In this eagerly awaited Court of Appeal decision, a panel of five judges ruled on the scope of the duties of good faith and fairness in contracts, and more specifically, on the theory of imprévision in a long-term power contract signed in 1969 between Churchill Falls Corporation Limited ("Churchill Falls")and Hydro-Québec (the "Contract").

Pursuant to the Contract, which involved substantial undertakings on both sides, Hydro-Québec was required to purchase nearly all the power produced by Churchill Falls for a substantial period of time (initial term of 65 years). However, the Contract did not contain a clause to adjust the power purchase price, which was set until the term expired. The decision to exclude such a price adjustment clause had been taken following lengthy negotiations between the parties.

During the term of the Contract, there was a marked increase of the value of energy over the years due to changes in the energy market. Hydro-Québec was therefore able to benefit from purchasing the power at a price set in the Contract, and reselling said power at the substantially higher market price, thereby generating a substantial profit.

As a result of these market changes, Churchill Falls contended that Hydro-Québec had a duty to renegotiate the contract, in accordance with the principles of good faith, fairness, cooperation, and the reasonable exercise of contractual rights.

The trial judge dismissed the action by Churchill Falls. The Court of Appeal confirmed the judgment and dismissed the appeal, holding that Hydro-Québec is not required to renegotiate the power price clause.

It is expected that Churchill Falls will file for leave to appeal this ruling to the Supreme Court of Canada.

Key principles stated by the Court of Appeal

First, the Court of Appeal confirmed that the theory of imprévision was inapplicable in Quebec law. Pursuant to this theory, where the occurrence of unforeseen circumstances drastically affects one of the parties to a contract, the cocontractant must collaborate to remedy these effects.

That being said, in the words of the Court of Appeal, [translation] "the legislator's silence on imprévision in the Civil Code of Québec does not prevent a party from raising the duty to act in good faith to remedy a contractual imbalance that could fall within the theory of imprévision where it is specifically accepted in positive law." (para. 127)

In this instance, however, the Court held that the duty to act in good faith cannot compel Hydro-Québec to renegotiate a clause that had been duly negotiated by the parties when it was concluded. Indeed, the duty to act in good faith is not limitless:

[translation]

[139] To protect the interests of one's co-contractor assumes that one does whatever one is reasonably able to do so that the other party performs its obligations and receives that to which it is entitled. But does this also entail sacrificing one's own interests in full or in part (i.e. during the performance of the contract, to what one is entitled) to better serve the other? Must one impoverish oneself on one side in order to better enrich the other? If there exists in the theory of modern obligations such a thing as the positive duty of reciprocal goodwill raised above [182], and the thing so formulated is uncertain, it has not been conferred such a scope by the positive law in force in Québec.

Nothing obliges a party, whomever they may be, to "put the interests of the other contracting party first":

[translation]

"[140] […] Nor is there anything in the nature of the contractual relationship between the parties that justifies applying a functional equivalent of "much higher obligations of a fiduciary" alluded to by Justice Cromwell [185]. Such obligations exist in common law, or more specifically in equity, according to its own logic that is foreign to this debate. But there is nothing in Québec civil law, in a contractual relationship between seasoned and well-advised parties, who negotiated a complex contract with significant financial stakes every step of the way for many months, which obliges a party, whomever they may be, to "put the interests of the other contracting party first". A contract such as this is not a marriage, even of simple convenience. Such a form of "contractual solidarity", nearly absolute, would greatly surpass what is required of a party with respect to good faith."

The Court of Appeal also rejected the idea that the principle of fairness in civil law can compel a party to renegotiate a contract in such a context:

[translation]

[158] According to another aspect of the appellant's position, the fairness referred to in article 1434 C.C.Q. would justify the court's intervention where the contractual equilibrium is fundamentally altered during the performance of the contract. Fairness, another "amorphous notion, difficult to clearly identify and even more difficult to truly define" [206], is in turn used as an underlying guiding principle to develop an argument similar to the theory of imprévision. Even if the appellant's proposition was accepted for purposes of discussion, fairness could only enter into play in those types of situations contemplated [pure hardship, as discussed below in this bulletin]. To give this notion the scope attributed by the appellant would once again amount to introducing a form of distributive justice in contract law. That is not the role that the legislature conferred on the courts.

On the other hand, the Court of Appeal reiterated that the Court's ability to sanction the unreasonable exercise of one's rights flows from the general duty to act in good faith. Such a situation may give rise to judicial intervention where a party profits from a situation to take undue advantage. This objective facet of good faith therefore closely resembles the theory of imprévision without being identical.

In the same vein, the Court of Appeal did not hesitate to refer to the concept of hardship, as defined by the Unidroit Principles,in order to establish an interesting parallel with the unreasonable exercise of a right. Hardship requires "serious and unexpected difficulties with the performance" to justify judicial intervention, which is not the case in this instance:

[translation]

"[155] All the examples that have just been listed presuppose, and have as a common denominator, one or another form of serious and unforeseen difficulty during the performance of the contract. Among such difficulties there are likely genuine cases of hardship within the meaning of this term in the Unidroit Principles. The financial health or survival of a party to a contract is therefore threatened. In such conditions, 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 this co-contractor is not of good faith and is behaving in an irrational and inexplicable manner, in one word, unreasonable. The hypothesis of such a failure by the co-contractor to respect the requirements of good faith, and that of an abuse co-contractor committed in the exercise of a contractual right, are then very close. Perhaps they are even, at least in some cases, one and the same […].

[156] But the case in this instance does not support the conclusion that the appellant, in concreto, finds itself in a similar situation. Quite the contrary. Not only is it viable and even prosperous, but at a future and certain date, its commitments towards the respondent will come to an end and it alone will control its highly valuable facilities and equipment, with a significant cost potential. […] The appellant is today asking that the respondent share the profits to which the respondent is entitled under the power contract, which are much higher than the parties' initial expectations, but which are merely fair consideration for the risks assumed by the respondent in 1969."