If an express provision in an agreement contains plain language, one party cannot allege that steps contrary to this provision were required to be taken by the other party by virtue of industry practice.
On January 23, 2009, the Alberta Court of Appeal affirmed the Queen's Bench decision that Marathon Canada had lawfully terminated an agreement with Enron Canada. The fact that the termination provision in the agreement was found to have been triggered was fortuitous for Marathon Canada, as it was "out of the money" on the contract.
The dispute in Marathon Canada Ltd. v. Enron Canada Ltd., 2008 ABQB 408; affirmed by 2009 ABCA 31, arose out of a natural gas purchase agreement (the "Agreement"), whereby Marathon Canada Limited ("Marathon") was the seller and Enron Canada Corp. ("Enron Canada") was the buyer (both parties being successors to the original parties to the Agreement).
When the U.S. company Enron Corp., Enron Canada’s indirect parent corporation, ran into financial trouble in the fall of 2001, its credit rating was downgraded to a B-, or "junk bond status". Within one hour of learning of this downrating, Marathon faxed a letter to Enron Canada alleging a Triggering Event of a Material Adverse Change, as set out in the Agreement, and terminated the Agreement.
A portion of the definition of Material Adverse Change in the Agreement included, with respect to Enron Canada and Enron Corp., long term debt unsupported by third part credit enhancement rated by Standard and Poors below BBB-. A Triggering Event was defined in the agreement as being the occurrence of a Material Adverse Change, unless the affected party was to establish and maintain a Letter of Credit for the other party (the "notifying party"). While Enron Canada responded to Marathon's letter by insisting that it was solvent and that no Triggering Event had occurred, it did not provide or maintain a Letter of Credit. The Agreement further provided that where a Triggering Event occurred, the notifying party could terminate the Agreement.
The trial judge determined that it was reasonable for Marathon to conclude that a Triggering Event of a Material Adverse Change had occurred in respect of Enron Corp., as set out in the Agreement, which entitled Marathon to terminate the Agreement. Enron Canada argued that it was the industry custom and practice for the notifying party to provide notice requesting the affected party provide performance assurance and allow reasonable time to comply before a right to termination arose. However, the Court concluded that the evidence did not establish such a well-known industry practice that there could be a presumed intent to be bound by it, particularly where the alleged practice was contrary to the plain language in the Agreement, to which the law clearly states that effect must be given.
Furthermore, because Marathon had supplied natural gas under the Agreement in November which Enron Canada had not paid for, the trial judge awarded Marathon damages plus interest for this amount owing. The trial judge also dismissed Enron Canada's counterclaim, concluding that the Agreement contemplated a "one way" arrangement which allowed Marathon, upon lawfully terminating the Agreement, to walk away without having to compensate Enron Canada for incurring the loss of the favourable price for the gas granted under the Agreement. While Enron Canada argued that the one way clause amounted to a penalty such that Enron Canada should be able to seek relief from forfeiture, the trial judge held that this was not a case where the parties had an unequal bargaining power such that it would be fair or equitable to deny enforcement of the one way provision in the Agreement.
Enron Canada appealed this decision. The Court of Appeal held that the trial judge's findings of fact, that a Triggering Event and Material Adverse Change had occurred under the terms of the agreement, and that there was no industry practice or commercial context which demanded that Marathon should have held back on its contractual rights, were reasonable. The Court further held that the trial judge did not misdirect himself on the law when interpreting the Agreement. Because Marathon was within its rights afforded by the Agreement when it terminated the contract, the Court concluded that the trial judge had not erred in finding that Enron had not made out its counterclaim. Thus, the entire appeal was dismissed.
This case demonstrates the inclination of courts to determine disputes based on plain language in the contract, as opposed to industry standard, particularly where sophisticated parties are involved and the party seeking to implicitly impose the industry standard on the contract was the drafting party.