No Early Termination Rights for Clients
Validity of Customary Imbalances Provision
By refusing leave to appeal in the Victoria matter1 earlier this summer,2 the Supreme Court of Canada has affirmed one of two significant rulings issued by the Quebec Court of Appeal (“QCA”) in theVictoria matter and the Peyrow matter.3 Both of these judgments were rendered in favour of our firm’s client Athena Energy Marketing Inc. (“Athena”).4 Although they touch upon a number of issues relevant to natural gas industry, these rulings are of particular importance as they affect the manner in which suppliers do business in Quebec.
In short, the Victoria matter confirms that Athena’s natural gas supply agreement should be properly qualified as a contract of sales and not of service. It therefore cannot be terminated by the client before term.
In the Peyrow matter, the QCA found that Athena, a natural gas vendor, possessed no specific expertise for establishing and forecasting a client’s energy consumption needs and that Athena had made no representations to its client in that respect. The QCA also decided that Athena had validly applied the Imbalances Provision that is typically found in all natural gas supply agreements, thereby reversing the judgment at first instance which had concluded that Athena should not have applied this contractual provision to properly mitigate its damages.
A commercial client will typically buy gas from a private natural gas supplier instead of from the local distributor company (i.e., Société en commandite Gaz Métro LLP (“Gaz Metro”) in Québec), in order to benefit from more diverse pricing schemes. While Gaz Metro offers a single, monthly fluctuating, price for the natural gas it sells to consumers, the natural gas supplier is namely able to offer a plethora of different market prices to its customers. The private supplier can also conclude long duration deals whereby the client will agree to buy a fixed daily quantity of gas at a fixed price for a term of several years. This allows the client to properly budget for its natural gas consumption expense which, in some cases, is one of the highest expenses of his business.
But what happens when the gas consumption of a client turns out to be significantly lower than expected, after he has entered into a multi-year fixed price deal? Can the client unilaterally terminate his natural gas agreement with the private supplier at any given time (as would be the case with a supply agreement concluded with Gaz Métro)? Can the client blame the supplier for improperly forecasting and establishing the fixed quantity of gas that he agreed to buy over the course of several years? In the Victoria and Peyrow matters, these questions were asked and answered, albeit in certain fact-specific contexts.
In Victoria, the QCA confirmed that the natural gas supply agreement between the parties was one of sale rather than services.5 Athena was found not to be acting as a natural gas “dealer” or “intermediary,” but rather as a seller which had to actually become owner of the gas it was reselling to its clients. Victoria was therefore legally precluded from terminating its natural gas supply agreement with Athena at any time – which it could have otherwise done with a service contract (after certain conditions had been satisfied). Victoria remained bound to honour its contractual obligations despite the marked drop in its natural gas consumption after it sold four of its buildings.
In Peyrow, the customer had contractually committed to take delivery of and purchase a fixed quantity of natural gas per year for a five-year term and at a fixed price. Peyrow’s annual gas consumption proved to be significantly less than the fixed quantity he agreed to take delivery of by way of contract. He placed the blame on Athena for not having properly established his future natural gas consumption and refused to pay Athena’s invoices regarding the natural gas he did not consume. The QCA found no manifest error in the trial judge’s conclusion that Athena did not possess the expertise nor the required factual knowledge to provide a forecast and establish Peyrow’s future natural gas consumption.6
It is also noteworthy that the QCA set aside the trial judgment in Peyrow and concluded that, absent any other agreement with its client, Athena was bound to apply the customary “imbalances” contractual provision obliging it to resell Peyrow’s unconsumed natural gas on a monthly basis at market price.7 The Court of Appeal also concluded that the trial judge had erred in finding that Athena had made no effort to reach Peyrow in order to allow him to liquidate his unconsumed natural gas in a manner other than that called for in the contract.8 Athena acted in good faith and was bound to apply the contractual resale clause,9 after having offered other possible solutions to Peyrow for the resale of his unconsumed gas.
The takeaway for the industry is not insignificant: regardless of market price drops or individual consumption decreases, a client cannot do away with its fixed price – consumption contract with a private supplier in Quebec. Our courts have rightfully recognized that it is because the client has obligated itself to buy a fixed quantity of gas for a defined period of time that it can benefit from a fixed price.10