On August 10, Ontario Superior Court Justice J. MacKenzie rendered his decision in the civil lawsuit between the City of Guelph and waste treatment technology company Super Blue Box Recycling Corp. (SUBBOR). Justice MacKenzie found in favor of the city and dismissed SUBBOR’s $32-mllion breach of contract claim, awarding damages in favor of the city.
The judgment requires the company to pay the city’s legal costs, which amount to more than $4.5 million — though it’s unlikely the company will have to pay the full amount. SUBBOR must also remove its property from the land it leased from the city for its demonstration facility and return that land to its original condition.
SUBBOR has appealed the judge’s decision, asking that the ruling be set aside and also seeking $9.2 million in damages.
The court case and writing of the judgment took several years, with many municipalities and waste technology companies anxious to learn the outcome. What went wrong between the two parties, they wondered? Who was at fault?
As Justice MacKenzie wrote, the overarching concerns raised in the litigation involve questions about the duty of performance of contractual obligations, the impact of that duty in interpreting the terms of a contract that sets out significant events or milestones, and “the duty of good faith performance upon a municipal corporation vis–vis a private sector party” in relation to a contract to demonstrate a novel technology relating to municipal solid waste management.
SUBBOR was a company established by Greg and Hubert Vogt, whose other company — Eastern Power (the parent of SUBBOR and also a third party in the lawsuit) — built a plant that successfully generates electricity from methane captured at the site of Toronto’s former Keele Valley Landfill. Their background generating energy from landfill gas made the Vogts’ proposal credible to take unsorted garbage and process it through an anaerobic digestion system and generate clean electricity, recyclables and peat. SUBBOR’s process had a high-tech dimension. The computerized process incorporated a novel heat treatment unit that used controlled explosions of steam to break down waste material.
Anaerobic digestion (AD) is a proven technology for a variety of waste streams, including municipal sewage sludge and animal manures. In Europe, many such plants also process municipal solid waste. However, large-scale plants in North America have often failed for financial or technical reasons. For example, a plant in Newmarket — only two hour’s drive from Guelph — has experienced technical problems and has been the subject of litigation and multi-million-dollar retrofits.
For these reasons, AD for solid waste treatment has a kind of “buyer beware” stigma in Canada. Yet the value proposition is compelling in light of current concerns about climate change, since AD — and the SUBBOR concept in particular — hold the promise of eliminating the escape of greenhouse gases from waste processing, and potentially garnering lucrative emissions trading credits. That was one reason why SUBBOR received millions of dollars from the federal Technology Partnership Canada program.
When the company’s owners went looking for a host community in 1997 to demonstrate their process at a commercial scale, the City of Guelph seemed like a good fit. Guelph has presented itself as a leader in waste diversion and innovation, and was the first city in Canada to build a two-stream Wet/Dry waste processing plant in the 1990s. The plant had experienced problems, however, and the city eventually switched to a three-stream collection scheme. It spent millions retrofitting its recycling plant, but the composting plant (the former “wet” waste processing facility) eventually failed, in part because of corrosion of its roof.
SUBBOR’s proposal to build an AD plant that — once proven — could potentially handle virtually all the city’s waste offered a sort of insurance policy against potential problems with the city’s waste processing equipment. The opportunity to demonstrate an innovative technology and once again become a waste diversion leader was irresistible, and a contract was developed and signed in 1998.
However, the city eventually claimed the process was never successfully demonstrated and the relationship between the municipality and the company deteriorated. After discussions with a mediator failed, SUBBOR sued the city for breach of contract, seeking $32 million in damages. SUBBOR alleged the city had acted in bad faith, had interfered with Guelph Hydro connecting a power line to the site, had unreasonably charged the company development charges for the construction of its facility, and imposed a tip fee for accepting waste from other municipalities.
The project and disagreements
The project commenced operations in January 2000. SUBBOR received 30 tonnes of solid waste, although not all system components were yet tested. The relationship between the parties quickly became strained. Even as the company approached the city to process all the city’s waste, in December 2000 the city began charging SUBBOR tip fees for waste received from third parties.
In February of 2001 an event occurred that later became crucial to the eventual litigation when the city informed the company that the second three-year term provided for in the 1998 agreement had commenced on January 28, 2000 — the date when SUBBOR received the initial 30 tonnes of waste. The city’s interpretation of the commencement date had the net effect of shortening the time horizon for the company to demonstrate its technology. SUBBOR eventually contested this interpretation, seeking a greater period of time to show that its system could work. Subbor didn’t contest the city’s claim of the January 2000 start date until long after the city sent Subbor its letter to that effect.
As these and other issues arose, the parties eventually agreed to engage a facilitator to help resolve their disagreements. Four meetings held between July 2001 and February 2002 failed to resolve the issues. In February 2002 the city took actions (including a “dump-lock”) that blocked SUBBOR from receiving waste for processing, based on the company’s refusal to pay invoices that it contested. (This was later removed when the company paid its bills.) The following month, the situation deteriorated further when the provincial environment ministry issued an order against the city over air biofilter issues arising from the city and SUBBOR’s facilities; this became another item of dispute.
In addition to the ongoing argument over the start date (and implied end) of the contract, the relationship was further clouded by a series of disagreements. Among other things, Guelph denied SUBBOR access to the city’s composting facilities for stabilizing its peat (until the company obtained ministry approval). Developing a peat test protocol proved difficult for both parties and the ministry.
By late January 2003 the city issued a letter requiring SUBBOR to quit the site and remove its equipment by no later than the end of July of that year. At the end of March it terminated access to the facility altogether. A series of letters and applications ensued between the city council and the company, but when no relief was found, on or about July 11, 2003 the company launched its lawsuit, and finished decommissioning the plant in the fall. (Interestingly, Eastern Power sued Italy’s largest municipal utility for $162 million in damages in the late 1990s over what Eastern called a breach of contract related to a deal to supply a plant to generate power from sewage in Rome. The Italian utility won and Eastern Power was ordered to pay $44,000 in costs.)
The trial was held in the autumn and early winter of 2005. The city spent $4.5 million in legal fees and the price to hire experts to testify on behalf of the city. Even though the judgment favors the city, it will probably have to pick up part
of the tab; the size of costs awarded to the city has yet to be determined by the court.
During the litigation neither SUBBOR officials nor city staff would talk to the media. Observers were left to wonder whether the demonstration failed because the city had been high-handed and unreasonable, or whether the company had been uncooperative and/or its process simply didn’t work.
On the surface, it appeared plausible that the city hadn’t been a good “entrepreneurial partner” in helping the fledgling project. The city had imposed unexpected development charges on the company, and tip fees for waste brought in from other parties. The dump lock had interfered with hooking up the facility to hydro, thus stymieing the important power sale component of the project.
The city’s position was also plausible. Let’s face it, had SUBBOR’s plant worked like gangbusters from the start, city staff would probably have been enthusiastic to share the limelight of success. It was in their self-interest for SUBBOR’s plant to work.
So, what happened?
In his 91-page decision, Justice MacKenzie rejected SUBBOR’s arguments and found in favor of the city on every major point, including the city’s interpretation of the contract and the commencement date of the project. The judge’s summary of the contractual bickering will no doubt be studied by lawyers in this field as a guide for what to include (or not include) in these sorts of agreements.
Beyond the strict legal issues, the judge’s findings describe the convoluted chain of events and dysfunctional relationship in detail. Importantly, the judge is careful not to pretend he’s a technical expert or pass judgment on the technology, but he hints that city staff may have been justified in their suspicions about SUBBOR’s process.
Central to his findings is that it would have taken the company longer (if ever) than the term of the contract with Guelph to prove its technology worked on a commercial scale. His decision refers to instances of waste material plugging up the equipment, and failure of the heat treatment unit (HTU) — which was central to the process — to function as anticipated.
The SUBBOR technology involves two-stage anaerobic digestion of feedstock with “intermediate steam explosion” — the most novel feature of the system. The judge writes that, “although steam explosion is a known technology, it had never previously been used in conjunction with anaerobic digestion for MSW management.”
He continues: “Although SUBBOR’s operations records for the Demonstration Plant establish numerous runs, i.e., operation, of the HTU from January 2002 through December 2002, these records reveal significant problems in achieving a reliable and continuous operation for the HTU.”
“…In the aftermath of the above problems with the initial HTU, SUBBOR proceeded to design, construct and install a ‘new’ HTU; however, the testing of the new HTU for a three day period in July 2003 did not resolve the problem of establishing a regular, reliable and continuous operational run.
“In the end, SUBBOR’s Project Manager (Mr. Larmour) met with SUBBOR’s technical expert (Mr. Campbell) on these issues in June of 2005. At the meeting, Mr. Campell made notes which are telling in terms of SUBBOR’s concerns that the HTU system in place might never function according to SUBBOR’s expectations.”
The judge quotes from Campbell’s notes about “still some pluggage — problems in strainer” and “still needs some modifications — probably three to six months to prove it worked” and “if not successful go to a batch system — probably three months to perfect or other alternatives.” Justice MacKenzie refers to other problems at the front end of the process, including “plastics not being recoverable as recyclable material and in fact causing malfunctions by pluggages in the system.”
The system never met the processing standard of 25,000 tonnes of waste per year, writes the judge, quoting experts who said this would have required SUBBOR to achieve a rate of 7.5 tonnes per hour at the front end, whereas the company’s 2002 records show only 2.6 tonnes per hour. Continuous operation was not achieved and testimony from the company’s own people indicated that “it would be possible to describe SUBBOR’s operation runs of equipment as being ‘sporadic’.” (In its appeal, SUBBOR says such a processing standard was never included in the original contract.)
We may never know if the technology would have worked had the company been given more time. Perhaps a revised SUBBOR-type project will one day prove itself in another jurisdiction. However, the judge’s document provides a useful roadmap for other municipalities and entrepreneurs about what to do (and not do) when entering into agreements to demonstrate waste treatment and disposal technologies. (See John Nicholson’s Waste Business column, page 14. Readers may also download a pdf version of the judgment under the Posted Documents section atwww.solidwastemag.com)
Guy Crittenden is editor of this magazine.