SCC upholds contract between Churchill Falls, Hydro Québec

The Supreme Court of Canada ended a long-standing dispute between the provinces of Quebec and Newfoundland and Labrador today over the sharing of profits from a hydroelectric plant on Labrador’s Churchill River, deciding that the contract cannot be revisited by the courts.

In a 7-1 decision in Churchill Falls (Labrador) Corp. v. Hydro‑Québec, the Supreme Court found that the contract did not violate principles of good faith and equity and that the doctrine of unforeseeability did not apply in this case. The agreement made in 1969 between the two provinces for the Churchill Falls plant, which was completed in late 1971, has seen more than $27.5 billion delivered to Hydro-Québec and approximately $2 billion to Newfoundland and Labrador.

“At the time the Contract was entered into, the benefit that CFLCo [Churchill Falls (Labrador) Corporation] now characterizes as disproportionate, namely the guarantee of fixed prices for the purchase of electricity, was seen as a way to have Hydro‑Québec assume a risk that CFLCo did not want to assume,” Justice Clément Gascon wrote, with Chief Justice Richard Wagner and justices Rosalie Abella, Michael Moldaver, Andromache Karakatsanis, Suzanne Côté, Russell Brown and Sheilah Martin concurring.

“In return, Hydro‑Québec was to obtain low fixed prices and a long‑term contract, two benefits on which it insisted in 1969 in exchange for increasing its contribution to the project. It is true that it now, in good faith, earns substantial profits as a result. However, the magnitude of those profits does not justify modifying the Contract so as to deny it that benefit.”

Today’s decision affirms the lower court decisions “that this contact was a fair contract when it was negotiated, and it remains a fair contract in spite of the ‘changed circumstances’ relied up on by CFLCo,” Pierre Bienvenu of Norton Rose Fulbright Canada LLP in Montreal, who was lead counsel for the respondent, Hydro-Québec, told Legal Feeds. “CFLCo gets exactly what it bargained for, and it still does.”

In 1969, the appellant Churchill Falls (Labrador) Corporation Limited and the respondent Hydro-Québec entered into a contract that saw Hydro-Québec undertaking to purchase almost all the power generated by the Churchill Falls hydroelectric plant. That contract — which had a 65-year term including an automatic 25-year renewal, to be enacted 40 years after the plant had been installed and was in service at full capacity — set a fixed price for the power that was to decrease in stages over time, with no price adjustment clause. Hydro‑Québec guaranteed any cost overruns for the Churchill Falls plant, among other guarantees.

In 2010, the appellant instituted an action against the respondent in the Quebec Superior Court, arguing that the magnitude of the respondent’s profits resulting from the current value of electricity had been unforeseeable in 1969 and was causing an injustice. It submitted that the obligation to act in good faith and the obligation to exercise contractual rights reasonably that are provided for in Quebec’s Civil Code imposed a duty on the respondent to renegotiate the terms of the contract.

The Superior Court dismissed the action, and the Court of Appeal affirmed the judgment. It found that, except in cases of real hardship, the general principle of good faith set out in articles 6, 7 and 1375 of Quebec’s Civil Code was of no assistance to a party in the appellant’s situation.

“All of CFLCo’s arguments, which are based on the nature of the Contract and its implied duties, the general duty of good faith, or a variation on the doctrine of unforeseeability (imprévision), must fail,” Gascon wrote in today’s decision. “Moreover, all of them require questioning the trial judge’s determinative findings of fact, which are tainted by no palpable and overriding error.”

The appellant had argued that the contract was a relational contract akin to a joint venture — that the parties’ agreement created, in effect, a common project.

But the majority of the court disagreed. Quebec courts have tended “to liken a joint venture contract to a contract of undeclared partnership . . . where businesses choose to become partners and to cooperate in a project by each investing resources and by sharing any profits from the project [and] can be held liable for one another’s undertakings and debts,” the Supreme Court found. That was not the relationship of the contact between the appellant and respondent, the court decided.

In dissenting reasons, Justice Malcolm Rowe found that “. . . properly characterized, the Power Contract binding the parties is relational in nature. Parties to a relational contract are typically presumed to have bound themselves to a higher standard of good faith,” which allows the parties to rely on a heightened duty of co-operation. “Hydro-Québec has breached this duty by refusing to establish by way of mutual agreement a price adjustment formula for these extraordinary profits.”

However, Hydro Québec’s guarantee to cover overrun costs was uncapped, Bienvenu says, and “that was key to allowing this project to go forward,” citing the Muskrat Falls hydro-development project on the same river, which is bedevilled by significant cost overruns and delays, “to get a sense of the magnitude of the risk that Hydro-Québec accepted by giving this uncapped guarantee.”

Today’s decision has significance to contract law in rejecting the theory that in the event of changed circumstances — in this case, higher electricity prices — “the party can ask the other party to renegotiate the contract,” Bienvenu says. “The court said there is no such doctrine or theory in the law of Quebec, and indeed, it points to a deliberate decision of the [Quebec] legislature not to incorporate that legal theory into the law of Quebec.”

As well, he says, the court held that one cannot rely on the principle of “‘good faith’ in the execution of contracts in order to incorporate through the back door this doctrine of changed circumstances.”

In this case, the evidence cited by the Supreme Court showed that the parties deliberately chose not to include an escalation clause in their contract that would have allowed for the price to be reviewed if the market value of energy increased, Bienvenu says.

“The lesson for contracting parties, particularly commercial parties, is that if they want the ability to renegotiate the contract in the event of changed circumstances, they have to insert a clause to that effect.”

The last two contracts made between the provinces are set to expire in 2041. Counsel for the appellant was not available for comment.