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Court of Appeal of Quebec Releases Decision in Churchill Falls (Labrador) Corporation Limited v. Hydro-Quebec

On August 1, 2016, the Court of Appeal of Quebec (the Court) released its decision in Churchill Falls (Labrador) Corporation Limited v. Hydro-Quebec (the Decision). The Decision relates to the terms of a 65-year power purchase agreement signed in 1969 between Churchill Falls (Labrador) Corporation Limited (CFLCo) and Hydro-Quebec (the Contract). At trial, CFLCo had argued that the Contract was unfair, and should be renegotiated between the parties, as it permitted Hydro-Quebec to earn large profits that were unforeseeable at the time the Contract was signed. CFLCo lost at trial, and appealed. The Decision dismissed the appeal with costs, and upheld the findings of the trial judge, holding that a renegotiation of the Contract would deprive Hydro-Quebec of the benefits which motivated it to sign the Contract in the first instance.

In 1969, after several years of negotiation, CFLCo and Hydro-Quebec signed the Contract whereby Hydro-Quebec was entitled to purchase virtually all of the electricity produced by CFLCo's hydro-electric plant (the Project). The Contract provided that CFLCo would receive a fixed price for the electricity purchased from the Project by Hydro-Quebec over a 65-year period. The price would be determined according to the final capital cost of the Project, and would decrease in increments over time.

In February 2010, CFLCo commenced proceedings against Hydro-Quebec, asking that it renegotiate the pricing terms of the Contract. Due to changes in the energy markets, CFLCo took the position that, under Quebec law, the obligation to act in good faith required Hydro-Quebec to renegotiate the specific terms of the Contract relating to the price of electricity. CFLCo lost at trial, and then appealed. In the Decision, the Court dismissed the appeal by CFLCo, with costs, and upheld the 2014 trial decision, holding that there was no obligation on the parties to renegotiate the specific term of the Contract which dealt with price.

CFLCo submitted that the findings of fact made by the trial judge were not rooted in the evidence at trial, and that the approach favoured by the judge under which "a contract is a contract" impeded the trial judge from appreciating the complexity of the bargain struck by the parties, which CFLCo argued was based on an equitable division of risk and benefit. As a result, CFLCo argued that the unforeseen circumstances in the world of energy, which resulted in substantial profits for Hydro-Quebec, should now be shared, given the general principle of good faith set out in articles 6, 7 and 1375 of the Civil Code of Quebec.

The Court rejected CFLCo's submissions. It held that the findings of fact made by the trial judge were based on firm evidence. The parties had chosen, freely and voluntarily, not to vary the price of electricity in the Contract, even though they were fully cognizant that this price could fluctuate over the life of the Contract. In doing so, the Court accepted the evidence tendered by one of Hydro-Quebec's experts at trial that a declining price under a power purchase agreement is a common practice in long-term agreements, as it allows power projects to raise and pay off large amounts of debt, while permitting investors (like CFLCo) to retain a majority equity interest despite contributing a small portion of the total funds.

The Court also dismissed CFLCo's argument based on good faith under the Civil Code of Quebec. It held that Hydro-Quebec's actions over the lifetime of the Contract were not a failure to act in good faith as the parties had, on several occasions, concluded parallel contracts which included real concessions in favour of CFLCo. The further fact that CFLCo was currently a viable and prosperous business, and would at the end of the Contract have full control over the Project - a valuable power plant endowed with considerable potential - demonstrated that CFLCo was not experiencing hardship. The Court held that in these circumstances, to allow CFLCo's argument of good faith to succeed in the absence of hardship would be to grant relief based on a principle that does not exist under Quebec law.

The Decision was released a week before a related judgment dated August 9, 2016 from the Quebec Superior Court on the interpretation of the Contract (the Superior Court Decision), which also ruled against CFLCo. The Superior Court Decision relates to the specific provisions in the Contract dealing with the amount of electricity CFLCo is permitted to withhold from Hydro-Quebec and sell to third-parties. Under the terms of the Contract, CFLCo is only permitted to withhold two blocks of energy - of 225 and 300 megawatts, respectively - from Hydro-Quebec. (Price was not considered in the Superior Court Decision, as that term of the Contract had already been considered and decided in the Decision released the prior week.)

In the Superior Court Decision, Hydro-Quebec successfully argued that the renewal of the Contract meant that its electricity entitlement and scheduling rights, when automatically renewed on September 1, 2016 for a new 25-year period, would be the same as under the Contract. The result means that once the Contract is renewed, CFLCo will continue to be entitled to only capture and sell the two fixed blocks of power from the Project to third parties, such as the Province of Newfoundland and Labrador. Hydro-Quebec will continue to get virtually all of the electricity generated from the Project. Based on the holdings in the Decision and the Superior Court Decision, this means that Hydro-Quebec will also continue to reap the majority of the financial benefits from the Project for the next 25 years.

The Decision and Superior Court Decision represent the latest round of an ongoing dispute between the Province of Newfoundland and Labrador - which owns CFLCo through Nalcor, its provincial Crown corporation - and Hydro-Quebec. In the 1970s and 1980s, Newfoundland and Labrador twice unsuccessfully challenged Hydro-Quebec's rights under the Contract. In both instances (read the cases here and here), the Supreme Court of Canada ruled against Newfoundland and Labrador, and upheld the validity of the Contract.