Good Faith in Contract Law

The scope for re-visiting contract terms for reasons of good faith are limited under Quebec law, according to the November 2nd, 2018, judgment of the Supreme Court of Canada in Churchill Falls v Hydro-Quebec. The same is probably the case at (Canadian) common law, .

The judgment comes after years of ongoing dispute between (essentially) the provincial governments of Newfoundland and Labrador and that of Quebec over the benefits of a 1969 contract on a 65-year term (expiring in 2041) under which Quebec has had a virtually exclusive right to Churchill Falls electricity generation at fixed prices. Those prices have for many years been well below market prices.

Churchill was asking the Court to re-frame the contract or to compel Hydro-Quebec to renegotiate the contract, based on a number of arguments boiling down to good faith (including that it was a so-called relational contract similar to a joint venture or franchise, and thereby prioritizing cooperation and equitable sharing of risks and benefits). Churchill lost before the Quebec trial and appeal Courts in 2014 and 2016, and its appeal to the Supreme Court has now been dismissed.

While the judgment is obviously geared to the particular and quite exceptional circumstances of such a long-term contract, it is not without general guidance in relation to Quebec contract law at large, although drawing a precise set of rules from the judgment can be a challenge.

The general legal backdrop has been in place for many years and consisted of the Quebec Civil Code rules on good faith and consensualism. Articles 6 and 7 require good faith in the exercise of civil rights and prohibit the exercise of any right with the purpose of harming another or in an excessive or unreasonable manner (as contrary to the requirements of good faith). Articles 1431 and 1434 of the Civil Code speak to the binding nature of contracts, and are basically to the effect that contract clauses encompass only the subject-matter on which the parties have agreed to contract, and that a valid contract binds the parties not only in relation to what they have expressed in the contract, but also in relation to what flows from it per its nature or per equity or law.

Churchill’s position began with renegotiation: the contract should be renegotiated because it was a relational contract similar to a joint venture in which the parties intended to prioritize cooperation and equitable sharing of risks and benefits; unforeseen events required renegotiation.

The Court rejected Churchill’s argument that the dramatically changed market conditions were unforeseeable, such that by implication the contract should be changed or renegotiated. The parties had decided to allocate the risk of price fluctuation to Hydro-Quebec and had intentionally chosen not to include a price adjustment clause. The Court held that unforeseeability is not a doctrine presently recognized in Quebec law, noting that even in jurisdictions (comparing European civil law jurisdictions) where the doctrine is recognized, it only applies in narrow circumstances and certainly not where there is an unforeseen benefit to one party without a reduction in benefit for the other party.

The Court also rejected the contention that the contract was relational as akin to a joint venture contract, without however deciding on the scope of such contracts under Quebec law. Likewise, it was not a relational contract in way of a long-term master contract which set out the realationship but without great definition of detail. While the contract reflected a certain interdependence and was of long duration, those facts alone did not indicate a relational element that would justify imposing heightened duties of good faith. The contract set out defined and detailed prestations (the equivalent of common law consideration) as opposed to providing for flexible economic coordination.

Nor could a duty to renegotiate be implied; the respective prestations did not require an implied duty to exceed the usual requirements of good faith in cooperating or a duty to redistribute windfall profits. There was no gap or omission in the contract that required the reading-in of an implied duty in order to make the scheme of the contract coherent. There was no ambiguity having regard to the contract’s provisions for fixed prices and the context of the contract in which the parties had espressly agreed allocation of price risk fluctuations based on a “known unknown” as regards future prices.

The Court noted that as an exception to the general rules on the binding nature of contracts, article 1375 of the Civil Code deals with all obligations (encompassing both contract and tort) and says that good faith governs the conduct of parties, both at the time the obligation arises (so at the time of contracting) as well as at the time of the obligation’s performance or extinction. However, while good faith can temper formalistic interpretation of contracts, it also serves to maximize the meaningful effect of a contract and its respective prestations. Good faith could not be used to argue unforeseeability indirectly where that doctrine had not been incorporated into law, and was not synonymous with either charity or distributive justice (which would be unpredictable and contrary to contractual stability). This was not one of the unfair situations (in the sense of the parties’ relationship) that would justify intervening. Equally, it could not be said that Hydro-Quebec’s refusal to renegotiate was in the circumstances a breach of the duty of good faith; one does not necessarily entail the other. Since good faith is related to the parties’ conduct, so it could not be used to impose obligations that are completely unrelated to their conduct and would overlook the principle that in meeting good-faith requirements a party must also be able to satifsy his or her own interests; a duty to cooperate did not mean that one’s own interests must be sacrificed.

The position is likely no different at Canadian common law, although the Supreme Court did not say do explicitly. However, the Court noted in remarking that a party must be able to look after its own interests its 2014 judgment in the common law contract case Bhasin v. Hrynew which acknowledged (summarizing what is itself a lengthy judgment with nuances) good faith as a “general organizing principle” in contract law, and which “underpins and informs” the various rules in common law contract which recognize obligations of good faith contractual performance and a common law duty applicable to all contracts to act honestly in the performance of contractual obligations.

Coincidentally, as a comparative note, Floyd Zadkovich LLP have just recently commented on the English law position in the context of a recent judgment.

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