Quebec Contracts for the Supply of Natural Gas by a Private Supplier: No Right of Early Termination
In the matter of Athena Energy Marketing Inc. v. 9080-9211 Québec Inc.1, the Superior Court of Quebec dealt with the issue of how to characterize the legal nature of a contract for the supply of natural gas by a private supplier2. After analyzing the specifics of the contractual relationship, the Court concluded that the agreement between the parties was a contract of sale rather than a contract of enterprise or services contract3.
Background
The defendant, a company named Les propriétés Victoria (“Victoria”), was a member of a group of businesses that purchased natural gas collectively. This type of arrangement allowed them to obtain the best price possible and shielded them from fluctuations in the price of natural gas, which can be highly volatile. To avoid such volatility, Victoria entered into a contract for the supply of natural gas with Athena Energy Marketing4 (“Athena”) which provided for daily deliveries for a fixed term of five years.
In the course of the successive sale of four buildings for which it had been purchasing natural gas, Victoria’s gas consumption dropped significantly and then ceased altogether, and it consequently sought to terminate its supply contract with Athena before the expiration of the five-year term.
Positions of the parties
Victoria argued that the supply contract was not a contract of sale but a contract of enterprise or services. It maintained that under Article 2125 of the Civil Code of Québec, it could therefore terminate the contract at will and that as of the termination date it had no further payment obligations towards Athena. In support of its contention that this was a services contract, Victoria argued that Athena was a natural gas trader and at no point ever became the owner of the gas. According to Victoria, Athena provided it with a service and would accordingly suffer no loss if it stopped supplying it.
Athena, on the other hand, argued that the supply contract was a contract for the sale of natural gas, and not a contract of enterprise pursuant to which it rendered services. Athena was itself contractually bound to purchase from Shell Canada the gas that it had committed to re-sell to Victoria over the five-year term of the contract. The contract was thus one of sale, and Victoria could not terminate it before it expired.5
Judgment
The Superior Court of Québec, noting the total absence of evidence regarding the nature of any services Athena was purportedly rendering, other than having negotiated a good price for the supply of natural gas, dismissed Victoria’s claim that the supply contract was a services or enterprise contract:
[TRANSLATION]
[47] … To use Victoria’s own terminology, this was not an instance of “commodity trading”. Just because Athena negotiates the price of the gas it purchases and re-sells doesn’t mean that it is rendering a service to Victoria, or to any other of its clients for that matter.
The judge, acknowledging that the title the parties give to their contract does not suffice to characterize it, examined all of the provisions of the contract between Victoria and Athena and concluded that it was indeed a contract of sale. Having found that Athena was not a natural gas trader, the judge decided that an initial sale of gas had taken place between Shell Canada and Athena and a second between Athena and Victoria. Thus, as Victoria did not take up the contracted quantity of gas, Athena was left with excess quantity that it necessarily had to re-sell (which it did in accordance with terms of the contract between the parties).
Finally, after considering the reality of the market, the judge held that it was not possible for businesses to secure a fixed competitive price protecting them from daily fluctuations in the price of natural gas while at the same time retaining the right to unilaterally terminate the contract. The negotiated savings were directly tied to the volume contracted and the duration of the agreement. As the judge pointed out, “you can’t eat your cake and have it too”6.
The judge accordingly concluded:
[TRANSLATION]
[61] … it is clear to the Court that contract P-4 between Athena and Victoria is a contract of sale and not a contract of enterprise or for services. Consequently, Victoria could not unilaterally terminate it on the basis of article 2125 CCQ …
Commentary
The judgment in Athena Energy Marketing Inc. v. 9080-9211 Québec Inc. is of particular interest because of the distinction it makes between natural gas supply contracts entered into with private suppliers in Quebec and service contracts that consumers enter into with Gaz Métro, Quebec’s natural gas utility. There are several judgments7 that specify that the distribution contract between Gaz Métro and its customers is a contract for services and not a contract of sale. As the owner (through several subsidiaries) of various pipelines in Quebec, Gaz Métro offers the services of transporting and distributing natural gas, for which it bills its customers8. Conversely, private suppliers (such as Athena) engage exclusively in purchasing natural gas and then re-selling it to their clients. This difference in the contractual acts performed by the utility and private suppliers is the basis for the difference in the legal characterization of their respective contracts in Quebec.
This decision also highlights the importance for private suppliers of natural gas doing business in Quebec to ensure that their contracts are appropriately drafted such that (a) the sale aspect is clearly evident, and (b) the client cannot maintain that the supplier undertook to perform any type of service for it. The supplier will thus avoid the risk of having a Quebec court characterize its supply contract as a contract for services (or of enterprise). Far from being academic, this distinction has very real consequences, not the least of which is the absence of any right on the part of the client of a private supplier to unilaterally terminate the contract.
1 Athena Energy Marketing Inc. (Services de gaz naturel RBC Inc.) v. 9080-9211 Québec Inc. (Propriétés Victoria), 2013 QCCS 2715.
2 Victoria has appealed the judgment, on this point in particular. The Quebec Court of Appeal is slated to hear the appeal this fall.
3 See the following judgments by the Quebec Superior Court to the same effect: Groupe BMR Inc. v. Superior Energy Management Gas, l.p., 2012 QCCS 952; and Superior Energy Management v. Para-Net buanderie et nettoyage à sec Inc., 2012 QCCS 7122.
4 Now doing business under the name Services de gaz naturel RBC Inc.
5 While Victoria stopped consuming natural gas before the end of the contractual term, the latter contained a liquidated-damages and damage-minimization clause whereby Victoria had to pay Athena the difference between the contract price and the price Athena was able to sell the unused gas for on the open market.
6 This is a liberal translation of the Judge’s determination that “[Victoria] ne pouvait obtenir le beurre et l’argent du beurre. ”
7 See for example, Limtech Carbonate Inc. (Syndic de), 2012 QCCA 619, par. 7; Société en commandite Gaz Métro v. Duchesne & Associés Inc., 2008 QCCQ 5293, par. 2; Société en commandite Gaz Métro, 2011 CanLII 100191, par. 8 (QC RDE).
8 In the case being discussed here, it was in fact Gaz Métro that transported the natural gas from Shell’s point of delivery at the Alberta border to its customers in Quebec, making a profit in doing so.
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