Ottawa is sitting on urban gold. The CFL granted a group of real-estate developers and a junior hockey owner an expansion franchise Tuesday, conditional upon the revitalization of dilapidated Frank Clair Stadium at Lansdowne Park in the heart of the Canadian capital. Only Larry OBrien, the blunt-spoken and controversial mayor of Ottawa, clearly stated what everyone assumes to be the obvious. We have a process that we are going through to determine what we want to do with this 40 acres, OBrien said of the prime real estate on the Rideau Canal. I think your timing is perfect.29

32.

Other media accounts, including those reporting comments by the principals of OSEG, provide a description of the meetings that took place between OSEG and City officials during 2007 and 2008. The fact that such meetings were taking place was also acknowledged by senior City Staff in memos to Council.30

33.

However, when asked, the City has been unable to provide any business records between March 2008 and October 2008 of the communications between the City staff assigned to Lansdowne and OSEG, except one string of emails dated May 29, 2008.31 The Respondent has stated that there are no other minutes of meetings, emails, letters or memoranda.32

34.

The only accounts therefore of these meetings are those provided by the media, including an article in the Ottawa Citizen on October 16, 2008 which reported on the then upcoming

29

Cross-Examination of Kent Kirkpatrick, May 5, 2011, Qs 403-09, pp. 97-98; Exhibit A to Ballard Affidavit, Applicants Record, Vol. 2, Tab 4A, pp. 210, 212; Exhibit B to Ballard Affidavit, Applicants Record, Vol. 2, Tab 4B, p. 219; Exhibit G to Ballard Affidavit, Applicants Record, Vol. 2, Tab 4G, p. 306. 30 Exhibit F to the Ballard Affidavit, Applicants Record, Vol. 2, Tab F, pp. 304-305 and Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, para. 21, p. 7. 31 Exhibit 6 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 6, pp. 96-99. 32 Exhibit 10 on the Cross-Examination of Kent Kirkpatrick, May 11, 2011, Applicants Reply Record. Vol. 3, Tab 19 p. 748 and Answers to Undertakings given by Kent Kirkpatrick at his cross-examination, Respondents Record, Vol. 11, Tab Q, Qs. 9 and 10, p. 4979.

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announcement by OSEG of its plans for Lansdowne Park. That article in part related the following:
. . . Polling by the city and by the Citizen shows strong support for keeping the park for a publicly owned project not connected to fixing up Frank Clair Stadium. The surveys also found redevelopment of the park should not be contingent on having a professional sports franchise, that fixing the crumbling stadium in exchange for development rights to the site is unacceptable; and that only a slight majority of participants favour retaining the stadium at all. Despite, city officials halted their redevelopment process in order to deal directly with the developers. [emphasis added]33

35.

As predicted by that Ottawa Citizen article, on October 17, 2008, OSEG issued a press release announcing that they had been awarded a conditional CFL team for Ottawa, and were unveiling plans to revitalize one of the most important pieces of public property in the City. The press release stated that:
The next step for Lansdowne Live is to begin negotiations with the City of Ottawa. The City had requested a specific proposal from the ownership group and the detailed proposal will be formally presented to City Officials next week.34

36.

The Citys evidence however is that an unsolicited proposal for the redevelopment of Lansdowne Park was submitted by OSEG in October 2008.35 The City Manager was unable to confirm that it had been shared in advance with Council.36

37.

At no time throughout this period was the matter of compliance with City procurement rules raised in any report to Council concerning the unsolicited proposal received by OSEG, or subsequently by the Senator Sports & Entertainment (SSE) group.37

33 34

Exhibit G to the Ballard Affidavit, Applicants Record, Vol. 2, Tab G, pp. 306-307. Exhibit H to the Ballard Affidavit, Applicants Record, Vol. 2, Tab H, p. 308 and Exhibit 12 to the Kirkpatrick Affidavit, Application Record of the Respondent, Vol. 1, Tab 12, pp. 129. 35 Para. 28 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 10-11. 36 Exhibit 12 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 12, p. 113 and Answers to Undertakings given by Kent Kirkpatrick at his cross-examination, Respondents Record, Vol. 11, Tab Q, p. 5004. 37 Para. 31 to the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 198.

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ii. 38.

The Deloitte Report

Following the Council Meeting of November 12, 2008, the City retained Deloitte to provide an analytical review of and advice concerning the OSEG proposal, which was to include providing an evaluation of the project, offering suggestions about how it might be restructured to provide a better financial and risk balance for taxpayers; undertaking a limited benchmarking exercise with comparable facilities located elsewhere in North America; and completing a market assessment with respect to corporate boxes.38

39.

The Deloitte report represents the only review of the OSEG scheme that was commissioned by the City and carried out by a competent authority that is independent of City government.39

40.

The Deloitte report offered several criticisms of the OSEG proposal as it existed at that time, and made the following recommendations to address them: (a) (b) That capital costs estimates for the stadium and arena be increased by 3040%, to $120 to $130 million; A strong recommendation that revenues from building naming rights, sponsorships, licensing of club boxes and luxury suites, concessions, and advertising (which Deloitte estimated to be well in excess of $2.5 million per year) be identified and assigned to the arena and stadium, and not, as proposed, to the OHL and CFL franchises; That an annual rent of $410,000 be charged to the CFL franchise in year one and rise to $535,000 in year five; That the retail development be required to pay land rent and that the lease be registered on title and take precedence over the bank debt; That any net operating surplus generated by the development be distributed first on account of major maintenance and operating reserve, and then to repay the City contribution (equal to land rent), and then and only then to providing a return on the City equity.40

(c) (d) (e)

38

Exhbit 6 to the Cross-Examination of Kent Kirkpatrick, May 10, 2011, Applicants Reply Record, Vol. III, Tab 15, p. 687. 39 Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1665-1677, pp. 448-453. 40 Exhibit B to the Affidavit of Colleen Bauman, sworn April 14, 2011 (Bauman Affidavit), Applicants Reply Record, Vol. 2, Tab 8B, pp. 362-363.

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41.

The Deloitte Report was not presented to Council, nor was it made available to inform public consultation at that time or subsequently.41 Similarly, the details of the OSEG proposal that were criticized by Deloitte were not for the most part made available to Council, nor were they otherwise discernible from the public record.

42.

Moreover, the public record provided no summary of the Deloitte report, and there was no summary in the report to Council for its meeting in April 2009.42 As a result, Council directed staff to enter into partnership negotiations with OSEG but without having the benefit of recommendations made by Deloitte.

43.

While the OSEG plan was modified subsequently, many of the features of the scheme that drew criticism from Deloitte remained substantively similar.43 iii. Stadium Needs Analysis

44.

At roughly this same time, a report commissioned by the City titled Needs Analysis for Multi-Purpose Sports and Entertainment Facilities (December 2008), identifies the Site as ranked behind five other sites that are considered better suited to host such a sports facility. That report was presented to Council at its meeting in April 2009.44 iv. SS&E v. OSEG

45.

Sometime shortly before the Deloitte analysis was to have been completed, another unsolicited proposal was received by the City. This came from the Senators Sports and Entertainment group ("SS&E") for a stadium to be built near Scotiabank Place in Kanata as part of a larger, mixed-use development (the "SS&E Proposal"). The SS&E Proposal concerned the development of a soccer stadium for a major league soccer team upon

41 42

Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1732-1733, pp. 470-472. Exhibit 26 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 26, p. 35. 43 Exhibits 69 & 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tabs 69 & 71, pp. 2555-2579 and 25822646. 44 Exhibit J to the Ballard Affidavit, Applicants Record, Vol. 2, Tab J, p. 348.

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SS&E securing a franchise. The SS&E Proposal also included an adjacent commercial development.45 46. The City assembled an evaluation team to assess the proposals to determine whether the proposals warranted further discussion. The City also engaged a Fairness Commissioner to monitor the process for evaluating the unsolicited proposals.46 47. A staff assessment of the business cases for the proposals was tabled at a joint meeting of the Citys Planning and Environment and Corporate Services and Economic Development Committees on April 6, 2009. That report presented an assessment of two unsolicited proposals for the design, construction, operation, maintenance and programming of multi-purpose sports and entertainment facilities in Ottawa.47 It presented options for proceeding with one or the other unsolicited bids, but also allowed that Council could decide not to pursue either proposal and instead develop alternative redevelopment scenarios for the Site in accordance with the Design Competition process it had approved 18 months earlier. The committees tabled, for consideration on April 20 and 22, 2009, the acceptance of the staff assessment and proposed recommendations to Council in respect of further steps. 48. Ottawa residents had an opportunity to comment on City staff recommendations at the joint committee meeting held on April 20, 2009, but no public consultation took place prior to that meeting to allow comment on the change in direction that had taken place regarding the redevelopment of the Site since the consultations of early 2008, notwithstanding a high and ongoing level of public interest.48 No public explanation was offered during this time to explain how the competition for a new stadium complied with

45 46

Para. 32 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 12. Para. 41 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 14. 47 Para. 44 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 16. 48 Para 30 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 198.

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City procurement rules, nor why locating a CFL team at Frank Clair Stadium had become the foremost and overriding consideration for redeveloping the Site. D. THE APRIL 22, 2009 APPROVALS DIRECTING STAFF TO NEGOTIATE A PARTNERSHIP AGREEMENT WITH OSEG TO REDEVELOP LANSDOWNE PARK At its meeting on April 22, 2009 City Council considered the staff report tabled by the committees. As noted, Councils deliberations did not have the benefit of important details of the OSEG scheme, nor the Deloitte review. In addition, key details concerning the scheme were misrepresented to Council, most notably the assertion that OSEG has been awarded a new CFL franchise for Ottawa, conditional only on an acceptable agreement with the City for Frank Clair Stadium. That conditional offer, which was not disclosed until November 2009, does not contain a specific reference to Frank Clair Stadium but only to securing a lease to suitable stadium facilities.49 50. In the absence of that information, on April 22, 2009, based on the reports and representations, Council passed the following resolution:
THEREFORE BE IT RESOLVED that staff be directed to negotiate a partnership agreement with The Ottawa Sports and Entertainment Group (OSEG) to redevelop Lansdowne Park, including revitalizing the Civic Centre and Frank Clair stadium, enhancing Trade and Consumer Show space and protecting the Ottawa Farmers Market, based on a revenue- and value-neutral basis, subject to Committee and Council approval and based on the following conditions: 1. 2. That the City continue to support the Central Canada Exhibitions move to the Albion Road site; That the City of Ottawas contribution to the revitalization of Lansdowne Park be limited to a dollar amount to be established during the negotiations, based on the principle of not increasing the overall cost to the taxpayer; and That any revenues generated from the revitalized Lansdowne Park not be used to subsidize any professional sports teams;50

49.

3.

49

Paras. 47 and 48 of the Ballard Affidavit, Applicants Record, Vol. 2, p. 203 and Exhibit T to the Affidavit of Ballard Affidavit, Applicants Record, Vol. 2, Tab T, p. 555. 50 Para. 49 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 17.

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51.

In addition to these three conditions, pursuant to Motion No. 65/10 Council also directed that design principles for the transformation of Lansdowne Park which included the following: (a) that the composition of retail, commercial, and community benefit public space, including the Farmers' Market, for the balance of the lands at Lansdowne Park give regard to the criteria established by Council and be determined through a design process as follows: that the Aberdeen Pavilion remain in its current location and plans must preserve and enhance sight lines to this building from the surrounding streets and from the Rideau Canal, and the facade of the Horticulture Building be retained; that plans recognize Bank Street's designation as a Mainstreet in the Official Plan; Traditional

(b)

that the opportunities for use of the site by community stakeholders, such as local sports groups, should be enhanced;

that the plan respect the scale and character of the neighbourhood and the public nature of the site, and that: there be no housing component; there be no large format commercial uses; commercial uses be limited to uses that support the main uses on the site, and/or that are compatible with the neighbouring business districts.51

52.

According to his evidence, the City Manager did not take these resolutions as specific direction that he was obligated to implement, but rather only as general guidance that could be pursued in the manner he deemed appropriate. Therefore instead of negotiating an agreement with OSEG to implement the specific directions given by Council, the City Manager negotiated a partnership scheme that reflected an approach that Council had not considered, namely a closed system and waterfall scheme that intertwined all revenues and losses that were projected to result from the partnership plan. As the City Manager acknowledged during cross examination:

51

Para. 50 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 17-19.

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Council did not direct as a condition that, "Go away and negotiate a closed financial system where all revenue and expenditures flow through. And then there's an agreement on how the partners participate in that net cash flow." Even though that wasn't directed as a condition, I thought it was a very important element that should be part of the agreement. I was able to negotiate it. And in my mind, that related to and dealt with the conditions or the directions that were in the motions regarding the financial nature of the partnership. If you follow me. ... And as I have described, focused on the overall issue of, "How is Council going to know what potential financial benefit OSEG and the City could have from the arrangement that we were about to negotiate." And I felt that by putting a closed financial system in place, I dealt with the concern about to what potential OSEG may be able to extract value out of this system, because they had the professional sports teams. But frankly, I was concerned about to what extent that OSEG was going to extract value out of this partnership related to the retail use, the stadium operation, all of it. And that's why I thought, "Here's a prime directive that can relate to the financial concerns that Council stated in this motion and all others."52

E.

SEPTEMBER 2009 REPORT TO COUNCIL THE FIRST ITERATION OF THE LANSDOWNE PARTNERSHIP PLAN On September 1, 2009, PricewaterhouseCoopers (hereinafter PWC) delivered a report titled "Lansdowne Park: Business Plan for Transformation" which had been prepared for Graham Bird and Associated who was acting on the Citys behalf.53 The objectives of the Report were stated to be to: present certain financial forecasts for the project partners in relation to the proposed legal covenants; present certain economic benefits resulting from transformation; and the Lansdowne

53.

provide commentary on the key financial and economic metrics of the Lansdowne transformation.

54.

On September 2, 2009, City Council was presented with the Lansdowne Partnership Plan (the "LPP")54, being OSEG's formal redevelopment plan for Lansdowne. The executive summary to that document included a summary of City of Ottawa Council Directions and

52 53

Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1830 & 1857, pp. 508-509 & 516-518. Para. 66 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 33 and Exhibit 30 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 30, p. 522. 54 Exhibit 29 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 29, pp. 454-518.

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Solutions. That summary purported to recite the decisions made by Council at its meeting in April 22, 2009 and corresponding OSEG solutions55 55. The LPP also included a non-binding Memorandum of Understanding which set out the main financial and contractual elements of the LPP, included what is described as a closed system for aggregating and distributing revenue generated by the various components of the development plan.56 56. On September 2, 2009, Mr. Kirkpatrick submitted a report to Council recommending that Council receive and table the LPP for subsequent consideration by a joint CSEDC and PEC meeting, approve the Public Consultation Plan and direct City staff to prepare a second supplementary report detailing the next steps required for implementation of the LPP.57 57. That report described the basic elements of the proposed partnership scheme, and together with the PWC report and LPP, provided the basis for the public consultation that Council would approve to take place early that fall. i. 58. Steps Taken To Implement Councils Decisions Of April 22, 2009

Mr. Kirkpatricks report also states that:

In preparing this plan and partnership framework, all of the requirements set out in Councils motion of April 22, 2009 were thoroughly considered. A detailed accounting of how the Lansdowne transformation plan and partnership framework address Councils requirements is contained in the attached report. (refer to Document 1).58

59.

The Document #1 referred to, reproduces a portion of the LPP executive summary titled Summary of City of Ottawa Council Directions and Solutions. That document offers a brief summary account of how the 22 directions given by Council in April had been

55 56

Para. 56 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 22. Paras. 58-60 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 24-31. 57 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 589. 58 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 603.

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addressed. However, the solutions presented to the directions given by Council in April, are OSEG solutions taken from its proposal, not responses drafted by City staff.59 60. The report of the OSEG solutions comingled the three conditions Council had stipulated, with numerous guidelines it had also approved, making no effort to distinguish the conditions from the guidelines. It also failed to accurately reproduce the decisions Council had made and presented only a very summary indication of whether those decisions had or would be implemented.60 61. The failure of this account and other information provided Council to accurately and fully describe the LPP is dealt with at considerable length in the affidavits of Ms. Elizabeth Ballard,61 Professor Ian Lee,62 Mr. Alan Mak,63 and is commented on by Professor Loxley64 and Professor Kitchen.65 It was also the subject of extensive cross examination of Professor Lee and Mr. Mak by counsel for the Respondent. Issues relating to whether the presentation of this information met the standard of good faith required of City governments, are addressed under Part IV, B, below. ii. 62. Compliance With City Procurement Rules

The September 2, 2009 report to Council, raises the question of compliance with City procurement rules as follows:
For the reasons set out hereafter, there are no Legal/Risk Management impediments to implementing the recommendations contained in this report. Pursuant to section 22 of the City of Ottawas Purchasing By-law, it is permissible for the City to waive the requirement for competitive bid solicitation for goods, services and construction and replace it with negotiations where there is an

59 60

Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1844-1851, pp. 514-515. Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 603. 61 Paras. 9,28, 59 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 192,197, 206. 62 Affidavit of Ian Lee, sworn October 4, 2010 (Lee Affidavit), Applicants Record, Vol. 3, Tab 5, pp. 614-663. 63 Exhibit B to the Affidavit of Alan Mak, sworn January 17, 2011(Mak Affidavit), Applicants Reply Record, Vol. 1, Tab 3B, pp. 66-102. 64 Affidavit of John Loxley, sworn October 14, 2010 (Loxley Affidavit), Applicants Record, Vol. 3, Tab 7, pp. 897-910. 65 Affidavit of Harry Kitchen, sworn January 13, 2011 (Kitchen Affidavit) Applicants Reply Record, Vol. 3, Tab 2, pp. 18-30.

- 20 -

absence of competition for technical or other reasons and the goods, services or construction can only be supplied by a particular supplier and no alternative exists. OSEG is the only party that has a conditional Canadian Football League franchise that would be an anchor tenant for a revitalized Frank Clair Stadium. Moreover, under the proposed Lansdowne Partnership Plan, OSEG would be responsible for all stadium and arena operations and would cover any losses resulting from such operations. OSEG would also fund lifecycle repairs. The financial due diligence carried out to date by the City and its consultants on the OSEG proposal has demonstrated, among other things, that the City would be receiving fair value under the Plan. The proposed Plan also acknowledges and respects the current collective bargaining relationships with CUPE 503 and IATSE at Lansdowne 66 Park.

iii. 63.

Resolutions

At the September 2, 2009 meeting, Council passed a series of motions, including that the LPP be considered by a Committee of the Whole and Council on November 12, 2009. Among the directions given by Council at that time were the following: Motion 71/18 directing staff to make available to Council the conditional offer supporting the claim that a stadium must be built at Lansdowne Park, or that the OSEG must run the football team Motion 71/21: because of public concern regarding the costs of the LPP, and the need for clear, easy to understand yet fully detailed financial information; directing staff to prepare a list of the expenditures and incomes, listed separately, to be made available to the public as part of the public consultation process. Motion 71/26 because the two previous CFL franchises had not survived directing staff to include in the implementation report specific information detailing who will assume the costs of servicing the capital debt and the servicing costs of the stadium if the CFL franchise fails. Motion 71/33 directing the City Treasurer and City Clerk & Solicitor to prepare a report to Council outlining whether the OSEG proposal would be compliant with respect to the bonusing provisions of the Municipal Act, 2001.67

64.

City Council also passed a motion requesting the Auditor General of the City to determine if the OSEG bid should be considered subject to the Purchasing By-law for Request for Proposals and that the Auditor General further be directed to consider auditing the staff

66 67

Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 605. Exhibit 34 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 34, pp. 683-688.

- 21 -

review of the proposal, with the audit report to be tabled prior to Council scheduling approval of the LPP.68 iv. 65. The Auditors Report

The first of two reports by the Office of the Auditor General (hereinafter the OAG) was produced shortly before the Special Meeting of City Council scheduled to consider the LPP, but after the public consultation on the LPP had concluded. On the question of procurement, the OAG report expressed the view that:
In response to the first Council motion to the Auditor General, it is our opinion that this represents a sole source response to an unsolicited bid. However, no contravention of the Purchasing By-Law has occurred and furthermore Council effectively approved this action at its meeting on 12 November 2008 when a motion to re-start the design competition was tabled 'pending the results of the City Manager's evaluation of the OSEG proposal. This decision was reinforced on 11 March 2009 when Council approved the Assessment Framework and was further reinforced at the Council meeting of 22 April 2009 when the City Manager was given direction to negotiate an agreement with OSEG. As such, the process being followed is legitimate and is neither inappropriate nor illegal.69

66.

In arriving at this conclusion, the OAG makes no reference to the Ottawa Option, nor does it address the basis upon which compliance with the provisions of Purchasing By-law might be justified. Rather OAG cites the legal opinion of both internal and external counsel in support of its conclusion, as it does the votes of Council to reject the motion to proceed with the design competition.70

67.

The OAG also points out that in several respects the Citys proposed LPP does not fully comply with the conditions established by Council, and offers 28 specific comments, including the following:
As discussed above, although it would have been advisable to obtain formal Council approval for the suspension of the design competition, the process used was acceptable and authorized by Council.

68 69

Exhibit 34 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 34, p. 689. Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1442. 70 Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, pp. 1450-1451.

- 22 -

The current proposal does not fully comply with Councils direction in the following areas: a) The inclusion of an optional housing component may be seen as not fully compliant with Council direction; b) The use of revenues to reimburse franchise fees and start-up costs related to the proposed CFL and existing OHL teams; and Management Comment: Over the 30-year term OSEG is able to recover their investment in the sports franchises. In consideration of this the City has been able to acquire, at its option, a potential interest in these teams, for example: if OSEG disposes of a franchise, the revenue comes into the closed system; if OSEG defaults on its commitments, the City retains first right of refusal for acquisition of the franchises subject to league approval. The operation of the sports franchisees are expected to generate $53 million of the $173 million to the closed system over the 30 years which represents 96 per cent of the OSEGs total return of $55 million over the same period. c) Enhancement of the on-site trade show facilities is not included in the proposal. Despite concerns regarding the amount of additional retail space included in the proposal, Councils direction did not place a cap on this component of the project. The proposed use of property tax revenue to provide a direct revenue stream is unusual and could establish an undesired precedent. The use of an 8% rate of return is not fully justified in the proposal and could be subject to further analysis. Management Comment: Eight per cent is the rate that was negotiated as a risk-adjusted rate of return. OSEG was initially proposing a risk-adjusted rate of return of 15%. All related expenses as well as both gross and net cash flows are not clearly defined. After the Citys and OSEGs debt (principle and interest) is recovered via property taxes and retail revenue respectively, Level 1 is intended to provide funding to the City/MSC for the life-cycle maintenance of the new site which would otherwise require funding from overall tax revenues. Management Comment: In addition, it should be highlighted that these contributions are guaranteed by the OSEG regardless of whether there is a net positive cash flow to fund them or not.) The development of new trade show facilities has not been fully analyzed for feasibility, functionality or the anticipated cost to the City. Management Comment:

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Staff has identified this as a potential option, however, this proposal is being pursued and additional information will be gathered and provided to Council regarding this scenario. The proposed re-location of the Central Canada Exhibition (CCE) to the Albion Road site is assumed and not fully developed, including the cost to City of such a move. The CCE has indicated that as much as $60 million may be required to facilitate this re-location. Management Comment: The $60 million estimate was the Central Canada Exhibition Associations (CCEAs) approximation for the inclusion of tradeshow space as part of the overall development of the Albion Road site. The City did work with the CCEA and funded an engineering study to determine the costs of the CCEAs relocation to the Albion Road site. Staff resources with the Real Estate Partnership and Development Office (REPDO) are working with the CCEA to assist in the development of alternative strategies to facilitate their relocation. Please refer to July 24, 2002 Lansdowne Park and Albion/Rideau Road Site Central Canada Exhibition Association Report and July 9, 2008 Lansdowne Park CCEA Agreement Renewal Report regarding Councils approval of the relocation of the CCEA from Lansdowne. By its own admission, the work undertaken by Price Waterhouse Coopers (PWC) did not constitute an audit. PWC has indicated that it does not express an opinion or any other form of assurance on the financial or other information and that its work was conducted on the basis that information provided by the City and OSEG was accurate and complete.71

F. 68.

NOVEMBER 2009: APPROVAL IN PRINCIPLE OF THE LPP At a Special Meeting of Council held on November 12, 13 and 16 2009, Council considered the LPP Implementation report that was tabled with Council on September 2, 2009. There were to be 93 public delegations at the November 2009 Council Meeting, 73 of which were opposed to the Plan.72

69.

On November 16, 2009, and subject to various conditions, Council approved the LPP in principle, including the options presented for residential, office and hotel uses, and directed staff to negotiate a comprehensive project agreement framework with the OSEG for the future consideration by Council.73

70.
71 72

Once again, Councils imprimatur was subject to various conditions, these included:

Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, pp. 1452-1459. Para. 45 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 202. 73 Para. 91 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 40-41.

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Making changes to the waterfall scheme to improve returns to the City; and That reviews of both the financial proposal and the retail approach be carried out to ensure that the project was financially viable.74

G. 71.

JUNE 2010: APPROVAL OF THE LANSDOWNE PARTNERSHIP PLAN At a Special Ottawa City Council Meeting, held on June 17 & 23-25, 2010 Council met to consider the June 9th report of the City Manager, recommending approval of the LPP.75

72.

At the meeting, the Mayor and Councillors were provided with the Auditor General's report,76 results of the transportation and retail studies, results of the design competition, all set out above, as well as various numerous other reports describing the various aspects of the LPP, and the process leading to it. Among these reports were two that set out the essential financial and legal dimensions of the partnership scheme, these were:

The Project Agreement Framework77 which provided a description of legal

agreements and material business terms of the LPP; and The Business Model78 prepared by PWC which included the essential terms for the LPP.

73.

On June 28, 2010 Council voted to approve the LPP and enacted By-law 2010-225 to confirm the proceedings of Council. That approval was set out in a series of resolutions, which inter alia, approved the Project Agreement Framework, the PWC Business Model, and authorized the City Manager to negotiate and execute, on behalf of the City, the Project Agreements as described in the Project Agreement Framework.79

74 75

Paras. 91-92 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 40-41. Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, pp. 2685-2785. 76 Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, pp. 2666-2684. 77 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2555-2579. 78 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, pp. 2582-2646. 79 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2555-2579.

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H. 74.

THE LANSDOWNE PARTNERSHIP PLAN (LPP) As approved by Council, the LPP sets out a redevelopment plan for the entire Lansdowne Site, as well as for an adjacent property known as Sylvia Holden Park. That redevelopment is to take place in accordance with the terms of a Project Agreement which is described as the primary agreement between the City/municipal services corporation (City) and the Ottawa Sports and Entertainment Group (OSEG), setting out the financial and other fundamental elements of the relationship between the parties in respect of the project and providing a framework for many of the other agreements and leases that comprise the LPP.80

75.

The project agreement describes the requirements of the various elements of the LPP which include the reconstruction of Frank Clair Stadium, the CFL and OHL sports franchises, the urban park (including the Aberdeen Pavilion and Horticultural Building), residential townhouses and condominiums, over 330,000 square feet of new retail and integrated office space, an office tower and underground and surface parking facilities.81

76.

A complex partnership structure is established under the LPP which is described this way by the Project Agreement Framework:
A limited partnership will be established for each component of the project. In respect of each component limited partnership: the limited partner will be a master limited partnership (of which the City and OSEG will hold an equal number of units and the general partner will be a corporation of which the City and OSEG, or an approved affiliate thereof, will hold an equal number of shares) the general partner will be a corporation owned by OSEG or an affiliate of OSEG.82

i. 77.
80 81

The Commitment and Obligations of the City Under the LPP

In particular, the LPP commits the City to:

Ibid. Ibid. 82 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2557.

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Contribute $129,300,000 for the redevelopment of the Stadium the Arena and related parking facilities;83 Contribute $35,000,000 for its share of the costs to establish an urban park on the Lansdowne Site which is to include the Aberdeen Pavilion and the Horticulture Building;84 Contribute $8.5 million for the construction of a new trade show and exhibition hall;85 Assume all responsibility for any remediation resulting from existing environmental conditions and for costs resulting from archaeological conditions at the Lansdowne site;86 Enter into a minimum 30-year head lease with OSEG for the entire park and it will contract OSEG to undertake redevelopment and construction;87 Enter into a 30 year lease with the stadium component limited partnership for the Stadium and Arena. The lease is have an initial term of 30 years for an annual base rent of $1;88 Enter into a 50 year lease with the retail component limited partnership for the 10.2 acres of Lansdowne Park that is to be used for retail and commercial development. The initial term of the lease is 50 years with an option for the tenant to renew for two additional ten year periods. The annual rent for this is to be $1.00 for the first 30 years, and thereafter a market rent as defined by the as yet to be concluded Project Agreement;89 Sell or lease of lands and air rights for residential development;90 Grant OSEG contracts for management, and programming at the Stadium and Arena;91 Grant OSEG rights with respect to the development, construction and management of retail, office and other facilities on the site, including the Stadium and Arena;92 and Provide OSEG with the right of first opportunity to acquire the retail lands should the city desire to dispose thereof, rather than have it submit a competitive bid.93

83 84

Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, p. 2780. Ibid. 85 Ibid. 86 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2556. 87 Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, p. 2754. 88 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2566-2570. 89 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2570-2574. 90 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2557. 91 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2567. 92 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2577 and 2756. 93 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2573.

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78.

In order to finance its obligations under the LPP scheme, City Council will authorize the issuance of debentures totalling $162,400,000.94 Payments on this debenture would be approximately $9.9 million95 (at 5.35% interest) over 40 years. This debt will, upon the issuance of these debentures, become an immediate obligation of the taxpayers of the City of Ottawa. The City has also agreed to commit a further $10,200,000 to the LPP from the sale of air rights relating to the proposed condominium development on the site.96 ii. The Commitment and Obligations of OSEG under the LPP

79.

Under the LPP, OSEG must: Acquire and operate97 a Canadian Football League (CFL) team at the Stadium for minimum period of 5 years; Acquire and operate98 the Ottawa 67s Ontario Hockey League (67s or OHL) franchise and maintain the Arena together with the Stadium, as the 67s homeice location; Make a Minimum Equity contribution of $30,000,000.0099, of which $19.2100 million is identified as being on account of costs acquiring the CFL and OHL sports franchises; Guarantee the completion of the stadium component and the Citys portion of the parking structure and be responsible for cost overruns in relation thereto;101 Fund any shortfalls in the reserve fund established to maintain the stadium and arena;102 and Provide or arrange third party financing for the costs of building the retail development.103

94 95

Exhibit 85 to the Kirkpatrick Affidavit, Respondents Record, Vol. 6, Tab 85, p. 3087. Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, p. 89. 96 Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, p. 2755. 97 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2557. 98 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2576. 99 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2588. 100 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2611. 101 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2556. 102 Ibid. 103 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2621 and 2623.

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iii. 80.

The Closed System and the Waterfall

The stadium, arena, parking and commercial components form part of a closed system whereby cash flows from operations are distributed to the City and to the OSEG according to a priority payment structure.104 According to the Project Agreement Framework this distribution scheme105, the waterfall is to operate as follows: The net cash flow (as will be defined by the parties) will be distributed as follows: First, payments on account of the reserve for the stadium component and the Citys portion of the parking structure, on a cumulative, but not compounded basis; Second, to each of OSEG and the City, a return on OSEGs Equity and on the Citys Funding Equity at 8% per annum, on a cumulative, but not compounded basis; if there is sufficient net cash flow to make only a portion of such payment, proportionate payments will be made to each party; Third, return to OSEG of its Additional Equity;106 Fourth, following the third anniversary of the commencement of the operating term of the Retail Lease, the return of OSEGs Minimum Equity, amounts paid in connection with the completion guarantee and the Citys Funding Equity as follows (if there is sufficient net cash flow to make only a portion of such payment, proportionate payments will be made to each party); In respect of OSEGs Minimum Equity and amounts paid in connection with the completion guarantee, on a straight-line amortized basis over a period of 27 years; In respect of the Citys Funding Equity, on a straight-line amortized basis over a period of 27 years;

81.

Fifth, a return on the Citys Deemed Equity at 8% per annum, on a cumulative, but not compounded basis; and Sixth, any remaining balance will be shared equally by the parties.

No definition of net cash flow is provided to the public or Council107 However during cross examination Mr. Kent Kirkpatrick confirmed that it is the parties intentions that after paying interest and capital to third party lenders, all income and losses from the various

104 105

Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2558-2559. Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2559. 106 This is also represented as being in fourth place in the waterfall. See for example Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2591. 107 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2559.

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components of the LPP will be aggregated. From this total, deductions for certain unspecified expenses are to be made. The remainder, if any, will flow into the waterfall.108 82. The extent to which the City and OSEG will receive cash distributions from the Waterfall depends as well on the extent to which their respective investments in the LPP are recognized as equity, as follows: OSEG will be required to contribute at least $30 million through capital contributions (cash or its equivalent) and/or letters of credit in respect of the project (including the CFL and OHL sports franchises), [described as Minimum Equity];109 Contributions by OSEG in connection with the completion guarantee for the stadium and parking structures will be treated as Equity110, as will any contributions required to meet payments to the capital reserve or to cover net losses, including those relating to operation of the sports franchises; If OSEG contributes Equity in excess of the $30 million minimum it shall be considered Additional Equity;111 The City is to receive a credit for Deemed Equity, of $23.5 million, being the assigned value of the retail component lands and the office head lease;112 and The City will receive a credit for Funding Equity113 which according to the evidence of Mr. Kirkpatrick is to be $13.4 million, but which according to the formula approved by City Council on June 28, 2010 should be approximately $76 million.

83.

As the uncontradicted evidence of the Applicants asserts, key aspects of the LPP were impossible even for a sophisticated reader to understand, not only because of incomplete and often contradictory information provided about the scheme114, two critical instances of which have now been acknowledged by the Applicant115, but because of the public claims made about the scheme by the Mayor and other proponents.116 Professor Lee, who is a

108 109

Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1323-1324, p. 356. Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2558. 110 Ibid. 111 Ibid. 112 Ibid. 113 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2588. 114 Paras. 15-29, 43 of Lee Affidavit, Applicants Record, Vol. 3, Tab 5, pp. 620-624, 628. 115 Paras. 57-71 of the Supplementary Affidavit of Kent Kirkpatrick, sworn April 26, 2011 (Supplementary Kirkpatrick Affidavit), Respondents Record, Vol. 8, Tab L, pp. 3988-3992. 116 Cross-examination of Ian Lee, May 5, 2011, Qs. 42-63, 433, 439, pp. 10-14, 86-88.

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professor at the Sprott School of Business, Carlton University who previously served as the Director of its MBA Program, and a Glebe resident, has closely followed the evolution of plans to redevelop Lansdowne Park.117 He was one of a group of individuals, which included a chartered accountant, venture capitalist, high tech entrepreneur, and other professionals, who worked together to assess the LPP. His evidence was that he and the group could not ascertain critical features of the scheme because of the failure of the City to provide a candid and accurate account of the main features of the scheme. 118 iv. 84. The Presentation And Review of the LLP Financial Scheme

As noted, the financial arrangements of the LPP, have primarily been presented to Council by reports prepared by PWC, as the LPP Business Model. The Model was first presented to Council in September 2009. The second, and revised version of that model was presented to and approved by Council in June 2010.

85.

The PWC report reflected the terms of its retainer which was to prepare a financial model and projections to be used to support the business case for the redevelopment of Lansdowne Park.119 A limited review of the assumptions and projections of the financial model was prepared by the OAG and also presented to Council for its meetings in June 2010. The flaws and limitations and errors of the OAGs review are discussed below, as are those of the PWC report.120 (a) The Importance of Independent Financial Review

86.

Professor John Loxley is an expert on the subject of Public Private Partnerships (PPPs) and was retained by the Applicant to carry out a review and comparison of the procurement approach adopted by the City of Ottawa for proceeding with the LPP against

117 118

Paras. 1-2 to the Lee Affidavit, Applicants Record, Vol. 3, Tab 5, pp. 614-615. Cross-examination of Ian Lee, May 5, 2011, Q. 216, pp. 47-48. 119 Exhibit 71 to Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2585. 120 See discussion at paras. 93-97 and 122-132 of this factum.

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best-practice procedures for implementing public-private partnerships, both in Canada and elsewhere.121 87. Among the principal conclusions of his review are that: (a) Because many PPPs have been found wanting by auditors general in New Brunswick, Nova Scotia, Ontario and Quebec, norms and best practices have been established to address the challenges PPPs present. (b) The LPP is a particularly complex example of a PPP because of the several interrelated but quite different components that comprise the Plan and because the proposal has changed over time. Accordingly, the need to adhere to best practices is that much more pronounced in this particular case.122 88. According to Professor Loxleys uncontroverted evidence: the best-practice norms for Canadian and international public procurement are comprised of two elements. The first requires a public authority to solicit competitive bids for the goods and services it is seeking to acquire or contract for. The second has been developed in response to the particular and often complex challenges presented by public-private partnership projects. Thus, even where competitive bids have been sought with respect to PPPs, such projects should be subject to a value-for-money assessment or audit to provide a further safeguard of the public interest and the public purse.123

121

Professor Loxley is a Professor of Economics and former Head of Department of Economics at the University of Manitoba. He is a Fellow of the Royal Society of Canada and has served as an Economic Advisor to several governments, including that of Manitoba. He has studied Public-Private Partnerships (PPPs) for the past 15 years. Professor Loxleys work on PPPs has covered their economics and financing, government policy towards them throughout Canada, value for money assessments and the use of public sector comparators. His work on PPPs has been published in both newspapers and scholarly outlets, principally in a recent book on the subject entitled Public Service, Private Profits: The Political Economy of Public-Private Partnerships in Canada, with Salim Loxley. 122 Para. 5 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, p. 899. 123 An elaboration of what best practice means in this area in Canada is to be found in Service Industries: Public Private Partnerships: Canadian Guide, June, 2001, a publication of the federal government, which remains the authoritative guide to PPP best practice in this country. This, in turn, is based on P3 manuals developed in British Columbia, Ontario, Saskatchewan, New Brunswick, Nova Scotia and by Industry Canada. It also draws on manuals developed by P3 agencies in the UK, the UN and Australia (Service Industries, pp. 80-81).

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(b) The Failure to Accurately Present Critical Elements of the LPP Financial Scheme 89. It was the evidence of several witnesses that materials made available to Council and the public were often inaccurate, incomplete, or misleading.124 90. Among the most important of the inaccurate and misleading characterizations of the LPP financial scheme are two that engender very substantial financial consequences for the City. Both were acknowledged for the first time during the course of and in response to this litigation. The first concerns the relative priority given to the return of any OSEG Additional Equity, and the other concerns the extent to which the Citys financial commitments to the LPP are recognized as City Funding Equity.125 91. In the case of the former, City Council approved two incompatible versions of the waterfall scheme. In the case of the latter, the City approved a Funding Equity formula that was far more advantageous to the City than Mr. Kirkpatrick now says was intended. In both cases the City Manager asserts that Councils approvals should be interpreted or amended in a manner that would very substantially reduce the benefits that City would otherwise derive under the scheme.126 (c) The Return of OSEGs Additional Equity 92. In his affidavit, Alan Mak points out a significant contradiction between the manner in which the OSEG Additional Equity is treated in the documents presented to and approved by City Council. In his affidavit responding to Mr. Mak, Mr. Kirkpatrick acknowledges this

124

Paras. 15-29, 43 of Lee Affidavit, Applicants Record, Vol. 3, Tab 5, pp. 620-624, 628 and Para. 9 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 192-193. See also discussion at paras. 133-137 of this factum. 125 Paras. 57-71 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p.p. 3988-3992. 126 Ibid. and Answers to Undertaking given by Kent Kirkpatrick at his cross-examination, Respondents Record, Vol. 11, Tab Q, pp. 4983-4987.

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contradiction, and says that it only came to his attention upon reading the Mak affidavit. He also indicates that he regrets the inconsistent information presented to Council.127 93. The Additional Equity at issue is comprised of amounts paid by OSEG on account of the stadium completion guarantee, to back-stop the reserve fund, or to cover any net losses under the LPP including those that may arise from the operation of the sports franchises. No limit is imposed on the extent to which OSEG may accumulate Additional Equity.128 94. OSEG is to earn an 8% return on such funds when these are committed. The issue is whether it is entitled to the return of this equity at Level three, that is, in priority to the return of the Citys Funding Equity and the OSEG Minimum Equity, or following those cash returns. There is no dispute that the relative position of an equity entitlement in the waterfall will have a very significant impact on the timing and likelihood of receiving cash payments under the scheme.129 95. Mr. Kirkpatrick acknowledges that both his report to Council and the PWC Business Model incorrectly presented the return of OSEG Additional Equity at level four in the waterfall.130 However, the Project Agreement Framework placed this OSEG entitlement at level three, that is ahead of key City entitlements. ` 96. In other words, City Council approved two different waterfall schemes in passing motions to approve the Project Agreement Framework and Financial Model and there is no indication of which version of the LPP Councillors had in mind when they voted for or against the motions of June 28, 2010.

127 128

Para. 71 to the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p. 3992 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2588 and Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1468-1473, pp. 388-390. 129 Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1404-1405, p. 374. 130 Paras. 57-71 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3988-3992.

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(d) The Value of the Citys Funding Equity 97. In response to questions put during cross examination, Mr. Kirkpatrick states that the formula for calculating the Citys Funding Equity presented and approved by Council in June 2010, was also incorrect, in this case by overstating the value of the Citys Funding Equity by over $62 million. Mr. Kirkpatrick says that it was the intention of the Parties for the Citys Funding Equity to be $13.469 million, not the $76.1 million that is derived from applying the formula approved by Council. As the return on Funding Equity occurs at level 2 of the waterfall, reducing the Citys Funding Equity by over 80% has considerable and adverse financial consequences for it.131 98. The formula for calculating the Citys Funding Equity and approved by Council, was set out in both the Project Agreement Framework, and the Business Model as Mr. Kirkpatrick acknowledged. The definition of the Citys Funding Equity approved by Council also aligns with version set out the Draft Project Agreement of May 25, 2010. 99. As noted, both the Project Agreement Framework and the Business Model, were expressly approved by Council. 100. In responding to the Applicants undertaking request for an explanation of how the Funding Equity figure was derived, the City states in part as follows:
The definition of the City's Funding Equity found in the Project Agreement Framework at Exhibit 69 to Mr. Kirkpatrick's Affidavit, Vol. 5, page 2559 of the City's Record; and at the June 9, 2010 PWC Report, Exhibit 71, Vol. 5, p. 2558 of the City's Record, does not include any deduction from the Total City Project Costs of the amount that could be debentured from the Avoided Costs of $3.8M per year [$62,631,403]. If the description of the calculation contained in the Project Agreement Framework were followed, the City's Funding Equity would be $76,100,133, or $62,631,403 greater than Council was advised in the June 9, 2010 PWC Report. Neither Mr. Kirkpatrick nor anyone else from the City, to the best of his knowledge, was aware of the omission of the deduction for the amount that can be debentured
131

Paras. 57-71 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3988-3992 and Answers to Undertaking given by Kent Kirkpatrick at this cross-examination, Respondents Record, Vol. 11, Tab Q, p. 4983-4987.

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from the Avoided Costs from the definition of Funding Equity in the Project Agreement Framework, until after he was asked in his cross examination to go through the calculation, and asked to provide this undertaking. As a result, Mr. Kirkpatrick now knows that paragraph 130(a) of his Affidavit of December 20,2010, which defines Funding Equity in the words used in the Project Agreement Framework. Before the Project Agreement can be executed or closed, the wording of the Project Agreement Framework, or the actual Project Agreement, when finalized, will have to be changed, and those changes approved by Council (should it so decide), to reflect the intention of the parties at the negotiation table, and to show how the expected Funding Equity, estimated in June 2010 to be $13.469M, was and is to be calculated.132

101.

In the case of both the treatment of OSEG Additional Equity and the calculation of the Citys Funding Equity, Mr. Kirkpatrick says that it was the intention of the parties to implement the LPP in a manner that would greatly reduce the benefits the City would otherwise have derived under the scheme if the Additional Equity was not to have priority at level 3 of the waterfall, and the Citys Funding Equity was to be $76.1 million as provided for according to the formula Council approved.133 (e) The Claim to Revenue Neutrality

102.

As noted, one of three conditions imposed by City Council on the negotiation of the LPP was that:
That the City of Ottawas contribution to the revitalization of Lansdowne Park be limited to a dollar amount to be established during the negotiations, based on the principle of not increasing the overall cost to the taxpayer.134

103.

In response, the City Managers report of September 2009 offered this response:
Under the current Memorandum of Understanding, City staff and the OSEG have negotiated an agreement, which is forecasted to generate cash and avoid tax pressures. Tax revenues generated through the redevelopment will place the City in a cash-positive position135

104.

The Managers report also represented:

132

Paras. 57-71 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3988-3992 and Answers to Undertaking given by Kent Kirkpatrick at this cross-examination, Respondents Record, Vol. 11, Tab Q, pp. 4983-4987. 133 Paras. 57-71 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3988-3992. 134 Para. 49 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, p. 17. 135 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 610.

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The debt to be issued was modeled as a 40-year term at 5.35 per cent (the current posted 40 year rate at which the City could borrow from Infrastructure Ontario) and would require yearly debt servicing of $7.142M per year. The debt servicing can be funded from: The cost savings of $3.8M already included in the Citys budget for both capital and operating expenses; 75 per cent of the forecast tax revenue generated from the retail space being proposed as part of Phase 1 ($2.874M); and, Contributions totalling $1.370M from the parking reserve over the first 6 years (average of $228,333) and repaid in years 7 to 11.

The debt-servicing model also assumes that the taxation on these properties will increase by 2.5 per cent per year, reflecting inflationary tax increases.136

105.

The Citys response adopts the premise of the initial OSEG proposal137 and adds the concept of funding the Citys debt servicing from forecast tax revenue from the retail development to take place on the Lansdowne site.

106.

The concept of revenue neutrality described in this manner features prominently in material submitted to Council, and made available to the public. It was used by advocates of the LPP, including the Mayor and Councillor Chiarelli, who the Respondent cites as an authority on the subject to persuade the public that redevelopment of Lansdowne Park would not cost the taxpayers a dime.138 (f) Allocation of Tax Revenues

107.

The Citys claim that it would somehow use tax revenues from the site to service the Citys LP debt raised particular concerns, because the explanations offered by the City did not allow even those following the scheme closely to understand the Citys true intentions.139 As Mr. Lees evidence indicates, it took him some time to understand that tax revenues derived from these prospective developments on the Lansdowne site will not actually be

136 137

Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 606. Exhibit 12 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 12, p. 128. 138 Cross-examination of Ian Lee, May 5, 2011, Qs. 42-63, 433, 439, pp. 10-14, 86-88. 139 Cross-examination of Ian Lee, May 5, 2011, Qs. 152-160, 540-541, pp. 34-37,112-113.

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used to service the debt the City will incur to rebuild the Stadium and related parking facilities, as he states:140
In my view, the Citys statements on revenue neutrality, cash surpluses and incremental taxation are based upon a notional or fictitious accounting model and are, at best, misleading. One should not need an accounting degree to understand the true costs of redeveloping a unique public landmark property. Moreover, the material provided by the City to explain its economic model is so lacking in critical details that even with such a degree, getting a clear understanding of the costs and risks of the scheme is virtually impossible.141

108.

In reviewing the staff proposal of September 2009, the OAG indicates that he too took the Citys intent to be that it would directly allocate tax revenue to servicing LP debt. In carrying out an audit of the staff review of the OSEG proposal, the OAG stated:
The Proposed use of property tax revenue to provide a direct revenue stream in unusual and could establish an undesired precedent.142

109.

The revenue neutrality analysis is set out in Section 3.2 of the Business Model, and includes the following representations:
75% of retail, office and related parking taxes have been included in this analysis for the purposes of determining revenue neutrality [58] If annual cash surpluses from avoided costs, property taxes and payments from the waterfall are allowed to accumulate, the City of Ottawa will have sufficient cash reserves to retire the outstanding debt in 2040.143

110.

The Citys fact sheet describing the business model, states that a significant proportion of the Citys debt payments on funds borrowed to carry out the LPP scheme will be covered by $2.6 million of retail property taxes from the site.144

111.

Mr. Kirkpatrick has acknowledged that the City does not intend to use tax revenues derived from development on the Lansdowne Site to service the City debt incurred in relation to the LPP, and that it will not apply for relief under the Provincial tax incremental

140 141

Ibid. Para. 43 of the Lee Affidavit, Applicants Record, Vol. 3, Tab 5, p. 628. 142 Exhibit 47 of the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1454. 143 Exhibit 71 of the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, pp. 2641-2643. 144 Exhibit X of the Ballard Affidavit, Applicants Record, Vol. 2, Tab X, p. 594.

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financing rules. Rather the concept of dedicating tax revenues to service the LPP debt was purely notional.145 112. Nevertheless, questions endured about the revenue neutrality analysis throughout the period leading to the Council meeting of June 2010. For example, in his report to Council that June, the Auditor begins by relating Motion No. 77/11 which according to the City Managers evidence, the Auditor mistakenly took to be an outstanding decision of Council. His report provided as follows in relating the circumstances of this motion:
WHEREAS dedicating taxes from development to a specific project is not a standard City practice; AND WHEREAS this will set a precedent that subsidizes one group of retailers versus others; THEREFORE BE IT RESOLVED that the City Manager be instructed to commission an independent study to evaluate the various consequences of dedicating property taxes to a single expenditure in the Citys Budget, and the Auditor General verify the methodology.

The independent study referred to in Motion 77/11 was not completed by management. As such, the Auditor General could not verify the methodology.146 113. The concept of using municipal tax revenues in this purported manner was also the subject of a report prepared for the Applicant by an expert in municipal taxation, Professor Harry Kitchen. His assessment, underscores the lack of any valid basis for treating tax revenues from commercial development on the Lansdowne site as available, even notionally, to service City debt for rebuilding the Stadium and building related parking facilities.147 His report is discussed further below.

145 146

Paras. 5 & 6 to the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p. 3960. Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, p. 2678. 147 Para. 24 to the Kitchen Affidavit, Applicants Reply Record, Vol. 1, Tab 2, p. 26.

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114.

The Citys proposal turns on the notion that a certain portion of the tax revenues generated by the retail development that is to be established on Lansdowne Park is incremental.148

115.

During cross examination Mr. Kirkpatrick acknowledged that the City has no policy supporting the principle that certain taxes are incremental and therefore may, at least notionally, be dedicated for particular purposes.149 Nevertheless he proposed that members of City council might adopt this principle in regard to the financing of City obligations under the LPP. As he explained the concept to Council:
Mr. Kirkpatricks evidence is that he: ... made it clear to Council, and to the public attending or viewing Council meetings, that the concept of revenue neutrality depended upon a determination by Council that a certain portion of the property taxes to be paid by the businesses to be established at the project were "incremental" in the sense that they would not have located in Ottawa if the project was not created.150

116.

In representations to Council, Mr. Kirkpatrick suggests that individual Council members should rely on their personal views to determine whether retail stores that might locate on the Lansdowne site would not otherwise have established in Ottawa.151 He proposes that this determination be made on the basis of a retail strategy that the City commissioned, but which provided no assurance that any unique retail stores would actually establish on the site.152

148 149

Paras. 27-42 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3968-3975. Ibid. 150 Para. 33 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p. 3971. 151 Paras. 34-40 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, paras. 34-40, pp. 3971-3974. 152 Para. 45 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3977-78 and Exhibit 68 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 68, pp. 2414-2552.

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117.

At Councils meeting on June 28, 2010, a list of potential stores for the site was handed out by one of the principals of OSEG. However that list153 does not indicate that any of these prospective retail tenants are unique in the sense proposed by Mr. Kirkpatrick. (g) Avoided Cost

118.

The other major element of the revenue neutrality argument claims credit for avoided costs the City would otherwise incur were it to continue to operate and improve Lansdowne Park without proceeding with the LPP. In this regard it relies upon projections that include both the net annual deficit relating to LP operations and the annual investment of $2.4 million in capital improvements that is said to be necessary for each of the next 30 years.154

119.

The Rosen Report challenges the $3.8 million figure that is used as a 30 year commitment for the revenue neutrality argument. However, in addition to the question of how long the City would need to spend $2.4 million annually on capital improvements, the avoided costs figure is overstated for two reasons: (a) First, the costs of maintaining and improving the Horticulture building and the Aberdeen Pavilion, will remain with City under the LPP, 155 (b) Second, under the LPP significant revenues that would otherwise accrue to the City are abandoned under a collateral arrangement with one of the principals involved in OSEG, to fund the establishment of a trade show facility elsewhere. In addition to committing $8.5 million in public funding to this facility, the City has entered into a no-compete clause that precludes it from using the Aberdeen Pavilion and other Lansdowne facilities to host trade shows. Revenues from such

153

Cross-Examination of Kent Kirkpatrick, May 11, 2011, Qs. 2075-2077, 2083, pp. 588-589, 591 and Exhibit 8 to the Cross-Examination of Kent Kirkpatrick, Applicants Reply Record, Vol. 3, Tab 17, p. 728. 154 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2556. 155 Cross-Examination of Kent Kirkpatrick, May 11, 2011, Qs. 2132-2133, pp. 603-604.

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activities now provide more than $1 million a year Lansdowne Park.156 120.

to

support

operations

at

The revenue neutrality analysis also fails to include other costs that will be incurred by the City arising from the redevelopment of the Lansdowne site. These costs include environmental remediation of the site,157 the costs of re-establishing amateur sports facilities that currently occupy the site,158 and the $35 million estimated to be the cost of establishing the Public Park.

121.

As Mr. Kirkpatrick confirmed during cross examination, the establishment of a public park on the Lansdowne site has always been an integral element of the redevelopment plan159 and is referred to as such throughout the materials before Council. In addition, redevelopment of the park portion of the site is also being undertaken to support the redevelopment of and activities that are to take place on other portions of the Lansdowne Park. Examples include the entry way to underground parking facilities is to be situated in the Public Park, as is a bus staging area, and surface parking during certain months of the year. In addition, the costs of moving the Horticulture Building, which is necessary to accommodate commercial development on the site, are estimated to be $6 million, and these are included as part of the public park budget.160 v. The Auditors Report of June 2010

122.

On the eve of the Council meeting of June 26, 2010 a second report concerning the LPP was tabled by the OAG. That report was prepared in response to Councils request that the OAG assess the accuracy of the forecasts as well as the reasonableness of the

156

Answers to Undertaking given by Kent Kirkpatrick at his cross-examination, Respondents Record, Vol. 11, Tab Q, p. 5390. 157 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2556. 158 Cross-Examination of Kent Kirkpatrick, May 6, 2011, Q. 1135-1142, pp. 312-315. 159 Cross-Examination of Kent Kirkpatrick, May 10, 2011, Q. 1919, p. 540. 160 Cross-Examination of Kent Kirkpatrick, May 10, 2011, Q. 1929, pp. 542-543.

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assumptions used in the financial projections of the LPP. The OAGs report represents the only review of the LPP to be carried out on the Citys behalf.161 123. The OAGS report is brief and begins with following qualification: The audit scope was limited to an assessment of the financial information contained in the LPP proposal. The audit did not include generating independent figures, nor was it intended to provide an opinion on the development itself. As such, it does not represent an evaluation of the merits of the underlying concepts for re-development of the Lansdowne Park site as presented in the LPP proposal (e.g., a private-sector partnership, revenue neutrality, the use of property taxes, the optimal site for a stadium, etc.). The 2009 Audit of the Lansdowne Park Proposal Process, presented to Council on 12 November 2009, outlines the OAGs broader findings in this regard.162 124. The OAG then offers the following views:
... we can confirm the accuracy of the financial forecasts. Regarding the reasonableness of the assumptions in the LPP model we have identified three areas of risk including retail vacancy rates, the proposed contribution from savings on maintenance of the existing facility and interest rates. As such, based on our assessment, we conclude that the financial model for the LPP can achieve its projected results. The key to doing so is that the assumptions contained in the model hold true over time. 163

125.

The OAGs report suffers from a number of limitations.164 As it points out, the details of LPP were being revised to the last minute, affording little time for it to carry out its work.165 Whatever the reasons, the OAG report provides only a broad indication of the extent and character of the analytical work that was carried out.

126.

Among the apparent deficiencies of the OAG report, is its failure to identify key discrepancies and contradictions of the PWC Business Model and Project Agreement Framework. As described above, these include two very different descriptions of the waterfall scheme, and a formula for calculating the Citys funding equity that would establish that figure at $76 million, nearly 5 times greater than Mr. Kirkpatrick advises was

161 162

Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1665-1677, pp. 448-453. Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, p. 2679. 163 Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, p. 2684. 164 Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, pp. 95-101. 165 Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, p. 2679.

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the parties intent. Both discrepancies have obvious and substantial consequences for the respective benefits the parties are projected to derive under the scheme. 127. The Auditors report provides no indication that he was aware of these fundamental contradictions. The related problem, is that because the Auditor fails to identify the assumptions of the LPP model he deems to be reasonable, it is impossible to know which variation of the LPP he had in mind. 128. There are other issues with the Auditors report that bear upon the confidence one would have in its conclusions. For example, and as noted, the OAG appears to have been mistaken about the status of Councils motion 77/11 that called upon the City Manager to commission an independent study to evaluate the various consequences of dedicating property taxes to a single expenditure in the Citys Budget, and the Auditor General verify the methodology.166 129. There is also the problem of the OAG presenting his report as an audit of the LPP, a characterization which according to Mr. Lees evidence fundamentally misrepresents the nature and extent of the financial review that in fact was carried out.167 130. There are also problems of internal consistency which the Rosen Report points out in regard to the Auditors contradictory statements of the consequences for the City if the LPP fails. In one instance the OAG report states, the City would not lose its entire investment,"168 while in another that there is no ultimate protection against OSEG and the City losing their investment and/or not having adequate repayment coverage169

166 167

Ibid. at p. 2684. Paras. 44-51 of the Lee Affidavit, Applicants Record, Vol. 3, Tab 5, pp. 629-630. 168 Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, pp. 100-101. 169 Ibid.

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131.

Finally, the Auditors report suggests that his conclusions are qualified by the comments previously expressed by his report of 2009.170 However no explanation is offered to explain what bearing that former report is to have on issues like revenue neutrality which assumes at least the nominal dedication of tax revenues to repay the Citys LPP related debt. This was an issue of concern to the Auditor in 2009,171 and the Citys revenue neutrality argument remained essentially unchanged since that time.

132.

The only other review to have been commissioned was the Deloitte critique of early 2009. It provided a far more extensive and detailed assessment than that presented by the OAG, of a scheme that had grown much more complex.172 vi. Review by Rosen & Associates Limited

133.

In order to prepare reply evidence, the Applicant retained Rosen & Associates Limited, Litigation and Investigative Accountants, a firm with considerable expertise in business valuations and accounting to carry out a financial analysis of two aspects of the LPP.173

134.

Mr. Mak and his colleague Mr. Khory prepared two expert reports (hereinafter the Rosen Report and Rosen Supplementary Report) that have been entered as exhibits to these proceedings. It was their opinion inter alia that the Citys so-called revenue neutrality analysis tends to grossly overstate the Citys probable financial benefit from LPP. When property taxes are excluded from the Citys revenue neutrality calculation, the Citys participation in LPP is projected to result in a significant net negative cash flow from $111 million to $208 million.174

170

Exhibit 73 to the Affidavit of Kent Kirkpatrick, sworn December 10, 2010, Respondents Record, Vol. 1, Tab 73, p. 2679. 171 Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1454. 172 Exhibit B to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab 8B, pp. 326-368. 173 Mak Affidavit and Exhibits A and B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3 and Tab 3A and Tab 3B, pp. 63-64, 103-119. 174 Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, pp. 68-69.

- 45 -

135.

The Rosen Report also found that important differences between the rights of the City and the rights of OSEG to cash distributions from the LPP have not been adequately explained in the publicly-disseminated materials. OSEG is being given considerable

advantages because the OSEG LPP-related debt (mortgage financing) is to be funded directly by the LPP revenues, in priority before profit distribution to the partners of LPP (i.e., the City and OSEG). Furthermore, OSEGs LPP-related debt is secured by the assets of LPP. If LPP is not able to fund OSEGs debt, OSEG has the option to abandon LPP, and its loss would be limited to invested equity and its ownership interest in LPP. In contract, the City will to issue debentures (for $162 million) and must pay those obligations in full, regardless of the success of LPP.175 136. In addition, after analysis of the available overall project cash flows, the Rosen Report states that while the City will be expected to provide the majority of the required investment capital, OSEG will be given the greater proportion of the cash distributions from LPP.176 137. The Rosen Report also identified several serious concerns regarding the LPP financial model, such as errors in estimating cost savings and incomplete analysis of cost distributions by the City.177 PART III - STATEMENT OF QUESTIONS: 138. The following questions are to be decided on this application: (a) Should the by-laws and resolutions of the Ottawa City Council made on June 28, 2010 and on November 19-22, 2010 in so far as they relate to the redevelopment of Lansdowne Park in the City of Ottawa be quashed by
175 176

Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, pp. 90-91. Exhibit A to the Affidavit of Alan Mak, sworn April 11, 2011 (Supplementary Mak Affidavit), Applicants Reply Record, Vol. II, Tab 7A, p. 301. 177 Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, pp. 73-95.

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this Honourable Court for illegality pursuant to s. 273 of the Municipal Act?178 (b) Specifically, (i) Has the Respondent acted in bad faith in the course of negotiating and approving the LPP; (ii) Has the Respondent violated its procurement by-laws and rules, and in so doing has acted illegally and in disregard of the requirements of s. 270 of the Municipal Act; and (iii) Has the Respondent illegally bonused OSEG, contrary to s. 106 of the Municipal Act? PART IV - ISSUES AND THE LAW A. 139. SECTION 273 OF THE MUNICIPAL ACT: QUASHING BY-LAWS FOR ILLEGALITY The Applicant seeks to quash for illegality the by-laws and resolutions of the Ottawa City Council made on June 28, 2010 and on November 19-22, 2010 in so far as these relate to the redevelopment of Lansdowne Park in the City of Ottawa. 140. Specifically, the Applicant submits that: The City has acted in bad faith; The City has violated its procurement by-laws and rules, and in so doing has acted illegally and in disregard of the requirements of s. 270 of the Municipal Act; and The City has illegally bonused OSEG, contrary to s. 106 of the Municipal Act.

178

Municipal Act, 2001, S.O. 2001, c. 25.

- 47 -

141.

This Application is brought under s. 273 of the Municipal Act, the relevant parts of which read as follows:
273. (1) Upon the application of any person, the Superior Court of Justice may quash a by-law of a municipality in whole or in part for illegality. 2001, c. 25, s. 273 (1). (2) In this section, by-law includes an order or resolution. 2001, c. 25, s. 273 (2).
179

142.

According to the Supreme Court of Canada, illegality is a broad generic term that encompasses any non-compliance with the law.180 As well, according to the Ontario Court of Appeal, it encompasses by-laws that are passed in bad faith.181

143.

In Shell Canada Products Ltd. v. Vancouver (City), McLachlin J., as she was then, adopted a deferential approach to the review to municipal decisions.182 However, this deferential approach should not be interpreted so broadly so as to preclude judicial oversight of municipal decisions.

144.

Indeed, where a statute explicitly requires a court to review a municipal decision on a question that falls at the heart of the courts very expertise, deference is not appropriate. This point was made by the Supreme Court of Canada, in London (City) v. RSJ Holdings Inc. a case involving s. 273 of the Municipal Act, the very same provision that is at issue in the case at bar. Charron J., writing for the Court, explained as follows:
[T]the City argues that the overarching principle which should govern the court on a s. 273 review of a municipal by-law is one of deference. While this approach may be appropriate on a review of the merits of a municipal decision, in my view, the Citys argument is misguided here. Municipalities are creatures of statute and can only act within the powers conferred on them by the provincial legislature: Shell Canada Products Ltd. v. Vancouver (City), 1994 CanLII 115 (S.C.C.), [1994] 1 S.C.R. 231, at p. 273. On the question of illegality which is central to a s. 273 review, municipalities do not possess any greater institutional expertise than the courts [t]he test on jurisdiction and questions of law is correctness: Nanaimo

179 180

Municipal Act, 2001, S.O. 2001, c. 25. London (City) v. RSJ Holdings Inc., [2007] 2 SCR 588 at para. 35 [London (City)]. 181 Grosvenor v. East Luther Grand Valley (Township), 2007 ONCA 55 (CanLII) at para. 27 [Grosvenor]. 182 Shell Canada Products Ltd. v. Vancouver (City), [1994] 1 S.C.R. 231 [Shell].

- 48 -

(City) v. Rascal Trucking Ltd., 2000 SCC 13 (CanLII), [2000] 1 S.C.R. 342, 2000 SCC 13, at para. 29.183

145.

Thus, according to the Supreme Court, the question of whether the by-laws and resolutions at issue are illegal within the meaning of s. 273 is to be reviewed on the standard of correctness.

146.

As will be discussed at greater length below, the case at bar engages important issues of transparency, accountability, openness, fairness and good faith on the part of a municipal government. These are key democratic principles. In the view of the Supreme Court, deference is not appropriate in situations where municipal governments act improperly or undermine democratic legitimacy:
I would add the following comment on the principle of deference. The dissent of McLachlin J. (as she then was) in Shell Canada is often cited as a broad statement of the deference that courts owe to municipal governments. In large part, this deference is founded upon the democratic character of municipal decisions Municipal law was changed to require that municipal governments hold meetings that are open to the public, in order to imbue municipal governments with a robust democratic legitimacy. The democratic legitimacy of municipal decisions does not spring solely from periodic elections, but also from a decision-making process that is transparent, accessible to the public, and mandated by law. When a municipal government improperly acts with secrecy, this undermines the democratic legitimacy of its decision, and such decisions, even when intra vires, are less worthy of deference.184

147.

As a creature of statute, a municipalitys jurisdiction is limited by their enabling statutes. The courts have held that municipalities must comply with the mandatory requirements of their enabling statutes. Where they act outside of the obligations imposed upon them by statute, deference is not owed to their decisions. In the case of Blight et al. v. The Rural Municipality of Portage la Prairie, the Manitoba Court of Queens Bench explained as follows:
As a consequence of obtaining their powers through their enabling statutes, municipalities have limited jurisdiction. Ian MacF. Rogers, Q.C., The Law of Canadian Municipal Corporations, looseleaf, 2d ed. (Toronto: Thomson Canada Limited, 2003) vol. 2, 193.41, summarized those limitations as follows:

183 184

London (City), supra at para. 37 (emphasis added). Ibid. at para. 38.

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Whenever it is provided in an enabling statute that a council shall, in exercising a particular power, comply with certain conditions imposed by the legislature for the safeguarding of the public interest or where an express limitation or qualification has been placed upon the exercise of such powers a by-law which has been passed without observing such conditions will, as a rule, be illegal and void or else merely voidable depending on the wording of the statute. The general rule is that, if a statute forbids the enactment of a by-law interfering with private property except on certain stated conditions, the conditions must be strictly fulfilled. Although the old approach of strict interpretation of municipal statutes is no longer appropriate, once the court interprets an obligation as mandatory, Rogers statement of the law remains consistent with well established principles Thus, a municipality cannot ignore mandatory obligations imposed upon them by statute. Often these obligations are legislated safeguards for the public. Municipalities do not have the inherent right to alter the requirements based on politics or expedience. They are in effect jurisdictional in nature. Generally a municipality can only maintain its jurisdiction by demonstrating compliance with the mandatory requirements of the Act.185

148.

In the case at bar, the Applicants submit that the City has violated s. 106 of the Municipal Act, the prohibition against the granting of bonuses to commercial enterprises, and s. 270 (1), the statutory requirement to adopt and maintain policies, and thereby acted outside their jurisdiction.

149.

As well, as will be discussed below, the actions of the City, including both Council and staff, have also been inconsistent with the requirements of s. 224 (role of council), s. 227 (role of officers and employees of the municipality), and s. 254 (retention of records).

150.

Furthermore, the Applicants submit that the City has acted illegally by violating its own procurement by-law.

151.

Thus, given that the issues in this case involve questions of illegality and bad faith that fall at the heart of the courts very expertise, deference is not appropriate.

185

Blight et al. v. The Rural Municipality of Portage la Prairie, 2008 MBQB 329 (CanLII) at paras. 22-24 (emphasis added).

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B.

THE CITY HAS FAILED TO ACT IN GOOD FAITH i. Overview:

152.

It is the role of City Council to represent the public and to insure that their decisions are implemented and that the municipality operates in an accountable and transparent manner. Similarly, it is the role of City staff to implement Councils decisions and establish administrative practices and procedures to carry out these decisions.

153.

Under both the Municipal Act and at common law, the City, both Council and staff, must carry out these duties in good faith. Conversely, a failure to live up to their legal obligations is bad faith.

154.

As expressed in the case law, good faith means that the City cannot act unreasonably and/or arbitrarily and/or without the expected degree of fairness, openness, candour and impartiality. It cannot use its powers to serve private purposes at the expense of the public interest.

155.

In negotiating and approving the LPP, the City acted illegally by failing to act in good faith and by using its powers to serve private interests. It not only ignored the requirements of its own by-laws, but it repeatedly failed to meet the standard of candour, frankness, impartiality and fairness that is required of municipal governments under the Municipal Act. ii. Role of City Council and Staff and the Requirement That They Act in Good Faith

156.

The role of City Council and staff is set out in sections 224 and 227 of the Municipal Act respectively. Notably, City Council must represent the public and ensure that their decisions are implemented and that the municipality operates in an accountable and transparent manner.

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224. It is the role of council, (a) to represent the public and to consider the well-being and interests of the municipality; (b) to develop and evaluate the policies and programs of the municipality; (c) to determine which services the municipality provides; (d) to ensure that administrative policies, practices and procedures and controllership policies, practices and procedures are in place to implement the decisions of council; (d.1) to ensure the accountability and transparency of the operations of the municipality, including the activities of the senior management of the municipality; (e) to maintain the financial integrity of the municipality; and (f) to carry out the duties of council under this or any other Act. 2001, c. 25, s. 224; 2006, c. 32, Sched. A, s. 99.186

157.

Similarly, City staff must implement Councils decisions and establish administrative practices and procedures to carry out their decisions.
227. It is the role of the officers and employees of the municipality, (a) to implement councils decisions and establish administrative practices and procedures to carry out councils decisions; (b) to undertake research and provide advice to council on the policies and programs of the municipality; and (c) to carry out other duties required under this or any Act and other duties assigned by the municipality. 2001, c. 25, s. 227.187

158.

These statutory provisions embody the requirement that City Council and City staff act in good faith. Indeed, failure to act in accordance with a statutory duty is itself evidence of a want of good faith. As the Court of Appeal has emphasized, municipalities are creatures of statute exercising powers delegated to them by the provinces Institutions and individuals exercising statutory powers are obliged to do so in good faith.188

186 187

Municipal Act, 2001, S.O. 2001, c. 25. Ibid. 188 Grosvenor v. East Luther Grand Valley (Township), 2007 ONCA 55 (CanLII) at para. 42 (emphasis added) [Grosvenor].

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159.

Similarly, the requirement on City officials to act in good faith is also well established in the case law:
It goes without saying that municipal officials are to act in good faith and with due diligence in the discharge of their obligations and the exercise of their powers.189

160.

Consistent with this requirement that City officials must act in good faith, s. 272 of the Municipal Act provides that where a by-law is passed in good faith, it may not be quashed solely on the grounds that it is unreasonable.
272. A by-law passed in good faith under any Act shall not be quashed or open to review in whole or in part by any court because of the unreasonableness or supposed unreasonableness of the by-law. 2001, c. 25, s. 272. 273. (1) Upon the application of any person, the Superior Court of Justice may quash a by-law of a municipality in whole or in part for illegality.190 2001, c. 25, s. 273 (1).191

161.

Indeed, the Citys obligation to act in good faith is an essential characteristic of the valid exercise of by-law enacting authority by municipal councils.192

162.

Therefore, as set out in the Municipal Act and described in the case law, the City, including Council and staff, must carry out their duties and exercise their power in good faith. A failure to live up to the requirements of their statutory duties is evidence of bad faith. iii. The Meaning of Bad Faith:

163.

In general, the courts have endorsed a broad concept of bad faith. Bad faith does not necessarily imply or suggest any wrongdoing on the part of Council but rather means

189 190

679619 Ontario Limited (Silvers Lounge) v. Windsor (City), 2007 ONCA 7 (CanLII) at para. 49. According to the Ontario Court of Appeal in Grosvenor, supra at para. 27, [i]llegality is a generic term covering any act not in accordance with the law [and] encompasses by-laws that are passed in bad faith. 191 Municipal Act, 2001, S.O. 2001, c. 25. 192 Grosvenor, supra at paras. 37, 42.

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that the City acted unreasonably and arbitrarily and without the degree of fairness, openness, and impartiality required of a municipal government.193 164. Openness and candour are particularly important in the municipal context given the statutory requirement that Council must carry out its work in public. This requirement is given expression through the numerous provisions in the Municipal Act which relate to accountability and transparency,194 the holding of Council and Committee meetings in public,195 the taking of minutes196 and the maintaining of records,197 and the requirements that the City exercise its power by by-law.198 In London (City), supra, the Supreme Court has noted that these kind of provisions show a clear legislative choice for increased transparency and accountability in the decision-making process of local governments.199 165. Bad faith also includes the exercise of power to serve private purposes at the expense of the public interest: 200
A by-law may be quashed if the council in passing it was not using its power in good faith in the interest of the public, but simply to subserve the interests of private persons.201

166.

Arbitrary or unfair conduct are also included within the meaning of bad faith, as is a lack of procedural fairness:
[A]rbitrary or unfair conduct are recognized indicia of bad faith that may, in certain circumstances result in a court quashing all or part of a by-lawIn the circumstances of this case, I consider an arbitrary decision to be one that is made on personal whim, or on the basis of random choice, without any supporting

193

Re H.G. Winton Ltd. and North York (1978), 20 O.R. (2d) 737 at pp.744-5 (Div. Ct.)(emphasis added) [Winton]. See also Equity Waste Management of Canada v. Panorama Investment Group Ltd., 1997 CanLII 2742 (ON C.A) at para. 61 (emphasis added) [Equity Waste]. See also Re Hall and City of Toronto et al. (1979), 23 O.R. (2d) 86 at 92: a singular absence of frankness and impartiality, which are the usual indicia of good faith. 194 223.1-223.24,270(1)5, Municipal Act, 2001, S.O. 2001, c. 25. 195 239 Municipal Act, 2001. 196 247(4) Municipal Act, 2001. 197 254(1) Municipal Act, 2001. 198 5(3) Municipal Act, 2001. 199 London (City), supra at para. 4. 200 Equity Waste Management of Canada v. Panorama Investment Group Ltd., 1997 CanLII 2742 (ON C.A) at para. 61 (emphasis added) [Equity Waste]. 201 Howard & City of Toronto (1928), 61 O.L.R. 563 at pp. 544-5.

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evidence. I consider unfair conductto be procedural fairness - the failure to provide the stakeholderswith an opportunity and a chance to be heard.202

167.

Courts have also held that a failure to act with due diligence can be evidence of bad faith. In Grosvenor v. East Luther Grand Valley (Township), the fact that there was no due diligence undertaken by a municipal council when passing a by-law was a significant factor relied upon by the Ontario Superior Court in finding that the council had not acted in good faith.203

168.

In Grosvenor, the Ontario Superior Court found that due diligence requires a municipal council to consider and undertake any necessary studies in order to fully understand the issue at hand:
What due diligence did Council undertake prior to enacting By-law 2003-07?... It is clear that Council had undertaken no studies nor prepared or received any report with respect to highway designationSimply put, there was no due diligence.204

169.

Other indicia of a lack of due diligence applicable to the municipal context include the fact that municipal councils should not act in haste, should consider all the available evidence, including independent sources of information, and should conduct judicious research before implementing a new by-law. The level of due diligence required depends upon the circumstances and complexity of the issue:
Council did not exercise due diligence in researching the prohibition judiciously and fairly by considering all the evidence available to it relevant to the issues. The Municipality acted in haste and in alarm as a result of the June 13th, 2004, incident without independent facts In so proceeding, the Municipality failed to exercise the degree of due diligence which the circumstances and complexity of the issue required. This failure, in my 205 view, renders the by-law void as being ultra-vires the authority of Council.

202

Langille (Rickshaw Runners of Toronto) v. Toronto (City), 2007 CanLII 15245 (ON S.C.) at para. 47 (emphasis added). 203 Grosvenor v. East Luther Grand Valley (Township), [2006] O.J. No. 5562, affirmed 2007 ONCA 55 at para. 71. 204 Ibid. at 51 (emphasis added). 205 Southwold (Township) v. Buwalda, [2006] O.J. No. 1202 (Sup. Ct.) at paras. 26, 39-45 (emphasis added).

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170.

Similarly, in order to meet even a minimal standard of due diligence, council must attempt to fully inform itself of an issue either through its administration or by way of the retention of outside experts, if necessary. It cannot ignore or fail to make inquires about relevant facts. This point was made by the Ontario Superior Court in Xentel DM Inc. v. Windsor (City):
[T]here was no evidence of Council having directed its mind to the causal connection between public safety and the performance of exotic animals. If anything, there is ample evidence to suggest it failed its due diligence obligation which in my view, existed in the circumstances. [T]here is no evidence before me that [Council] even considered the causal connection between exotic animal performances and public safety. Nor did it attempt to inform itself through its administration or by way of retention of outside experts, if necessary, to assess the issue of public safety which is the cornerstone of its legislative authority in the first place. This is the essence of at least the minimal due diligence which in my view Council was obligated in circumstances of this case, to carry out. The Council was warned about the importance of the public safety issue as being the only basis to properly pass the By-law. The animal welfare/public safety issue was "front and centre" for the Council, but it effectively ignored or refused to acknowledge any obligation of a reasoned and balanced review of the issue; in other words, there was no due diligence performed 206

iv. 171.

The City has Exhibited a Lack of Good Faith:

In their handling of the Lansdowne Partnership Plan, the City, both Council and staff, have exhibited a lack of good faith, including by failing: to show vigilance and ensure that Councils directives were carried out; to present the LPP in a candid, frank and impartial manner; to exercise a minimum of due diligence to ensure that it was getting value for money; to ensure the accountability and transparency of the operations of the municipality; and by acting arbitrarily and unfairly. v. Failure to Ensure Councils Directives were Carried Out:

Abandonment of the Design Competition

206

Xentel DM Inc. v. City of Windsor, 2004 CanLII 22084(ON. S.C.) at paras. 35, 55 ,65 (emphasis added).

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172.

The City has failed to act in good faith from virtually the outset of the process of deciding the future of Lansdowne Park, which begins with the failure to implement the decision and by-law passed by Council on November 28, 2007. That by-law required that City staff initiate a two-stage design competition for Lansdowne Park based on a Rights to Development approach, according to a timetable that foresaw negotiation getting underway with the successful proponent for the redevelopment of Lansdowne by the end of 2008.207

173.

According to that schedule,208 following public consultations, City staff were to return to Council in early March 2008, with a Design Brief setting out the principles upon which competing bids for the redevelopment of Lansdowne Park would be sought.

174.

While City staff carried out the public consultation process, mandated by Council, they failed to take any further steps to implement the decision made by Council the previous November. 209

175.

In fact, in March or April of 2008, around the time when the Design Competition was to have been formally launched, the City Manager, without either informing or seeking the direction of Council directed City staff to stop working on the Design Brief.210

176.

Thus, City staff improperly abandoned the Design Competition in its early stages in direct conflict with their statutory duty in s. 227 of the Municipal Act to implement councils decisions and in so doing failed to act in good faith.

177.

It was not until May 16, 2008, that Council was advised by the Deputy City Manager that the timing of the competition ha[d] been delayed as issues surrounding the future of Frank Clair Stadium are being further investigated, and a conditional CFL franchise is

207 208

Exhibit C to the Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 224. Exhibit C to the Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 238. 209 Paras. 14-16 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 194. 210 Cross-Examination of Kent Kirkpatrick, May 5, 2011, Q. 548, p. 131.

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being considered.211 While alluding to the CFL franchise, this memo does not disclose to Council that private discussions were taking place with representatives of what would become OSEG about the redevelopment of Lansdowne, precisely the subject of the design competition.212 Moreover relating these details in a memorandum to Council rather than in a proper report to it, precluded the opportunity for timely discussion and debate about these issues by Council, in a public forum. 178. Just over a month later, in a memo dated June 27, 2008, the Deputy City Manager offered a slightly more candid account to the Planning and Environment Committee that the Design Competition was on hold until mid-Fall 2008 pending a complete review of building conditions of the Frank Clair Stadium and the Civic Centre and a review of the Shenkman business plan/CFL proposal.213 179. Halting the design competition to review a particular proposal for Lansdowne Park was not only improper because it was inconsistent with Councils directive from November 2007, but also because considering such a proposal was prohibited by the Ottawa Options Policy, in place at that time, which explicitly provided that unsolicited proposals for projects which have been initiated or planned to be initiated should not be considered except as part of the planned procurement process.214 The design competition for Lansdowne was a planned to be initiated procurement process that got underway as early as September 2007,215 therefore unsolicited proposals relating to it could not be considered separate and apart from that process.

211

Exhibit E to the Ballard Affidavit, Applicants Record, Vol. 2, Tab E, p. 249. See also Cross-Examination of Kent Kirkpatrick, May 5, 2011, Q. 569, pp. 137-138. 212 Para. 22 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 249. See also Cross-Examination of Kent Kirkpatrick, May 5, 2011, Qs 633-635, p. 158. 213 Exhibit F to the Ballard Affidavit, Applicants Record, Vol. 2, Tab F, p. 304. 214 Exhibit 2 on the Cross-Examination of Kent Kirkpatrick held May 5, 2011, Respondents Record, Vol. 2, Tab 11, p. 534. 215 Cross-Examination of Kent Kirkpatrick, May 5, 2011, Q. 299-300, pp. 74-75.

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180.

By abandoning a procurement process in favour of an unsolicited proposal, City staff favoured the interests of a small group of private individuals over the public interest in a fair and competitive process and failed to act in an impartial way.

181.

Having been advised of these improper actions, City Council should have taken steps to require that its decisions were implemented, as required by s. 225 of the Municipal Act, and that City procurement rules were observed, but it took no steps to do so and remained passive in the face of this obvious disregard for City by-laws.

182.

In fact, it was only on April 22, 2009, almost a year and a half after the Design Competition had been approved by Council and well after the OSEG proposal had been improperly received and considered that Council voted to abandon the Design Competition.216 In doing so, it acted arbitrarily and in a discriminatory manner to favour particular private interests, namely those of OSEG, over all other parties that might, if they had been given the opportunity, have submitted bids to redevelop Lansdowne Park.

183.

These acts and omissions by Council and City staff were in breach of their respective statutory obligations under sections 224 and 227 of the Municipal Act, and in breach of the Citys duty to act in good faith. vi. Failure to Ensure that Councils April 22, 2008 Conditions Regarding the Lansdowne Park Proposal Were Implemented

184.

A similar failure to implement Councils decisions also occurred with respect to the conditions for negotiating a partnership agreement with OSEG, as approved by City Council on April 22, 2009.217

185.

As noted, the two central conditions imposed by Council were:

216 217

Exhibit 27 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 27, p. 431-433. Exhibit 27 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 27, p. 430-432.

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That the City of Ottawas contributions to the revitalization of Lansdowne Park be limited to a dollar amount to be established during the negotiations, based on the principle of not increasing the overall cost to the taxpayer; That any revenues generated from the revitalized Lansdowne Park not be used to subsidize any professional sports teams; 218

186.

Although these conditions were clearly stated by Council as a requirement to entering into a deal with OSEG, the City Manager responsible for negotiating with OSEG, stated that he regarded these specific conditions as objectives for the negotiations, according them no greater priority than a number of design principles also approved by Council.219

187.

Moreover the report to Council setting out the results of the negotiations Council had authorized failed to accurately identify the two conditions established by Council for those negotiations and failed to provide a candid account of whether they had been achieved.

188.

The report to Council of September 2, 2209 stated that:

In preparing this plan and partnership framework, all of the requirements set out in Councils motion of April 22, 2009 were thoroughly considered. A detailed accounting of how the Lansdowne transformation plan and partnership framework address Councils requirements is contained in the attached report (refer to Document 1.)220

189.

In fact, the information provided to Council concerning the extent to which the specific conditions and design guidelines had been achieved was perfunctory, inaccurate and misleading. Moreover it had been prepared by OSEG, not City staff.221

190.

The report provides this information with respect to the two key conditions stipulated by Council in April 2009:222 Direction Limit the City of Ottawas contribution to a dollar amount based on not increasing the overall Transformation Proposal Under the current Memorandum of Understanding, City staff and the OSEG have negotiated an agreement, which is

218 219

Ibid. Cross-Examination of Kent Kirkpatrick, May 10, 2011, Q. 1828, p. 507. 220 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 603. 221 Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1844-1851, pp. 514-515. 222 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, pp. 608-611.

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cost to the taxpayer

forecasted to generate cash and avoid tax pressures. Tax revenues generated through the redevelopment will place the City in a cash-positive position. No tax levies will go to support the professional sports teams. The City will financially support the debenture and the redevelopment program. OSEG will assume responsibility of any construction and operating losses, as well as lifecycle costs. OSEG will realize a reasonable return on its equity, a return of its equity, and the City will realize a return on its Deemed Equity. Any additional net cash flow will be shared equally between the partners. The City will receive property tax revenues resulting from the redevelopment program.

Agree not to use any revenues generated to subsidize professional sports. No tax levies will go to support the professional sports teams.

191.

In regard to Councils condition regarding subsidizing the sports franchises, its direction was not, as this response suggests, limited to the use of tax revenues to subsidize the team. In fact it is not in dispute that revenues generated under the LPP, including from the Stadium, Arena and parking facilities which are to be paid for entirely by the City, will be used to both directly and indirectly to reimburse OSEG for the costs of acquiring and operating the CFL and OHL franchises, including any losses it may incur.223 In fact, the failure of City staff to meet Councils non-subsidy condition, was pointed out subsequently by the Office of Auditor General, but only after the public consultation process concerning the OSEG proposal was completed.224

192.

It was obviously in OSEGs interest to divert attention from the generous subsidies to the sports franchises that are engendered by the scheme and from which they would directly benefit. By delegating the obligation to report on what had been done to carry out Councils direction, the City acted arbitrarily and in favour of private interests and failed to

223 224

Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1451-1454, pp. 385-386. Public consultation sessions were held in September and October, 2009. See paras. 81-82 of the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab A, pp. 37-38. The Auditors report is dated November 2009. See Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1438.

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comply with the requirements of sections 224 and 227 of the Municipal Act to ensure that Councils decisions were implemented. 193. Similarly, the report to Council also represented that staff had met Councils direction that the development plan be limited to a dollar amount to be established during the negotiations, based on the principle of not increasing the overall cost to the taxpayer.225 194. There is no support for the contention that tax revenues generated through the redevelopment will place the City in a cash-positive position. At best, the City claims that when avoided costs are taken into account, and most of the costs of creating an urban park and remediating the site are ignored, the nominal allocation of tax revenues will put the City in a cash positive position if the LPP is a success.226 195. Thus, the solutions presented in the September 2, 2009 Report to Council fail to provide a candid or transparent account of the extent to which the conditions had been met. 196. The failure of City staff to carry out Councils specific direction to negotiate with OSEG subject to certain conditions is another example of a lack of good faith and breach of statutory obligations, as is the failure of Council itself to ensure that is directives are implemented. Although, Council subsequently approved the Lansdowne Partnership Plan without the conditions it stipulated in September 2008 having been fully met, that approval was founded in part on the incorrect assumption that the conditions regarding no subsidy and no increase to taxpayers had been met based on misrepresentations and a lack of candour by staff.

225 226

Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 610. Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 597.

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vii. 197.

Failure to Present LPP in a Candid, Frank or Impartial Manner

The City also failed to act in good faith and with candour, frankness and impartiality227 by failing to provide timely disclosure of important facts and information about the OSEG proposal.

198.

For example, in making its decision in favour of the LPP, City Council relied on the erroneous information concerning the extent to which OSEGs CFL franchise was contingent on the use of Frank Clair Stadium. This belief that the CFL franchise was conditional upon the revitalization of Frank Clair Stadium was reported in the media as early as March 25, 2008228 and contained in the report to Council for its meeting in April 2009.229 Subsequent disclosure of the terms of that offer, which did not occur until after Councils approval of the LPP scheme in November 2009, revealed no such stipulation.230

199.

City staff also failed to share with Council or make public a highly critical report of the OSEG proposal by the respected and independent accounting firm, Deloitte, from March 2009. That report offered several criticisms of the OSEG proposal, and made recommendations to address them, in each case in a manner that greatly improved the benefits to be derived by the City under the LPP.231 The Deloitte reports criticisms are discussed at length at paragraphs 38-43.

200.

The Deloitte Report was not presented to Council nor the public, but neither was any summary or account of the criticisms and recommendations it offered. As a result, Council directed staff to enter into partnership negotiations with OSEG without having the benefit of recommendations made by Deloitte.

227

As noted, a key indicia of bad faith is a lack of candour, frankness and impartiality. See Winton, supra at 744-5 and Equity Waste, supra at para. 61. 228 Exhibit D to the Ballard Affidavit, Applicants Record, Vol. 2, Tab D, p. 245. 229 According to the OSEG Fact Sheet that was attached to the Joint Report dated April 22 2009, OSEG was awarded a new CFL franchise for Ottawa, conditional only on an acceptable agreement with the City for Frank Clair Stadium. See Exhibit 25 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 25, p. 393. 230 Paras. 47-49 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 203 and Exhibit T to the Ballard Affidavit, Applicants Record, Vol. 2, Tab T, p. 559. 231 Exhibit B to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab B, pp. 343-365.

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201.

While the OSEG plan was modified subsequently, many of the features of the scheme that drew criticism from Deloitte remained essentially unaltered in the LPP approved by Council.232

202.

By failing to present the Deloitte Report to Council, City staff failed to meet the City Managers own definition of due diligence, which includes identify[ing] the information that Council not just reasonably need[s], but would benefit from in making a decision.233 Without a doubt, the Deloitte Report would have assisted Council in making a better informed decision about the LPP.

203.

Information presented to the public and Council concerning the scheme was also rife with incomplete, inaccurate, contradictory, misleading and simply wrong accounts of the LPP. These seriously undermined the ability of even informed observers to understand the scheme being proposed, and ultimately resulted in Council approving a scheme that includes entirely contradictory versions of key elements of scheme, and which is according to the City Manager at odds with the intentions of the party in key and material respects.

204.

Two of the most serious examples of these deficiencies concern the waterfall hierarchy and the extent of the Citys Funding Equity. Both of these examples have been described above at paragraphs 89-101.

205.

In the case of the waterfall scheme, City Council relied upon erroneous information presented by the City Manager in September 2009 and June 2010 with respect to the levels of the waterfall payments.234 In some of the materials before Council it appeared that the Citys return on its Funding Equity would occur in the waterfall before OSEG

232 233

Exhibits 69 & 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tabs 69 & 71, pp. 2555-2579, 2582-2646. Cross-Examination of Kent Kirkpatrick, May 5, 2011, Q. 201-202, pp. 51-52. 234 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 600.

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received its return on its Additional Equity.235 This same waterfall ordering was also found in the PWC report considered by Council at its June 2009 meeting.236 However, elsewhere in material before Council, this order in the waterfall was reversed.237 206. As a result of this contradictory information, Council approved two quite different schemes at the same time, and there is no indication in the record to indicate which was intended.238 In cross-examination the City Manager stated that it was the parties intention that the City adopt the version that very significantly favours OSEG by allowing it to recover its Additional Equity in priority over the return of the Citys Funding Equity, or any return on its Deemed Equity. 239 207. An even more fundamental error is made in the information relied upon by Council at its meeting in June 2010, and this relates to the formula used to arrive at the value of the Citys Funding Equity. 208. As indicated by the City Manager during cross-examination,240 the funding formula for calculating the Citys Funding Equity set out in the Project Agreement Framework241, the PWC report,242 and the staff report of June 9, 2010,243 which were approved by Council on June 28, 2010,244 results in the Citys Funding Equity equalling $76,100,133. However, during cross examination, the City Manager stated that this was an error. This figure is more than 5 times greater than the amount of Funding Equity the parties intended the City to be given credit for.245

235 236

Exhibit C to the Lee Affidavit, Applicants Record, Vol. 3, Tab 5C, pp. 824-825. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2590-2591. 237 Paras. 57-71 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, pp. 3985-3992. 238 Exhibit 84 to the Kirkpatrick Affidavit, Respondents Record, Vol. 6, Tab 84, pp. 3032-3037. 239 Cross-Examination of Kent Kirkpatrick, May 11, 2011, Q. 2234-2237, pp. 634. 240 Answers to Undertakings given by Kent Kirkpatrick at his cross-examination, Respondents Record, Vol. 11, Tab Q. pp. 4983-4987. 241 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record Vol. 5, Tab 69, pp. 2559. 242 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, pp. 2638. 243 Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, pp. 2685-2785. 244 Exhibit 84 to the Kirkpatrick Affidavit, Respondents Record, Vol. 6, Tab 84, pp. 3018-3068. 245 . Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2638.

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209.

This $62 million error regarding Funding Equity is an egregious example of the erroneous and inaccurate information relied upon by Council in approving the OSEG proposal.

210.

The City also misrepresented the role of PWC,246 which was retained to prepare the LPP Business Model but expressly did not carry out any audit, or provide any other form of assurance on the financial or other information provided to it by the City and OSEG which comprised the basis for that business plan.247

211.

Likewise, the June 2010 report of the Auditor General for the City of Ottawa, was presented as an audit of the LPP, but it was in fact a limited financial review that was not an audit carried out in accordance with generally accepted auditing standards or in accordance with the standards established by the Canadian Institute of Chartered Accountants.248

212.

The most significant and ubiquitous misrepresentation of the LPP arises from claims that it is revenue neutral or as Council put it in April 2009, that it would have no impact of taxpayers. This claim is a consistent, albeit opaque, theme of the reports to Council, OSEG promotional material, the PWC report, and City fact sheets.249 It was also echoed by repeated claims by the Mayor, and Councillor Chiarelli, that the LPP wasnt going to cost the taxpayers a dime.250 Even informed observers following the approvals process closely were unable to determine what the Citys intentions were in regard to tax revenue generated by commercial development on Lansdowne Park. Was the City planning to dedicate 75% of such tax revenues to cover the costs under the LPP or only 37%?251 On what basis were such tax revenues to be considered available for that purpose? Was the

246

Paras. 45-46 of the Lee Affidavit, Applicants Record, Vol. 3, Tab 5, p. 190 and Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1459. 247 Exhibit 30 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 30, p. 588. 248 Paras. 48-49 of the Lee Affidavit, Applicants Record, Tab 5, p. 630. 249 See for example the Fact Sheet posted on the City of Ottawas website, Exhibit X to the Ballard Affidavit, Applicants Record, Vol. 2, Tab X, p. 594. See also 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, pp. 26412644. 250 Cross-examination of Ian Lee, May 5, 2011, Qs. 42-63, 433, 439, pp. 10-14, 86-88. 251 Exhibit X to the Ballard Affidavit, Applicants Record, Vol. 2, Tab X, p. 594.

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City actually intending to use these tax revenues to service the Citys debt, or was it simply advancing a notional construct? While Mr. Kirkpatrick made clear, at least on one occasion before Council that it was not the Citys intention to segregate these commercial tax revenues,252 one would have had to be present to hear that comment, and then attempt to reconcile the City Managers comments with contradictory or entirely ambiguous statements by the Mayor and others and in materials published by Council or OSEG describing the scheme. 213. In fact the Citys characterization of the likely impact, for Ottawa taxpayers, of proceeding with the LPP lacked transparency, candor or any valid basis. As the Rosen analysis points out, servicing the debenture that will be issued to pay for the Citys obligations under the LPP will, contrary to the Citys revenue neutrality claims, yield net negative cash flow to the City on a net present value basis.253 As well, the Citys budget does not run a surplus, there are no plans to segregate and accumulate 75% or any percentage of retail or other tax revenues from the site and the Citys debt will be paid from general revenues.254 214. A host of other claims concerning the LPP similarly misrepresent or obscure the reality of the scheme, examples of which include the claims that: OSEG will be responsible for all construction risks and will be at risk for cost overruns for certain construction activities on the site.255 This claim is misleading because any such payments will be treated as Additional Equity under the waterfall, and returned with interest to OSEG and in priority to certain payments due to the City;256 The OSEG partners will receive a return of 8% on their equity, far less than the 15% or more that the private sector would normally anticipate realizing on capital
252 253

Para. 6 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p. 3960. Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, pp. 68-69. 254 Ibid. 255 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2556. 256 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2558.

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investments.257 In fact there is no evidence to support the claim that the private sector would normally anticipate earning a 15% return on the costs to acquire and operate a CFL team, an enterprise that has failed on two previous occasions in Ottawa. Moreover, the 8% OSEG is to earn on these investments is effectively guaranteed by proceeds from the waterfall even if the teams fail after 5 years; or that OSEG would be responsible for making cash contributions to the reserve funds.258 In fact the obligation at first instance is that of the limited partnerships. OSEGs only obligation is to make up any shortfalls, in which case its contribution will be treated as Additional Equity and accorded priority over the return of the Citys Funding Equity, and a return on its Deemed Equity. 215. The consistent and obvious purpose of these highly misleading characterizations of the LPP is to grossly inflate the benefits the City may derive under the scheme, while downplaying the advantages accorded OSEG. 216. The role of avoided costs in meeting the Citys financial obligations under the scheme is also overstated in public presentations of the scheme for reasons that have been outlined in paragraphs 398-399 of this factum. 217. A final misrepresentation relates to the manner in which revenues from naming rights, the sale of corporate suites and other related revenues have been misallocated to the sports franchises instead of the arena and stadium. The result of this misallocation is that the sports franchises appear to be more viable than in reality and the citys contributions under the scheme appear to be smaller. 218. As described by the Deloitte study, the sale of naming rights, corporate boxes and other rights represents a substantial source of revenue for the owners of sports facilities. The
257 258

Exhibit X to the Ballard Affidavit, Applicants Record, Vol. 2, Tab X, p. 595. Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2556.

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Deloitte report estimates these revenues to be $2.35 million in Year I, growing to $2.6 million in year 5 over $2.5 million per year and it strongly recommends that these revenues be identified as building revenues.259 Under the LPP at least some of these rights and associated revenues have been assigned to the OHL and CFL franchises, not the Arena or Stadium.260 219. As Deloitte points out, this allocation of revenues inflates the revenues described as emanating from the sports franchises and depresses the value of the revenues generated by the facilities. This is shown in graph form on page 54 of PWC business model (June 9, 2010).261 Thus while the OHL franchise is shown to be marginally profitable over the term of the LPP, the Arena is shown to be losing money. 220. The financial overview of the stadium and arena provided on page 27 of the PWC report shows these facilities losing $765,000 to $888,000. If Deloittes strong recommendation had been followed these facilities would be shown as generating profits in excess of $1.5 million per year. The allocation of these revenues streams would increase the losses that are expected to be incurred in operating the CFL franchise and could jeopardize the profits the OHL franchise is expected to earn.262 221. The misallocation of revenues from naming rights, the sale of corporate boxes, advertising and other such sources fundamentally misrepresents the relative financial flows under the scheme and the ongoing subsidy provided by such revenues to the sports teams, that would, but for these misallocated revenues, continue to be marginal, but more likely losing financial enterprises over the entire life of the LPP. As represented to Council in the PWC report both sports are projected to be profitable enterprises over the 30 year life of the scheme, but only marginally so. While the stadium is also projected to generate profits,
259 260

Exhibit B to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab 8B, p. 363. Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2567. 261 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2637. 262 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, pp. 2611-2612.

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this is not true for the Arena that is estimated to be, and remain, a losing proposition. However the allocation of naming and other rights from the sports franchises to the facilities immediately reverses this picture and would show both facilities being profitable, and the teams losing money year over year.263 222. While net revenues from the teams and facilities all flow to the waterfall, allocation of these revenues determines the relative profits and losses of these respective enterprises, and value of these revenues is important if this is foregone revenue to the City for which it is given no equity credit in the waterfall.264 223. Moreover, unlike the putative savings the City may derive from avoiding some of the costs of maintaining the status quo at Lansdowne Park, or the nominal allocation of certain tax revenues from the commercial development that is to take place at LP, these revenues, estimated to be in excess of $2.5 million per year, would otherwise represent real cash flows the City could use to defray the costs of servicing the debt it will incur to refurbish the facilities that will generate these income streams. 224. It would appear that OSEG also implicitly agrees that the Citys descriptions of the LPP are incorrect, misleading and incomplete. 225. For example, in his affidavit, John Moss, a lawyer for OSEG, specifically took issue with the statement in the affidavit of Professor Ian Lee that OSEG has been granted a Head Lease for the entire Lansdowne Park and a Stadium Lease for the same period, calling these statements not correct and misleading.265 226. However these statements were drawn from the Citys own documents:

263 264

Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2637. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2638. 265 Para. 35 of the Moss Affidavit, Record of the Intervener, OSEG, p. 11.

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a)

The City will enter into a minimum 30-year head lease with OSEG for the entire park and it will contract OSEG to undertake redevelopment and construction. Report to Council, 9 June 2010, by Kent Kirkpatrick, City Manager, p. 71.266 It is expected that the City will enter into a 30 year head lease with OSEG for the entire park and contract OSEG to undertake redevelopment and construction. Business Plan for Transformation, PWC, 9 June 2010, p. 4.267 The [Municipal Services Corporation] MSC will enter into a minimum 30year head lease with OSEG for the entire park and it will contract OSEG to undertake redevelopment and construction. See Report to City Council, 2 September 2009, by Kent Kirkpatrick, City Manager, p. 9.268 The above sentence is also included in the Business Plan for Transformation, 1 September 2009, by PWC, p.7.269

b)

c)

d) 227.

These numerous examples of the incomplete, inaccurate, contradictory, misleading and erroneous information relied upon or presented by the City, are further compelling evidence of bad faith. viii. Failure to Ensure the Accountability and Transparency of the Operations of the Municipality

228.

Another example of a lack of openness and candour on the part of the City is its failure to maintain proper business records regarding its discussions and negotiations with OSEG in 2008.

229.

Municipal governments must operate in an accountable and transparent manner. This obligation is made express in s. 270 of the Municipal Act, which requires a municipality to adopt a policies to ensure that it is accountable to the public for its actions and that its actions are transparent to the public.270

266 267

Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, p. 2754. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2587. 268 Exhibit 31 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 31, p. 597. 269 Exhibit A to the Lee Affidavit, Applicants Record, Vol. 3, Tab 5A, p. 640. See also Reply Affidavit of Ian Lee, sworn January 13, 2011, Applicants Reply Record, Vol. 1, Tab 1 at paras. 7-11. 270 Municipal Act, 2001, S.O. 2001, c. 25.

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230.

One way in which a municipality meets these obligations is by maintaining records. In fact, s. 254 of the Municipal Act imposes a duty to retain and preserve the records of a municipality.

231.

In this regard, the Records Management Policy of the City of Ottawa and By-law No. 2003-527 establish that Official Business Records of the City must be retained for a predetermined period of time.271

232.

As acknowledged by the City Manager, staff are conscious when working on projects of the need to document their work including by creating official business records. In his view, documents and communications about Lansdowne were official business of the city as soon as they were created or transmitted.272

233.

Despite this acknowledgment, the City has been unable to provide any business records between March 2008 and October 2008 of the communications between City staff assigned to the Lansdowne Project and OSEG, except one string of emails dated May 28, 2008.273 Similarly, with the exception of one document,274 there are no minutes of meetings or memoranda. Yet we know from the accounts of City Staff and the principals of OSEG that several private meetings took place between the City and those representing OSEG. 275

234.

Given the importance of the redevelopment of Lansdowne Park to the City and the complexity of OSEG proposal, it stretches credibility to believe a single string of emails

271

Exhibits A and B to the Affidavit of Guy Michaud, sworn January 19, 2011, (Michaud Affidavit), Applicants Reply Record, Vol. II, Tab 6, A and B, pp. 191-298. 272 Cross-Examination of Kent Kirkpatrick, May 5, 2010, Q. 335, p. 81 and Exhibit A to the Michaud Affidavit, Applicants Reply Record, Vol. II, Tab 6A, pp. 193-196. 273 Cross-Examination of Kent Kirkpatrick, May 5, 2011, Q. 692, p. 178. 274 Ibid. 275 Exhibit 19 on the Cross examination of Kent Kirkpatrick, May 11, 2011, Applicants Reply Record, Vol. III, Tab 19, p. 748; Exhibit A to the Ballard Affidavit, Applicants Record, Vol. 2, Tab A, pp. 210 and 212; Exhibit B to the Ballard Affidavit, Applicants Record, Tab B, Vol. 2, p. 219; Exhibit G to the Ballard Affidavit, Applicants Record, Tab G, Vol. 2, p. 306; Exhibit F to the Ballard Affidavit, Applicants Record, Tab F, Vol. 2, p. 304; Exhibit 8 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 8, p. 103 and Exhibit 13 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 13, p. 144.

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from May 2008 is the totality of the record of communications between the City and OSEG from March to October 2008. 235. The only reasonable assumption is that City staff failed to maintain these business records contrary to the requirements of the Citys records management policy and their statutory obligations. This failure to ensure openness, accountability and transparency is further evidence of bad faith. ix. 236. 237. Failure to Exercise Due Diligence by Determining Value for Money:

As discussed above, a lack of due diligence itself can also be evidence of bad faith.276 In the present case, given the complexity, cost and importance of the LPP, at a minimum due diligence required that the City follow best practices to ensure that it was getting value for money.

238.

According to Professor Loxleys uncontroverted expert opinion, best practices for assuring value for money in the case of complex P3 schemes is to solicit competing bids for the particular project, and to carry out an independent value-for-money audit as an additional safeguard.277 In the redevelopment of Lansdowne Park this would mean following the competitive procurement practices mandated by the Ottawa Purchasing By-law No 50 of 2000. In fact, s. 2(1) of that by-law provides that the objective of this By-law is to obtain best value when purchasing goods, construction and services for the City while treating all suppliers equitably.278

239.

As Professor Loxley explains, Public Private Partnerships (PPPs), such as the LPP represent the procurement of goods and/or services by the public sector. They must for that reason meet normal purchasing guidelines and practices, the first and essential

276 277

Grosvenor, supra at para. 51. Para. 5 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, p. 899. 278 Exhibit 32 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 32, p. 621.

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principle of which is that public sector procurement proceed by way of a competitive bidding process, except in extraordinary circumstances. This is because the solicitation of competing bids for the provision of goods and services is regarded as by far the most effective approach for assuring that procurement processes are transparent, fair to all potential suppliers and, most importantly, provide taxpayers with the assurance that they have obtained the best value-for-money when public funds are being spent.279 240. Thus, the appropriate standard of due diligence for projects such as the redevelopment of Lansdowne Park is embodied by procurement rules that require acquisition of goods and services for public use be carried out in an open, transparent and accountable manner. The solicitation of competing bids is the central means by which public officials can ensure that value for money is obtained for municipal taxpayers. As discussed, in proceeding by way of sole-source procurement, the City abandoned this essential safeguard of the public interest and failed in its obligation to act with due diligence. 241. Having approved a sole-source procurement, its obligation to commission an independent and thorough assessment of the LPP was that much greater, but here again the City failed to protect the interests of Ottawa ratepayers. 242. In fact, Professor Loxleys expert opinion is that the process adopted by the City of Ottawa to select and enter into the LPP is unique in failing to adhere to even the most rudimentary norms established to ensure that such projects represent a sound use of public funds and assets. As Professor Loxley puts it:
Having rejected the most important mechanism for ensuring value-for-money, namely a competitive procurement process, it has compounded the problem by failing to commission any meaningful, independent and objective assessment of

279

Paras. 8-9 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, pp. 900-901.

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whether the LPP represents value-for-money Ottawa.281

280

for the ratepayers of the City of

243.

The consequences of the Citys failure to commission a timely, thorough and independent review of the LPP can in part by found in the fundamental misrepresentations of the scheme that were included in the key reports upon which Councils approval of June 2010 was based. Moreover these only came to light in consequence of the reviews carried out on behalf of the Applicant.282

244.

While the Deloitte review did meet this standard of independence, it was not shared or repeated, and was completed at an initial stage of the project.283

245.

Furthermore, the PWC report, which was often presented in a manner that suggested that the LPP had the benefit of its independent review,284 provided no such assessment. Rather as the terms of its retainer, and the qualifications to its report make clear, PWC was not retained to evaluate or comment on the merits of the LPP scheme.285

246.

The OAG can be seen as providing a measure of independent scrutiny of the scheme, but as discussed at paragraphs 122-131, its review was rushed, limited in scope, and flawed.286

280

Value-for-money is based not only on lifetime costs of a project but also on broader considerations. It can be demonstrated by comparing the costs and benefits of proceeding with the project using conventional public sector purchasing arrangements with those that would prevail if the alternative PPP approach were taken. Value-for-money is defined as using the fewest resources to achieve desired service outcomes considering a broad range of factors including service levels, cost, promotion of growth and employment, environmental considerations and other health, safety and economic issues. Accordingly, best practice in relation to PPPs requires that all projects, including those that have been selected following a competitive bidding process, demonstrate value-for-money. Neither of the reviews carried out by the OAG purport to have carried out and value for money assessment of the LPP. It has been recognized for over a decade now in Canada that a value-for-money analysis is an essential tool for assessing the relative economic benefit of a potential PPP scheme. The need for such a review is particularly important in the case where a P3 project is sole sourced. (See Paras. 24 and 32 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, pp. 906-908.) 281 Para. 32 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, p. 908. 282 Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, p. 69, fn5 and Answers to Undertaking given by Kent Kirkpatrick at his cross-examination, Respondents Record, Vol. 11, Tab Q, pp. 4986-4988. 283 Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1669-1677, pp. 450-453. 284 Exhibit 47 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 47, p. 1459. 285 Exhibit C to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab 8C, p. 371. 286 Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, p. 2678 and see this factum, paras. 122132.

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247.

Similarly, the legal opinion from Borden Ladner Gervais (BLG) 287 regarding whether the LPP was in conformity with the Citys Procurement by-law and the Municipal Act, may be pointed to by City as evidence of due diligence on its part. However, correspondence between City staff reveal that it was not truly independent. As well, the manner in which it was dealt with by City staff was tainted by the same lack of frankness and impartiality as discussed above.

248.

Of particular concern is the fact that City staff appear to have communicated in advance to BLG what they wanted the BLG opinion to say. Also of concern is the fact that the City Manager copied OSEG on his communications with the Deputy City Solicitor discussing the opinion.

249.

In response to emails from the public, questioning the Citys legal ability to sole source redevelopment of Lansdowne Park, the City Manager sent an email on Saturday, September 12, 2009, informing Kevin McCann of OSEG, Graham Bird, the Citys consultant, and Carey Thomson, Deputy City Solicitor, as follows:
I expect to have the full written legal opinion from BLG next week confirming (in addition to the legal staff opinion) that the partnership plan does not contravene in any way Councils own by-laws or procurement law or any provision of the Municipal Act, including bonusing. That should give any lawyer pause for thought before they venture any opinion on possible transgressions. 288

250.

As well, on Monday, September 14, 2009, Deputy City Solicitor, Carey Thomson, sent materials to BLG. Mr. Thomson provided a limited number of documents to BLG for the external legal opinion, but also provided his own draft legal opinion regarding the sole sourcing issue, an action which again would have affected the independence of the BLG opinion.289

287 288

Exhibit 48 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 48, p. 1468. Answers to Undertakings given by Kent Kirkpatrick, Respondents Record, Vol. 11, Tab Q, p. 5055. 289 Answers to Undertakings given by Kent Kirkpatrick, Respondents Record, Vol. 11, Tab Q, pp. 5073-5075.

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251.

In their opinion, BLG stated that entering into a contract with OSEG with respect to the Proposed Redevelopment Plan without a competitive procurement process would be lawful. However, they expressed uncertainty and qualifications including the following:
[W]e caution that a number of the issues we have been asked to analyse have not been the subject of judicial consideration as of the date of this memorandum and that some uncertainty remains as to the characteristics of certain aspects of the Proposed Redevelopment Plan. Consequently, we cannot guarantee that a court, fully apprised of the circumstances of this unique public/private partnership, would share our conclusions either in whole or in part.290

252.

However, despite the qualification in the BLG opinion, City Council was not provided with a copy of it. Instead they were merely given a summary which indicated that BLG had answered in the affirmative that the LPP could proceed without a competitive procurement process.291 This is yet another example of a lack of frankness and candour which affected the Citys ability to make a truly informed decision.

253.

Another serious examples of a lack of due diligence and good faith, by proceeding in a manner that favoured the private not public interest, concerned the Citys failure to obtain any independent assessment of the OHL franchise value. Yet the $10 million being paid for the team and recognized as OSEG Minimum Equity, was a value arrived at following private discussion among the principals of OSEG, one of who owns the Ottawa 67s, the OHL franchise in question, which will now be acquired as a limited partnership under the LPP.292

254.

It is well beyond any plausible standard of due diligence and good faith for the City to have simply acceded to this valuation without obtaining any other or independent advice.293

290 291

Exhibit 48 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 48, pp. 1468-1469. Exhibit 41 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 41, pp. 1350-1351. 292 Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1009-1015, pp. 283-284. 293 Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1015, 1049, pp. 284, 296.

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255.

The Lansdowne Partnership Plan is a complex, multi-level public-private partnership. As a result, a high level of due diligence was called for. Yet the City failed to meet the most basic standard of due diligence when it failed to take any steps to ensure that it was getting value for money. This is compelling evidence of bad faith. x. Arbitrary or Unfair Conduct

256.

Another indicia of bad faith is arbitrary or unfair conduct. This includes the failure to provide stakeholders with a meaningful opportunity to be heard.294 In the present case, there was a lack of meaningful consultation on many levels.

257.

For example, the City failed to advise or consult with the Ontario Heritage Trust in a timely manner. Lansdowne is home to two important heritage buildings which are respectively protected by heritage designations and by an agreement, in the case of the Horticulture Building, and an easement in favour of the Ontario Heritage Trust, in the case of the Aberdeen Pavilion.295

258.

In a letter to the City Manager from the Ontario Heritage Trust, dated May 21, 2010, the Trust expressed their concerns over the Citys failure to adequately consult with them and the disregard shown by the City with respect to heritage conservation at Lansdowne Park:
As a legal stakeholder and provincial approval agency for a large portion of the site the Trust needs to be closely involved in the design review and project team selection in order to ensure that the resulting designs are consistent with the easement agreement, and meet a high standard of architectural, landscape and urban conservation. The Trust cannot support the current approach to the redevelopment and sees some fundamental flaws in process, competition parameters, preliminary designs and heritage review. The partial demolition and relocation of the Horticultural building is contrary to the Trusts mandate, the easement agreement, the Ontario

294 295

See Langille, supra at para. 47. Paras. 53-54 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 204-205.

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Heritage Act, the Provincial Policy Statement of the Planning Act and cannot be considered as heritage conservation.296

259.

This general disregard exhibited by the City towards the heritage buildings affected by the LPP has led to the Lansdowne site being listed as one of the ten most endangered heritage places in Canada on the grounds that the proposed development is incompatible with the history of the 142 year old park.297

260.

As well, the Ontario Conservation Review Board has recently held in a decision that moving the Horticulture Building, as is called for, is a violation of conservation principles:
[I]t is the in situ location of the Horticulture Building at the traditional hub of exhibition and sports activity within Lansdowne Park that is its authentic environment. This is apart from its proximity to Aberdeen Pavilion. Its cultural heritage values or interests, notably contextual, are best protected in its original site. Relocation to a site farther east will lessen, and in the case of contextual will remover, these values or interests.298

261.

Had the City consulted in the manner they should have, they would have been more aware and sensitive to the heritage requirements of the site at an earlier stage of the project. Their lack of appropriate consultation on this issue is evidence of their arbitrary and bad faith conduct, as is their disregard for the heritage values of the site.

262.

The Citys attitude toward community parkland is another example of how they behaved in an arbitrary and unfair manner, disregarding the best interests of the local community.

263.

Despite the fact that there is very limited park space in the urban core, and what little does exist is of tremendous importance to local residents, the LPP allows for the establishment of a condo tower on the site of Sylvia Holden. This park was inaugurated by way of a

296 297

Exhibit V to the Ballard Affidavit, Applicants Record, Vol. 2, Tab V, pp. 574-575. Paras. 53-54 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 204-205. 298 Re: The Corporation of the City of Ottawa Intention to Repeal a By-law that Protects under s. 29 of the Ontario Heritage Act the Property Known as 957 Bank Street (Horticulture Building, Lansdowne Park), Ottawa Ontario, (May 24, 2011) Conservation Review Board, CRB 1101 at p. 28.

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resolution of the former City of Ottawa on December 21, 1994, and thus has been part of the urban community green space for a number of years.299 264. As well, the City failed to consult in a meaningful way with Ottawa residents about the LPP or respond to requests from Ottawa Community Associations for meetings to discuss the Plan or properly report on the views of those who were consulted. As well, the City did not take the views of the public into account in making decisions about the redevelopment of Lansdowne Park.300 xi. 265. Conclusion on Lack of Good Faith and Due Diligence

Therefore, in approving the LPP, the City acted illegally by failing to act in good faith. It not only ignored the requirements of its own by-laws, but it repeatedly failed to meet the standard of candour, frankness, impartiality and fairness that is required of municipal governments under the Municipal Act, as evidenced by its reliance on misleading or inaccurate materials and failure to keep proper business records. It failed to exercise any due diligence with respect to determining value for money. As well, it behaved in an arbitrary or unfair manner when it failed to adequately consult or give due regard to important heritage conservation principles.

C.

THE CITY HAS VIOLATED ITS OWN PROCUREMENT BY-LAWS i. Overview:

266.

It is well established as a foundational requirement of public law that governments and other public bodies act with a high degree of integrity, transparency and fairness when undertaking public procurement. Open, fair and competitive processes are the essential means by which these objectives are to be achieved.

299

Para. 58 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 205-206; Para. 4 and Exhibit 1 of the Affidavit of Dan Chenier, sworn December 21, 2010, Respondents Record, Vol. 6, Tab C and C1, pp. 3401, 3407. 300 Paras. 34-43 of the of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, pp. 204-205.

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267.

In the present case, the City abandoned these principles, first by accepting an unsolicited proposal from OSEG to provide the very goods, services and construction that were already the subject of a competitive procurement, then by improperly halting and ultimately abandoning that public competitive process while it carried on private discussions with OSEG, and finally by proceeding with a sole source procurement from OSEG for those same goods, services and construction.

268.

In so doing, the City disregarded and acted in breach of its procurement by-laws and the requirements of s. 270 of the Municipal Act.

269.

The Citys subsequent reliance on exceptions permitted under its procurement rules in exceptional circumstances essentially where no other means of supply exists have no application to the OSEG proposal. Moreover these exceptions were invoked well after key decisions were made to proceed with the OSEG proposal, and in circumstances that belie the good faith of the City. This Honourable Court has specific jurisdiction to quash a bylaw of a municipality for illegality.301 ii. Public Procurement

Guiding Principles: 270. As established by case law, public procurement requires that government bodies, including municipalities, act with a high degree of integrity, transparency and fairness. Public procurement is not the same as private procurement since it involves public funds:
Confidence in the integrity of government bidding processes is a matter of considerable public importance.302

271.

Public procurement must be viewed as distinct from the purely private realm of contract law:

301 302

Section 273(1) of the Municipal Act. Coco Paving (1990) Inc. v. Ontario (Minister of Transportation) (2009), 79 C.L.R. (3d) 166, [2009] O.J. No. 2547 [Coco Paving], at para 13.

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The most important difference [between public and private procurement] is the fact that municipalities undertake their commercial and contractual activities with the use of public funds. Another consideration justifying different treatment of public contracting is the fact that a municipality's exercise of its contracting power may have consequences for other interests not taken into account by the purely consensual relationship between the council and the contractor. For example, public concerns such as equality of access to government markets, integrity in the conduct of government business, and the promotion and maintenance of community values require that the public procurement function be viewed as distinct from the purely private realm of contract law. Finally, it must be remembered that municipalities, unlike private individuals, are statutory creations, and must always act within the legal bounds of the powers conferred upon them by statute. In particular, council members cannot act in pursuit of their own private interests, but must exercise their contractual powers in the public interest.303

272.

The essential objective of government procurement policies are:

(1) Fairness to competitors in the procurement system. A fair procurement system that applies one set of transparent rules to all bidders increases confidence in the system, and encourages increased participation in competitions. This maximizes the probability that the government will get good quality goods and services that meet its needs, at minimum expense to the taxpayer. In short, fairness gives taxpayers value for the taxes they pay. (2) Ensuring competition among bidders. When bidders are placed on a level playing field and compete, it is more likely that government will get good quality goods and services that meet its needs, at minimum expense to the taxpayer. Competition also gives taxpayers value for the taxes they pay. (3) Efficiency. This speaks directly to the government getting good quality goods and services at minimum expense. This also speaks to the need for a procurement system to run in a timely, practical manner without causing unnecessary expense. (4) Integrity. A procurement process with integrity increases participants' confidence in the procurement system and enhance their participation in it. This increases the probability that government will get good quality goods and services that meet its needs, at minimum expense to the taxpayer. A procurement process with integrity also gives taxpayers value for the taxes they pay.304

273.

The City of Ottawa must also conform to the requirements of the Agreement on Internal Trade (AIT), Annex 502.4, which applies to purchases in Canada of goods and services equal to or in excess of $100,000, and of construction equal to or in excess of $250,000. The City must also conform to the Agreement on Government Procurement between Canada and the United States, which applies to the procurement of construction services

303

Shell Canada Products Ltd. v. Vancouver (City), [1994] 1 S.C.R. 231 at pp. 240-241 McLachlin J. (as she was then) in dissent. 304 Canada (Attorney General) v. Almon Equipment Ltd., 2010 FCA 193 (CanLII), 2010 FCA 193 at para. 23.

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by the City of Ottawa and many other Canadian municipalities that take place before October 2011.305 274. According to the evidence of Professor John Loxley, the first and essential principle of both domestic and international procurement regimes is that public sector procurement must proceed by way of a competitive bidding process for any significant purchase or contract for goods and services, except in extraordinary circumstances. This is because the solicitation of competing bids for the provision of goods and services is regarded as by far the most effective approach for assuring that procurement processes are transparent, fair to all potential suppliers and, most importantly, provide taxpayers with the assurance that they have obtained the best value-for-money when public funds are being spent.306 275. The importance of fair and transparent public procurement at the municipal level and the national/international requirements are also reflected in s. 270 of the Municipal Act, which requires a municipality to not only put into place a procurement policy, but also to maintain it:
(1) A municipality shall adopt and maintain policies with respect to the following matters: 3. Its procurement of goods and services.

276.

Thus, where a municipality adopts procurement policies/by-laws but ignores their requirements, as is the case here, it is acting in a manner that is entirely inconsistent with the Municipal Act. Furthermore, since the procurement policy has to be both adopted, and also maintained, then waiving all procurement requirements for the entirety of a major municipal project is obviously in violation of the intention and substance of s. 270.307

305 306

Para. 8 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, pp. 900-901. Para. 9 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, p. 901. 307 This argument also applies with respect to the waiver by the City of By-law no 2002-38 (Sale of Real Property). Under this by-law, where land is leased for longer than 21 years (as is the case with the LPP), it must be declared

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277.

The Ontario Court of Appeal has accepted the premise that a by-law in violation of a procurement policy is also a violation of s. 270 of the Municipal Act:
There can be no doubt that disposition, in s. 270(1) and in NOTLs disposition policy, includes a license or transfer of possession as represented by the Third Agreement. As I have pointed out, Mr. Holloway and NOTL did not consider the Third Agreement to be governed by the disposition policy and so it was not followed in that NOTL did not by resolution declare the [dock] to be surplus. This is no mere technical matter. Surplus means land that is no longer required for the use of the relevant municipality. This interpretation conforms to the ordinary meaning of the word surplus something that is left over when requirements have been met: see 2015429 Ontario Ltd. v. Dynasty Homes (Wasaga Hills) Ltd., supra, at para. 57. It would be both wrong and unreasonable for NOTL to consider the dock, an important access point to the Niagara River, to be no longer required for the use of the . . . municipality. The 2008 by-law violates s. 270(1) of the Municipal Act, 2001 and NOTLs own disposition policy. It is void on that basis alone.308

Ottawa Procurement By-laws Adopt Competition as the Guiding Procurement Principle

278.

The guiding principles of public procurement policy are codified in the City of Ottawas Purchasing By-Law 50-2000 (Purchasing By-Law).309
2 (1) The objective of this By-Law respecting procurement is to obtain best value when purchasing goods, construction and services for the City while treating all suppliers equitably. (2) The guiding procurement principle is that purchases be made using a competitive process that is open, transparent and fair to all suppliers. 3. (1) Best Value means the optimal balance of performance and cost determined in accordance with a pre-defined evaluation plan;

279.

Section 20(1) of the Purchasing By-law requires that purchases are to be made using a competitive process that is open, transparent and fair, and that treats all suppliers equally.

surplus by by-law. (See Exhibit 86 to the Kirkpatrick Affidavit, Respondents Record, Vol. 6, Tab 86, p. 3093). While the City Manager recommended to Council that the LPP lands be declared surplus, Council did not follow that advice, instead waiving the requirements of the Sale of Real Property by-law, which, like the Procurement by-law, is required under s. 270 of the Municipal Act (Exhibit 85 to the Kirkpatrick Affidavit, Respondents Record, Vol. 6, Tab 85, pp. 3074-3075). 308 Niagara River Coalition v. Niagara-On-The-Lake (Town), 2009 CanLII 25982 (ON S.C.) at paras. 149-152 (emphasis added). (Overturned on other grounds on appeal in Niagara River Coalition v. Niagara-on-the-Lake (Town), 2010 ONCA 173 (CanLII) but the OCA did not question the finding that a violation of the municipal policy constituted a violation of s. 270 of the Municipal Act, see para. 65). 309 Exhibit 32 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 32, pp. 612, 625.

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Purchases exceeding $50,000, where owing to the nature or the requirement, suppliers are invited to propose a solution, should be done by way of a request for proposal (RFP).
20. (1) A Request for Proposal should be used where one or more of the criteria for issuing a Request for Tender cannot be met, such as: (a) owing to the nature of the requirement, suppliers are invited to propose a solution to a problem, requirement or objective and the selection of the supplier is based on the effectiveness of the proposed solution rather than on price alone, or (b) it is expected that negotiations with one or more bidders may be required with respect to any aspect of the requirement.310

280.

The paramountcy of competitive process, as the guiding procurement principle, is also reflected in the provisions of the Purchasing By-Law, that restrict the receipt of unsolicited proposals where a competitive procurement process is already underway. However, where such an unsolicited proposal is properly received, the City must then engage a more limited, but still competitive procurement process to solicit other proposals for the goods, services or construction that are the subject of the unsolicited bid. The provisions of Section 25 of the Purchasing By-Law, dealing with unsolicited proposals, are further defined in the Citys Ottawa Options Policy 2002.311

281.

Non-competitive purchases may be made only as an exception to the competitive procurement process, which is codified and confined to circumstances that come within the definitions listed in Section 22(1) of the Purchasing By-Law.312

282.

It is submitted that the Purchasing By-Law enacted to comply with Section 270 of the Municipal Act and national and international legal obligations as set out above, has superior legal status to any project specific by-law that may be enacted in an attempt to waive all procurement legal requirements. Project specific by-laws would also have to

310 311

Ibid. Exhibit 2 to Cross-Examination of Kent Kirkpatrick, May 5, 2011. 312 Exhibit 32 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 32, pp. 612, 625.

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directly comply with the intention and requirements of the Purchasing By-Law and Section 270 of the Municipal Act. iii. Exceptions to the Competitive Procurement Process Should be Narrowly Interpreted:

283.

Non-competitive procurement is permitted under Ottawa procurement rules but only in certain narrowly defined circumstances, such as where only one source of supply would be acceptable and cost effective,313 or where there is an absence of competitionand the goods, services or construction can only be supplied by a particular supplier and no alternative exists.314

284.

The legal authorities have consistently held that competition is the norm315 and that exceptions to competitive procurement processes for government authorities should always be interpreted very narrowly:
Attempts to rely on exceptions as a means of avoiding the maximum possible competition will not be permitted, and onus will be on the procurement authority to show any reliance on an exception is, in fact and in law, appropriate. [O]ne can avoid the open procurement process only in certain limited cases. If however, one attempts to rely on those exceptions as a means of avoiding the maximum possible competition then such behaviour will not be permitted. It is the Tribunals view that exceptions to the open competitive process should be read narrowly. Where evidence is presented to suggest that a limited tendering procedure is not justified, the onus will fall upon government departments to show that the use of these exceptions is, in fact and in law, appropriateThe true requirement is for the government to demonstrate the case for a sole sourcing.316

285.

As another example:
Article 506(12) of the AIT provides, in part, that [w]here only one supplier is able to meet the requirements of a procurement, an entity may use procurement procedures that are different from those described in paragraphs 1 through 10 in the following circumstances: . . . (b) where there is an absence of competition for technical reasons and the goods or services can be supplied only by a particular supplier and no alternative or substitute exists.

313 314

Ibid. Section 22(1)(c) of the Purchasing By-law. Ibid. Section 22(1)(d) of the Purchasing By-law. 315 In Business Systems Inc. (Re), 2002 CanLII 46962 (C.I.T.T.) (emphasis added) (See also Re Complaint Filed by Foundry Networks (23 May 2001), PR-2000-060 (CITT); Re Complaint Filed by Novell Canada, Ltd. (17 June 1999), PR-98-047 (CITT).) 316 Sybase Canada Ltd. (Re), 1997 CanLII 12034 (C.I.T.T.).

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In order for a limited tendering procedure to qualify under Article 506(12)(b) of the AIT, the following two key elements must be present: (1) there is only one supplier that can meet the requirements of the procurement; and (2) no alternative or substitute exists. The Tribunal has previously interpreted the provisions with respect to limited tendering very narrowly. This is consistent with the purpose of the trade agreements that emphasize that competition is the norm. The Tribunal has also required that, in instances when PWGSC has invoked a limited tendering procedure, the onus is on PWGSC to demonstrate that such a procedure is justified. It is of the opinion that PWGSC has failed in this regard. In the Tribunals view, it would have been quite reasonable and possible, in this case, for DNDs requirement to be written in terms of performance criteria and opened up to competition. Based on the evidence before it, the Tribunal is of the view that there may indeed have been other equivalent suits available on the market that could have satisfied the requirement. The Tribunal is of the view that it is only through an open competition that this question can be resolved...317 [emphasis added]

286.

Exceptions to procurement rules in the municipal context should similarly be narrowly interpreted and the onus should be on the City to establish they have met an exception with respect to the LPP. iv. The Receipt of the Unsolicited OSEG Proposal in October 2008 was Unlawful

287.

As discussed, on September 14, 2007, the process for revitalization of Lansdowne Park had begun at the City of Ottawa with a report to the Planning and Environment Committee (PEC).318 Consequently, on November 28, 2008 Council decided to proceed with a design competition that would seek competing proposals for the redevelopment of Lansdowne Park and reward the successful proponent with the right to negotiate an agreement with the City to carry out that undertaking.

288.

The Design Competition passed by Council on November 28, 2007, clearly followed the principles and was compliant with the requirements of the Purchasing By-Law, and the report to Council recommending the process underscored the benefits of proceeding with redevelopment plans by way of a competitive process, stating as follows:319

317 318

Patlon Aircraft & Industries Limited (Re), 2003 CanLII 54791 (C.I.T.T.). Exhibit 1 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 1. 319 Exhibit C to Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 228.

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Holding a competition, in itself, makes a statement of the importance of the lands and the need for design solutions beyond the ordinary; Competitions are broadly advertised and this brings the attention and interest of professional talents who may not normally work in the Ottawa area; The focus of both design professionals and the media enhances the exploration of, and debate around, potential design ideas; The competition process allows for public input; and The use of an outside jury adds credibility and professionalism to the process.320

289.

In fact the Design Competition was precisely the process authorized by the Purchasing By-law for a project such as the redevelopment of an important urban landmark property. Section 20(1), as noted above, specifically provides that an RFP process is to be used in the case of procurement for purchases exceeding $25,000 where:
[O]wing to the nature of the requirement, suppliers are invited to propose a solution to a problem, requirement or objective and the selection of the supplier is based on the effectiveness of the proposed solution rather than on price alone.321

290.

Nevertheless, while the design competition process was underway, City staff met privately with representatives of OSEG to discuss OSEGs plans for redeveloping Lansdowne Park, in other words to provide precisely the goods services and construction that were the subject of the Design Competition process.322

291.

Once the competitive process was framed and the project was underway, it was a violation of basic principles of open and fair competition for the City to carry on private meetings with one prospective proponent, or to encourage in any way the submission of one proposal to provide the goods and services otherwise subject to an ongoing procurement process.

320 321

Exhibit C to Ballard Affidavit, Applicants Record, Vol. 2, Tab C, p. 228. Exhibit 32 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 32, p. 625. 322 Exhibit C to Ballard Affidavit, Applicants Record, Vol. 2, Tab C, pp. 230-231.

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292.

This principle is embodied by the Ottawa Option Policy, 2002, which precludes the receipt of an unsolicited proposal where a competitive procurement process has been initiated or is planned to be initiated.323

293.

The Ottawa Option Policy was passed by City Council on September 30, 2002 as an amendment to Section 25 of the Purchasing By-Law,324 in part to specifically deal with P3 proposals such as the one submitted by OSEG. It provides:
The Ottawa Option provide the City of Ottawa with a method for receiving unsolicited bids for projects and then offer others an opportunity to improve and bid on the proposal, while at the same time protecting the ability of the original proponent to match any other competing bid. Adopting this approach overcomes many problems associated with traditional unsolicited bids. Typically, it is recommended that local governments should not consider unsolicited bids for a variety of reasons. For instance, the benefits of P3s are that they take advantage of competition among partners. Unsolicited proposals cannot be compared to proposals from other potential partners. Another possible concern with unsolicited bids is the potential for the perception of bias and unfair procurement procedures. The Ottawa Option overcomes these concerns by providing an approach whereby the City of Ottawa can receive unsolicited proposals for a project in a fair and practical manner. The process is as follows: A private Sector Participant submits an Unsolicited Proposal for a project which is innovative and, which is not initiated or is not planned by the City of Ottawa [emphasis added]

294.

The obvious intent of this provision is to prevent a proponent from jumping the queue by presenting an unsolicited proposal to provide goods and services that are the subject of an existent or planned competitive procurement process. To allow otherwise would be to fundamentally undermine the integrity of the Citys procurement rules, and confound the principles of fairness and transparency that are the cornerstones of public procurement.

295.

As acknowledged by the City Manager, upon the Design Competition Report being brought forward to Council in November 2007, the Lansdowne redevelopment project had

323

It should be noted that the Ottawa Options Policy was amended by City Council in February 2009 (See Exhibit 33 to Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 33) five months after the OSEG proposal was formally received in October 2008. As a result, it should have been received under the Ottawa Option Policy 2002. 324 Exhibit 2 to Cross-Examination of Kent Kirkpatrick, May 5, 2011, Tab 11 of the Applicants Reply Record, Vol. III, Tab 11, p. 534.

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been planned or was initiated to be planned for the redevelopment of Lansdowne Park.325 296. It was therefore entirely improper for City Staff, the Mayor or other members of Council to meet with OSEG representatives after that date, to discuss the OSEG proposal for the redevelopment of Lansdowne, and it was unlawful for City staff to receive and consider the unsolicited redevelopment proposal submitted by OSEG in October 2008. 297. Not only did the City breach the law and the Ottawa Option Policy by taking receipt of and proceeding to assess this OSEG proposal, but the City then used its improper consideration of the proposal to halt the Design Competition. Thus, apparently indifferent to the requirements of City procurement rules, Staff reported to Council in May 2008, that the Design Competition was delayed at least in part to give staff an opportunity to discuss OSEGs plans for Lansdowne Park and whether the CFL franchise was or was not tied to Lansdowne Park.326 298. That error was again compounded when Council failed to revive the Design Competition after being alerted to the fact that it had been suspended, and by agreeing, in November 2008, that the Design Competition would remain on hold pending the consideration of the OSEG proposal submitted the previous month. 299. While the Ottawa Option Policy was amended in February 2009, after the OSEG unsolicited proposal was submitted to the City in October 2008, those amendments did not obviate the need for the City to still engage a competitive process following the receipt of an unsolicited proposal in the narrow circumstances where that might be permitted. In any event the revised Ottawa Option Policy 2009 did not apply retroactively.

325 326

Cross-Examination of Kent Kirkpatrick, May 5, 2011, Q. 300, p. 75. Exhibit E to the Ballard Affidavit, Applicants Record, Vol. 2, Tab E, p. 250.

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300.

For these reasons, it was unlawful for Council to decide on April 22, 2010 that it would not proceed further with a competitive process for the redevelopment of Lansdowne Park, and instead instruct City Staff to negotiate a partnership agreement with OSEG to redevelop the Park. The negotiation of such an agreement was precisely the outcome to have been awarded to the successful proponent chosen at the conclusion of a transparent and fair competition, not one manufactured after a series of largely undocumented private meetings between the City and OSEG.327

301.

Moreover, while proceeding in this manner, there is no evidence that staff raised or Council considered the requirements of Ottawa procurement rules. v. The OSEG Proposal is Not Exempt Under s. 22 of the Purchasing By-law

302.

It is only after Council approved negotiations of a partnership plan with OSEG that, in response to concerns raised by Councillors and members of the public, City staff addressed the question of whether Ottawa procurement rules apply to the redevelopment of Lansdowne Park. Thus, the Citys consideration of the requirements of Ottawa procurement by-laws came well after the fact of having facilitated the one single proposal and after Council made key decisions to proceed with the OSEG scheme.

303.

Accordingly, in May 2009, the City Solicitor provided a written legal opinion to Council that stated that because Lansdowne Live Proposal involved real estate development, neither the Purchasing By-Law nor the Ottawa Options Policy applied.328 That opinion is clearly wrong, and a subsequent legal opinion provided by BLG did not support that finding.329

327

Exhibit 19 on the Cross examination of Kent Kirkpatrick, May 11, 2011, Applicants Reply Record, Vol. III, Tab 19, p. 748; Exhibit A to the Ballard Affidavit, Applicants Record, Vol. 2, Tab A, pp. 210 and 212; Exhibit B to the Ballard Affidavit, Applicants Record, Tab B, Vol. 2, p. 219; Exhibit G to the Ballard Affidavit, Applicants Record, Tab G, Vol. 2, p. 306; Exhibit F to the Ballard Affidavit, Applicants Record, Tab F, Vol. 2, p. 304; Exhibit 8 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 8, p. 103 and Exhibit 13 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 13, p. 144 328 Exhibit M to the Ballard Affidavit, Applicants Record, Vol. 2, Tab M, p. 443. 329 Exhibit 48 to the Kirkpatrick Affidavit, Respondents Record, Vol. 3, Tab 48, pp. 1468-1486.

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304.

In fact, the OSEG proposal and the redevelopment plan that followed from it, clearly fall within the definitions of goods, construction and services under the Purchasing By-Law. The OSEG proposal and the redevelopment plan are in essence the provision of land-use planning landscape design, business planning, architectural, and other services. The implementation and operation of the LPP will include professional services such as project and facilities management, architecture and design, engineering and construction, events planning and management, as well as the operation of sports franchises. These services clearly and often explicitly fall within the definitions and scope of Ottawa procurement rules.330

305.

Moreover, even if there was no outstanding Design Competition, it would still have been unlawful for Council to proceed without the benefit of the alternative competitive process under the Ottawa Options Policy. Where an unsolicited proposal is considered to be eligible to be received, under the Policy, a defined competitive process is still required.331

306.

Most importantly, no proposal to waive the application of the Purchasing By-Law under Section 22(1) thereof was ever put to or passed by Council. Moreover, even had Council purported to approve such a waiver, there is no reasonable basis on which the exceptions under Section 22(1) could have applied in the case of the OSEG proposal to redevelop Lansdowne Park.

307.

Section 22 (1) of the Purchasing By-Law codifies when the requirement for competitive bid solicitation for goods, services and construction may be waived. The two definitions that the City raises with respect to OSEGs proposal are:
(c) Where only one source of supply would be acceptable and cost effective.

330

Exhibit 32 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 32, p. 612, Section 3 and p. 629, Section

25.
331

Exhibit 2 to cross-examination of Kent Kirkpatrick, May 5, 2011, Exhibit 2 on cross-examination of Kent Kirkpatrick, Tab 11, Volume 3, Applicants Reply Record, p. 534.

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(d) where there is an absence of competition for technical or other reasons and the goods, services or construction can only be supplied by a particular supplier and no alternative exists.

308.

The City has failed to establish, as it has the onus to do, a valid basis upon which the OSEG proposal could be seen as falling under these exemptions, other than to point to the fact that OSEG has a conditional franchise from the CFL to establish another football team in Ottawa. At best, this would have uniquely qualified OSEG to be a tenant at Frank Clair Stadium once it was refurbished.

309.

There is certainly no evidence to support the notion that OSEG was the only entity qualified to manage the project of constructing a stadium, or provide facilities management services for the Stadium or Arena. There is no evidence that OSEG has experience with respect to either of these services.332

310.

Even if one were to accept that OSEG, the CFL and Frank Clair Stadium were inextricably linked, which they were not, this does not mean that OSEG meets any of the criteria of 22(1)(c) or (d) with respect to the entire redevelopment of Lansdowne Park.

311.

Certainly there are alternatives to proceeding with the redevelopment project other than in the form of a highly complex and integrated public private partnership scheme.

312.

The fact that the redevelopment of Lansdowne Park was amenable to a competitive procurement process is obvious. In fact Council approved the Design Competition which was just such a process. While OSEG might have won such a competition, the City was not entitled to abandon the Design Competition and its own rules, simply because OSEG expressed interest in the project.

313.

Furthermore, there is no evidence to support the notion that OSEG could not have responded to the Design Competition. There is evidence that OSEG preferred not to

332

Cross-Examination of Kent Kirkpatrick, May 5, 2011, pp. 117-118, Qs. 486-492 and pp. 145-146, Qs. 596-599.

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participate in the Design Competition because of a professed lack of confidence in the competitive process Council had formally approved.333 There is also evidence that OSEGs participation in the redevelopment of LPP was not contingent upon it being given full redevelopment rights to the Park.334 314. It is illogical to suggest that principles of transparent and accountable governance that underlie the Purchasing By-Law and s. 270 of the Municipal Act, should be less applicable to a major redevelopment requiring substantial public investment than to such public purchases as the acquisition of office equipment. 315. There was, and still is no valid basis for asserting that the competitive procurement process of the Citys Purchasing By-law did not apply to the redevelopment of Lansdowne Park. vi. 316. Other Untendered Procurement Contracts

In addition to proceeding by way of a sole source procurement for the design, architectural, financial planning and other services OSEG has provided in developing the LPP, the City also proposes to sole source from OSEG various professional services relating to the implementation of the LPP. As set out in the Project Agreement Framework, these include the following contracts. (a) Stadium Project Management Agreement335

317.

Pursuant to the Stadium Project Management Agreement, OSEG will: (i) take carriage of the development of the stadium plans and specifications set out in the Project Agreement; (ii) cause the construction of the Stadium under the Stadium Construction Contract; and

333 334

Para. 8 of the Ballard Affidavit, Applicants Record, Vol. 2, Tab 4, p. 192. Exhibit 6 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 6, p. 99. 335 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2577.

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(iii) provide day-to-day supervision of Agreement on behalf of the City

the

Stadium

Construction

OSEG will charge project management fees during construction consisting of reimbursement for staff allocated to stadium construction and reimbursement of expenses.336 (b) 318. Urban Park Project Management Agreement337

Pursuant to the Urban Park Project Management Agreement, OSEG will act as project manager for the construction of the urban park. The agreement is anticipated to be

between the City, Parks Canada and the NCC, as the owners of the urban park lands, and OSEG, as manager. OSEG will charge the following fees under the agreement: 319. Operation during term: five percent of the annual budget costs plus reimbursement for staff allocated to urban park, provided that such fee is included in the waterfall. Renovation/redevelopment: ten percent of the cost thereof. Parking Construction Management Agreement (Tier 3).338

Pursuant to the Urban Park Property Management Agreement, OSEG will manage the urban park, Aberdeen Pavilion and Horticultural Building. The agreement is anticipated to be between the City, Parks Canada and the NCC, as the owners of the urban park lands, and OSEG, as manager.

OSEG will charge the following fees under the agreement: operation during term: five percent of the annual budget costs plus reimbursement for staff allocated to urban park, provided that such fee is included in the waterfall renovation/redevelopment: ten percent of the cost thereof

336 337

Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2575. Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2577. 338 Ibid.

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(c) 320.

Parking Construction Management Agreement

The agreement pursuant to which OSEG will: (i) cause the construction of the parking structure, and (ii) provide day-to-day supervision of the Parking Construction Agreement on behalf of the City. OSEG will charge project management fees during construction of three percent of hard and soft costs of construction. (d) Parking Management Agreement

321.

Pursuant to the Parking Management Agreement, OSEG (or an operator engaged by OSEG) shall operate and maintain all of the parking spaces within the parking structure. The Parking Management Agreement will be entered into by the parking operator with each relevant person related to each of the project components.

322.

There is no evidence that any of these contracts would qualify for exemption under s. 22 of the Purchasing Bylaw. In fact, there is no indication that the OAG, BLG, City Staff or Council even considered the question. The fact that OSEG plans to contract out construction of the Stadium belies any notion that OSEG is uniquely qualified to carry out all of the services required to implement the LPP. Moreover, it is difficult to imagine a basis upon which it might be argued that an exemption under s. 22(1) of the Purchasing Bylaw is warranted so that sole source contracts can be awarded to OSEG to manage the urban park and the parking garage.

323.

As for the contention that the SS&E proposal met the requirement for competition, it is only necessary to point out that the SS&E did not make any proposal for redevelopment of Lansdowne Park.

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vii. 324.

Procurement and International Trade Law

As noted, the City of Ottawa must conform to the requirements of the Agreement on Internal Trade (AIT), Annex 502.4, which applies to purchases in Canada of goods and services equal to or in excess of $100,000, and of construction equal to or in excess of $250,000, along with the Agreement on Government Procurement between Canada and the United States (CUSPA), which applies to the procurement of construction services by the City of Ottawa and many other Canadian municipalities that take place before October 2011.339

325.

Section 10 of Ottawas Purchasing By-Law, with which even unsolicited proposals must comply, provides that:
(1) Procurement by the City may be subject to the provisions of trade agreements. (2) Where an applicable trade agreement is in conflict with this By-law, the trade agreement shall take precedence. (3) Supply Management shall advise Directors where a procurement action may not conform to an applicable trade agreement as early as possible in the procurement process. 340

326.

Under the terms of the recently negotiated CUSPA, municipalities are exposed to claims for compensation by other suppliers of the construction and related services that are subject to the Agreement. Moreover, the provincial government is obliged to establish interim measures to preserve the interests of US bidders, including the suspension of the procurement process.341

339 340

Para. 8 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, pp. 900-901. See s. 10 of the Purchasing By-law, Exhibit 32 to the Kirkpatrick Affidavit, Respondents Record, Vol. 2, Tab 32, p. 618. 341 Canada-US Agreement on Government Procurement (CUSPA), 16 February 2010.

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327.

Thus, under CUSPA rules, the Province must establish dispute procedures for US suppliers that wish to complain that a Canadian government, including municipal governments, failed to comply with its procurement obligations under the Agreement.342

328.

By proceeding with the OSEG proposal the City, having failed to consider the obligations of the City under CUSPA, has acted in a manner that was contrary to its international and national obligations. viii. Conclusion:

329.

The Applicant submits that the City acted illegally in proceeding with a sole-source procurement for redevelopment of Lansdowne Park, in the first instance by accepting a proposal from OSEG to redevelop the Park while a competitive procurement process was underway to solicit just such proposals, and ultimately by approving the LPP without having complied with the terms of the Purchasing By-law. The April 22, 2009 and June 28, 2010 by-laws are null and void as being in contravention of the intention and substance of s. 270 of the Municipal Act.

D.

THE CITY HAS ILLEGALLY BONUSED OSEG i. Overview:

330.

Section 106 of the Municipal Act prevents a municipality from assisting any commercial enterprise through the granting of bonuses. The prohibition explicitly prohibits, as a deemed bonus, the giving or lending of property, including money, and the leasing of property at below fair market value.

331.

Contrary to this express prohibition, the City has assisted OSEG by providing leases at below market value, by providing financial assistance to acquire and operate CFL and

342

Ibid. Appendix C, s. 16.

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OHL franchises, and by providing preferential terms with respect to OSEGs return on their equity under the Lansdowne Partnership Plan. 332. This assistance provided by the City confers obvious benefits on OSEG unsupported by any corresponding concomitant obligations for the benefit of the City. This bonusing under the LPP scheme is directly contrary to s. 106 of the Municipal Act. ii. 333. The Prohibition on Bonusing

The prohibition on providing assistance to a commercial enterprise, such as OSEG, is set out in s. 106(1) of the Municipal Act:
106.(1) Despite any Act, a municipality shall not assist directly or indirectly any manufacturing business or other industrial or commercial enterprise through the granting of bonuses for that purpose. (2) Without limiting subsection (1), the municipality shall not grant assistance by, (a) giving or lending any property of the municipality, including money; (b) guaranteeing borrowing; (c) leasing or selling any property of the municipality at below fair market value; or (d) giving a total or partial exemption from any levy, charge or fee.343

334.

Where a violation of s. 106 is found, a by-law can be quashed for illegality even if it was passed in good faith and for a valid municipal purpose. 344

335.

It is important to note that bonusing under this provision is defined very broadly and includes both direct and indirect assistance. Assistance is further deemed to include the giving or lending of property, including money, and the leasing of property at below fair market value. In passing s. 106, the legislature clearly intended to capture, and prohibit, a wide range of assistance, and singled out specific forms of assistance in particular for express prohibition.

343 344

Municipal Act, 2001, S.O. 2001, c. 25. 1085459 Ontario Ltd. v. Prince Edward County (Municipality), 2005 CanLII 28851 (ON S.C.) [Prince Edward County].

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336.

A broad and remedial interpretation of the prohibition on bonusing is consistent with s. 64(1) of the Legislation Act, which provides that every Act shall be interpreted as being remedial and shall be given such fair, large and liberal interpretation as best ensures the attainment of its objects. The specific deemed examples of prohibited bonusing given in s. 106(2) of the Municipal Act are not exhaustive. Thus, the language chosen by the legislature suggests an intention that the prohibition be applied to all situations of bonusing, whether simple or complex. An interpretation which limits or restricts the application of the wide prohibition contained in s. 106 to simple or straightforward situations would defeat its purpose, be inconsistent with its language, and lead to the untenable result that so long as a deal is complex it is above judicial scrutiny.345

337.

In this respect, the legislation provides for certain limited exemptions to the prohibition in s. 106, in sections 107 through 110 of the Municipal Act. Thus, where the legislature intended s. 106 to not apply, it has identified the explicit instances. There is no warrant for reading any other exceptions into s. 106 itself. Certainly, there is no exemption whatsoever for public-private partnerships. No matter how complex, where a municipality offers assistance, including the forms of assistance explicitly prohibited by s. 106(2), it is in breach of the legislative prohibition.

338. 339.

None of the statutory exemptions to s. 106 appear to apply in the case at bar. In general, a bonus in the municipal context has been defined as a benefit conferred by a council upon a person over and beyond benefits conferred upon other ratepayers and inhabitants which involves either expenditures, direct or indirect, of corporate funds, or the

345

To the extent that the B.C. case, Nelson Citizens Coalition v. Nelson (City), [1997] B.C.J. No. 138 [Nelson] stands for the principle that bonusing prohibitions should be interpreted restrictively, it should be read with some caution in light of the difference between s. 106 of the Ontario Municipal Act, and s. 292 B.C. Municipal Act, R.S.B.C. 1979, c. 290, in force at the time. Notably, the specific examples of assistance in the B.C. act are narrower and do not include exemption from any levy, charge or fee or leasing or selling any property of the municipality at below fair market value.

- 100 -

surrender of a right or claim of the municipality to collect funds by way of taxes or otherwise from such person.346 340. There is little jurisprudential guidance concerning s. 106. However, in 1085459 Ontario Ltd. v. Prince Edward County (Municipality), this Court discussed the meaning and application of s. 106 at some length and held, in obiter, that even taking a restrictive approach to the threshold required for finding unlawful or prohibited assistance, any obvious advantage to a commercial enterprise was a bonus for the purposes of the Municipal Act.347 341. In that case, the Court held that a $115,000 upfront payment to an IT company as part of a contract for high-speed internet services for the County was a bonus, even though the payment was to be paid back by the company over the course of five years through a reduction in charges to the municipality.348 342. Thus, according to that decision, a benefit under s. 106 includes the provision of any form of financial assistance to a commercial enterprise, even where that assistance is paid back over time and granted in the context of the provision of a service which will benefit the municipality. 343. In more complex cases involving large commercial deals, the Court may look at the extent to which a corresponding concomitant benefit has been accorded to the municipality in exchange for the advantage granted to the commercial enterprise. 344. In Nelson, supra, a case which involved the anti-bonusing provision under the Municipal Act of British Columbia, the Court was asked to consider whether an agreement

346

Rogers, Ian McFee, The Law of Canadian Municipal Corporations, 2nd ed. (Toronto: Carswell, looseleaf) at p. 864 (emphasis added). 347 Prince Edward County, supra at para. 17 (emphasis added). 348 Ibid.

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concerning the development of a hotel/marina complex on the Citys waterfront constituted the according of assistance to developers. 345. In that case the Court held that, under the B.C. legislation, in determining whether a bonus has been conferred, the Court must have regard to the agreement between the municipality and the commercial enterprise as a whole, in order to determine whether it confers an obvious advantage on the enterprise for which there is no concomitant obligation in return that benefits the municipality. The Court found after carefully analyzing the facts and the terms of the agreement before it, that any advantage conferred by the City was offset, on a relatively equal cost basis, by the corresponding benefits provided by the developer to the City.349 346. Helpful guidance can also be found in some early cases which were based on historic versions of anti-bonusing statutory prohibitions. 347. For example, in Keay v. City of Regina, the Court stated that a bonus could be a transfer of land, either without consideration or for a totally inadequate consideration. In that case, the Court found that a lease of lands for a term of ninety-nine years at the rent of twentyfive dollars per annum to be a bonus.350 348. Similarly, in Listowel (Town) v. Listowel Casket Co., the Court found that a lease of land for a term of eight years for an annual rent of $1.00 was a bonus.351 349. It is worth noting that a bonus does not simply mean something for nothing. Rather, as was the case of Ward v. City of Edmonton, a bonus imports some direct or indirect consideration to the Municipality.352 Thus, the fact that the City gets some benefit from

349 350

Nelson, supra at 65. Keay v. City of Regina, [1912] 6 D.L.R. 327 (Sask. Sup. Ct.) at paras. 1-2. 351 Listowel (Town) v. Listowel Casket Co., [1943] O.J. No. 156 (On. Sup. Ct.). 352 Ward v. City of Edmonton, [1932] A.J. No. 29 at para. 17.

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the party to whom they are according assistance, does not mean that a bonus has not been accorded.353 350. In summary, as suggested by the case law, any obvious advantage or any benefit unsupported by any concomitant obligation benefiting the City must be found to be a bonus. Moreover, where assistance takes the form of assistance specifically itemized in s. 106(2), such actions should, by statutory direction, be deemed to be prohibited assistance. iii. 351. Bonuses Accorded by the City to OSEG

The Nelson case stands for the proposition that when the agreement between the City and commercial enterprise involves a complicated matrix of covenants, the agreement must be viewed as a whole to determine whether an advantage or benefit has been accorded the enterprise and there in no concomitant obligation that benefits the City.

352.

However, where there is clear breach of s. 106 of the Act, there is no need for the court to delve into the complexities of a partnership scheme. As this Court has held, where such a bonus is found to exist, a reciprocal obligation of approximately equivalent monetary amount will not obviate the breach. In our submission the lease of city property under the LPP for a nominal rent represents assistance to OSEG, a commercial enterprise, and therefore clearly violates the prohibition set out by s. 106(2)(c) of the Act, (a provision which has no equivalent in the BC legislation before the Court in the Nelson case). Further submissions on this point follow below.

353.

However, the leases to be established under the LPP scheme do not represent the only form of assistance provided to OSEG by the City. For the purpose of determining whether

353

See also Prince Edward County, supra at para. 17.

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these other forms of assistance represent the granting of bonuses, an inquiry into some of the complexities of the scheme is required. 354. Certainly such an inquiry becomes more difficult with the complexity of the scheme, but the legislature did not intend the anti-bonus provisions of the Municipal Act to apply only to uncomplicated transactions. 355. It is also relevant to point out that the challenge of analysing the complexities of the LPP, is made more difficult because City has rejected the two foremost methods for ensuring that the City will receive benefits under the scheme that are commensurate with the advantages accorded its partner: i) a competitive procurement process; and ii) an independent value for money assessment.354 356. As Professor Loxleys uncontroverted evidence attests, the complexity of P3 schemes only heightens the need for both a competitive process for choosing the successful partner, and then for assessing whether the P3 actually provides good value for money.355 357. As this Court has pointed out, public-private partnerships have become an increasingly common modality for carrying out municipal undertakings. Their inevitable complexity must not however become a device for frustrating meaningful public review, or allowing municipalities to ignore the prohibition on providing bonuses. 358. While the LPP certainly involves a complicated matrix of covenants, it is not difficult to identify the key advantages and benefits established under the scheme, particularly when one considers how these are exchanged in regard to the key elements of the LPP.

354 355

Para. 40 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, p. 910. Paras. 5, 9 and 24 of the Loxley Affidavit, Applicants Record, Vol. 3, Tab 7, pp. 899, 901, 906.

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iv. 359.

The Lease of City Facilities and Property to OSEG Are Bonuses

Granting assistance by leasing or selling any property of the municipality at below fair market value is prohibited under s. 106(2)(c) of the Act. Under the LPP, the City proposes to lease facilities and land owned by the City to OSEG for a period of 30 years for a nominal rent of 1$ per year.356 These leases clearly violate the prohibition set out in s. 106(2)(c).

360.

While anti-bonusing provisions of the Municipal Act are similar to those of B.C. municipal legislation, the specific prohibition of s. 106(2)(c) is not found in s. 292 of the B.C. statute which provides only that council may not grant assistance to a commercial enterprise by granting as a gift property owned by the municipality.357

361.

The explicit prohibition of s. 106(2)(c) is unqualified and must be interpreted and applied in accordance with the ordinary meaning of the words therein. The Stadium, Arena and the portion of Lansdowne Park to be leased for commercial development, are the property of the City and Ottawa. Each of these City assets has a value in the tens of millions of dollars. The lease of these properties under LPP is to limited partnerships, in which OSEG, a commercial enterprise, has a 50% interest.358

362.

To enter into these leases for a period of 30 years at a nominal rent, is clearly to lease property of the City of Ottawa at below market value, and therefore to grant bonuses contrary to s. 106 of the Act. The Applicant submits that this should end the inquiry. The prohibition set out by s. 106 is unqualified and is clearly breached in the case of leases for the stadium, arena, and related parking facilities. In the face of clear non-compliance with the prohibition set out by s. 106(2)(c) there is no need for the type of comparative analysis that engaged the Court in the Nelson case.

356 357

Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2567. Nelson, supra at para. 20. 358 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2557

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363.

However, if this submission is rejected, a consideration of the leases in question reveals that they establish no concomitant obligation for OSEG that would benefit the City and approximately offset the lease of City property at below market value. A consideration of the particulars of these leases follow. (a) The Stadium Lease

364.

As noted, the Stadium and Arena are being leased for thirty years at a nominal annual rate to a limited partnership in which OSEG has a 50% interest.359 Even if one looks beyond the terms of the lease agreement itself, there is no concomitant obligation on the part of OSEG that confers a benefit on the City that is roughly equivalent, or even nearly so. To begin with, revenues generated by these facilities may at first instances be used to reduce losses on other components of the project, including the sports franchises, with any remainder being paid into the waterfall which disproportionately rewards OSEG in the manner noted above.360

365.

It is true that the City is assured that a reserve fund will be established with respect to the maintenance of this capital asset. However contributions to the reserve fund are first and foremost an obligation of the stadium limited partnership and other sources of revenue generated by the elements of the LPP.
361

Only in the event that there is insufficient net

cash flow, are the resources of OSEG called upon. Even in this case however, OSEG is entitled to earn interest on and the return of such funds under the waterfall.362 366. In addition, while the reserve funds are assigned a value under the closed system which is presented as a benefit to the City, the Rosen report argues that the reserve funds should

359 360

Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2566-2576. Cross-Examination of Kent Kirkpatrick, May 6, 2011, Q. 1369-1370, pp. 366-367. 361 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, pp. 2566-2576. 362 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2558 and Cross-Examination of Kent Kirkpatrick, May 6, 2011, Q. 1387-1390, p. 370.

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more properly be considered a benefit to the limited partnership which has the obligation to maintain facilities that it has the advantage of leasing at no cost.363 367. Moreover, the treatment accorded City and OSEG commitments under the LPP in this regard is entirely asymmetrical - the reserve fund is assigned a value, while the foregone rent from the Stadium and Arena is not. 368. The only cash return to the City in relation to the Stadium lease will be in regard to its Funding Equity which represents only 10% of the capital364 it will commit to building these and related parking facilities. However even this return should not be considered a concomitant benefit for the City because both the stadium and parking facilities in question are projected to operate at a profit.365 These profits would otherwise be available to service the debt the City will incur to build and refurbish these facilities. The same is true for the revenues the City would have otherwise derived from charging a market rent for these facilities, and would have derived from the sale of the premium seating, advertising and operation of concessions. (b) The Commercial Lease 369. Over ten acres of Lansdowne Park are being leased for commercial development by the City for up to 70 years, the first 30 of which for an annual rent of $1 year. The Deloitte report, which considered an earlier OSEG proposal that varied in detail but not in substance, strongly advised against the deferral of such payments, which it viewed as properly being given priority over payments to OSEG.366 370. Contrary to this advice, any payments in lieu of a market rent to the City (Deemed Equity) are placed at level 5 of the waterfall. This means that all other entitlements arising under
363 364

Exhibit B to the Mak Affidavit, Applicants Reply Record, Vol. 1, Tab 3B, p. 80. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2638. 365 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2637. 366 Exhibit B to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab 8B, p. 359.

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the waterfall, including those to subsidize the sports franchises, will receive priority over the payment to the City on account of this Deemed Equity. 371. Thus while the City is to receive a return of 8% return on its Deemed Equity of $23.5 million according to present projections, it will not receive its first payment on this account until sometime after 2038.367 372. Moreover, even if one were to regard these future payments as representing some rough equivalence as this Court has opined, such an exchange does not obviate the fact that the lease is a bonus contrary to s. 106. v. The Assistance Provided to OSEG to Reimburse it for the Costs of Acquiring and Operating the CFL and OHL Sport Franchises are Bonuses

373.

Stripped of its complexity, the LPP may be seen predominantly as a scheme for conferring a number of obvious advantages on OSEG for the purposes of reimbursing it for the costs of acquiring and operating CFL and OHL franchises, and underwriting the risks of those franchises losing money.

374.

To begin with, nearly two-thirds of the initial capital committed to the scheme by OSEG, is on account of the acquisition and start up costs associated with the CFL and OHL franchises. Similarly the lions share of cash payments OSEG is to receive under the waterfall will be to reimburse it for these costs.368

375.

As detailed below, the costs to acquire the sports franchises are to be repaid from waterfall funds, together with accumulated interest at 8% annually. If the CFL franchise loses money, and it is expected to do so for some time
369

, losses will, at first instance, be

directly subsidized by profits from other components of the LPP. If this cross subsidy is

367 368

Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2635. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2638. 369 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2611.

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insufficient, the remaining losses, together with accumulated interest, are to be repaid from the waterfall.370 376. This financial assistance is largely to be paid with revenues generated by facilities established entirely at public expense, or with foregone revenues that would otherwise be paid to the City as fair market value for land, facilities and rights that are instead being leased or granted at nominal cost to limited partnerships in which OSEG has a 50% interest and management control. 377. In particular this assistance provides obvious advantages in the following manner: (a) The City has agreed to commit a portion of the revenues that will be generated by

facilities, rights and property it owns at Lansdowne Park, to reimburse OSEG for the $19.2 million it will spend to acquire CFL and OHL franchises (at level four of the waterfall) and to pay OSEG an 8% annual return on any outstanding balance of that sum (at level two of the waterfall);371 (b) Under the LPP net cash flow regime, the City has agreed that revenues will be

used to cover any operating losses of the OHL or CFL franchises, before net cash flows are paid into the waterfall;372 (c) Similarly, where cash revenues from other elements of the LPP are insufficient to

cover operating losses, OSEG is entitled to have payments it may make on this account treated as Additional Equity, which then earns interest at 8% annually (level 2) and must be repaid (level 3);373

370 371

Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1468-1473, pp. 388-390. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2590. 372 Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1468-1473, pp. 388-390. 373 Ibid.

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(d)

The City has agreed that these payments to OSEG from the waterfall will be made

even if the teams fail, subject only to the proviso that the CFL franchise operates for 5 years;374 (e) The City has agreed to provide indirect financial assistance to OSEG by assigning,

at no cost, certain rights to the limited partnerships (established to operate the sports franchises), including the rights to sell premium seating on game days, and to operate concessions at the Stadium and Arena.375 As described by the Deloitte study, the sale of

naming rights, corporate boxes and other rights represents a substantial source of revenue for the owners of sports facilities. Under the LPP at least some of these rights and associated revenues, which are estimated to be in the order of several hundred thousand dollars per year, have been assigned to the OHL and CFL franchises, not the Arena or Stadium.376 (f) The City has agreed to rent Frank Clair Stadium for the purpose of hosting CFL

games for an annual fee of $300,000, far less than the estimated market value for such rights. 377 378. In return for these advantages, the benefit the City points to is the right of first refusal to purchase the sports franchises if OSEG should put them up for sale.378 In addition, if the sports franchises make a profit, then after full reimbursement of all OSEG equity, together with interest thereon, the City is to share in one half the profits. Current projections do not anticipate this to occur for several decades to come, if at all.379

374

Cross-Examination of Kent Kirkpatrick, May 6, 2011, Qs. 1468-1473, pp. 388-390 and Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2557. 375 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2567. 376 Exhibit B to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab 8B, p. 363. 377 Exhibit B to the Bauman Affidavit, Applicants Reply Record, Vol. 2, Tab 8B, pp. 363 and Answers to Undertaking given by Kent Kirkpatrick at this cross-examination, Respondents Record, Vol. 11, Tab Q, pp. 5000-5001. 378 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2577. 379 Para. 70 of the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p. 3992.

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379.

In sum, these individual financial obligations of the City and risks assumed in regard to the sports franchises are measured in the tens of millions of dollars, and are accorded high priority under the waterfall scheme. The concomitant obligations of OSEG are nominal and benefit to the City will occur only if the teams operate at a profit for the next several decades.

380.

The disparity between the advantages the City is according to OSEG, and the benefits it is to receive in return, is obvious and stark. Therefore the direct and indirect assistance provided by the City to OSEG assists that commercial enterprise in regard to acquiring and operating the Sports Franchises, by granting bonuses, contrary to s. 106 of the Act. vi. The Citys Investment In the Urban Park

381.

The other major element of the LPP is the construction of an urban park. The debenture to be issued by the City for $162 million to fund its obligations under the LPP will include $35 million to cover its share of the costs for establishing the urban park.
380

382.

The Citys financial commitment in regard to the urban park, provides indirect assistance to OSEG in at least two significant ways that offend the prohibition on granting bonuses under s. 106 of the Act.

383.

First, $6 million of the $35 million the City will spend on the public park, is to be on account of moving the Horticulture Building. Demolition and relocation of the Horticulture building has been part of the LPP from the outset and has always been regarded as necessary to accommodate OSEGs vision for retail commercial development to be built on Lansdowne Park.381

380 381

Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, pp. 2780-2781. Exhibit 12 to the Kirkpatrick Affidavit, Respondents Record, Vol. 1, Tab 12, pp. 132-133.

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384.

Second, unspecified amounts of the Citys budget for the Park will be spent on creating surface parking and a bus staging area. Such facilities will primarily support non-park activities, including the particular demands of providing transportation services for people attending events in the Arena and Stadium.382 vii. Municipal Tax Revenue and Avoided Costs Cannot be Regarded as a Concomitant Obligation of OSEG that Provides a Benefit to the City

385.

As described, the assessment that may be required to determine whether an obvious advantage has been accorded a commercial enterprise, involves a consideration of the advantages accorded and concomitant benefits received. However, it is not the purpose of the anti-bonusing provisions of municipal law to provide a vehicle for determining whether the City has made a good deal or not and the Applicant seeks no such determination here.

386.

However, the City contends that LPP represents an advantageous financial bargain for the City, and that cash flows will be positive for the City under the waterfall scheme. This contention might be taken as representation that no obvious advantage has been accorded OSEG under the scheme. Determining the validity of this claim, requires an examination of assumptions and analysis upon which it is based.

387.

These are set out in two primary documents. The first is the business model report prepared by PWC, and the other is the review of that report by the OAG. The PWC report declares that the LPP will be revenue positive for the City. It is this conclusion with which the OAG appears to agree, and which is presented as a central assertion of the report to Council recommending that it proceed with the LPP.383.

382 383

Cross-Examination of Kent Kirkpatrick, May 10, 2011, Qs. 1937-1940, p. 545. Exhibit 74 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 74, pp. 2756-2757.

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388.

Both the PWC and Auditors reports suffer from serious deficiencies, and these have been noted.384 For present purposes, it is the claim about positive cash flows that warrants closer scrutiny.

389.

That PWC Report presents a revenue neutrality analysis, which it states shows that this project is not revenue neutral, it is revenue positive.385 A review of that analysis reveals that it is based on two assumptions; i) that tax revenues from the commercial development can be considered a benefit the City derives under the scheme, and ii) that avoided costs can be similarly regarded. Neither assumption is sound, but whatever ones view of the validity of these assumptions, such putative benefits to the City cannot be considered a concomitant obligation of OSEGs, for reasons that follow. Municipal Tax Revenues

390.

The PWC Business Model assumes that 75% of retail, office, and related parking taxes are available for the purpose of assessing revenue neutrality because these revenues will be incremental386.

391.

Tax revenues derived from a commercial development cannot be considered a concomitant benefit that would offset a bonus provided by the City to facilitate that development for several reasons.

392.

To begin with, as previously discussed, the City does not intend to segregate tax revenues from the commercial development on Lansdowne Park to service the debt it will incur to meet its obligations under the LPP. The construct of dedicating such revenues is purely notional.387 But the notion itself, which was used to persuade Council and the public

384 385

See paras. 84-137 of this factum. Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2641. 386 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2641. 387 Exhibit 69 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 69, p. 2559 and Paras. 5 & 6 to the Supplementary Kirkpatrick Affidavit, Respondents Record, Vol. 8, Tab L, p. 3960.

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of the merits of the LPP, is entirely at odds with sound principles of municipal financing, and at odds with s. 106 of the Act.388 393. The legislative history of this provision shows that it is intended, inter alia, to preclude the use of bonuses to attract a particular business to a community that would not otherwise locate there.389 To suggest that a municipality could treat the tax revenues paid by such a business as offsetting a bonus it was accorded, simply turns the very purpose of this provision on its head. Section 106 would become, according to this reasoning, a provision to encourage rather than prohibit bonusing. 394. Such an interpretation of s. 106 of the Municipal Act is also inconsistent with the Tax Incremental Financing Act390, which exists for the purpose of allowing the use of municipal tax revenues to support redevelopment projects. The City has confirmed that it has not and does not intend to apply for tax relief under that statute.391 395. This concept of incremental taxation is also entirely unsound as a matter of municipal tax policy as well. The uncontroverted evidence of Professor Kitchen, an expert on the subject, put it this way:
In my opinion, the Citys proposal on incremental taxation, surplus revenue and dedicated tax revenue is not supported by any principle of sound municipal finance or best practice. Commercial development under the LPP is not being taxed at a higher rate than other comparable properties in the City and as such, there is no valid basis for considering any LPP tax revenue as incremental or surplus to the Citys needs.392

396.

He also offers the following opinion evidence:

If debt is financed by using tax revenue from certain commercial and retail properties to finance the capital costs of a sports stadium, it means that taxes on all properties in the City are used to finance the cost of servicing development on the Lansdowne site. As noted, this type of cross-subsidization violates a primary principle of a sound municipal finance system and it does not adhere to best

388 389

Paras. 24-27 of the Kitchen Affidavit, Applicants Reply Record, Vol. 1, Tab 2, pp. 25-27. Prince Edward County, supra at paras. 10-11. 390 Paras. 17-19 of the Kitchen Affidavit, Applicants Reply Record, Vol. 1, Tab 2, pp. 23-24 and Cross-Examination of Kent Kirkpatrick, May 11, 2011, Q. 2008, pp. 567-568. 391 Cross-Examination of Kent Kirkpatrick, May 11, 2011, Q. 2009, p. 568. 392 Para. 32 of the Kitchen Affidavit, Applicants Reply Record, Vol. 1, Tab 2, p. 29.

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practices in financing municipal spending. Furthermore, it becomes a more serious problem when the taxes from properties across the City are used to finance borrowing that is primarily benefiting the private sector. There is no basis in municipal finance principles or best practices for using public funds (taxes) to support private sector sports stadiums.393

397.

As Mr. Kirkpatrick confirmed, there is no Ottawa policy supporting the notion that some municipal taxes are incremental and may be assigned, even notionally, to service particular debts the City may incur. Moreover, as noted, the City failed to follow through on a motion that would have commissioned an independent report on whether such a practice would be sound in law and policy.394 Avoided Costs

398.

The PWC report also assumes that in calculating revenue neutrality it can include as benefit to the City, the avoided costs the City would otherwise incur if it continued with the status quo at Lansdowne park.395

399.

Putting aside the question of whether avoided costs estimates are accurate, the issue here is whether such avoided costs may be considered benefits that might offset an advantage provided to OSEG. The simple answer is no, for the obvious reason being that the benefit accorded by such avoided costs is not one provided by OSEG, but rather follows from capital investments made by the City. It is only in the case of potential backstop contributions to the reserve fund that any potential benefit might flow to the City. Even in this case however, a $1.3 million commitment to the reserve fund is far less than the $3.8 million per year the City purports to be saving as avoided costs.
396

400.

The analysis carried out by PWC purports to establish that there is at least parity when the commitments of the City under the LPP are compared with the benefits that it is to derive

393 394

Para. 31 of the Kitchen Affidavit, Applicants Reply Record, Vol. 1, Tab 2, p. 29. Exhibit 73 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 73, p. 2670. 395 Exhibit 71 to the Kirkpatrick Affidavit, Respondents Record, Vol. 5, Tab 71, p. 2642. 396 Exhibit X to the Ballard Affidavit, Applicants Record, Vol. 2, Tab X, p. 594.

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from it. It is quite clear that only a small fraction of the money needed to service the Citys costs of servicing debt under the LPP will actually come from revenues generated by those investments. Rather, the positive cash flow projected by PWC depends upon notional revenues from taxes and avoided costs. We have argued that this claim is little more than a public relations exercise intended to misrepresent the financial impacts of the LPP on municipal taxpayers. However, quite apart from the question of good faith, the inclusion of such nominal benefits to the City as offsetting the very obvious advantages accorded OSEG does not meet the requirement that such advantages be met by concomitant obligations by OSEG that benefit the City. These nominal benefits clearly fall outside the scope of any trade off that might be read into s. 106 of the Municipal Act. viii. 401. Conclusion on Bonusing

The preceding submissions assert that under the LPP scheme, the City is assisting both directly and indirectly a commercial enterprise, OSEG, through the granting of various bonuses for that purpose. In the case of leases of City property at below market value, the breach of s. 106(2)(c) is clear and requires no further analysis.

402.

Other forms of assistance provided to OSEG require an understanding of the complicated matrix of covenants established by the LPP, and this exercise reveals a number of ways in which assistance is to be provided to OSEG for which OSEG has no concomitant obligation that benefits the City. This is particularly apparent in relation to OSEG costs to acquire and operate CFL and OHL franchises.

403.

The Applicant has also considered whether the Citys revenue neutrality analysis provides a basis for characterizing the assistance provided OSEG as anything other than granting improper bonuses.

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404.

It is not necessary to delve any further into the other complexities of the LPP to establish that clear, obvious advantages have been accorded under the scheme.

405.

Alternatively, if further assessment is warranted, when viewed as whole, the assistance described in some detail above clearly confers a number of obvious benefits unsupported by any concomitant obligations benefitting the City. Any temptation to view the scheme otherwise must ignore the following dominant features of the LPP that consistently reward and benefit OSEG, which include: (a) First, the gross disparity in the treatment accorded the respective capital contributions of the parties under the LPP.
397

100% of the capital committed by

OSEG, including payments made to honour the completion guarantee, fund shortfalls to the life cycle fund, or to cover net losses, is treated as equity under the LPP. In contrast, only 10% of the capital committed by the City is treated in this manner, and that percentage is further reduced if its investment in the urban park is taken into account, as it should be. (b)
398

Second, the priority of payment under the waterfall from cash revenues generated by the LPP significantly favours OSEGs equity over that of the City. This is most clearly evident in according priority to the repayment of OSEG Additional Equity, together with 8% interest thereon, over the repayment of the Citys Funding Equity, and over any interest payment on the Citys Deemed Equity.399

(c)

Third, if the LPP fails, OSEG losses are capped at $30 million, or the funds that it has invested at that time. The Citys liability under the scheme is capped at $50 million, but this figure ignores the ongoing losses the City will incur in having to

397 398

See discussion at paras. 133-137 and paras. 379-380 of this factum. Answers to Undertaking given by Kent Kirkpatrick at this cross-examination, Respondents Record, Vol. 11, Tab Q, pp. 4983-4987. 399 See discussion at paras. 92-96 of this factum.

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service outstanding debt obligations under the $162 million debenture it has agreed to issue to fund its obligations under the LPP.400 406. In the Applicants submission considering the LPP as a whole, confirms that there is no concomitant obligation of OSEG to offset the substantial and pervasive assistance the City provides to OSEG. For these reasons, this assistance must be regarded as granting bonuses contrary to s. 106 of the Municipal Act. PART V - ORDER REQUESTED 407. The Applicant respectfully requests the following Orders: (a) An Order quashing for illegality the by-law and resolutions of the Ottawa City Council made on June 28, 2010 and on November 19-22, 2010 in so far as they relate to the redevelopment of Lansdowne Park in the City of Ottawa; (b) An Order that nothing shall be done under the by-law until this Application is disposed of; (c) Such further and other relief as the circumstances of the case may required and this Honourable Court deem to be just. ALL OF WHICH IS RESPECTFULLY SUBMITTED THIS 13th day of June, 2011.

June 13, 2011

________________________________ SACK GOLDBLATT MITCHELL LLP Barristers & Solicitors 30 Metcalfe Street, Suite 500 Ottawa, ON K1P 5L4 Tel: 613-235-5327/ Fax: 613-235-3041 Steven Shrybman LSUC#: 20774B Fay Brunning LSUC#: 29200B Colleen Bauman LSUC # 53347J Lawyers for the Applicant-

400

Exhibit B to Mak Affidavit, Applicants Reply Record, Vol.1, Tab 3B, p. 68.

FRIENDS OF LANSDOWNE INC. Applicant

and

CITY OF OTTAWA Respondent

OTTAWA SPORTS AND ENTERTAINMENT GROUP and Intervener

Court File No: 10-49352

ONTARIO SUPERIOR COURT OF JUSTICE Proceeding commenced at Ottawa

FACTUM OF THE APPLICANT

SACK GOLDBLATT MITCHELL LLP Barristers & Solicitors 30 Metcalfe Street, Suite 500 Ottawa, ON K1P 5L4 Tel: 613-235-5327 Fax: 613-235-3041 Steven Shrybman LSUC#: 20774B Fay Brunning LSUC#: 29200B Colleen Bauman LSUC # 53347J Lawyers for the Applicant