2016 QCCA 1229, 2016 QCCA 1229

Churchill Falls (Labrador) Corporation Ltd. c. Hydro-Québec 2016 QCCA 1229 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-024690-141 (500-17-056518-106) DATE: August 1, 2016 CORAM: THE HONOURABLE FRANCE THIBAULT, J.A. YVES-MARIE MORISSETTE, J.A. MARIE ST-PIERRE, J.A. MARK SCHRAGER, J.A. ROBERT M. MAINVILLE, J.A. CHURCHILL FALLS (LABRADOR) CORPORATION LIMITED APPELLANT – Plaintiff v. HYDRO-QUÉBEC RESPONDENT – Defendant JUDGMENT * [ 1 ] This is an appeal from the judgment of the Superior Court, District of Montreal (the Honourable Joël A.

Silcoff) of July 24, 2014, which dismissed Appellant's motion introductory of suit. [1] 1- INTRODUCTION [ 2 ] On May 12, 1969, after several years of negotiation, the parties signed a power contract in virtue of which Respondent undertook to purchase virtually all of the electricity produced by the Churchill Falls hydroelectric plant. [2] The contract provided that Appellant, as the owner/operator of the plant would receive a fixed price for the electricity purchased which price would decrease in steps over the 65 year term of the contract.

The price as set forth in the contract would be determined according to the final capital cost of the project. [ 3 ] Appellant submits that at the time the contract was signed, the parties intended to share equitably the risks and benefits flowing from it. As an indication of such intention, Appellant raises the interdependence of the parties and the circumstances surrounding the execution of the contract. According to Appellant, the extent of profits now being received by Respondent upon the resale of electricity was unforeseeable at the time that the risks and benefits were agreed upon.

This disproportionate division of profit is incompatible with the interdependent relationship of the parties and is divorced from the original division of risk and benefit agreed upon in the power contract.

Respondent's enrichment does not originate in the contract because, Appellant argues, the allocation of this windfall was not foreseen by either party. [ 4 ] Appellant continues that in the circumstances, Respondent's obligation to act in good faith, to cooperate and to exercise its contractual rights reasonably, requires that the pricing under the contract be renegotiated. [ 5 ] Given Respondent's refusal to renegotiate the power contract and following the final reimbursement of the loan undertaken to finance the construction of the power plant, Appellant instituted proceedings. The suit was dismissed.

The judge concluded that the relationship between the parties was not based on an equal sharing of the risks and benefits flowing from the contract. To the contrary, Respondent incurred the majority of the risk to enable Appellant to debt finance the construction of the plant without any reduction in Appellant's equity in the project. In consideration of the risk assumed, Respondent obtained the guarantee of fixed stable pricing as well as the protection against inflation of operating costs.

In the judge's opinion, Appellant's position that the price should be renegotiated would deprive Respondent of the benefits which motivated it to sign the power contract in 1969. [ 6 ] For the reasons which follow, the Court is of the opinion that the appeal should be dismissed with legal costs.

2- THE FACTS [ 7 ] On April 17, 1953, the British Newfoundland Corporation Limited ("Brinco") was incorporated. The shareholders were a consortium of British and Canadian industrial, banking and mining companies. [3] [ 8 ] On May 20, 1953, the legislature of Newfoundland and Labrador passed a law [4] to enable Brinco to explore and develop the hydroelectric resources of the Hamilton River, renamed Churchill in 1965. [5] The next day, an agreement was signed. Brinco undertook to invest the monies necessary for this purpose.

In exchange, Brinco received the exclusive right to explore and develop a large portion of Labrador [6] for 99 years renewable for a second term of 99 years. [7] [ 9 ] On January 31, 1958, Hamilton Falls Power Corporation Limited was incorporated as a wholly owned subsidiary of Brinco. [8] It subsequently became Churchill Falls (Labrador) Corporation Limited, [9] the Appellant. [10] [ 10 ] On June 30, 1958, Brinco assigned to Appellant part of its rights to develop the hydroelectric potential of the upper Churchill River. [11] On May 26, 1960, Appellant gave notice of the exercise of its rights to develop as provided by the agreement of May 21, 1953. [12] [ 11 ] On March 13, 1961, the House of Assembly of Newfoundland and Labrador enacted legislation approving a lease to Appellant.

This legislated lease signed on May 16, 1961 granted to Appellant for a period of 99 years, renewable at its option for an additional 99 years, the exclusive right to certain parts of the Churchill River and its watershed for the purpose of generating hydroelectric power [13] in consideration of a rental equal to 8% of the profits plus a fixed royalty. [14] [ 12 ] Until the early 1960's one of the obstacles to the development of the hydraulic power of the Churchill River was financial.

To obtain a loan, the Appellant required a creditworthy customer who would undertake to purchase on an ongoing basis virtually all of the electricity generated by the plant irrespective of its needs. Respondent met these requirements.

Discussions commenced in March 1961, [15] and on the 23 rd of that month, [16] Brinco made a proposal to Respondent which was refused by Respondent on May 15, 1961 by a letter indicating its preference to develop its own hydraulic resources. [17] [ 13 ] There ensued several unsuccessful negotiations between Appellant and Respondent and between Appellant and other potential purchasers in Ontario and the United States of America. [18] Correspondence of March 19, 1964, [19] and a statement by the Quebec Premier on July 8, 1964, [20] indicate that negotiations had completely broken down.

Respondent resumed work on its own energy projects. [21] However, in 1965, discussions between the parties resumed and draft letters of intent were exchanged. [22] In its annual report, Respondent wrote that the construction of Manic-3 could be deferred if work on the Churchill Falls project would commence in the near future. [23] [ 14 ] The parties reached an agreement in 1966.

The letter of intent signed on October 13, 1966, expresses their intent to conclude a power contract. [24] Respondent undertook to purchase all the electricity generated (Section 1); Appellant would "retain" up to 300 megawatts of electricity (Section 10); the term of the contract would be two periods of 40 or 44 years with a right of renewal at Respondent's option (Section 11); Respondent undertook to pay for all the electricity made available to it in virtue of the "take or pay" clause [25] in

Section 24 (Section 15); the price of the electricity was fixed and decreased every five years (Section 16); a price adjustment was foreseen as a function of capital cost (Section 17); the parties agreed to a "take or pay" clause in virtue of which for a period of 25 years commencing at the completion of the plant, Respondent would make sufficient payments to cover the annual costs of Appellant's debt service and other fixed costs (Section 24). [ 15 ] A number of events occurred after the execution of the letter of intent. These had an impact on the content of the eventual contract.

Firstly, substantial project cost overruns were incurred. Secondly, it was difficult to obtain financing. Consequently, Respondent agreed to assume certain additional liability and financial risk. [26] [ 16 ] The minutes of a joint meeting of the executive committees of the Boards of Directors of Brinco and Appellant held on April 10, 1968, [27] record the aforementioned changes. The chairman, Mr. Donald Gordon, explains to the members of the executive committee that the negotiations with Respondent required that certain decisions be made.

The purpose of the joint meeting was to inform the attendees of the status of discussions with Respondent and to obtain their instructions for the negotiating team as to positions to adopt regarding the negotiations. [28] The minutes of the meeting indicate that Respondent insisted on five points including an option in its favour to renew the power contract for an additional 25 years at a fixed rate of its 2 mills/kWh. [29] The purpose of this extension was to spread out the project costs over a longer period given the increase in the cost of the project.

The minutes indicate that Respondent had clearly let it been known that should Appellant attempt to qualify the rate based on considerations extraneous to the contract, the purpose of the extension would be defeated. [30] Appellant's negotiating team was authorized to negotiate an extension of 25 years at the rate of 2 mills/kWh on the condition that Respondent undertake to exercise the option no less than 10 years prior to the expiry of the contract: 1. Renewal of the contract Hydro-Quebec wished to be able to project a lower mill rate than the present draft of the contract permitted.

Due to increased costs and escalation the effect of the present term of 44 years from first delivery or 40 years from completion indicated an average mill rate considerably in excess of that contemplated in 1966. Accordingly, they had requested a 25 year extension of the contract on a flat mill rate basis suggested at two mills per kilowatthour. They wished this to be in the form of an option. This would produce a gross revenue of $60-65 million per annum. There would be no debt outstanding.

Should CFLCo attempt to qualify the rate by the addition of escalators or make any provision for its tax position, the purpose of the extension would be defeated. Although the Churchil [sic] project was marginally more attractive then [sic] nuclear power today, it was conceivable that it would not be in 40 years’ time.

It was obvious that a commitment on the extension was preferable to an option and it also appeared desirable to endeavour to have the mill rate expressed in either U.S. or Canadian funds at the option of CFLCo in order to afford the greatest protection against serious devaluation of the Canadian dollar. The meeting authorized the negotiating team to conclude an arrangement with Hydro-Quebec for an extension, by

way of option to them of the term of the contract of 25 years at two mills per kilowatthour on the condition that they exercised such option at least ten years before termination of the contract and preferably much sooner.

It was also felt desirable to endeavour to secure for CFLCo the option to have the price payable in either Canadian or U.S. dollars if this was achievable. [31] [ 17 ] Throughout the period from February to May 1968, the parties continued to negotiate principally on the renewal terms of the contract. [32] They finally agreed on an automatic renewal for a period of 25 years at the fixed rate of 2 mills/kWh [33] which was to Appellant's advantage since Respondent had sought a renewal at its option. [ 18 ] It was provided that the project be funded by the issuance of mortgage bonds in the amount of $US 500 million and $Can 50 million. [34] The lenders required that Appellant self finance an additional amount equal to 1/3 of the foregoing sums. [35] To help satisfy this requirement, Respondent agreed to inject $Can 115 million into the project. [36] [ 19 ] The power contract was signed on May 12, 1969, slightly more than two and one half years after the letter of intent. [ 20 ] The power contract provided that Appellant would sell virtually all of the electricity generated by the plant for a period of 40 years.

It contains an automatic renewal clause for a period of 25 years (Section 2.1 and 3.2); the purchase price for the electricity is fixed and decreases three times every five years and then once after ten years after which it remains stable. The rates were fixed as a function of the final capital cost of the project and a mathematical formula determined the manner of adjusting the rates to take into account such costs (Section 8.2). [ 21 ] The contract provides for the retention by Appellant of a defined quantity of electricity to supply its subsidiary, Twin Falls Power Corporation (Section 4.2.2).

Appellant is also permitted to "recapture" up to 300 megawatts upon three years prior notice in order to meet the energy requirements of the Province of Newfoundland and Labrador (Section 6.6); each party was required to construct the transmission lines on its side of the Labrador Quebec boundary (Section 7.2); Respondent was granted the right to operate the plant in the event that Appellant would fail to do so (Section 4.2.5). [ 22 ] Respondent undertook various obligations. It guaranteed the completion of the work.

Thus, in addition to the $Can 700 million to be raised by Appellant, Respondent would fund the sums necessary to complete construction of the plant and to bring it into full operation. In such respect, it also undertook to provide the funds necessary to service the debt and cover operating costs prior to completion of the plant (Section 5.1). [ 23 ] Respondent also undertook to advance the necessary funding to service the debt in the event of Appellant's default (Section 5.4) and to pay any interest due by Appellant in excess of 6% (Section 15.1).

As well, in the event of a shortage of funds and as long as the financing was not repaid, Respondent undertook to advance to Appellant the funds necessary to make loan payments and to maintain and operate the plant (Section 12.1). Respondent would be required to make such advances even if the plant was damaged or destroyed, the whole with a view to servicing debt and to repair and restore the plant (Section 12.4). The power contract is not subject to termination in the event of force majeure (Section 17.1 and 17.2).

Moreover, it was agreed that if Appellant was unable to complete the project so as to deliver electrical energy pursuant to the provisions of the contract, then Respondent could act in its stead (Section 21.1). [ 24 ] We open parenthesis to summarize three Court cases which occurred following the opening of the power plant. The judgments were adduced in evidence to demonstrate the context of the parties' dealings. [37] [ 25 ] The Recall Case.

On August 6, 1976, the government of Newfoundland and Labrador required that Appellant supply it with 800 megawatts of power commencing October 1, 1983. [38] Appellant refused because to do so would be contrary to the power contract and to the provisions of the loan documents. [39] [ 26 ] The Province of Newfoundland and Labrador and Respondent each instituted proceedings before the courts of their respective jurisdictions.

Newfoundland and Labrador lost in first instance and the Newfoundland and Labrador Court of Appeal dismissed the appeal. [40] The same result was experienced in Quebec where the Superior Court declared that Appellant's default to sell to Respondent all energy produced by the plant subject to the permissible "recapture" would constitute a breach of contract. The Quebec Court of Appeal dismissed the appeal. [41] On June 9, 1988, the Supreme Court of Canada dismissed the appeal from the Newfoundland judgment [42] and declared moot that arising from the Quebec judgment. [43] [ 27 ] The Reversion Act .

On December 17, 1980 the Province of Newfoundland and Labrador passed legislation to retrocede to the Province the rights granted under the legislated lease. [44] Following a reference by the government on February 10, 1981, the Court of Appeal of Newfoundland and Labrador confirmed the validity of the legislation. [45] The matter was appealed to and pleaded before the Supreme Court of Canada, but during the advisement the parties requested that the Supreme Court not render judgment as they wished to negotiate a settlement. [46] However, the parties failed to agree [47] and on May 3, 1984, the highest Court, rendered a judgment in Reference re Upper Churchill Water Rights Reversion Act . [48] The Supreme Court of Canada held that the pith and substance of the law was such as to interfere with the rights of Respondent outside the territorial jurisdiction of Newfoundland and Labrador and was thus ultra vires of the legislature of that province. [ 28 ] The Final Capital Cost of the Plant.

The mill rate payable by Respondent under the terms of the power contract is a function of the final capital cost of the plant. Having failed to agree on such cost, the parties submitted the matter to arbitration. Dissatisfied with the arbitral decision, Appellant instituted proceedings before the Quebec Superior Court to determine the final capital cost. After judgment and pending appeal, the parties agreed and fixed the final capital cost of the plant at $Can 900 million. [49] [ 29 ] Over the years, Appellant recaptured the megawatts reserved for it in virtue of the terms of the power contract.

The electricity was sold to Newfoundland and Labrador Hydro who in turn resold it at a profit to Respondent. [ 30 ] On June 18, 1999 the parties entered into the Guaranteed Winter Availability Contract (GWAC) with effect retroactive to November 1, 1998 and expiring in 2041. [50] Respondent agreed to pay more for energy made available to it beyond the volumes foreseen by the power contract. In exchange, Appellant renounced to its discretion to make such additional capacity available and granted to Respondent the right to require delivery of such additional power.

[ 31 ] At the special meeting of the Board of Directors of Appellant where the GWAC was approved, William Wells, then Chief Executive Officer (CEO) of Appellant and chairman of the meeting, stated that the agreement would assure Appellant's financial viability until 2041. [51] At trial, Victor Young who was a subsequent CEO of Appellant added that the GWAC enabled Appellant to pay dividends to its shareholders. [52] 3- THE TRIAL JUDGMENT The admissible evidence [ 32 ] After a review of the facts as set forth in the preceding

section of this judgment, the trial judge addressed issues of admissibility of evidence relating to various documents and certain expert evidence. [ 33 ] The judge dismissed Appellant's application to adduce as testimonial evidence pursuant to

article 2870 Civil Code of Québec (" C.C.Q. "), three documents originating with Respondent but for which the actual authors could not be identified. [53] He also refused production into evidence of a document entitled "Statement of Intent Regarding Churchill Falls Negotiations" dated February 1, 1984, [54] because the document was subject to settlement privilege. [55] [ 34 ] The judge also refused production of the report of one of Appellant's experts, Mr. David P.

Massell, Doctor of History, entitled "Churchill Falls Narrative" dated November 30, 2011, [56] and to which report numerous documents were annexed. [57] This report summarizes the events leading up to the signature of the power contract in 1969. [ 35 ] The judge remarks that the dispute revolves around events occurring subsequent to the execution of the contract, particularly the changes in the electricity market, and the effect of such changes on the obligations of good faith and cooperation and on Respondent's obligation to exercise its rights in a reasonable manner. [58] The judge opined that since Mr.

Massell's report did not address these points, his chronology of events pre-dating the conclusion of the contract was not relevant. [59] [ 36 ] The judge added that Mr. Massell's report was neither useful nor necessary because it presented the documentation related to the negotiation and signature of the power contract in an incomplete and biased fashion. [60] Moreover, the judge added that the report went well beyond Mr.

Massell's field of expertise, as he had no particular knowledge of Respondent's business, the history of Quebec's "Quiet Revolution", negotiation of power contracts, finance or law. [61] The judge strongly rebukes Mr.

Massell for his lack of objectivity. [62] The refusal to permit the production of the Massell report encompassed the numerous documents annexed thereto. [63] The judge also ruled that these documents were not to be considered as part of the record distinct from the report. [64] [ 37 ] Given his decision not to allow the production into evidence of the Massell report, the judge ruled that he need not consider the report of Mr. Savard, the expert witness called by Respondent to rebut the evidence of Mr. Massell. [65] [ 38 ] Appellant also filed an expert report of Mr.

John Dalton, dated October 8, 2010, analysing the power contract and entitled "Evaluation of the Power Purchased Contract for the Churchill Falls Project when Negotiated and under Current Market Conditions". [66] [ 39 ] The judge remarks that there are a number of points of agreement between Mr. Dalton and the Respondent's expert, Mr. Carlos Lapuerta, principally:

a) the contract was a reasonable one for its time;

b) the full potential of Churchill Falls had to be developed for the project to be cost effective;

c) because of the distance factor, the cost of transmission had to be amortized over the largest amount of power possible;

d) hydroelectric facilities are relatively immune to inflation because once capital has been committed, operating costs are small;

e) the contract allocated risk efficiently from Appellant's perspective and that of the lenders;

f) Respondent assumed many of those risks;

g) the fixed price allowed Appellant to finance the project;

h) Appellant got to build the project and to largely achieve its return objectives;

i) there had to be a purchaser or purchasers prepared to commit to all of the power;

j) as a result, Appellant encouraged Respondent to enter into the contract on the basis that Churchill Falls power would be cheaper than Respondent's alternatives, and the latter made its choice on that basis;

k) protection from inflation was one of the benefits Respondent got under the contract;

l) the contract gave Respondent a higher degree of inflation protection than would pursuing its own projects. [67] [ 40 ] Mr. Dalton acknowledged that the pricing provided in the power contract reflected the capital cost of the project and the cost of financing it. [68] The pricing was reasonable given the market for electricity in 1969 when the contract was signed. [69] However, the electricity market has significantly evolved since 1969 such that the value of the power sold pursuant to the contract has increased considerably. [ 41 ] In Mr.

Dalton's opinion, the Respondent has benefitted from the increased value of the electricity resulting from the unforeseen changes in the market whereas Appellant continues to be bound by a price structure which is out-of-date. [70] Mr. Dalton specified the

changes which have occurred in the market for electric power since 1969:

a) significant increases in oil prices due to "oil price shocks", particularly in 1971-1973 and 1979-1980;

b) an era of high inflation;

c) reduced public confidence in nuclear energy;

d) increased exports by Respondent at profitable rates to New England and New York State;

e) statutory changes to Respondent's mandate permitting "... a more aggressive pursuit of export market opportunities";

f) the emergence of broader wholesale markets in the United States due to the adoption of "Open Access" regulations by the United States Federal Energy Commission (FERC) and to the construction of enhanced transmission interconnection facilities;

g) the structural and administrative changes adopted by Respondent to take advantage of the newly available expanded wholesale electricity markets in the United States. [71] [ 42 ] While recognizing Mr. Dalton's expertise, the judge questioned his objectivity as well as his analysis of certain salient facts and thus doubted the credibility, reliability and probative value of the opinions expressed in the Dalton report. [72] The judge emphasized Mr.

Dalton's failure to consider the joint meeting of the Boards of Directors of Brinco and Appellant held on April 10, 1968, wherein were expressed the significant stakes underlying the power contract and the reasons which led the parties to conclude the pricing structure. [73] [ 43 ] The judge's concerns over the probative value of the Dalton report led him to conclude that the report did not support the relief sought by Appellant. [74] [ 44 ] On the other hand, the judge accepted the expert report dated May 28, 2012 of Mr.

Lapuerta filed by Respondent and entitled "An Economic and Financial Analysis of the Contract Between Hydro-Québec and Churchill Falls (Labrador) Corporation Limited". [75] He concluded that this report was credible, reliable and convincing. [76] Accordingly, the judge relied heavily on this report citing long extracts. [ 45 ] According to Mr. Lapuerta the power contract of 1969 reflects the following paradigm which the judge adopts: 20.

To summarize, the parties chose the following contractual paradigm: Hydro-Québec accepted significant risks, but enjoyed cost certainly and protection against inflation, while CFLCo secured the ability to raise large amounts of debt and to earn a relatively secure return on investment, and Brinco retained a majority equity position. [77] [ 46 ] Even though the electricity market has evolved since 1969, Mr. Lapuerta expressed the opinion that the parties to the contract were not unaware that the price of electricity could vary considerably by way of increase or decrease during the long life of the contract.

Contrary to Appellant's expert Mr. Dalton, Mr. Lapuerta believed that the uncertainty of change in the future price of electricity was known to the parties ("known unknowns") and it was precisely to guard against such uncertainty that the parties agreed to the fixed price

schedule in the contract. [78] [ 47 ] According to the judge, Appellant does not contest the fairness of the power contract at the time of its execution on May 12, 1969. [79] Rather, it questions Respondent's refusal to renegotiate the pricing terms in order to take into account subsequent significant changes in the Quebec and North American energy markets. These changes have enabled Respondent to profit enormously from the contract in a manner not contemplated by the parties at the time it was signed.

Given the principles of good faith, the obligation to cooperate and the duty to exercise contractual rights reasonably, Respondent is bound to renegotiate the price with particular regard for the relationship between the parties and the significant changes in the market since 1969. [80] [ 48 ] Appellant argues that the duty of good faith and the doctrine of abuse of rights set forth in articles 6, 7, 1375 and 1434 C .C.Q. confirm the intent of the legislator to introduce the notion of contractual equity into the Civil Code of Québec . [81] This is not the doctrine of imprévision , but rather, a duty to act in a manner which reflects the relationship binding the parties and their reciprocal expectations with a view to maintaining the equilibrium of the contract. [82] Once this equilibrium is disrupted, the Court can intervene to re-establish it, according to Appellant's submissions. [83] [ 49 ] Respondent maintains that Appellant's position is not based on any recognized legal principle.

Moreover the facts of the case do not support the relief sought since the pricing in the contract reflected the risks assumed by Respondent which allowed the project to come to fruition. The power station will have enormous value upon the expiry of the power contract. The contract was an equitable and reasonable bargain when it was struck in 1969 and remains so today. [84] [ 50 ] Respondent adds a reference to

article 1439 C .C.Q. which states that a contract may not be "resolved, resiliated, modified or revoked" except on grounds recognized by law or by agreement of the parties. [85] Appellant's position closely resembles the doctrine of imprévision rejected by the Quebec legislator and which is not otherwise recognized in Quebec. [86] Respondent adds that the duty of good faith relates to the behaviour and conduct of parties, not to unforeseen or unpredicted circumstances in their relationship. [87] [ 51 ] The judge thus enunciated the issues in the case, as follows:

(1) In the circumstances giving rise to the negotiation and signature of the Power Contract and in light of the events occurring subsequent thereto, in refusing to renegotiate the pricing structure for the future, is Hydro-Québec in breach of its civil law duties of good faith and cooperation and that of exercising its contractual rights in a reasonable manner?

(2) In the affirmative, can the Court intervene in order to grant what it considers appropriate equitable relief?

(3) In the affirmative, what is the appropriate relief?

(4) Under reserve of the forgoing, is CFLCo’s claim prescribed or otherwise barred by waiver, ratification, fin de non-recevoir or other similar doctrine? [88] THE FIRST TWO GROUNDS: Has Respondent breached its duties of good faith and cooperation and its obligation to exercise its contractual rights in a reasonable manner?

In the affirmative, can the Court intervene in order to grant what it considers appropriate equitable relief? [ 52 ] The judge was of the view that the relationship between the parties and their respective expectations should be gleaned from the contract. [89] [ 53 ] In the letter of intent of October 13, 1966, [90] the parties agreed to an option to renew at an undetermined price. However, this approach was quickly abandoned for financial considerations. These concerns are set forth in the minutes of the joint meeting of the Boards of Directors of Brinco and Appellant held on April 10, 1968.

The increased construction costs for the project made the contract far less viable economically for Respondent looking 40 years forward.

The judge cites large portions of these minutes which have been quoted above in this judgment. [91] [ 54 ] The judge concludes that the absence of a price indexation clause in the contract was the result of a negotiation and the price as indicated reflects the intention of the parties at the time the contract was signed. [92] The judge states that the contract was freely negotiated. [93] He particularly found that the evidence in no way supported Appellant's contention that it was in a disadvantaged negotiating position. [94] [ 55 ] The judge analyzed the sharing of risk under the contract.

He concluded that most of the risks relating to financing and construction costs of the Churchill Falls project were assumed by Respondent despite the fact that Appellant remained the project manager and owner. In return, Respondent obtained protection against the increase of electrical prices throughout the duration of the contract, including the 25 year renewal term.

The judge characterizes this as reasonable consideration given the significant risks assumed by Respondent. [95] [ 56 ] The judge acknowledged numerous changes in the electrical market since the signature of the contract in 1969 but he refuted Appellant's contention that these changes were unforeseeable. In such regard he adopted the conclusions of Respondent's expert, Mr.

Lapuerta and his notion of "known unknowns". [96] Thus, the judge concluded that the parties to the contract knew that the future was uncertain and that the price of electricity was subject to fluctuation; it was a known unknown. [ 57 ] Appellant obtained what it sought – a long term contract obliging Respondent to purchase all the energy produced by the Churchill Falls project, irrespective of Respondent's requirements (take or pay) at a price which guaranteed to Appellant, almost risk free, the financing and construction of the project as well as a reasonable return on investment. [97] Respondent obtained a supply of electricity at a price comparable to its own hydroelectric projects together with a comparable stability of that price and protection against inflation. [98] [ 58 ] The judge refuted Appellant's argument based on changes in the market for electricity: [517] To accept CFLCo's restrictive assertions regarding the limited nature of what Hydro-Québec bargained for and "got", requires the Court to ascribe an intention, on the part of Hydro-Québec, as to its objectives in negotiating the Power Contract not reasonably supported by the evidence.

Moreover, it requires an inappropriate and restrictive

interpretation of the Hydro-Québec Act regarding the allegedly limited scope of the mandate of Hydro-Québec, as it existed from time to time and at all times relevant to the present proceedings. [518] It is not relevant whether the amendments to the Hydro-Québec Act had or had not changed its mandate as it relates to the matters in issue in these proceedings and, accordingly, whether there may be "...something different that [its] getting today ". These changes, if they did occur, were not intended to nor did they adversely affect the interests of CFLCo.

It does not follow, seeing the nature of this relationship described above that, for this reason alone , it " ... should share the [allegedly] unexpected benefits ". [519] In this context, the only question to be asked and answered is whether, as CFLCo contends, by reason of these amendments to the Hydro-Québec Act , the contractual obligation of good faith and cooperation and the duty to exercise its rights in a reasonable manner require Hydro-Québec to: " ...share the [allegedly] unexpected benefits " in the manner sought in these proceedings. [520] Seeing the eidence [sic] as to the nature of the relationship between the parties and of the contractual equilibrium agreed to under the Power Contract, the Court would conclude there is no such justification in fact or in law to support this contention. [99] [Emphasis in original.] [ 59 ] Moreover, the judge underlined that the action continued a juridical saga commenced by the Province of Newfoundland and Labrador with a view to challenging the contract. [100] He added that the Province encouraged Appellant to institute proceedings and assumed the cost thereof. [101] The foundation for the recourse is substantially similar to that of the previous proceedings. [102] After analyzing the various law suits between the Province and the Respondent, the judge concluded that the instant recourse is without merit. [103] [ 60 ] He noted that Appellant's submission based on good faith and abuse of rights resembles the doctrine of imprévision . [104] Even if Appellant's expanded view of the duty to act in good faith was correct, the obligation could not be successfully invoked in this case because the contractual equilibrium agreed upon by the parties was not changed. [105] The judge was of the view that Appellant is not seeking to re-establish a contractual equilibrium that had been lost but rather, is seeking a new contract under terms more favourable to

it. [106] [ 61 ] The judge also based his findings on the principle of the stability of contracts found primarily in

article 1439 C .C.Q.

He added that the notion of contractual good faith as set forth in articles 6, 7, and 1375 C .C.Q. governs the conduct of the parties and does not enunciate a broad principle of equity in contracts. [107] [ 62 ] He concluded that since Respondent is exercising its rights reasonably and in conformity with the parties' intent so that there arises no obligation to renegotiate the contract. [108] THE THIRD GROUND: If the two foregoing questions are answered in the affirmative, what is the appropriate relief? [ 63 ] Appellant seeks principally to replace the pricing provisions in the contract with new terms reflecting the current price for electricity obtained by Respondent in the export and Quebec domestic markets. [109] Failing this, Appellant seeks the cancellation of the power contract. [ 64 ] Respondent contests the proposed pricing

schedule raising several problems with the methodology of the calculation. [110] It also contends that cancellation of the contract would cause an interruption of the supply of electricity with dire consequences. [111] [ 65 ] The judge agreed with Respondent that Appellant's methodology is problematic, particularly with regard to costs of transmission and distribution of electricity as well as the capital cost of new hydroelectric power plants built by Respondent after signature of the contract. [112] He concluded that the proposed pricing

schedule is inappropriate and that the proof in the record does not support an alternative which would take account of the problems in methodology raised by Respondent. [113] THE FOURTH GROUND: Is Appellant's claim prescribed or otherwise barred by waiver, ratification, fin de non-recevoir, or other similar doctrine? [ 66 ] The judge remarked that Appellant's case rests primarily on changes in the electric market which benefitted Respondent and which would impose on Respondent a duty to renegotiate the contract. These changes occurred between 1970 and 1997.

The new market for electricity would have, in essence, crystallized upon the adoption by FERC, in 1996 of a new policy regarding the regulation of the American market ("Open Access"). Thus, the judge concluded that Appellant's recourse is prescribed. [114] [ 67 ] However, the judge was of the opinion that Appellant never renounced its recourse based on the unfairness it perceives in the contract.

Accordingly, he did not consider the doctrines of waiver, ratification, fin de non-recevoir or other similar doctrine as impediments to the relief sought. [115] [ 68 ] Finally, the judge dismissed the Appellant's action with costs including the costs of Respondent's experts and also awarded a special fee of $250,000.00 to Respondent's attorneys. 4- THE ISSUES [ 69 ] The parties' submissions address Appellant's contestation of certain factual conclusions drawn by the judge (Section 5.1 below) and the conclusions of law (Section 5.2 below) regarding the requirements of contractual good faith, prescription and the admissibility into evidence of certain documents. 5- THE ANALYSIS 5.1 The contestation of factual conclusions [ 70 ] Appellant disputes various factual conclusions arrived at by the judge.

It submits that the approach favoured by the judge in virtue of which "a contract is a contract" as well as his emphasis on previous litigation, impeded him from appreciating the complexicity of the fundamental bargain struck by the parties and from concluding that the relationship was based on an equitable division of risk and benefit.

The occurrence of unforeseen circumstances in the world of energy gave rise to substantial profits which Respondent should now share given its duty to act in good faith. [ 71 ] Appellant is emphatic that the interdependence of the parties, the mutual confidence which characterized all their dealings, the signature of the letter of intent and the execution of the multi-year power contract, leads to one conclusion: the bargain struck is based on an equitable sharing of risk and benefit.

More particularly, Appellant argues that, at the time it was signed, the long term contract conferred benefits on both parties and reflected a certain interdependence. Respondent had put on hold the development of its own hydroelectric projects, and the contract assured it access to the sources of energy required to satisfy the needs of Quebecers. The contract also allowed Appellant to obtain the financing it required to build the plant.

The start of construction prior to the signature of the contract on May 12, 1969 attests to the high level of confidence existing between the parties; the wording of the contract requires their mutual cooperation.

The occurrence of an unforeseen situation after the signature of the contract should lead to a renegotiation so that the equilibrium desired by the parties not be disrupted. [ 72 ] Appellant further submits in this regard that the high level of confidence and interdependence between the parties gave rise to a high level of flexibility between them so that when circumstances evolved between the time of the signing of the letter of intent and the contract, the parties adapted. This spirit of cooperation should give rise now, to an obligation to renegotiate the price

schedule of the power contract because of the unforeseen changes in the energy market.

[ 73 ] Appellant's argument is three pronged; it contends that 1) the equilibrium of the contract at the outset was equitable; 2) this equilibrium has been upset by unforeseen events which transformed the energy market and 3) the cooperation characterizing the relationship between the parties obliges Respondent to renegotiate the price

schedule to re-establish the equilibrium intended by the parties at the outset. [ 74 ] Regarding the first point, we recognize that the relationship between the parties reflects a certain interdependence. Thus, since 1965, Respondent put many of its own construction projects on hold such that at the time the power contract was signed, Respondent needed the energy to be produced by Appellant. The facts also bear out that the parties trusted each other: on the faith of the letter of intent, Appellant invested $Can 132 million and Respondent invested $Can 115 million.

The equilibrium between the risks and benefits flowing from the contract was considered fair by the parties when the contract was signed. Both parties and their experts agreed with this proposition. [ 75 ] However, Appellant differs with the judge's conclusion on each of the second and third propositions stated above. [ 76 ] Appellant argues that unforeseen events shattered the initial contractual equilibrium. It contests the judge's conclusion that the parties knew that energy prices were subject to fluctuation when they fixed the price so that this element was a "known unknown", as articulated by the expert Mr.

Lapuerta. [116] Appellant distinguishes the forseeability of the possibility of the occurrence of an event on the one hand from the expectations of the parties to a long term contract faced with an unforeseeable event. In this case, nobody foresaw the radical transformation of the North American energy market. [ 77 ] Appellant is in sound financial health and should remain so based on reasonable forecasts.

Nonetheless, it argues that the striking difference between the price of energy foreseen in the contract and its present market value renders the contract unfair and had the parties known, they would never have agreed to such an unfair sharing of the benefits. [ 78 ] The Court believes that Appellant is attempting to redefine the initial equilibrium agreed to by the parties. It is appropriate to re- examine the parties' circumstances when they signed the contract.

The uncontradicted evidence establishes that they knew that the price of hydroelectric power was subject to fluctuation but they voluntarily agreed to fix the price. [ 79 ] The judge drew conclusions from the manner in which the parties fixed the price and from the reasons which motivated them. His assessment of the documentary and testimonial record (particularly the expert evidence) led him to conclude that Respondent accepted to assume the majority of the financial risks which allowed Appellant to debt finance the construction of the plant without dilution of its equity in the project.

Since the repayment of the loan in 2010, Appellant has become the owner of a valuable plant – estimated at 20 billion dollars by Thierry Vandall [117] – whose long life expectancy [118] would enable Appellant, after expiry of the contract in 2041, to sell the energy produced at market prices for many decades.

In consideration of substantial and indispensable financial undertakings needed to obtain the financing, Respondent received the guarantee of stable, predetermined pricing as well as protection from the inflation of operating costs. [ 80 ] The judge's conclusions that the parties' choice to not index the price of the energy was made in a free and voluntary fashion and that Respondent obtained protection against inflation of operating costs are firmly supported by the evidence. [ 81 ] The letter of intent and the contract entered into by the parties set out in clear terms that the agreed price for the sale of the electricity is based on the cost of construction of the plant and not the market price for the energy.

The notion of price indexation as a function of external elements (i.e. the market) is completely foreign to the parties' intent demonstrated by the documents. To be convinced of this, one need only read clauses 16 and 17 of the letter of intent and clause 8.2 of the power contract. [ 82 ] Secondly, the minutes of the meeting of April 10, 1968, demonstrate the parties' position and confirm that including a price adjustment clause in the contract was considered but rejected. The reason was explained by several witnesses.

Particularly, Thierry Vandall stated that in the 1960's, Quebec's hydroelectric potential was huge. [119] Respondent elaborated its development programs as a function of construction cost without consideration for the value of the energy in the marketplace.

To entice Respondent to purchase the energy produced by the Churchill Falls plant rather than build its own facility, Appellant needed to offer to Respondent the same benefits that Respondent could derive from its own projects – including protection against inflation – but at a better price, because, upon the termination of the contract, the plant would not belong to Respondent. [120] [ 83 ] Thirdly, Mr.

Ed Martin, President and CEO of Appellant, acknowledged during his testimony that the parties considered adding indexation clauses to the contract but deliberately chose not to. [121] [ 84 ] It was this free and voluntary choice not to index the energy price which enabled Appellant to obtain the financing required for the construction of the plant. [ 85 ] Respondent's expert, Mr. Lapuerta, [122] whose opinion was accepted by the judge, [123] explained why the parties agreed to a fixed, decreasing price. This pricing was totally unrelated to the cost or value of alternate sources of energy. Mr.

Lapuerta specifically makes the point that financing was made possible by the price

schedule in the contract: V. Conclusions 149. In 1969 the parties agreed to a fixed, declining price

schedule that was not anticipated to track the costs of alternative forms of power generation over time. Such a declining price

schedule is common practice in long-term power sales contracts, and along with other Contract terms, it has played a key role in permitting the project to raise and pay off vast amounts of debt, while permitting Brinco to retain a majority equity interest despite contributing a small portion of the total funds. The pre-determined price

schedule has also offered Hydro-Québec a high degree of certainty concerning the generation costs for a substantial portion of its portfolio, protecting Hydro- Québec against inflation in the costs of generating electricity. 150. The future level of oil prices was a “known unknown” in 1969, and the Contract allocated the risks of subsequent developments in oil prices in a reasonable way. The Contract insulated CFLCo from the risks that oil-fired generation or some other type of generation

might become economically more attractive than the Churchill Falls project, and in exchange CFLCo gave away the upside associated with the possibility that oil prices might increase and make the project quite attractive during the term of the Contract. This was the contractual paradigm agreed to by the parties, and it has worked in practice. More than four decades have passed, and the project is still on track to earn a return in line with its initial target, considering the cash flows to date and reasonable expectations for the future. 151.

The requested relief would undermine the contractual paradigm, rewarding CFLCo with the benefit of hindsight for the favorable resolution of risks that CFLCo never incurred, and taking away the cost certainty and the inflation protection that Hydro-Québec stood to obtain if the Contract price proved less expensive than alternatives. The requested relief would undermine the ability to enforce the efficient allocation of risk in long-term contracts. [124] [ 86 ] Mr. Lapuerta also explained the effect of the price

schedule as between the parties to the 1969 contract. The choice of a price decreasing over time was made for a particular purpose. It allowed Appellant to receive more funds at the beginning of the term of the contract in order to satisfy its debt obligations which were more onerous at that time: 44. It would be a mistake to believe that the price

schedule in the Contract reflected any projections concerning the likely future value of the power. Instead, a key objective of the price

schedule was to follow the

schedule of anticipated CFLCo interest expenses and debt repayments. Figure I below shows that. The Contract price permitted the project to earn higher cash flows at the beginning when the interest and debt repayment obligations were highest, in exchange for lower cash flows later on when the interest and debt repayments were lower. 45. Anyone lending money to this project would have relied heavily on the broadly parallel

schedule between the Contract price and the interest and debt repayments. The parallel

schedule reduced the risks to lenders in the early years when the interest and debt repayments were higher. Higher prices in the early years strengthened the cash flow position of the company, and permitted CfLCo to start paying back the loans more quickly. 46. Had the price

schedule instead contemplated higher prices as the years went by, then Hydro-Québec would have logically insisted on Iower prices in the early years to compensate. The result would have been lower expected operating cash flows for the entire project until the lower prices in the early years were finally overtaken by subsequent price increases. Lower prices in the early years would have implied less of a margin between the revenues and debt payment obligations, increasing the risk of default to bondholders.

Had the price been anticipated to rise in line with an index parameter, such as an inflation index or oil price index, then uncertainty in the future performance of the indexation parameter would have magnified the risks to bondholders. Investors would have responded by reducing the amount of debt they were willing to lend to the project. The only alternative would be to raise more equity, which as I explain below, if even possible, would have reduced Brinco’s equity share. 47. The price

schedule in the Contract reflects common practice in the design of long-term agreements concerning the sale of power. When an investor contemplates building a power station that will sell substantially all its power to one large customer, the investor will naturally seek a Iong-term contract before initiating construction. Many investors seek to finance construction with substantial amounts of debt, and they appreciate that lenders typically seek debt repayment schedules that involve higher payments in the early years of the project.

The investors therefore ask the purchaser of the power to agree to price schedules that start out relatively high, and decline over time in line with the decline in interest expenses and debt repayments. Analysts call this pattern “front-end loaded”, as the project can anticipate higher prices at the front end of the contract with lower prices towards the end. I have seen examples of front-end loaded long- term power contracts in several different countries, and the technique is mentioned in several different reports on the financing of power projects. … 58. In

summary, a major objective of the price

schedule was to follow the interest and debt repayment obligations, enabling the project to raise large amounts of debt financing. Had the parties agreed to index the price to inflation or to oil, then the possibility of higher future prices would have implied lower prices near the date of Contract signature, which would have introduced a high risk of default, incompatible with an investment grade loan. Investors would have responded by lending less to the project, or not lending at all. [125] [References omitted] [ 87 ] Mr.

Lapuerta explained that the lower price fixed for the renewal term of the contract was important for Respondent since it provided protection against the uncertainty of inflation in costs: 26. While the higher prices at the beginning of the Contract were attractive to CFLCo, the lower prices at the end of the Contract were attractive to Hydro-Québec, particularly because they offered protection against the uncertainties of inflation in the costs of generating electricity. By requesting a 25-year extension, Hydro-Québec showed that it attributed value to the lower fixed prices in the later years of the Contract.

While CFLCo did not want to grant a unilateral extension option, the parties agreed on an automatic extension at a fixed price. Hydro-Québec knew that the total costs of purchasing power under the Contract would fall within a relatively narrow range compared to the construction of a power station that used fossil fuels instead of water. [126] [ 88 ] The expert illustrated his position with the help of a table reproduced as Annex I to this judgment. Mr. Lapuerta's opinion on this matter was accepted by the judge. [ 89 ] The judge did not accept the opinion of Appellant's expert, Mr.

Dalton, because even though he recognized the importance of the protection against inflation (para. [369] of the judgment) he failed to include it amongst the benefits that Respondent derived from the contract. Also, he failed to consider a number of crucial exhibits (para. [386] of the judgment). [127] Thus, the judge rejected Mr. Dalton's thesis for reasons of credibility, reliability and probative value.

This Court may not intervene into such conclusion. [ 90 ] The parties' decision to not index the price for electricity was also the result of their choice that Respondent would bear the risk of any variation in the value of energy in the future, a risk which Appellant was not in a position to assume.

[ 91 ] Appellant has not succeeded in challenging one of the judge's most significant factual conclusions – i.e. that in the context of the initial contractual equilibrium, the Respondent assumed any risk in the fluctuation of energy prices. Two factual elements indicate that the contract allocates such risk to the Respondent: 1. the need for Appellant to obtain the "take or pay" clause because, as explained by each parties' expert, Appellant could not assume the risk of price fluctuation, and; 2.

Respondent's agreement to fixed pricing. [ 92 ] The need to include the "take or pay" clause in the contract attests that Appellant was not able to assume the risk associated with fluctuations in the market price for electricity. This clause obliges Respondent to take virtually all the power produced by the plant, thus guaranteeing to Appellant revenue sufficient to service its debt. [ 93 ] It is not contested that Appellant did not have the financial strength to undertake the project without long term financing.

On the final reckoning, Appellant invested $Can 150 million out of a total cost of $Can 950 million. [128] The price schedule, based on construction cost, was meant to secure the lenders. The loan risk was minimal precisely because the power contract provided the certainty that the electricity would be sold at a price sufficient to repay the debt irrespective of any fluctuation in the market price. [ 94 ] By accepting to pay a fixed price for energy over a long term contract, Respondent assumed a real risk given the possibility of a substantial decline in the price of nuclear or oil generated electricity: 80.

The Contract’s fixed price

schedule had a third main implication for Hydro-Québec, forcing it to incur substantial risks. If oil prices fell and made oil-fired power generation relatively cheap, or if nuclear power became extremely cheap as some contemporary economists thought might occur, then Hydro-Québec stood to suffer by paying a higher price for power from Churchill Falls compared to the costs of alternative forms of generation. [129] [ 95 ] The "take or pay" clause resulted from Appellant's refusal to assume the risk related to fluctuations in the value of energy and its inability to obtain financing had it assumed such risk. [ 96 ] In his report, Mr. Lapuerta explains the consequences of a fixed price

schedule for energy as follows: 89. In contrast, the fixed price

schedule insulated CFLCo from the risks that the power from Churchill Falls might prove less attractive than alternatives. Since the Contract protected CFLCo from the associated risks, it also prevented CFLCo from receiving any benefits during the life of the Contract if the power proved more attractive than alternatives. CFLCo’s position would then change at the end of the Contract.

At that point CFLCo would bear the risks that the facility might have no substantial value compared to alternatives, and would retain all the benefits if generating power from Churchill Falls was less expensive than alternatives. [130] [ 97 ] Appellant's proposition that Respondent was dependent on it for its energy supply must be put in context. Of course, Respondent needed the energy to be produced by Appellant, but not under any conditions.

Respondent's refusal to contract in 1961 and 1964, and the requirements it expressed in the minutes of the 1968 meeting, demonstrate that Respondent could have decided to pursue its own infrastructure projects rather than to opt for the purchase of Churchill Falls electricity. [ 98 ] In purchasing energy rather than constructing its own plant, Respondent obtained the benefit of a fixed price calculated as a function of construction cost and it obtained the additional advantage of protection against the inflation of operating costs which are absorbed by the plant's owner.

The uncontradicted evidence demonstrates that Respondent would only purchase energy from Appellant, instead of producing its own, if the advantages were the same but the price cheaper since Respondent would not own the plant once the contract expired. [ 99 ] For these reasons, Appellant has not succeeded in demonstrating reviewable error in the findings of the trial judge who concluded that: 1.

Respondent's expectations were legitimate at the time the contract was signed and remain so today; [131] 2. the parties decided not to include any provision in the contract allowing for the review or indexation of the price of the energy; and [132] 3. the relief sought by Appellant would distort the contract by depriving Respondent of the advantages it obtained in exchange for the risks it assumed. [133] 5.2 The contestation of legal conclusions [ 100 ] Not surprisingly the parties reiterate in appeal their submissions made in first instance. [ 101 ] The thrust of the argument developed in Appellant's brief is threefold.

The second argument addresses the remedies available to Appellant and the third concerns the possible effect of prescription on these remedies. The first branch of the submission is the most important since it contains the essence of the argument based on good faith.

Appellant articulates the central issue in appeal as follows: "Does Hydro-Québec have a duty, based on good faith, cooperation and reasonable exercise of rights, to renegotiate the Power Contract and Renewal Contract?". [ 102 ] As often occurs when an appeal raises multifaceted questions which can be analyzed in different ways, each party has articulated and subdivided the first issue on its own terms.

In such regard, Respondent answers the proposition underlying Appellant's first ground as follows: [ translation ] "In Quebec civil law the courts cannot modify contracts where an unforeseen change in circumstances has occurred". In joining issue, the parties speak neither in the same terms nor of the same things.

[ 103 ] Accordingly in this part of the judgment, the parties' arguments will be summarized without reference to the abundant case law, doctrine and comparative law sources cited in their briefs. We then propose to address the arguments bundled under common headings. A. The parties' contentions [ 104 ] Based on the notions of good faith, equity and abuse of rights (Articles 6, 7, 1375 and 1434 C .C.Q. ), Appellant submits that the judge relied too strongly on two principles which must be moderated, namely the binding force of contracts and the autonomy of the will of contracting parties.

Appellant continues that relational contracts of long duration, as opposed to transactional contracts, give rise to a duty for the parties to cooperate with each other. Their obligation to act in good faith may, in appropriate circumstances, require them to modify the terms of their contract. This duty to cooperate and even modify a contract, is codified in certain instances (see Articles 2149 and 2186 C .C.Q. ) and is now recognized in decided cases. It is not part of the theory of imprévision which the Quebec legislator chose not to include in the C.C.Q.

This duty to cooperate would apply to a contract which has become grossly inequitable or in respect of which the initial equilibrium has been broken because of new circumstances not anticipated by the parties. Appellant submits that these conditions are met in the present case so that the Court should grant the relief sought and declare that Respondent is obliged to negotiate with Appellant to modify the contract in order to provide for the payment of an equitable price to Appellant. [ 105 ] Respondent's submissions approach the issue from a different angle.

The theory of imprévision is a variation of the binding force of contracts (Article 1439 C .C.Q. ) which the Quebec legislator intentionally rejected in 1994. Furthermore, the theory applies only where certain strict conditions are met which is not the case here. The Respondent's obligation to act in good faith cannot be transformed into an underlying obligation to share the benefits derived from a contract freely negotiated and agreed to, which is Appellant's true purpose.

Even if the obligation to exercise contractual rights in good faith was recognized in the case law prior to the 1994 codification, its content has not been altered by that codification: it sanctions the conduct of a contracting party particularly where such parties' behaviour results in a rupture of the contractual equilibrium initially negotiated by the parties. However, this obligation does not constitute a legal basis for judicial revision of contracts where circumstances have changed.

In the present case, Respondent's behaviour is beyond reproach and if the price adjustment that Appellant seeks today had been put on the table in 1969, the negotiations would have ceased and the project would never have been built for want of financing. B. The link between imprévision and good faith [ 106 ] While Appellant guards against pleading the theory of imprévision in its brief, Respondent accuses it of attempting to introduce a doctrine resembling imprévision under the cloak of good faith or equity.

In fact, the similarity between imprévision and the concept of good faith described in Appellant's brief is sufficiently striking to merit examination of the legislative work preceding the adoption of the C.C.Q. Each party addresses this issue in its own way and at odds with the other. Thus, understandably, a certain confusion clouds this issue. [ 107 ] In this vein, towards the end of its principle argument, after having commented on several judgments of the Quebec courts, Appellant writes: "In that light, the few cases that have stated that imprévision does not apply in Quebec law were not wrongly decided.

Those cases dealt with situations that are not even commensurate with the present case and in any event, in each case, even the criteria for imprévision were not met". Substantially, Appellant's submits that the decided cases in Quebec correctly observe that the legislator excluded form the C.C.Q. one type of imprévision . However, that exclusion has nothing to do with the particular situation that has come to pass between Appellant and Respondent.

It is this situation which should now give rise in Quebec law, under the guise of the obligation of good faith, to a duty for Respondent to reopen certain aspects of the power contract. In other words, the instant particular situation is fundamentally different from the kind of imprévision which, according to the courts, was excluded by the Quebec legislator in 1991. Moreover, it is not because this situation may resemble one form or another of imprévision that a remedy based on the recognized obligation to act in good faith should be denied, the whole according to Appellant. [ 108 ] Respondent, for its

part is insistent when it reiterates that the theory of imprévision is not recognized in Quebec law. Respondent goes still further: [ translation ] "Invoking the power of the courts to develop the civil law, Appellant invites the Court, under the cloak of good faith, to do indirectly, that which the legislator purposely excluded. The judge in first instance was correct in refusing to follow Appellant's reasoning because: 1) the legislator rejected the theory of imprévision but even if it had not, the theory does not apply on the facts of this case and; 2) good faith cannot be used for this purpose".

However, if the theory of imprévision would not apply to the facts of this case, why insist that the Quebec legislator rejected it in 1991? [ 109 ] Perhaps there is another way to address the issue which will put to rest any doubt on the matter. One may wonder if the legislator, in rejecting the doctrine of imprévision during the preparatory work on the C.C.Q. , did not, explicitly or implicitly, dismiss Appellant's central argument before it was even articulated.

There are two aspects to this question: 1) what might be the effect of rejecting imprévision , on the scope of the obligation to act in good faith taken in abstracto ? 2) if the exclusion is not an obstacle to Appellant's good faith argument in the situation it currently finds itself, does it mean that looked at in concreto , Appellant should succeed in its case? (

i) The current provisions of the Civil Code of Québec [ 110 ] Throughout their submissions, Appellant and Respondent refer to a number of articles of the C.C.Q. in support of their respective contentions regarding good faith, equity in contractual

interpretation, abuse of rights, imprévision , binding force and inviolability of contracts. Still other articles of the C.C.Q. are helpful to clarify or nuance the possible answers to the parties' contentions. Given the numerous references to these provisions and their importance to a consideration of the issues, it is convenient to cite them at length in Annex II to this judgment. Thus, in the following paragraphs reference will be made only to the number of the C.C.Q. articles.

As needed, the relevant extracts from texts other than the C.C.Q. will be reproduced in the body of this judgment. (ii) The legislative choices of 1991 [ 111 ] One must begin a reflection on the C.C.Q. with the work of the Civil Code Revision Office (“CCRO”) and the outcome of the CCRO proposals. These recommendations cast a helpful light on the possible relationship between the theory of imprévision and the requirements of good faith.

[ 112 ] In its final report in 1978, the CCRO expounded a new equilibrium in contractual relations in order to [ translation ] "establish better justice and equity". [134] The revision was also a reform process and as such succeeded in proposing several new provisions of law. Such provisions sharply departed from the then existing law as demonstrated by Articles 37, 38, 75 and 76 of the draft Fifth Book (Obligations): 37. Lesion vitiates consent when it results from the exploitation of one of the parties by the other, and brings about a serious disproportion between the prestations of the contract.

Serious disproportion creates a presumption of exploitation. 38. A victim of a defect of consent may apply for the nullity of the contract or, if the circumstances so warrant, the reduction of his obligations. Where the defect of consent is imputable to the other contracting party, the victim may also sue in damages or join both recourses. 75. If unforeseeable circumstances render execution of the contract more onerous, the debtor is not freed from his obligation.

In exceptional circumstances, and notwithstanding any agreement to the contrary, the court may resolve, resiliate or revise a contract the execution of which would entail excessive damage to one of the parties as a result of unforeseeable circumstances not imputable to him. 76. An abusive clause in a contract may be annulled or reduced. [135] [References omitted] [ 113 ] These provisions inspired the following observations found in the General Introduction to Book V and in the comments to each article.

The lengthy extracts which follow help to explain the purpose which motivated the legislator in subsequently choosing to retain some of these proposals but to discard others: Moreover, given the importance today of contracts with a predetermined content and of contracts of adhesion, and in the face of governmental concern for the protection of weak and disadvantaged persons in contractual relationships, it was thought advisable to include a series of measures intended to re-institute some measures of social justice in these relationships.

As a first step, it was sought to revive a long-standing civilian tradition by re-introducing into Québec law the concept of lesion between persons of major age; it would now result from a serious imbalance in the obligations due to the exploitation of one of the parties by the other. In keeping with this general policy, the courts have also been granted a certain power of review regarding contracts. According to

Article 75, the courts would henceforth have the right, in exceptional circumstances, to review any contract whose execution would cause undue prejudice to one of the parties as a result of unforeseen events that could not be attributed to that party. Here again, this power applies only in exceptional cases and is limited by strict conditions. [136] And later, in explaining each

section individually the CCRO continues: 37 It has become common, in modern society. for certain contracts to be used by one party as a means of actually exploiting the other, taking advantage of an unfavourable position (poor economic condition. inexperience, senility, and so on). This is often the case with standard contracts and with contracts of adhesion. to mention but two examples.

In the face of such flagrant abuses at a time when governments are increasingly concerned with consumer protection. it was thought essential to reverse the decision made by the Commissioners in 1866 to exclude lesion between persons of major age, since social and economic conditions have changed. But a legislative policy still had to be devised which would reconcile protection of citizens’ contractual rights with legal stability of contracts. It was therefore thought preferable to allow lesion between persons of major age, but only in certain circumstances, so as to avoid unduly impairing contractual stability.

This

article is thus limited in scope, since lesion results not only from disproportion between the prestations (an objective concept), but also from one party’s exploitation of the other (a subjective concept). To invoke lesion, a contracting party must in fact show that there is a serious disproportion between the prestations under the agreement. Once that is established, in order to avoid placing an impossible burden of proof on the plaintiff, a presumption would arise to the effect that such dispropor lion results from exploitation by the other contracting party of the plaintiff’s condition or of circumstances.

Proof to the contrary can be made, of course. as the other party may show that no exploitation exists. Thus only in these precise circumstances, to be assessed by the courts. can lesion vitiate consent. So. the concept of lesion as adopted here is one based on the presumed weakness of the consent of the injured party. and is not an objective concept as in French law (153). Recognition of lesion is part of a tendency in modern legislation to protect one party against exploitation by the other (154). In view of the consistent violation of the principle in

Article 1012 C.C.. it has become necessary to bring the law into line with present conditions as other statutes have already done (155). Finally, the proposed Draft is preferred to that of

Section 118 of the Consumer Protection Act (156) because the Draft’s broad terms make it applicable to the whole field of contracts. … 75 The first paragraph of this

article reaffirms the principle of the binding effect of contracts and maintains the present rule of Québec law

(200), according to which the debtor is not freed merely because execution of the contract has been rendered more difficult or more onerous; if the debtor is to be freed because execution is impossible, such impossibility must truly be the result of a fortuitous event. The second paragraph is new law. It consecrates in the Draft the possibility of judicial review where there has been imprévision . namely, in circumstances which do not constitute a truly fortuitous event because they do not make it absolutely impossible but merely more difficult to execute the commitment.

A few comments must be made on this subject. In the first place, the words “exceptional circumstances” are at the beginning of the text to stress that the rule must only be used in truly extraordinary situations. The use of the expressions “excessive prejudice” and “unforeseeable circumstances” reinforce this idea and limit judicial discretion. In the second place, this rule is seen as representing, in effect, the complement of a general legislative policy, which is intended to establish better justice and equity in contractual relations.

The provisions relating to lesion protect at the time the contract is formed; those of imprévision protect at the time the obligation is executed. Finally, as a result of legislative evolution in recent years. for example in consumer protection and in the lease of things (201), where the courts may review an agreement because of lesion, adoption of such a rule of principle seems more acceptable to Québec law. 76 This

article is based on certain modern legislation intended to counter exploitation of parties to the contract (202). It allows the court to penalize abusive contractual clauses by annulling or reducing the obligations so assumed. Nullity of the clause is governed by

Article 51. [137] [References omitted] [ 114 ] The commentary on

Article 37 of the CCRO draft refers to

Article 1012 of the Civil Code of Lower Canada (" C.C.L.C. " ) . This

article was unchanged from 1866 to 1994 and read as follows: 1012. Persons of the age of majority are not entitled to relief from their contracts for cause of lesion only. 1012. Les majeurs ne peuvent être restitués contre leurs contrats pour cause de lésion seulement. The CCRO proposed to abolish this old rule. However, in adopting

Article 1405 of the C.C.Q. , the legislator reconfirmed the old rule though with variation. In the new Code , lesion vitiates consent in three instances: for a minor, for an adult subject to a protective order and thirdly, in cases where specifically provided by a provision of law such as Articles 1609 and 2332 of the C.C.Q. , by way of example.

As will be examined below, such trend is indicative of a legislative policy underpinning the C.C.Q. , which differentiates it from the CCRO draft. [ 115 ] Articles 38, 74 and 76 of the CCRO draft provided that the Court would weigh, in each case, the impact of the notions of unequal consideration, exploitation of a party, undue hardship and unforseeability: once the situation is analyzed upon application of these notions, the Court would rule on cancelling or reducing the obligations.

In prescribing these norms – i.e. one general rule, interpreted by the Courts according to the circumstances – the CCRO was inspired by various specific legislative provisions set out in the footnotes to the draft Code . [138] It characterized such approach as symptomatic of a modern legislative movement to remedy the exploitation of contracting parties. [139] However, rather than follow suit with a rule generally applicable to the law of obligations in the first Title of Book V of the C.C.Q. , the legislator in 1991 preferred to keep an updated version of the old rules. [140] Viewed in such manner, these rules are peculiar in the new Code . [ 116 ] Of course, nothing excludes a judge-made protection against changes in circumstances where the legislation is expressed in terms sufficiently general so as to leave to the Courts a large residual discretion to determine that which is unreasonable or abusive.

Article 1664

h) C.C.L.C. , [141] promulgated in 1974, succeeded in 1980 by

Article 1664.11 C .C.L.C. [142] in turn, replaced in 1994 by

Article 1901 C .C.Q. is an example of such a provision applicable to residential leases. It is an example, as one author aptly wrote, of a case where [ translation ] "the legislator avoided the trap of trying unsuccessfully to delineate all possible examples of abuse" [143] .

However, and wisely perhaps, the legislator did not completely abandon to the Courts the entire task of "delineating all possible examples of abuse" once a party declares itself a victim of abuse or bad faith by its co-contracting party, inequitable circumstances or unforeseen hardship and irrespective of whether the situation involves persons of full age or minors, individuals or corporations, or other contextual circumstances. Rather, the legislator has selected the contexts where unreasonable or abusive conduct may be corrected by the Courts.

In certain instances, the context chosen can apply to a multitude of situations as is the case with

Article 1437 C .C.Q. However, even here, the legislator has deliberately particularized the rule. No one would contend that the case before us involves, in the terms of

Article 1437 C .C.Q. , a consumer contract or a contract of adhesion. [ 117 ] From a different point of view,

Article 1621 C .C.Q. provides another example of the legislator refusing, in the 1994 reform, to yield freedom of action to the judges to [ translation ] "establish better justice or equity" [144] in the law of obligations. Here, the CCRO was in favour of a general provision to be applied by the Courts in their discretion concerning the granting of punitive damages [145] but the legislator insisted in

Article 1621 C .C.Q. on an express and specific enactment as a pre-condition to such relief. [ 118 ] Thus, upon analysis of the differences between the draft CCRO Code and the C.C.Q. , we see a cle

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