Canada: The Epilogue In Churchill Falls: A Contract Is A Contract

Last Updated: January 14 2019
Article by Jo-Anne Demers and Jérémie Torres-Ceyte

This decision is sure to remain noteworthy in Quebec civil law as it sets out the law on unforeseeability and the scope of good faith, while rightly reiterating that a contract is a contract.

The long and fascinating legal saga in Churchill Falls has finally come to end before the Supreme Court. Gascon J., writing for the majority, quashed Newfoundland's Churchill Falls' hopes of obtaining a modification to the contract binding it to Hydro-Québec. At the same time, the judges of the Supreme Court provided significant clarification to the scope of good faith in contractual matters, notably in respect of the doctrine of unforeseeability (imprévision), which was at the heart of the appellant's arguments.

The facts of this case are well known and need not be repeated at length. In 1969, following long and arduous negotiations, the parties, Brinco, the predecessor of Churchill Falls (Labrador) Corporation Limited [hereinafter Churchill Falls] on the one hand, and Hydro-Québec on the other, entered into a "power contract". The contract provided, inter alia, that Churchill Falls would sell the electricity produced by a hydroelectric plant to Hydro-Québec for a period of 40 years with an automatic renewal for a period of 25 years, at a price that would decrease in steps. In exchange, Hydro-Québec agreed to provide financial support to Brinco for various transactions involving significant financial risk. Several disputes arose from this contract, fueling abundant and complex legal proceedings on which the Supreme Court had already ruled on three occasions. Beyond the legal controversies, the focal point of the debate was the contractually established price for the delivery of electricity, and it is on this issue that the legal battle between the parties was focused in recent years. Invoking changes to the initial equilibrium reflected in the contract, Churchill Falls sought to impose an obligation on Hydro-Québec to renegotiate the price set out in the contract. It was in reality asking the Court to rule on the application of the doctrine of unforeseeability in Quebec law. Under this doctrine, judges would have the power to revise contracts on the request of a party, pursuant to a change of circumstance rendering its performance more costly for it.

Silcoff J. of the Superior Court rendered judgment in this case in July 2014. After considering the admissibility of certain evidence, he sought to determine whether and to what extent Hydro-Québec was required to renegotiate the contract initially concluded, on the basis of the duty of good faith and the duty to cooperate. In his view, there was no credible evidence grounding the conclusion that by refusing to renegotiate, Hydro-Québec had failed to comply with its duty of good faith.

The Court of Appeal confirmed the trial judge's approach. However, it also stated that there may be some overlap between good faith and unforeseeability because, in the Court's view, "the silence of the legislator on the subject of imprévision in the C.C.Q. is not an impediment to pleading that the duty to act in good faith can be invoked to remedy a disrupted contractual equilibrium in circumstances which could give rise to the application of the theory of imprévision in jurisdictions where such theory is specifically recognized by legislation."

The Supreme Court essentially confirmed the judgments rendered by the Superior Court and the Court of Appeal. Writing for the majority, Gascon J. conducted a detailed analysis of the doctrine of unforeseeability in relation to good faith in Quebec law. After reviewing the development of the doctrine in other legal systems, including French law, he noted that the doctrine does not seek to accommodate a party for whom the contract has simply become less beneficial; rather, it is a remedy that applies only when a party is financially endangered by full performance of the contract, which in Gascon J.'s view, excluded Churchill Falls from its application.

The crux of Gascon J.'s analysis irremediably condemned the appellant's arguments. After examining the choices made during the reform of the Civil Code of Québec, he noted "that the concepts — good faith and equity — favoured by the Quebec legislature to ensure contractual fairness are incompatible with a rule that would depend on external circumstances rather than on the conduct and the situation of the parties."

Gascon J. then elaborated on this statement in the remainder of his analysis. First, in support of the containment of the role of equity, because in his view, "equity is not so malleable that it can be detached from the will of the parties and their common intention". Next, and especially, in support of the statement that "[a]s helpful and fundamental as the concepts of good faith and equity are in protecting the contractual equilibrium in Quebec, it would be inappropriate to apply them ... to transform the objectives of corrective justice they are intended to protect into a mechanism of distributive justice that would be unpredictable and contrary to contractual stability."

Ultimately, the majority criticized the conduct of Churchill Falls, which, under the guise of good faith and cooperation, was attempting to get out of a contract that it had agreed to. Rowe J., in dissent, proposed a different approach. Based on a different view of the issue of contract characterization, which he considered a question of law, his reasons focused on the reconsideration of the trial judge's conclusions. He thus proposed an alternative characterization of the agreement between the parties, emphasizing the relational nature of the contract, which in his view, justified its overhaul.

This decision is sure to remain noteworthy in Quebec civil law as it sets out the law on unforeseeability and the scope of good faith, while rightly reiterating that a contract is a contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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