Insurer says it isn’t liable for finishing Bondfield renovation

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The insurance company liable for construction work at Toronto’s St. Michael’s Hospital says alleged corruption in the bidding process means it isn’t required to pay for the project – raising questions about who is on the hook for the unfinished $300-million redevelopment.

Zurich Insurance Co. Ltd., which guaranteed completion of the St. Michael’s project through insurance-like contracts known as surety bonds, has asked an Ontario court to rule that its obligations to pay for construction of the hospital are now void, court records show.

In court filings, Zurich alleges e-mails discovered by one of its consultants in March “appear to prove collusion” on the procurement process for the hospital project. Zurich accuses Bondfield of providing a secret e-mail address to a St. Michael’s official so he could pass information about the bidding process to the company’s former chief executive officer.

Zurich says in the documents that when it agreed to guarantee Bondfield’s work, it was unaware of these alleged “secret back-channel communications." The insurance company accuses John Aquino, Bondfield’s former CEO, of supplying Vas Georgiou, the former St. Michael’s executive in charge of the redevelopment, with his own “secret Blackberry device” which the pair used to communicate and ensure Bondfield under-bid its competitors when it was awarded the contract in 2015.

The insurance giant is now suing Bondfield, Mr. Aquino, Mr. Georgiou and Unity Health, a network of Toronto hospitals that includes St. Michael’s.

“Had Zurich known that Mr. Aquino and Mr. Georgiou were colluding to ensure that [Bondfield] would submit an artificially low bid … it would never have issued any bonds in connection with [Bondfield’s] bid… let alone bonds that exposed Zurich to over $300-million in liability,” Zurich’s statement of claim alleges.

Zurich Canada’s CEO, Saad Mered, said in an e-mailed statement to The Globe: “This proceeding reflects our very serious concerns about the integrity of the bidding process.” He declined further comment, citing the legal action.

None of the allegations have been proven in court and no statements of defence have been filed. Mr. Aquino did not respond to requests for comment. Peter Brauti, a lawyer for Mr. Georgiou, said his client will not comment on matters before the court. In a statement, St. Michael’s Hospital also declined to comment for the same reason.

All major construction contracts require builders to have a surety in case the contractor defaults or goes bankrupt. The surety acts as an emergency backstop, and in the case of public infrastructure, protects taxpayers. A surety offers a guarantee that a replacement contractor will be hired to finish a project that goes awry.

Key milestones in Bondfield’s work on the St. Michael’s Hospital redevelopment project

If the courts rule that Zurich’s obligation has been voided because of the corruption allegations, then taxpayers may be required to pay many more millions of dollars for the St. Michael’s project than the province anticipated.

Infrastructure Ontario, the procurement arm of the provincial government that oversaw the awarding of the contract, declined to respond to questions about the implications if Zurich prevails.

Bondfield, which was placed under court-ordered creditor protection in 2019, never reached any of the major milestones on the St. Michael’s project. The centrepiece is a 17-storey patient-care tower that was supposed to be finished in 2017, but is still not complete. (The hospital recently opened two floors for COVID-19 patients through the work of a replacement contractor.)

The entire redevelopment, which was also supposed to include extensive renovations to 150,000 square feet of the existing hospital, is more than two years behind schedule.

As a result of these significant delays, Infrastructure Ontario hasn’t made any of the scheduled payments of taxpayers’ money to Bondfield.

The project is a public-private-partnership and was financed, as are all Infrastructure Ontario projects, through a syndicate of bank lenders. Those loans, the largest of which came from Toronto-Dominion Bank ($68.7-million) and Bank of Montreal ($65.7-million), have been entirely drawn down, court documents say. Bondfield has been terminated as the contractor -- leaving Zurich as the project’s last funding resort.

In its statement of claim, Zurich says it has already paid $68-million in claims to keep the St. Michael’s project going – payments that it made before it learned of the e-mail account allegedly used by Mr. Georgiou. As part of its lawsuit, Zurich is also demanding that Mr. Georgiou, Mr. Aquino and St. Michael’s pay back that $68-million.

Bondfield’s collapse has been felt across the province in many sectors of the economy. Numerous subcontractors have gone without pay, and dozens of public sector infrastructure projects, such as community centres, hospitals and transit stations, have been delayed. But Zurich, which has said in court documents that it issued surety bonds for more than $1-billion worth of Bondfield’s projects, has taken one of the biggest hits.The insurance company says that, as of late 2019, it had already paid more than $200-million in claims – the largest surety loss in Canadian history.

In response, the company has been trying to recoup some of those losses in the courts. In a separate court action it launched against Mr. Aquino in November, Zurich alleged Mr. Aquino “misappropriated” or misused funds that should have been reserved to pay subcontractors on various Bondfield projects, as required under Ontario’s Construction Act. In his statement of defence, Mr. Aquino calls the action “groundless,” and accused Zurich of trying to make him liable for its “negligent and incompetent performance.”

Zurich has also sued two of Bondfield’s external auditors, PricewaterhouseCoopers and Deloitte LLP, claiming they failed to detect and flag for Zurich an alleged false invoicing scheme at Bondfield that siphoned $80-million out of the company. Statements of defence have not been filed. A lawyer for PwC said the company denies any liability. A lawyer for Deloitte did not comment.

Even before Zurich learned of the secret e-mail account, it was in a protracted dispute with St. Michael’s over its level of liability. On March 6, Unity Health and the Bank of Montreal filed a motion in Ontario Superior Court asking for an order compelling Zurich to make payments against one of its bonds on the project.

But Zurich has now responded that the motion should be dismissed in light of what it has learned about the alleged secret e-mail correspondence between John Aquino and Mr. Georgiou.

The e-mails came to light on March 10, when John Aquino’s younger brother, Steven Aquino, who became CEO of Bondfield in 2018 after John Aquino was fired, provided printed e-mails to the Zurich consultants, court records allege.

The e-mails, from May, 2014, show that someone close to St. Michael’s was sharing bidding tips with John Aquino shortly before Bondfield submitted its winning proposal. That person was writing from the e-mail address bccldevelopment@bondfield.com.

Steven Aquino told the Zurich consultant that he believed the user behind that e-mail address was Mr. Georgiou, and the account had been set up so “John Aquino and Mr. Georgiou could communicate with one another," according to an affidavit from Adrian Braganza, a Zurich official, that has been filed in court. Steven Aquino also said that Mr. Georgiou had "been provided with a Blackberry device to facilitate these communications,” Mr. Braganza said in his affidavit. The e-mails had been stored, Steven Aquino said, in a filing cabinet John Aquino had used before he was fired, Mr. Braganza’s affidavit alleges.

Steven Aquino declined to comment for this story, but the court-appointed monitor for Bondfield, Ernst & Young Inc., has said in court filings that he has co-operated with its probes.

Lawyers for Zurich hired forensic analysts to go hunting for the 2014 e-mails on Bondfield’s server, but found nothing. When the analysts combed through an archiving device that Bondfield uses to retain e-mails, they discovered that on Sept. 15, 2015, someone accessed the device and entered a number of search terms: “Vas Georgiou,” “vas.georgiou” and “BCCLDevelopment.” Whoever accessed the device then deleted 5,370 “potentially relevant messages,” court records state.

Sept. 15, 2015, was the same day The Globe and Mail published the first story in a series about Mr. Georgiou.

With a report from James Bradshaw

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