The Supreme Court Puts an End to the Judicial Saga Begun by Churchill Falls (Labrador) Corporation Limited

On November 2 the Supreme Court of Canada rendered a highly anticipated decision in the judicial saga involving Churchill Falls (Labrador) Corporation Limited (“CFLCo”) and Hydro-Québec¹. The Court dismissed CFLCo’s appeal virtually unanimously for a lack of any legal basis, and in doing so refused to countenance any application of the theory of unforeseeability in Quebec law or any broadening of the concepts of good faith and equity in order to impose on one of the contracting parties an obligation to renegotiate the contract.

Context

On May 12, 1969 CFLCo and the respondent Hydro-Québec entered into an energy supply contract with a term of 65 years whereunder Hydro-Québec agreed to purchase most of the electricity produced by a hydroelectric plant to be constructed on the site of the Churchill Falls in Labrador at a fixed rate that would decrease in stages over time, determined in accordance with the final capital cost of the project.

CFLCo contested the validity of the contract on the basis that the extent of the profits now being realized by Hydro-Québec was unforeseeable in 1969, such that an injustice had resulted. Invoking the obligation to act in good faith, the obligation to cooperate and the obligation to exercise contractual rights reasonably, CFLCo argued that Hydro-Québec was bound to renegotiate the terms of the contract, particularly those involving pricing.

The Quebec Superior Court², in a decision written by Justice Silcoff, concluded that the relationship between the parties was not based on an equal sharing of the risks and benefits flowing from the contract, given that Hydro-Québec had assumed most of the risks, thereby allowing CFLCo to obtain the required financing for the construction of the plant, in return for guaranteed price stability affording protection from inflation and increases in operating costs.

On appeal, a five-member bench of the Quebec Court of Appeal unanimously upheld the trial judgment and dismissed the appeal, expressing the view that the parties freely and voluntarily entered into a contract providing for fixed rather than indexed prices, despite being fully aware that energy prices could fluctuate over time. The Court stated that CFLCo was seeking to alter the very nature of the contract³ and that the obligation of good faith under articles 6, 7 and 1375 of the Civil Code of Québec did not oblige Hydro-Québec to renegotiate its terms.

The Court of Appeal did however indicate that it was open to a limited application of the doctrine of unforeseeability, through the prism of the obligation to act in good faith, an openness never before seen in Quebec law. For the Court did not rule out the possibility that in a situation involving “hardship” as defined in the Unidroit Principles, the party who is refused a delay, an easing of its obligations, an adjustment of the contract or any other objectively reasonable, non-prejudicial concession from the perspective of its co-contractor could argue before the court that its co-contractor is not respecting the requirements of good faith⁴.

Such circumstances were not however shown to exist in this case. Any unforeseen change in the circumstances surrounding the performance of the contract had not rendered performance more onerous for CFLCo, but simply more beneficial for Hydro-Québec.

Decision

In a 7-1 majority decision, the Supreme Court of Canada dismissed CFLCo’s appeal, on the ground that there is no legal basis in Quebec civil law for its claim.

The Court first of all pointed out that the contract between the parties cannot be characterized as a joint venture contract or a relational contract. As the parties clearly set out in their initial contract a series of defined and detailed performance obligations, no important obligations of that nature were left undefined. Thus, the parties’ intention was not to cooperate or to flexibly coordinate on an economic basis over time, in order to fill any gaps in the contract.

The Court next decided that there is nothing in the contract requiring Hydro-Québec to cooperate with CFLCo or renegotiate the fixed prices: “there is no gap or omission in the scheme of the Contract that requires this Court to read an implied duty into the Contract in order to make it coherent”⁵.

The Court stated that it is not appropriate to develop a doctrine of unforeseeability based on good faith or equity in Quebec law. It pointed out that the doctrine of unforeseeability is not recognized in Quebec civil law, having been expressly rejected by the legislature at the time of the reform of the Civil Code. According to the Court, “any development of concepts analogous to unforeseeability in Quebec law must take account of the legislature’s choice not to turn this doctrine into a universal rule”⁶. Moreover, in this instance unforeseeability could not be relied on by CFLCo in order to oblige Hydro-Québec to renegotiate the contract, since the agreement had not become less beneficial for CFLCo, but simply more beneficial for Hydro-Québec⁷.

The Supreme Court also concluded that the obligations of equity and good faith do not inherently create an obligation to renegotiate on the part of Hydro-Québec. The obligation of good faith adresses the legislature’s concern to protect the equilibrium of contracts but “it cannot be used to violate that equilibrium and impose a new bargain on the parties”⁸. Despite the fact that its application must remain flexible, the concept of good faith cannot be broadened to impose a duty to renegotiate a contract, and the duty to cooperate with the other party does not mean that one’s own interests be sacrificed. Furthermore, applying the concept of equity would be to indirectly introduce either lesion or unforeseeability into Quebec law in every case. To do so “would conflict sharply with the legislature’s intent”⁹.

That being said, the Supreme Court noted that in a situation of “hardship” corresponding to the description of that concept in the Unidroit Principles, the conduct of the contracting party that benefits from the change in circumstances “cannot be disregarded and must be assessed”¹⁰. The Court thus did not rule out the possibility that the obligation of good faith may require a contracting party to act in such a way as to limit the consequences of an unforeseen change in circumstances that renders performance of the contract excessively onerous for the other party.

Finally, the Court pointed out that “in any event, CFLCo’s action is prescribed”¹¹, as the situation in this case does not constitute a breach of an ongoing duty or a continuing fault. And because the most recent event to have disrupted the energy market occurred in 1997, the action has been prescribed since the end of 2000 at the latest.

This important decision confirms the validity of the contract entered into by the parties in 1969, reaffirms the scope of the obligations of good faith and equity and establishes the inapplicability of the doctrine of unforeseeability in Quebec civil law. It puts a long-awaited end to this third attempt by CFLCo and the province of Newfoundland & Labrador to convince the courts to amend the contract.