Churchill Falls v Hydro-Quebec: Serving Contracts with a Twist of Unforeseeability

A lot can change in 65 years, and most of it is unforeseeable. Can a contract be renegotiated to reflect these changes? In Churchill Falls (Labrador) Corp v Hydro-Quebec, 2018 SCC 46 [Churchill Falls], Churchill Falls (Labrador) Corporation Limited (“CFLCo”) and the Quebec Hydro-Electric Commission (“Hydro-Quebec”) dispute a contract signed in 1969. CFLCo claims that their contract should be renegotiated because it has provided an unanticipated source of profits for Hydro-Quebec. However, their demand for renegotiation on the basis of the doctrines of unforeseeability, good faith, and equity is tangential to their true aim: limiting the temporal scope of the contract so that they may enjoy the unforeseen profits.

CFLCo’s motivations aside, the Supreme Court of Canada (“SCC”) addressed several concepts of contract law in this case, explaining the difference between joint ventures and relational contracts, expanding upon the doctrine of unforeseeability, and listing the qualifications for invoking the doctrines of good faith and equity. The SCC rendered judgement on this case on November 2, 2018 and their analysis reveals the binding nature of a contract when signed and acted upon in good faith.

The Contractual Relationship

The contract signed by the parties set out a legal and financial framework for building a hydroelectric plant on the Churchill River basin in Labrador. The terms of the contract made the project viable and attractive for each party. Hydro-Quebec agreed to purchase most of the electricity produced by the plant for a period of 65 years, ensuring CFLCo a stable return on its investment and allowing it to use debt financing for the construction of the plant. In return for their commitment, the contract provided Hydro-Quebec with the right to purchase electricity from the plant at fixed prices for the duration of the entire term of the contract. Nearly half a century later, changes in the electricity market caused Hydro-Quebec’s purchase price for electricity to fall below market prices. Hydro-Quebec now sells this electricity at current market prices to third parties, yielding a tremendous profit of $28 billion compared to CFLCo’s $2 billion profit.

The contract is set to expire in 2041, but CFLCo has asked the courts to order the renegotiation of the contract and reallocation of its benefits before its expiry date. CFLCo has essentially asked the courts to limit the contract’s temporal scope, a request that goes beyond accommodation and seeks to limit the benefits of Hydro-Quebec. The Quebec Superior Court concluded that the intervention sought by CFLCo was not warranted, and the Quebec Court of Appeal (“QCCA”) dismissed CFLCo’s appeal based on their finding of a quid-pro-quo. The QCCA determined that as inducement for Hydro-Quebec bearing the financial risk of the project, the parties had intentionally chosen to not include a price adjustment clause in the contract. The issue then went before the SCC, who undertook an extensive analysis of the claim for renegotiating the contract, including a detailed discussion of unforeseeability and good faith in Quebec civil law.

The Court’s Decision

Justice Clément Gascon, one of the three Quebec justices on the SCC with notable experience analyzing the Civil Code of Quebec, CCQ-1991 [Civil Code], wrote the reasons for judgement. The Court held that Hydro-Quebec does not have a duty to renegotiate the contract, even though the contract proved to be an unanticipated source of profits. Moreover, the contract cannot be overturned absent a palpable and overriding error.

Strike 1: Neither a Joint Venture nor a Relational Contract

CFLCo argues that they entered into a joint venture contract with Hydro-Quebec because the parties intended to combine their resources to carry out the project and share the benefits of the venture equitably. A joint venture is a common law concept that does not necessarily reflect a particular legal form in Quebec civil law. The Quebec courts thus define a joint venture contract as a “contract of undeclared partnership” (Churchill Falls, para 61). The Civil Code provides that such a contract is formed “where businesses choose to become partners and to cooperate in a project by each investing resources and by sharing any profits from the project” (article 2186). CFLCo and Hydro-Quebec never intended to enter into a partnership or jointly assume the financial and logistical responsibility of the plant, so the contract cannot be characterized as a joint venture contract.

CFLCo asserted that they had instead entered into a relational contract with Hydro-Quebec. In response, the SCC cited Professor Jean-Guy Belley’s definition of a relational contract as a “contract that sets out the rules for a close cooperation that the parties wish to maintain over the long term” (“Théories et pratiques du contrat relationnel,” 139). The QCCA and the SCC noted that, although the contract reflects interdependence of the parties, this alone does not “indicate their agreement has a relational element” (Churchill Falls, para 69). The long-term interdependent nature of the contract does not in and of itself imply that the contract is relational. “Day to day” cooperation between the parties would have to exist for the contract to be relational (Churchill Falls, para 69). The SCC determined that CFLCo and Hydro-Quebec did not have sufficient day-to-day interaction to classify a relational contract.

Strike 2: No Basis for the Doctrine of Unforeseeability

CFLCo argued that the doctrine of unforeseeability should force the renegotiation of the contract because it did not intend to provide Hydro-Quebec with an unanticipated source of profits. Yet the trial judge found from the evidence that the parties “intended to allocate the risk of price fluctuations and that there was an agreement of wills on this point” (Churchill Falls, para 80). The doctrine of unforeseeability cannot be relied upon where it is clear that the disadvantaged party had accepted the risk that changes in circumstances may be detrimental to them in the future. Additionally, Quebec civil law does not recognize the doctrine of unforeseeability to begin with, as the Civil Code contains no article providing for such a rule. Accordingly, the doctrine of unforeseeability has no grounds in this case.

Strike 3: No Dependence on the Principles of Good Faith & Equity

CFLCo claims that the principles of good faith and equity impose a duty to renegotiate on Hydro-Quebec. The principle of good faith “serves as a basis for courts to intervene and to impose on contracting parties obligations based on a notion of contractual fairness” (Churchill Falls, para 103). However, courts cannot rely on the principle of good faith to order the sharing of profits that have in fact been honestly earned. Since the contract between CFLCo and Hydro-Quebec included a clear offer and acceptance of the terms of the offer, and certainty with respect to the material terms, the contract is both fair and enforceable. Thus, the SCC held that Hydro-Quebec had no obligation under the principle of good faith to mitigate the benefits of the contract.

Similarly, the principle of equity does not impose a duty to renegotiate on Hydro-Quebec. Equity is “a duty…on a party in light of the spirit of the law or the scheme of the agreement as well as a shared sense of fairness” (Civil Code, article 1434). The Civil Code acknowledges that equity may be invoked by the courts to intervene in order to remedy unfair situations. Yet the SCC found that nothing about the relationship between CFLCo and Hydro-Quebec would justify an intervention based on the principle of equity. Justice Gascon stated that the contract was clearly equitable because of sufficient consideration: “both parties to contract were experienced, and they negotiated its clauses at length” (Churchill Falls, para 109). Furthermore, Hydro-Quebec’s profits do not constitute a breach of an ongoing duty or a continuing fault. Therefore, the relief sought by CFLCo cannot be granted by the Court.

The Labrador Voice on the Court Disagrees

Coincidentally, the dissenting reasons in Churchill Falls are from the Court’s first and only member from Newfoundland and Labrador, Justice Malcolm Rowe. Justice Rowe differed on the Court’s analysis of the category of the contract at issue, and determined that CFLCo and Hydro-Quebec had formed a relational contract. To Justice Rowe, the language of the contract established an ongoing interaction and collaboration between CFLCo and Hydro-Quebec. Moreover, the parties committed to offering each other assistance during the execution of contract andexplicitly contemplated need for joint determination, discussion and revision.

This is significant because the duty of good faith and equity define the scope and content of a relational contract’s implied obligations. Whereas a court cannot modify or revise the contract, they may enforce what appears to be equitable. Although the contract contains no mechanism for the allocation of unforeseen profits, Justice Rowe determined that the parties in Churchill Falls had an implied obligation to cooperate:

Given the fundamental transformation of hydroelectric power from public good to private commodity, I cannot conclude that the parties intended the pricing formula in the Power Contract to operate under any and all circumstances, come hell or high water (Churchill Falls, para 181).

Hydro-Quebec breached this duty to cooperate by refusing to establish a price adjustment formula by way of mutual agreement. Justice Rowe maintained that Hydro-Quebec must be held to its obligation. 

Concluding Thoughts  

CFLCo utilized multiple arguments to attempt to convince the SCC to intervene in their contractual relationship with Hydro-Quebec. Yet they were not simply asking to broaden the scope of the contract; rather, CFLCo asked the SCC to limit the temporal scope of the contract so that it may enjoy the unforeseen profits of the plant. CFLCo will eventually receive all of these profits when the contract ends in 2041, and then for another 118 years until its lease expires. Arguably, CFLCo was not requesting to protect the equity of the contract at all, but was seeking to undo certain aspects of the contract while keeping the ones that suited it. The SCC saw through CFLCo’s arguments and dismissed the appeal: neither good faith nor equity could justify renegotiating a binding contract.