An application by Churchill Falls (Labrador) Corporation (CFLCo) to reopen the 1969 power contract on the basis that circumstances have changed in a manner that was unforeseeable at the time of signing was rebuffed by the Quebec Superior Court1 because it relied on arguments that are inconsistent with the principles of Quebec contract law.

The basis of the claim

In 1969, following several years of negotiation, CFLCo and Hydro-Québec entered into a power contract for a 65-year period that entailed the sale of virtually all the power and energy to be generated by a hydroelectric plant to be built at Churchill Falls in Labrador.

To enable CFLCo to secure the financing required to build the plant, Hydro-Québec agreed under the power contract to assume most of the principal financial risks associated with the project. In return, Hydro-Québec would pay a fixed price, declining at pre-determined intervals over the life of the contract, for the power and energy it was to purchase. This ensured that Hydro-Québec would enjoy a stable cost of supply until the term of the contract as well as protection against inflation.

Since the oil shocks of the 1970s, the Province of Newfoundland and Labrador, which became the majority shareholder of CFLCo in 1974 through its subsidiary Newfoundland and Labrador Hydro, has been arguing that the pricing terms of the power contract are unfair because, being much lower than the current market prices for power and energy, they have allowed Hydro-Québec to earn profits that were unforeseeable at the time of signing. Meanwhile, CFLCo continues to receive only the revenue provided for under the power contract.2

In February 2010, given Hydro-Québec’s refusal to renegotiate the pricing terms of the power contract, CFLCo brought an action before the Quebec Superior Court accusing Hydro-Québec of breaching its obligations to act in good faith and to exercise its contractual rights in a reasonable manner. CFLCo asked the Court to reopen the power contract and to replace the stable pricing terms it contains with pricing terms that would fluctuate in accordance with market prices or, in the alternative, to terminate the power contract.

The ruling

Having found that the power contract was fair when it was signed in 1969, the Court described CFLCo’s action as an attempt to change the original contractual equilibrium and replace it with a new contractual paradigm that would be more favourable to CFLCo and Newfoundland. The Court found that if CFLCo’s action were to be granted, Hydro Québec would be deprived, for the remaining term of the power contract, of the stability of its supply costs and of inflation protection with respect to the operating costs of the plant, which was the reason Hydro-Québec entered into the contract in the first place. The Court said that there was no legal basis for CFLCo’s request that the Court revise or amend the power contract.

The Court recalled that the notion of the binding nature of contracts validly formed, as codified in Articles 1434 and 1439 of the Civil Code of Québec, is of fundamental importance to the economy of Quebec and to the fabric of Quebec’s legal system. The Court went on to say that this notion, along with those regarding the stability of contracts and the legitimate expectations that their provisions will be respected, form the cornerstone of contract law in Quebec. They are notions essential to the proper and orderly functioning of commercial relations in a global economy and free market society.

Observing that CFLCo was seeking to amend the pricing terms of the power contract by invoking circumstances that were allegedly unforeseeable at the time the power contract was signed, the Court noted the similarity between this argument and the doctrine of unforeseeability and recalled that, at the time of the reform of the Civil Code of Québec, the legislator deliberately chose not to introduce that doctrine into Quebec law and Quebec courts have always refused to apply it.

As for the obligation of good faith and the reasonable exercise of contractual rights, codified in Articles 6, 7 and 1375 of the Civil Code of Québec, the Court found that these notions refer to the parties’ conduct in exercising their contractual rights and not to the concept of equity or some abstract notion of good faith in the general sense. Consequently, although the obligation of good faith allows the courts to penalize a party whose conduct upsets the original contractual equilibrium, it does not allow them to question the fairness of a contract or to revise or amend it.

The Court expressed the opinion that it is legitimate for Hydro-Québec, both today and when the power contract was signed, to keep the benefits it obtained in return for assuming the risks under the power contract. The Court observed that by seeking to modify the pricing terms of the power contract, CFLCo is in fact attempting to do precisely what the obligation of good faith forbids it to do, that is, undermine the original contractual equilibrium agreed to by the parties.

What can we learn from this ruling?

This ruling confirms the general principle that, except in situations expressly provided by law, Quebec law does not grant the courts any power to revise or amend validly formed contracts. The decision thus confirms clearly and forcefully the importance under Quebec law of the fundamental principle of the binding force of contracts and the notion of contractual stability. Finally, it establishes that one party cannot invoke obligations of good faith or abuse of rights to circumvent the legislator’s refusal to introduce the doctrine of unforeseeability into Quebec law at the time of the reform of the Civil Code of Québec.