Contracts and Reconciliatory Justice: Quebec v Pekuakamiulnuatsh Takuhikan

In Quebec (Attorney General) v Pekuakamiulnuatsh Takuhikan, 2024 SCC 39 [PT], the Supreme Court of Canada (“SCC” or the “Court”) developed a test to determine when contracts between the state and Indigenous entities engage the honour of the Crown. Applying this test to tripartite agreements between Canada, Quebec, and the Pekuakamiulnuatsh First Nation, the Court found Quebec liable for deficits assumed by the band council in supporting its chronically underfunded police force.

In addition to holding that the honour of the Crown applied, the SCC justified its order using a new remedial scheme of “reconciliatory justice” that transcends the restorative function of corrective justice (PT, para 148). The Court also clarified how the duty of good faith performance interacts with the honour of the Crown.

 

Facts

Pekuakamiulnuatsh Takuhikan is the band council representing the Pekuakamiulnuatsh First Nation. It is located in Mashteuiatsh, a community of between 2,000 and 4,000 people on the shore of Lac Saint-Jean in Quebec (PT, para 20).

In 1996, Pekuakamiulnuatsh Takuhikan entered into a tripartite agreement with the governments of Canada and Quebec whereby the governments would fund an Indigenous police force administered by the band council (PT, para 36). The agreement was based on the 1991 federal First Nations Policing Policy [Policy], which endeavours to provide First Nations with culturally appropriate police services equal in quality to those of similar communities in the region (PT, paras 26-27).

The tripartite agreement stipulated that Canada and Quebec would contribute a “maximum amount” of the cost of Mashteuiatsh’s police service (PT, para 83). If the actual cost was less than that amount, Pekuakamiulnuatsh Takuhikan was required to pay back the excess (PT, para 84). If the actual cost was more, Pekuakamiulnuatsh Takuhikan was responsible for all deficits incurred (PT, para 86). The agreement was renewed annually, with the governments’ maximum contributions varying from year to year (PT, para 84).

In fact, Canada and Quebec’s contributions were insufficient to cover the cost of the police service. Between 2013 and 2017, Pekuakamiulnuatsh Takuhikan assumed nearly $1.6 million of deficits (PT, para 37). Nevertheless, the service remained persistently underfunded and operated at an extremely low level of quality (PT, paras 129, 215).

 

Procedural History

Pekuakamiulnuatsh Takuhikan sued Canada and Quebec for the full amount of the deficits (PT, para 43). It alleged that the governments breached their duties of good faith, the honour of the Crown, and fiduciary duties by failing to negotiate sufficient funding for the police force (PT, para 44).

Superior Court of Québec

The Superior Court of Québec (“QCSC”) dismissed Pekuakamiulnuatsh Takuhikan’s claims (PT, para 48). The trial judge found that the parties had freely bound themselves to the maximum amounts stipulated from year to year, with Pekuakamiulnuatsh Takuhikan agreeing to cover any deficits (PT, para 51). There was no evidence of bad faith on the part of Canada or Quebec (PT, para 51). Further, the honour of the Crown and fiduciary duties did not apply, as the contract did not relate to a treaty or Aboriginal right under section 35 of the Constitution Act, 1982, Schedule B to the Canada Act 1982 (UK), c 11 (PT, para 52).

Court of Appeal of Quebec

The Court of Appeal of Quebec (“QCCA”) unanimously allowed the appeal and ordered Canada and Quebec to pay the full amount of the deficits (PT, para 54).

Bouchard JA criticized the trial judge for overemphasizing the law of contracts while ignoring the governments’ constitutional obligations (Takuhikan c Procureur général du Québec, 2022 QCCA 1699, paras 28-29, 61 [PT QCCA]). The honour of the Crown was engaged by the Policy, and the governments acted dishonourably by negotiating arbitrary and inadequate contributions (PT, paras 56-57). However, the QCCA did not specify whether there was an abuse of the good faith duty under articles 6 and 7 of the Civil Code of Québec, CQLR c CCQ-1991 (PT, para 136). It also found it unnecessary to rule on the question of fiduciary duties (PT, para 56).

Canada complied with the QCCA’s order to pay (PT, para 6). Quebec was therefore the sole appellant before the SCC.

 

Issues

The SCC considered two questions (PT, para 69):

1. Did Quebec’s conduct breach (a) its duty of good faith performance or (b) its obligations flowing from the honour of the Crown?
2. If so, what is the appropriate remedy for each?

 

Decision

An eight-judge majority of the SCC found that Quebec failed to meet the requirements of both good faith and the honour of the Crown. Writing for the majority, Kasirer J upheld the QCCA’s order to repay the full amount of the deficits. Côté J dissented alone.

Quebec Failed to Negotiate in Good Faith

When Quebec chose to renew the tripartite agreements year after year, it had an obligation to negotiate its contributions in good faith (PT, para 123). Although each contract lasted only one year and could be terminated at any time, several clauses contemplated an ongoing relationship in which funding for the police force would be reassessed and renegotiated annually (PT, paras 92, 94).

Quebec breached its duty to negotiate in good faith (PT, para 102). By refusing to negotiate sufficient funding each passing year, Quebec “undermined the respondent’s legitimate expectations and disrupted the parties’ shared contractual objective of maintaining the [police service]” (PT, para 125).

The Honour of the Crown Is Engaged by Contracts Related to Indigenous Difference and Credible Claims to Self-Government

The honour of the Crown was engaged by the tripartite agreements. While not all contracts between the Crown and Indigenous entities engage the honour of the Crown, it is engaged when two conditions are met (PT, para 145). First, the agreement must be entered into on the basis of a group’s Indigenous difference (PT, para 161). Second, the agreement must relate to an Indigenous right of self-government, either established or credibly claimed (PT, para 163). With respect to this second condition, Kasirer J left open the possibility that other Indigenous rights or interests besides self-government could also engage the honour of the Crown (PT, para 163). Nevertheless, the tripartite agreements fulfilled the stated criteria (PT, 172-84).

Since the honour of the Crown was engaged, Quebec’s failure to negotiate in good faith also constituted a failure to perform its contractual obligations with honour and integrity (PT, para 195). The honour of the Crown requires a higher standard which is superimposed on contractual obligations (PT, para 188).

Remedies: Corrective vs Reconciliatory

Regarding Quebec’s breach of good faith, Kasirer J decided that the appropriate remedy could not be determined on appeal (PT, para 205). Only the QCSC could determine the precise injury that Pekuakamiulnuatsh Takuhikan suffered from the breach (PT, para 208). If there had only been a breach of good faith, therefore, Kasirer J would have remanded the case to the QCSC to assess compensatory damages (PT, para 17).

In the end, however, Quebec’s breach of the honour of the Crown justified upholding the QCCA’s remedy, particularly with reference to the concept of “reconciliatory justice.” Unlike corrective justice, which seeks to restore the injured party to the position it would have been in but for another’s fault, reconciliatory justice requires courts to be creative and adaptable in crafting remedies that advance the long-term relationship between the Crown and Indigenous communities (PT, paras 148, 202-203). Given the circumstances of the case and the principle of proportionality, it was appropriate to require Canada and Quebec to pay the full amount of Pekuakamiulnuatsh Takuhikan’s deficits (PT, para 224).

Dissent

Côté J agreed that the honour of the Crown applied to the tripartite agreements (PT, para 263). However, she dissented on several key points.

In Côté J’s view, Quebec fulfilled its duties to negotiate in good faith and conduct itself honourably (PT, para 292). Côté J stressed that negotiating in good faith does not require the Crown to agree to every request made by the Indigenous party (PT, para 267). For its part, Quebec was flexible and attentive to Pekuakamiulnuatsh Takuhikan’s interests (PT, para 302).

Côté J also disagreed that a distinct remedial scheme was necessary to address the Crown’s breaches of good faith or honour (PT, para 318). In her view, corrective justice is sufficiently creative and adaptable to advance the goals of reconciliation (PT, para 322).

 

Analysis

Kasirer J’s ruling on the remedial principles of reconciliatory justice offers invaluable guidance to courts and Indigenous litigants. In particular, linking reconciliatory remedies to proportionality and the “culture shift” affirmed in Hryniak v Mauldin, 2014 SCC 7 gives courts an important mandate to expand Indigenous access to justice (PT, para 229).

Nevertheless, the decision could have undesirable consequences for the intersection of contract law and reconciliation going forward. The SCC took an important step in acknowledging that the honour of the Crown is engaged by certain contractual relationships—a conclusion to which the Court unanimously agreed. However, its application of good faith and honour to the tripartite agreements may discourage governments from using contracts as instruments of reconciliation in the future.

No Dishonour in Choosing Not to Contract

The majority decision acknowledged the deep injustice wrought by the chronic underfunding of Mashteuiatsh’s police service. However, it also affirmed that Quebec was free not to fund the police service at all. This tension casts doubt on the value of the honour of the Crown in voluntary contractual relations.

In his good faith analysis, Kasirer J stressed that Canada and Quebec’s negotiation tactics put Pekuakamiulnuatsh Takuhikan in a “no-win situation,” described by one witness as a “knife to the throat” (PT, paras 126, 131). Pekuakamiulnuatsh Takuhikan was faced with two bad choices: either it could continue paying the deficits incurred by its underfunded police force, or it could dismantle the force and instead rely on Quebec’s provincial police, which had already proven incapable of providing culturally appropriate services (PT, para 131).

Nevertheless, the majority’s analysis suggests that Quebec could have avoided its breach of good faith by simply declining to renew the agreements. Kasirer J made it clear that the good faith duty only arose when Quebec chose to continue the contractual relationship (PT, para 123). But this invites a bizarre conclusion. By giving Pekuakamiulnuatsh Takuhikan two bad choices, Quebec breached its duty of good faith. Yet if Quebec had terminated the agreement outright, leaving Pekuakamiulnuatsh Takuhikan with just one bad choice, no duty would have arisen.

This anomaly did not impact the QCCA’s determination that Quebec acted dishonourably, since Bouchard JA viewed Quebec’s breach of the honour of the Crown as flowing from the Policy and not directly from the contract (PT QCCA, para 118). In contrast, the SCC’s finding of dishonourable conduct appears to rely on its parallel finding that Quebec had a specific duty to negotiate in good faith (PT, paras 185-97). The result is that the honour of the Crown may have no effect when governments exercise their freedom not to contract.

Agreements May Not Be Kept

Côté J’s concerns with the majority ruling are summed up in the epigraph to her reasons: pacta sunt servanda (“agreements must be kept”). She stressed that Pekuakamiulnuatsh Takuhikan did not seek to have any part of the tripartite agreements annulled or declared abusive (PT, para 255). In other words, Pekuakamiulnuatsh Takuhikan accepted that it freely agreed to the terms, including its responsibility to assume any deficits incurred by the police force. Yet the majority decision, Côté J complained, uses good faith and the honour of the Crown to impose obligations that neither party agreed to (PT, para 241).

Despite the majority’s intentions, Côté J argued that using these principles to “rewrite” the agreement harms reconciliation in at least three ways. First, allowing parties to renegotiate final and certain terms undermines reconciliation (PT, para 287). Second, the majority’s approach ignores Pekuakamiulnuatsh Takuhikan’s agency and financial autonomy (PT, para 311). Third, the decision could discourage governments from signing similar contracts with Indigenous entities in the future (PT, para 323).

In my view, Côté J’s third concern is the most pressing. Kasirer J noted that contracts are one of the instruments available to support reconciliation (PT, para 158). Among their key benefits is that they allow governments to pursue a broad range of reconciliatory objectives while ensuring predictable outcomes. However, this benefit is jeopardized when principles like the honour of the Crown are used to impose liability that was not explicitly contemplated by the parties. Since the SCC also suggested that governments may avoid liability by exercising their freedom not to contract, they may be hesitant to pursue reconciliatory contracts in the future.

 

Conclusion

Broadly, Kasirer J’s decision accomplishes two important tasks in the law of reconciliation. First, it provides greater certainty as to when contracts between the state and Indigenous entities engage the honour of the Crown. Second, it affirms “reconciliatory justice” as a distinct remedial scheme and authorizes courts to apply it flexibly.

However, the ruling also casts doubt on the future of reconciliatory contracting. Arguably, the SCC invoked good faith and the honour of the Crown to displace key principles of contractual interpretation and liability. To the extent that governments rely on those contractual principles to ensure transparent, certain, and sustainable agreements, they may be less willing to use contracts as an instrument of reconciliation going forward.

 

This article was edited by Jeremy Vyn.