Churchill Falls (Labrador) Corp. v. Hydro‑Québec

Churchill Falls (Labrador) Corp. v. Hydro‑Québec
Collection
Supreme Court Judgments
Date
2018-11-02
Neutral citation
2018 SCC 46
Report
[2018] 3 SCR 101
Case number
37238
Judges
McLachlin, Beverley; Abella, Rosalie Silberman; Moldaver, Michael J.; Karakatsanis, Andromache; Wagner, Richard; Gascon, Clément; Côté, Suzanne; Brown, Russell; Rowe, Malcolm
On appeal from
Quebec
Notes
Case in Brief
SCC Case Information
Decision Content
SUPREME COURT OF CANADA
Citation: Churchill Falls (Labrador) Corp. v. Hydro-Québec, 2018 SCC 46, [2018] 3 S.C.R. 101
Appeal Heard: December 5, 2017 Judgment Rendered: November 2, 2018 Docket: 37238
Between:
Churchill Falls (Labrador) Corporation Limited
Appellant
and
Hydro-Québec
Respondent
Official English Translation: Reasons of Gascon J.
Coram: McLachlin C.J.* and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ.
Reasons for Judgment: (paras. 1 to 139)
Gascon J. (Abella, Moldaver, Karakatsanis, Wagner, Côté and Brown JJ. concurring)
Dissenting Reasons: (paras. 140 to 190)
Rowe J.
* McLachlin C.J. took no part in the judgment.
Churchill Falls (Labrador) Corp. v. Hydro‑Québec, 2018 SCC 46, [2018] 3 S.C.R. 101
Churchill Falls (Labrador) Corporation Limited Appellant
v.
Hydro‑Québec Respondent
Indexed as: Churchill Falls (Labrador) Corp. v. Hydro‑Québec
2018 SCC 46
File No.: 37238.
2017: December 5; 2018: November 2.
Present: McLachlin C.J.* and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ.
on appeal from the court of appeal for quebec
Contracts — Performance — Good faith and equity — Duty to renegotiate — Doctrine of unforeseeability — Contract between company and Hydro-Québec respecting construction and operation of hydroelectric plant — Take-or-pay undertaking by Hydro-Québec to buy fixed quantity of electricity produced by plant at fixed prices for 65 years — Hydro-Québec reaping substantial profits from resale of electricity as result of changes in market — Company bringing action for order that Hydro-Québec renegotiate contract and agree to reallocation of benefits — Whether party to contract can require other party to renegotiate contract because of allegedly unforeseeable changes in market since it was signed — Civil Code of Québec, arts. 1375, 1431, 1434.
In 1969, the Churchill Falls (Labrador) Corporation Limited and Hydro‑Québec signed a contract that set out a legal and financial framework for the construction and operation of a hydroelectric plant on the Churchill River in Labrador. In the contract, Hydro-Québec undertook to purchase, over a 65-year period, most of the electricity produced by the plant, whether it needed it or not, which allowed Churchill Falls to use debt financing for the construction of the plant. In exchange, Hydro‑Québec obtained the right to purchase electricity at fixed prices for the entire term of the contract. After the contract was signed, there were changes in the electricity market, and the purchase price for electricity set in the contract is now well below market prices. Hydro‑Québec sells electricity from the plant to third parties at current prices, and this generates substantial profits for Hydro‑Québec. In the circumstances, Churchill Falls is asking the courts to order that the contract be renegotiated and that its benefits be reallocated. Churchill Falls seeks to have the fixed rate being paid by Hydro‑Québec replaced with a new rate so as to ensure that the contract reflects the equilibrium of the initial agreement and in order to enforce Hydro‑Québec’s alleged duty to cooperate with Churchill Falls on the basis of its general duty of good faith. The Quebec Superior Court concluded that the intervention sought by Churchill Falls was not warranted, and the Court of Appeal dismissed Churchill Falls’ appeal.
Held (Rowe J. dissenting): The appeal should be dismissed.
Per Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.: Given the nature of the contract and the duties of good faith and equity, Hydro‑Québec did not have a duty to renegotiate the contract when the contract proved to be an unanticipated source of substantial profits for it. In Quebec civil law, there is no legal basis for Churchill Falls’ claim. The Court cannot change the content of the contract, nor can it require the parties to renegotiate certain terms of the contract or to share the benefits otherwise than as provided for in the contract.
The interpretation and characterization of the contract in this case are questions of mixed fact and law. Because the trial judge’s interpretation and characterization of the contract are based on a particular set of circumstances that are unlikely to have any precedential value, they may not be overturned absent a palpable and overriding error. No error that would justify overturning the trial judge’s findings of fact concerning the paradigm, the characterization and the interpretation of the contract can be found.
The contract cannot be characterized as a joint venture contract or a relational contract. A joint venture contract is formed where businesses choose to become partners and to cooperate in a project by each investing resources and by sharing any profits from the project. In this case, the evidence does not show that the parties intended to enter into a partnership or to jointly assume financial or logistical responsibility for the project beyond the simple cooperation required to perform their respective prestations. The parties’ relationship thus lacks the characteristics generally associated with the joint venture contract. As for the relational contract, it sets out the rules for a close cooperation that the parties wish to maintain over the long term and puts an emphasis on the parties’ relationship and on their ability to agree and cooperate. It does not define their respective prestations in much detail. As a result, it requires a cooperation that is, in the end, more active than the cooperation required by transaction‑based contracts. The parties’ contract sets out a series of defined and detailed prestations as opposed to providing for flexible economic coordination. Each party’s participation is clearly quantified and defined, and no important prestations are left undefined. This shows that the parties intended the project to proceed according to the words of the contract, not on the basis of their ability to agree and cooperate from day to day to fill any gaps in the contract. The long‑term, interdependent nature of the contract does not in itself imply that the contract is relational.
The contract does not contain implied clauses that impose on Hydro‑Québec a duty to cooperate and to renegotiate the agreed‑on prices. An implied duty may, within the meaning of art. 1434 of the Civil Code of Québec, be incident to a contract according to the nature of the contract if the duty is consistent with the general scheme of the contract and if the contract’s coherency seems to require such a duty. However, such an implied clause must not merely add duties to the contract that might enhance it, but must fill a gap. In this case, there is no gap or omission in the scheme of the contract that requires that an implied duty to cooperate and to renegotiate the agreed‑on prices be read into the contract in order to make it coherent. There is nothing to suggest that the parties’ prestations would be incomprehensible and would have no basis or meaningful effect in the absence of an implied duty according to which Hydro-Québec must either exceed the usual requirements of good faith in cooperating with Churchill Falls or redistribute windfall profits.
The doctrine of unforeseeability cannot serve as a basis for requiring Hydro‑Québec to renegotiate the contract. This doctrine is a private law rule that is recognized in some civil law jurisdictions and the effect of which is that parties can be required to renegotiate a contract if, as a result of unforeseen events, performance of the obligations stipulated in the contract would be excessively onerous for one of them. However, unforeseeability cannot be relied on where it is clear that the party who was disadvantaged by the change in circumstances had accepted the risk that such changes would occur, and it applies only where the new situation makes the contract less beneficial for one of the parties, and not simply more beneficial for the other. It does not apply where the parties receive the prestations and benefits that are provided for or are allocated to them in the contract. But this doctrine is not recognized in Quebec civil law at this time. Any development of concepts analogous to unforeseeability in Quebec civil law must take account of the legislature’s choice not to turn this doctrine into a universal rule. Furthermore, even in jurisdictions where the doctrine of unforeseeability is recognized, it applies only in narrow circumstances that quite simply do not correspond to those of the parties in this case. The parties intentionally allocated the risk of electricity price fluctuations to Hydro‑Québec, and the changes in the market did not have the effect of increasing the cost of performing Churchill Falls’ prestations or diminishing the value of the prestations it received from Hydro‑Québec. On the contrary, Churchill Falls has continued to receive exactly what it was owed under the contract, as well as the related benefits.
The principles of good faith and equity do not impose a duty to renegotiate on Hydro‑Québec. The introduction of the duty of good faith into the Civil Code of Québec shows that the legislature intended to temper the principles of the binding force of contracts and autonomy of the will of the parties. Good faith confers a broad, flexible power to create law and serves as a basis for courts to intervene and to impose on contracting parties obligations based on a notion of contractual fairness. It also serves to protect the equilibrium of a contract. However, it cannot be used to violate that equilibrium and impose a new bargain on the parties to the contract. The courts cannot rely on it to order the sharing of profits that have in fact been honestly earned. Despite its potential scope and its capacity to change the civil law because of its flexible application, the concept of good faith cannot be expanded to include the possibility of penalizing a party whose conduct has not been unreasonable, or a duty to renegotiate the principal obligations of a contract in all circumstances. The duty of good faith does not negate a party’s right to rely on the words of the contract unless insistence on that right constitutes unreasonable conduct in the circumstances. The duty to cooperate, which flows from the requirements of good faith, can require a party to be proactive in accommodating the interests and legitimate expectations of his or her contracting partner. But for a party to consider only the words of the contract and to refuse to renegotiate a contract or to share profits is not necessarily contrary to the general duty of good faith. The duty to cooperate with the other contracting party does not mean that one’s own interests must be sacrificed.
In this case, Hydro‑Québec is entitled to insist on adhering to the words of the contract and maintaining the equilibrium of the prestations the contract establishes for the benefit of the parties, which bound themselves knowing full well what they were doing. Hydro‑Québec is not breaching its duty of good faith in exercising its right to purchase electricity from Churchill Falls at fixed prices. Nor does its insistence on adhering to the contract despite the unforeseen change in circumstances constitute unreasonable conduct. Moreover, Hydro‑Québec is considering Churchill Falls’ legitimate contractual interests, given that it is not preventing Churchill Falls from receiving the benefits conferred on the latter under the contract. It has done nothing that threatens to disrupt the contractual equilibrium. Hydro‑Québec therefore has no duty to cooperate with Churchill Falls to mitigate the effects of the contract. The magnitude of the profits it earns under the contract does not justify modifying the contract so as to deny it that benefit.
As to equity, it cannot be relied on in support of the relief being sought, since its effect would then be to indirectly introduce either lesion or unforeseeability into Quebec law in every case. To hold that a change in the circumstances of the parties to a contract will always justify its being renegotiated in the name of equity would conflict sharply with the legislature’s intent. Equity is not so malleable that it can be detached from the will of the parties and their common intention. Nothing about the relationship between Churchill Falls and Hydro‑Québec would justify such an intervention in the circumstances of this case. There is neither inequality nor vulnerability in their relationship. Both parties to the contract were experienced, and they negotiated its clauses at length.
The relief being sought cannot be granted. There is no legal basis on which a judge could impose a new bargain on Hydro‑Québec to which it has not agreed. Allowing a contract to be modified by a judge at the request of a single party would conflict seriously with the principles of the binding force of contracts and freedom of contract that underlie Quebec civil law. In any event, Churchill Falls’ action is prescribed. The situation in this case does not constitute a breach of an ongoing duty or a continuing fault that is not subject to prescription. On the contrary, the right of action that Churchill Falls seeks to exercise arises when the events that give rise to it occur. The most recent event to have disrupted the electricity market occurred in 1997 at the latest. It was at that time that Churchill Falls’ right of action arose, and it has therefore been prescribed since the end of 2000 at the latest.
Per Rowe J. (dissenting): Properly characterized, the contract binding Churchill Falls and Hydro-Québec is relational in nature and both parties are subject to a duty of cooperation. Hydro‑Québec breached this duty. Accordingly, the appeal should be allowed.
The object of contract characterization is to link the contract at issue to a legal category so as to impose on the parties the legal effects of the true nature of their agreement. The aim of this exercise is to identify the essential objective of the contract and to categorize the contract based on the elements that define its nature. The exercise of characterization is a question of law unless consideration of evidence extrinsic to the contract is necessary to identify the true intention of the parties. In this case, the trial judge did not indicate the necessity of considering elements extrinsic to the contract to establish the nature of its fundamental obligation. Accordingly, characterization — in this instance — remains a question of law, reviewable on a standard of correctness.
Relational contracts typically require successive performance, whereby the parties have obligations to perform on a continuing basis. This category of contracts should not be limited to those that leave certain obligations to be defined by the parties at a later date. Rather than being a necessary condition, undefined obligations are but one indicator of relational contracts. Other indicators include the duration of the contract and the creation of an ongoing economic relationship rather than a one-off transaction. In this case, the contract at issue is not a simple contract of sale. It establishes a cooperative relationship between the parties and it is the framework for an interdependent and long-term relationship. This conclusion is reinforced by its language. First, the agreement makes clear that both parties saw the project as requiring ongoing interaction and collaboration. Second, the parties committed to offering each other assistance during the execution of the contract in order to ensure its success. Third, the parties explicitly contemplated the need for consultation, joint determination, discussion, and revision. When considering the overall framework of the parties’ rights and obligations, the true nature of the contract becomes apparent: it is relational.
The characterization of a contract determines the legal consequences that attach to it, including certain implied obligations that are necessary complements to the contract and reflect the presumed intention of the parties. The inclusion of an implied obligation is warranted where a reasonable person in the same circumstances would see an important and intrinsic connection between the implied terms and the nature of the contract. A court does not have to find that a contract would be ambiguous, incomprehensible, without foundation or without useful effect before including an implied obligation. In relational contracts, both good faith and equity provide guidance to defining the scope and content of implied obligations, including the implied duty to cooperate. Good faith implies an attitude that maximizes, for each party, the advantages of the contract. In circumstances where the parties must work together to achieve the object of their agreement over a long period of time, the relational nature of the contract imposes a heightened duty of good faith. Likewise, equity is a means to remedy the imperfections of a contract and re-establish an equilibrium where its division of burdens and benefits do not align with its intended scheme. While courts may not modify or revise contracts, they can enforce what appears to be equitable.
Based on the relational nature of the contract at issue and how it informs the requirements of good faith and equity, the parties had an implied obligation to cooperate in establishing a mechanism for the allocation of extraordinary profits. This obligation flows from the fact that a profit imbalance of this nature and magnitude is beyond what the parties intended when they concluded the agreement. The parties’ choice not to include a price adjustment mechanism was premised on shared assumptions about the nature and value of hydroelectric power at the time of the formation of the contract. It cannot be seen as excluding an obligation to cooperate should these shared assumptions no longer reflect reality. As the contract contains no mechanism for the allocation of profits that are beyond what was envisioned, the parties have an implied obligation to cooperate in defining the terms of their allocation. Hydro‑Québec has breached this duty by refusing to establish a price adjustment formula for these extraordinary profits by way of mutual agreement. Hydro‑Québec must therefore be held to its obligation, and should be ordered to cooperate with Churchill Falls for this purpose.
Where a fault continues in time and causes continuing damages, prescription starts running anew each day. By persistently refusing to enter into negotiations to establish a mechanism for allocating unforeseen profits, Hydro‑Québec has been in continuous breach of its obligation to cooperate. As Churchill Falls’ right of action is grounded in this continuous breach, its claim is not barred by prescription. On the question of remedy, while judges should refrain from ordering specific performance of obligations that require personal participation of the parties, the imposition of such an order here would not amount to an improper constraint on the parties’ capacity to act.
Cases Cited
By Gascon J.
Distinguished: Provigo Distribution inc. v. Supermarché A.R.G. inc., 1997 CanLII 10209; considered: Uniprix inc. v. Gestion Gosselin et Bérubé inc., 2017 SCC 43, [2017] 2 S.C.R. 59; referred to: Newfoundland (Attorney General) v. Churchill Falls (Labrador) Corp. (1985), 56 Nfld. & P.E.I.R. 91; Newfoundland (Attorney General) v. Churchill Falls (Labrador) Corp., [1988] 1 S.C.R. 1085; Hydro‑Québec v. Churchill Falls (Labrador) Corp., [1988] 1 S.C.R. 1087; Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 S.C.R. 297; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494; Dunkin’ Brands Canada Ltd. v. Bertico Inc., 2015 QCCA 624, 41 B.L.R. (5th) 1; National Bank of Canada (Canadian National Bank) v. Soucisse, [1981] 2 S.C.R. 339; Bank of Montreal v. Kuet Leong Ng, [1989] 2 S.C.R. 429; Houle v. Canadian National Bank, [1990] 3 S.C.R. 122; Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554; Provenzano v. Babori, [1991] R.D.I. 450; T.L. v. Y.L., 2011 QCCA 1205; SMC Pneumatiques (Canada) ltée v. Dicsa inc., 2000 CanLII 17881, rev’d 2003 CanLII 72264; Entreprises MTY Tiki Ming inc. v. McDuff, 2008 QCCS 4898; Nagarajah v. Fotinopoulos Kalyvas, 2003 CanLII 2834.
By Rowe J. (dissenting)
Uniprix inc. v. Gestion Gosselin et Bérubé inc., 2017 SCC 43, [2017] 2 S.C.R. 59; Montréal, Maine & Atlantique Canada Cie (Montreal, Maine & Atlantic Canada Co.) (MMA), Re, 2014 QCCA 2072, 49 R.P.R. (5th) 210; Station Mont‑Tremblant v. Banville‑Joncas, 2017 QCCA 939; Paquin‑Charbonneau v. Société des casinos du Québec, 2017 QCCA 1728; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 S.C.R. 297; Dunkin’ Brands Canada Ltd. v. Bertico Inc., 2015 QCCA 624, 41 B.L.R. (5th) 1; Banque Toronto‑Dominion v. Brunelle, 2014 QCCA 1584; Hydro‑Québec v. Construction Kiewit cie, 2014 QCCA 947; Warner Chappell Music France v. Beaulne, 2015 QCCS 1562; Société d’énergie Foster Wheeler ltée v. Montréal (Ville de), 2008 QCCS 4670; Éco‑Graffiti inc. v. Francescangeli, 2016 QCCS 6242; Miller v. Syndicat des copropriétaires de “Les résidences Sébastopole centre”, 1996 CanLII 4663; St. Lawrence Cement Inc. v. Barrette, 2008 SCC 64, [2008] 3 S.C.R. 392; Gourdeau v. Letellier de St‑Just, [2002] R.J.Q. 1195; Rabin v. Syndicat des copropriétaires Somerset 2060, 2012 QCCS 4431, [2012] R.L. 548; White Birch Paper Holding Company (Arrangement relatif à), 2015 QCCS 701, leave to appeal refused, 2015 QCCA 752; Laberge v. Villeneuve, 2003 CanLII 16498; Picard v. Picard, 2015 QCCS 5096.
Statutes and Regulations Cited
Act respecting the implementation of the reform of the Civil Code, s. 4.
Civil Code of Lower Canada, arts. 1020, 1024.
Civil Code of Québec, arts. 6, 7, 1375, 1380, 1431, 1434, 1497, 1507, 1590, 1601, 2186 para. 1, 2199, 2251, 2253 to 2255, 2880 para. 2, 2925.
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APPEAL from a judgment of the Quebec Court of Appeal (Thibault, Morissette, St‑Pierre, Schrager and Mainville JJ.A.), 2016 QCCA 1229, [2016] AZ‑51310795, [2016] Q.J. No. 9073 (QL), 2016 CarswellQue 8574 (WL Can.), affirming the decision of Silcoff J., 2014 QCCS 3590, [2014] AZ‑51096311, [2014] Q.J. No. 4813 (QL), 2014 CarswellQue 8025 (WL Can.). Appeal dismissed, Rowe J. dissenting.
Douglas Mitchell, Audrey Boctor, Daphné Wermenlinger and Patrick Girard, for the appellant.
Pierre Bienvenu, Andres C. Garin, Sophie Melchers, Horia Bundaru and Lucie Lalonde, for the respondent.
English version of the judgment of Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ. delivered by
Gascon J. —
TABLE OF CONTENTS
Paragraph
I. Overview
1
II. Background
7
A. Origin of the Development Project
8
B. Negotiations, Letter of Intent and Power Contract
11
C. Situation of the Parties After They Entered Into the Contract
17
III. Judicial History
25
A. Quebec Superior Court, 2014 QCCS 3590
25
B. Quebec Court of Appeal, 2016 QCCA 1229
30
IV. Issues
37
V. Analysis
40
A. Claim for Renegotiation of the Contract
40
(1) The Contract: Paradigm, Characterization and Content
45
(a) Paradigm of the Contract
54
(b) Characterization of the Contract
59
(c) Unforeseeability of the Changes in the Electricity Market
77
(d) Conclusion on the Factual Analysis
82
(2) Unforeseeability and Good Faith
83
(a) Doctrine of Unforeseeability
86
(b) Unforeseeability in Quebec Civil Law
93
(c) Good Faith and Equity
102
(3) Conclusion on the Principal Question
126
B. Relief Sought and Prescription
129
VI. Conclusion
136
I. Overview
[1] The Churchill River basin in Labrador is one of the areas with the greatest hydroelectric potential in the world. In 1969, following several years of negotiations, two sophisticated entities, the Quebec Hydro‑Electric Commission (“Hydro‑Québec”) and the Churchill Falls (Labrador) Corporation Limited (“CFLCo”), signed a contract (“Power Contract” or “Contract”) that set out a legal and financial framework for harnessing that potential by building a hydroelectric plant (“Plant”) on the river. It was a huge project involving a substantial amount of money. The parties chose to allocate the risks and benefits of the Contract over a 65‑year period.
[2] The Power Contract signed by the parties made the project viable and attractive for each of them. On the one hand, Hydro‑Québec undertook to purchase most of the electricity produced by the Plant, whether it needed it or not, and to protect CFLCo from any cost overruns incurred in the construction of the Plant. This assured CFLCo of a stable return on its investment and allowed it to use debt financing for the construction of the Plant, which is now estimated to be worth $20 billion. On the other hand, Hydro‑Québec sought and obtained the right to purchase electricity at fixed prices for the entire term of the Contract. This protected it from inflation and assured it that it would benefit from low prices in the event of an increase in market prices for electricity.
[3] Nearly 50 years after the Contract was signed, there have been changes in the electricity market whose effect is that the purchase price for electricity set in the Contract is well below market prices. As a result, Hydro‑Québec sells electricity to third parties at current prices while continuing to pay CFLCo the price agreed on in the Contract in 1969. This generates substantial profits for Hydro‑Québec.
[4] CFLCo argues that given this reality, which in its view was unforeseen, Hydro‑Québec can no longer avail itself of the benefits conferred on it by the words of the Contract. In CFLCo’s opinion, these circumstances, which it characterizes as new and unforeseeable, mean that for Hydro‑Québec to do so is contrary to the equilibrium established by the initial agreement and to the principle of good faith in contracting. CFLCo argues that, because the possibility that Hydro‑Québec would within the space of a few years find itself in so advantageous a position for the sale of electricity at very high prices was unthinkable in the late 1960s, the Contract as initially contemplated cannot be found to apply in such circumstances. CFLCo submits that because the parties’ agreement dealt first and foremost with the creation of a cooperative, sharing relationship, the words of the Contract do not reflect that primary intention of the parties and the application of the Contract now creates a situation that bears no resemblance to the contractual relationship contemplated in 1969.
[5] In the circumstances, CFLCo is asking the courts to order that the Contract be renegotiated and that its benefits be reallocated. Specifically, CFLCo seeks to have the fixed rate per kilowatt hour paid to it by Hydro‑Québec replaced with a new and more advantageous rate. It submits that this change is necessary for two reasons: first, to ensure that the Contract reflects the initial equilibrium it is relying on and, second, to enforce Hydro‑Québec’s alleged duty to cooperate with its long‑time partner on the basis of its general duty of good faith.
[6] The Quebec Superior Court and Court of Appeal both ruled against CFLCo. I agree with their conclusion. In Quebec civil law, there is no legal basis for CFLCo’s claim. This Court cannot change the content of the Contract, nor can it require the parties to renegotiate certain terms of the Contract or to share the benefits otherwise than as provided for in the Contract. All of CFLCo’s arguments, which are based on the nature of the Contract and its implied duties, the general duty of good faith, or a variation on the doctrine of unforeseeability (imprévision), must fail. Moreover, all of them require questioning the trial judge’s determinative findings of fact, which are tainted by no palpable and overriding error. I would therefore dismiss the appeal.
II. Background
[7] To clarify what is in issue, it is important to clearly determine what the parties intended and expected at the time they entered into the Contract and how their relationship has evolved since then. This review of the factual background is based essentially on the trial judge’s reasons. Since the courts below have already reviewed the relevant evidence thoroughly and in detail, I will limit myself to the salient aspects of that evidence that are determinative of the appeal.
A. Origin of the Development Project
[8] In 1961, the Government of Newfoundland and Labrador[1] signed a lease with the Hamilton Falls Power Corporation Limited (which later changed its name and became CFLCo), a subsidiary of the British Newfoundland Corporation Limited (“Brinco”). Brinco was a consortium of industrial, banking and mining companies whose directors were, according to the trial judge, elite titans of industry at the time. The lease conferred on CFLCo the right to make use of the watershed of the Churchill Falls site to produce hydroelectric power. The lease, which was for a fixed rent, had a term of 99 years, renewable for a further 99 years. It provided that royalties were to be paid to the Government of Newfoundland and Labrador, but prohibited the province from raising taxes or increasing the amount of the royalties.
[9] At the time, Brinco wanted to exploit the watershed and build a hydroelectric plant there, but it was apparently unwilling either to finance the plant by issuing shares in CFLCo or to commit its own funds. Instead, it tried to secure debt financing for the construction of the Plant. For that purpose, CFLCo, its subsidiary that was to develop the project, sought customers that could guarantee that they would purchase large quantities of electricity on a long‑term basis, in part to assure its future creditors that the project was financially viable. The customers it sought would also need to have the technology required to transmit the electricity produced by the Plant to consumers. In the trial judge’s opinion, there was nothing to suggest that, at the time, CFLCo was in any way dealing with an urgent situation that forced it to undertake the project in such circumstances.
[10] Hydro‑Québec, a state‑owned enterprise created in 1944 that has had a monopoly on electricity in Quebec since 1963, met these criteria. Furthermore, it was at that time facing an increase in the demand for electricity in Quebec. This did not make it the perfect partner, however, as it was capable of developing its own hydroelectric projects. Hydro‑Québec therefore had to be convinced that it would be worth its while to participate in the construction of plants owned by third parties and to purchase their electricity rather than producing its own.
B. Negotiations, Letter of Intent and Power Contract
[11] CFLCo approached Hydro‑Québec immediately after the 1961 lease was signed, but Hydro‑Québec rejected its initial offers. It was not until 1966 that the parties agreed on a development project. At that time, they signed a Letter of Intent setting out the terms of the project, although those terms required the approval of the governments of Quebec and Newfoundland and Labrador. Article 2.0 of the Letter of Intent stipulated that a final contract remained to be signed. The Letter of Intent stated that CFLCo would be responsible for building the Plant, and Hydro‑Québec for building the transmission lines to Quebec. The parties expected Hydro‑Québec to purchase a fixed quantity of electricity from the Plant for 40 years at fixed prices that would decrease every 5 or 10 years and would be based on the cost of building the Plant. That purchase guarantee took the form of a “take‑or‑pay” undertaking that would require Hydro‑Québec to buy and pay for a fixed quantity of electricity whether it needed it or not. The Letter of Intent also provided that CFLCo would have the right to receive 300 megawatts of electricity on request: this was the right of “recapture”. The parties also agreed that Hydro‑Québec would guarantee up to $100 or $109 million in construction cost overruns.
[12] Construction of the Plant began immediately, but both CFLCo and Hydro‑Québec quickly realized that the work was proving to be more costly than had been anticipated. In addition, potential creditors were hesitant and were asking for additional security. This required the parties to make changes to their respective prestations, with the result that a new contractual equilibrium was established following further negotiations. The 1969 Power Contract, which superseded and replaced the Letter of Intent, therefore differed fundamentally from the latter on certain key points. For example, Hydro‑Québec now guaranteed any cost overruns for the Plant. As well, the parties retained the initial 40‑year term, but agreed to add a clause providing for automatic renewal of the Contract for an additional 25 years.
[13] In his rigorous analysis of the evidence, the trial judge reviewed the negotiations on this last point in detail. He noted that, because the electricity prices were based directly on the Plant’s construction costs, cost overruns had increased those prices and made the project less attractive for Hydro‑Québec. He observed that, at the time, Hydro‑Québec had therefore requested — in what the executive committees of the bo