On November 27, 2008 in Charlottetown, Prince Edward Island, Justice the Hon. Gordon Campbell released his decision in WCI Waste Conversion v. ADI International Inc., a civil action tested in PEI’s Supreme Court. The ruling and details of the case offer valuable insights for waste management professionals in other jurisdictions on how to design and operate compost plants, negotiate contracts and maintain viable business partnerships.
The case revolved around whether a legitimate contract had been unreasonably breached when ADI International (“ADI”) terminated its relationship with WCI Waste Conversion (“WCI”) and, if so, what monies ADI owed WCI. The two companies had entered into an agreement to design, build and operate a compost plant on behalf of the local waste management authority. The relationship between the companies quickly became dysfunctional, prohibiting them from solving technical problems at the plant. ADI eventually terminated its relationship with WCI.
At trial Justice Campbell had to sort through complex technical issues and listen to expert opinion on every aspect of composting science and engineering in order to determine whose fault it was that the plant did not perform to expectations. ADI and WCI each blamed the other. He also had to review the contract in view of case law precedents.
In the end, Justice Campbell found in favour of WCI, ruling that ADI had indeed violated a lawful contract, and that ADI had interfered with WCI’s honest attempts to overcome technical challenges at the plant — attempts that could have succeeded (the judge believes) if fully implemented. He ruled that ADI pay $4.3 million to WCI, plus costs. (ADI is appealing the decision.)
In 1994, PEI implemented an organics source-separation system in the western part of the province to limit the amount of waste sent to landfill. The principle facility receiving source-separated wastes was the East Prince Waste Management Facility (sometimes called the Wellington site). In June 2000 the Island Waste Management Corporation (IWMC) decided that by the end of 2002 it would expand source-separation throughout the whole of PEI. A Request for Proposals was issued for delivery of a turnkey enclosed compost facility capable of processing 30,000 tonnes of organic material into Category A compost (the CCME term for compost that can be used in any application).
Joseph Kennedy and Philip Kerrigan, the principal shareholders of WCI Waste Conversion — an Ottawa-based company that builds waste and organics processing plants — wanted to respond to the RFP. Lacking sufficient funds to obtain the required bonding, they invited ADI Inter national — a structural, electrical and mechanical engineering firm — to participate. On July 9, 2001 the companies were awarded the $17.5 million IWMC contract to design-build-operate a Central Compost Facility (CCF) at Brookfield, PEI. ADI entered into a separate five-year contract with WCI to operate the plant. As it was responsible for the project bonding, ADI was named the principal in the contract with IWMC, and WCI became a subcontractor to ADI. Essentially, WCI would use its composting expertise to specify the technology and design the plant, and ADI, in addition to bonding, would execute the actual construction of the facility.
After some delays the facility was constructed and started accepting organic material in mid-July 2002. Less than five months later, ADI terminated its operating agreement with WCI and took over operation of the facility itself, and also terminated the design-build contract with WCI. This triggered a suit in which WCI sought a total of $5.1 million plus interest and costs from ADI, and a countersuit in which ADI sought $5.6 million plus interest and costs from WCI. At trial, just fewer than 4,000 exhibits were presented in 71 volumes of material.
Issues at trial
As part of the agreement between WCI and ADI, all communications with IWMC were to be undertaken solely by ADI. To that end, ADI was the signatory to the contract with IWMC. WCI understood the relationship to be a joint venture partnership in which ADI’s being the lead communicator was a technicality, simply because ADI put up the bond. WCI assumed it would be treated fairly, and that ADI would not use its position as lead communicator to its own advantage.
At trial, Justice Campbell determined that ADI used its position as lead communicator to characterize problems with plant operations as WCI’s fault, and to bill IWMC additional monies that were neither disclosed to nor shared with WCI. Withholding funds created hardship for WCI and benefitted ADI, the judge determined.
WCI was responsible for site and facility design and installation related to composting and biofilters. WCI subcontracted with Green Mountain Technologies (GMT), Engineered Compost Services (ECS) and Ambio Biofiltration (ABL) for the supply of (respectively) containers into which feedstock was placed for composting, the aeration system, and the biofilter (for odour).
WCI has extensive experience designing and working with these kinds of systems. A similar system to the one in PEI is in place in Pembroke, Ontario. The Pembroke facility (which has 11 containers compared to 48 at the PEI facility) is successful, has a similar feedstock to that of PEI, but is operated by staff trained by WCI.
A failed relationship
Justice Campbell writes, “WCI and ADI had a difficult relationship almost from the moment WCI invited ADI to participate in the project with them. It quickly became clear from the evidence presented at trial that the interpersonal skills and business practices of the two parties differed significantly. Their relationship was soon marked by uncertainty, frustration, mistrust and animosity. Their problems began well before the contract was ever awarded by IWMC.
“WCI maintains that it was in a joint venture partnership with ADI in the design/build contract with IWMC. ADI, on the other hand, denies there was any joint venture or partnership involved and maintains that it was the ‘contractor’ and WCI was merely its ‘subcontractor.'”
Considerable letters and email exchanges underscore that ADI treated WCI as a subcontractor, and that it alone could determine remuneration and key details related to the plant and equipment. However, the judge later determined that the relationship was, in fact, a joint venture partnership, even though the two parties agreed to present ADI as the primary contractor and WCI as a subcontractor.
Conflict between the parties and problems at the plant emerged when ADI, in the judge’s characterization, attempted to impose conventional engineering solutions on challenges that arose from composting science and technology.
The compost plant is a “high rate composting” system, an engineered or controlled process accelerated by the use of technology, that uses 48 containers which are divided into two groups of 24 containers each. WCI specified technical elements that were crucial for success; they were the “science guys” who understood composting as a biological process that could not simply be turned on or off by physical or mechanical means.
It was WCI’s position at trial that ADI unilaterally altered or ignored several design criteria or specifications stipulated by WCI, including matters relating to “the width and variability of speed of conveyor belts, the lack of nonstick coating on conveyor belts, the failure to supply a density separator, the failure to heat the floor in the receiving area, the failure to insulate ductwork carrying warm air from various buildings, and other concerns.” WCI also complained of unfair invoices directed to WCI and unfair holdbacks.
The plant operations were chaotic from the get-go.
WCI claimed that construction delays deprived them of sufficient time to set up equipment and perform necessary “dry run” testing on equipment. On startup they were given a quantity of materials far in excess of the
amount specified in the contract. Without sufficient commissioning time for the facility, WCI was immediately running into operational issues such as insufficiently trained staff, ineffective loaders, jamming of conveyor belts and improper operation of other equipment which required adjustments, all of which was further complicated by the fact they were dealing with an unsympathetic, uncooperative partner in ADI. WCI told ADI they were getting, “too much, too fast.”
In August, problems arose with respect to the leachate tank and collection system. The system was designed to consume all of the leachate in the compost process and the contract required that there be no excess leachate. However, large quantities of leachate were produced that had to be trucked off of PEI. Eventually it was determined that there was a crack in the leachate holding tank which WCI maintained occurred during ADI’s construction. (ADI disputes this.) WCI maintained that a significant portion of the excess leachate was actually condensate flowing into the leachate tank as a result of ADI changing WCI’s specifications and deciding not to insulate exterior ductwork (carrying warm exhaust air from various sectors of the compost facility).
WCI experienced problems with its con tainer loadout system during this startup period which only exacerbated other problems. The container loadout system includes a series of conveyor belts that take biowaste from the mixer and load it into the containers. Within the first few weeks of operation, WCI realized the containers weren’t heating up in the intended manner. They knew “the microbes weren’t happy” but they didn’t know why. They considered a number of potential causes such as carbon-to-nitrogen ratios, density and porosity, moisture levels, etc. After eliminating those factors, the only thing left was pH level.
WCI approached outside experts whose suggestions included altering the quantity of air supply to the containers and adding “amendments” such as lime or wood ash to the biowaste in order to adjust the pH level. This problem was of serious concern to WCI, which experimented with various adjustments and different regimes.
By October, the project was granted substantial performance, which had the effect of causing the operating agreement to commence. Notwithstanding the existence of what WCI considered to be a binding operating agreement between the WCI and ADI, ADI was denying there was any such contract. That written agreement called for ADI to direct IWMC to pay the monthly operating fees directly to WCI. ADI did not provide any such direction to IWMC, resulting in what WCI claims to have been a significant delay or a complete failure to pay WCI for its operations.
WCI contends that, coupled with unpaid monies due on the design-build contract, this added further financial strain and stress to WCI. Kerrigan stated that during this time WCI was continuing to “work furiously” with various composting experts towards resolving the pH issue.
By mid to late October, the parties had exchanged “saber-rattling” correspondence. In addition to concerns about the lack of an appropriate startup period, receiving too much biowaste too fast, and other unaddressed deficiencies, WCI felt that it was not being paid in a timely manner and did not have funds to pay its various subcontractors. It was, therefore, contemplating filing a mechanics lien against IWMC and ADI prior to the expiration of the lien period at the end of November.
On the other side, ADI expressed concerns about performance issues and the ability of WCI to operate the facility in a manner that would allow them to meet throughput capacity. These issues increased the tension and level of confrontation between the parties.
On November 26, 2002, ADI sent WCI a Notice of Default that gave WCI five working days to address performance issues at the plant. On December 4, 2002, immediately after the expiration of the fifth working day, ADI terminated WCI’s design-build contract and its operating agreement.
The judge writes, “ADI viewed itself as being unfettered in its budgetary control. Hollis Cole said it was his job to get as much money as possible into ADI’s pockets. With the contract award for $17,575,000 in place, ADI cut corners in supplying equipment and cut costs wherever possible, all with the view of enhancing ADI’s bottom line. If WCI had specified a piece of equipment with certain features and ADI supplied a piece of equipment with less expensive features, it was ADI’s intention to pocket the extra cash. If ADI failed to supply some equipment altogether, it had the benefit of not spending the money allocated for that equipment.
“WCI prepared its budgets and added its contingencies, margins, and PST, and gave that budget to ADI. Unknown to WCI, ADI added further extra sums (which it called “general conditions”) and a further 10 per cent mark-up to WCI’s amounts before incorporating WCI’s budget into its own. The final budget total was rounded to $17,575,000. Notwithstanding that ADI had budgeted extra or unallocated funds to address unexpected costs in respect of WCI’s scope of work, where extra costs were incurred or designs modified, ADI claimed extra charges.”
“I am satisfied,” the Justice Campbell writes, “that ADI’s conduct was motivated by its philosophy of maximizing its gain without respect for the impact that would have on its joint venture partner or the project.”
Justice Campbell’s decision is 130 pages long. His explanation of the composting process and the equipment and technology designed by WCI represent a kind of blue-print for how to build a compost plant and avoid problems. The written judgment reviews expert testimony on all aspects of equipment fabrication and installation; the details are too complex to recount here, but readers interested in viewing the whole document can download it in pdf format by clicking on Posted Documents at www.solidwastemag.com
One of the most serious problems, for instance, was the aeration system that WCI viewed as part of a composting system, but accuses ADI of viewing as more of an air handling system. (Unable to get anticipated performance, WCI’s aeration subcontractor found the fans had been installed backwards, propelling air in the wrong direction.) Another area of dispute was the quality of feedstock, the pH level of which presented unique challenges (WCI maintained) to the composting process. Yet WCI had been told the feedstock would be similar to the more-typical material received at another PEI facility.
Despite all the problems, the judge agreed that WCI was making substantial progress toward achieving the anticipated performance at the plant at the time ADI terminated the contract. “Based on this evidence,” he writes, “it is my conclusion that WCI was achieving throughput capacity by the time they were terminated. The termination was, therefore, not valid.”
In writing about the conduct and circumstances of the parties as a whole, Justice Campbell states: “ADI never respected WCI’s expertise in dealing with the biological processes of composting.”
He concludes that, “WCI was not the incompetent party. Greed, impatience and arrogance led ADI to terminate WCI. With that termination, IWMC lost its best chance of having the facility process the required volume of feedstock and produce Category A compost in accordance with the terms and time frames of the contract.”
In the end, Justice Campbell chose to accept almost all of WCI’s position and awarded total damages of $4,306,339 and costs (almost evenly split between monies owed for design/ build and operating the plant). The judge also writes, “the proceeding commenced against Joseph Kennedy in his personal capacity was, in my view, improper, vexatious and vindictive” and awarded him costs on a substantial indemnity basis.
The judge was also annoyed at the disorganized presentation of documents by ADI, for which he assigned costs, and did not accept t
he testimony of an expert technical witness for ADI, whose conclusions he determined were neither independent nor credible.
“We are pleased with the Supreme Court judgment and feel it recognizes and fairly represents the facts of this case,” says WCI’s Joe Kennedy. “The key lesson for other municipalities is that major problems can occur when there is a lack of proper oversight and procurement expertise maintained throughout the entire term of the contract.”
Kennedy maintains that the full service contract to design, build and operate for five years is an excellent form of contract to mitigate risks for municipalities when the design-build contractor is at risk to operate the facility according to specification.
“Also,” he says, “appropriately structured management oversight, supported by procurement experts, is essential for success. This form of contract was utilized successfully when PEI developed its waste-to-energy plant in 1982 that’s still in operation today.”
ADI’s Hollis Cole says his company has filed an appeal. “We disagree most emphatically with Justice Campbell’s interpretation of the law and the facts,” he says, adding, “A number of things from this case could negatively impact any compost facility in this country.
“The judge ruled that the facility is not producing Category A compost, but we have consistently done so, as is proven by more than 75 tests. And this despite the fact that the incoming biowaste is different from what was expected.”
Cole adds that when the contract to operate the plant went to tender ADI was selected. More than three years remain in the current contract, with an option to renew for another three years.
Guy Crittenden is editor of thus magazine. Contact Guy firstname.lastname@example.org
“Says Kennedy, ‘Major problems can occur when there is a lack of proper oversight and procurement expertise maintained throughout the entire term of the contract.'”