Churchill Falls (Labrador) Corporation Limited and Hydro-Québec 2018 SCC 46


This Decision1 is in relation to the 1969 contract between Churchill Falls (Labrador) Corporation Limited (“CFL Co.”) and Hydro-Québec which set out the legal and financial framework for the construction and operation of the Upper Churchill hydroelectric plant on the Churchill River in Labrador. Pursuant to the contract, Hydro-Québec undertook to purchase, over a 65-year period, most of the electricity produced by the generating plant which supported the debt financing for the facility’s construction. In exchange, Hydro-Québec obtained the right to purchase the electricity at fixed prices for the entire term of the contract.

In the subsequent years, there were changes in the electricity market and the purchase price for electricity set out in the contract became well below market prices. Hydro-Québec was able to sell electricity from the facility to third parties at market prices generating substantial profits. In light of these changed circumstances, CFL Co. petitioned the courts to order that the contract be renegotiated and its benefits be reallocated. CFL Co. sought to have a new rate put in place so as to ensure that the contract, in its view, reflected the equilibrium of the initial agreement and to enforce Hydro-Québec’s alleged duty to co-operate with CFL Co. on the basis of a general duty of good faith.

The Québec Superior Court2 concluded that the intervention sought by CFL Co. was not warranted, and the Québec Court of Appeal3 dismissed CFL Co.’s appeal. The Supreme Court of Canada (the “Court”) dismissed CFL Co.’s appeal by a measure of 7 Justices to 1, with the single dissenting judge being Justice Rowe from the Province of Newfoundland and Labrador, and with Chief Justice McLachlin taking no part in the Judgement.


CFL Co. argued that given the nature of the contract and the parties’ duties of good faith, and equity that Hydro-Québec had a duty to renegotiate the contract when it proved to be an unanticipated source of substantial profits for Hydro-Québec. CFL Co.’s position was that the contract must be renegotiated so as to allocate the profits more equitably between the parties.4


In support of its position, CFL Co. began by raising arguments relating to the characterization, content and interpretation of the contract. It submitted that the contract was a relational one akin to a joint venture.5 Its view was that the parties had always intended to prioritize cooperation and the equitable sharing of the risks and benefits associated with the project, and that the contract could not be considered to have dealt with the risk of electricity price fluctuations as radical as the ones that have occurred since the 1980s, such fluctuations being impossible to foresee in 1969.6

The Court however concluded that the contract could not be characterized as a joint venture or a relational contract. With respect to the potential of a joint venture, the Court found that the evidence did not show that the parties intended to enter into a partnership or to jointly assume financial or logistical responsibility for the development of the project beyond the simple cooperation required to perform their respective obligations.7 The Court thus found that the relationship of the parties lacked the characteristics generally associated with a joint venture.8

As for the contract being relational, the Court noted that in general a relational contract sets out the rules for close cooperation between the parties who wish to maintain such over the long-term, and puts an emphasis on the parties’ relationship and on their ability to agree and cooperate, and does not define their respective obligations and benefits in significant detail. The Court noted that such relationships require a cooperation that is more active than the cooperation that is required by transaction-based contracts.9

With respect to the contract in issue, the Court found that the parties had set out a series of defined and detailed obligations and benefits as opposed to providing for flexible economic coordination.10 The Court noted that each party’s participation was clearly quantified and defined and that this showed that they intended the project to proceed according to the words of the contract and not on the basis of their ability to agree and co-operate from day to day to fill in the gaps in the contract. The Court noted that the long-term interdependent nature of the contract did not in itself imply that the contract was relational.11 The Court specifically noted that the Court of Appeal was correct in finding that the trial judge made no palpable and overriding error that might warrant intervention, and that his determinative finding concerning the paradigm of the contract, mainly that its fixed prices and long-term were precisely the benefits Hydro-Québec was seeking in 1969, was strongly supported by the evidence he considered.12


CFL Co. also submitted that, as a matter of law, Hydro-Québec could not receive such profits without being required to distribute part of them to CFL Co., relying in support of this argument in part on the general duty of good faith13 that is recognized in Québec civil law and in part on implied duties under the contract based on equity.14 Hydro-Québec noted, and the Court accepted, that CFL Co. was essentially asserting the right to require the renegotiation of the contract on the basis of unforeseeability.15

With respect to the matter of a potential implied duty, the Court found that although an implied duty may, within the meaning of article 1434 of the Civil Code of Québec16, be incident to a contract if the duty is consistent with the general scheme of that contract and its coherency appears to require such a duty, that such an implied clause must not merely add duties to the contract that might enhance it, but must fill a gap. The Court then concluded that there was no gap or omission in the scheme of the contract that required an implied duty to co-operate and to renegotiate the agreed upon prices be read into the contract in order to make it coherent.17

In dealing with this issue of an implied renegotiation clause, the Court specifically noted that the interpretations proposed by CFL Co. could not override the judge’s findings on the allocation of risks between the parties as stipulated in the contract and on the benefits flowing from it, particularly for Hydro-Québec.18 The majority also noted that the application of Justice Rowe’s conception (in dissent) of the relational nature of the contract amounted to a summary reassessment of what the parties intended the central paradigm of the contract to be that was based on an interpretation of the evidence, both intrinsic and extrinsic, that the trial judge did not accept.19

With respect to the application of the doctrine of unforeseeability, the Court concluded that a cursory review of the contract’s clauses and their context was enough to justify a conclusion that the parties intended to fix the price of electricity for the entire term of the contract,20 and importantly that the trial judge found from the evidence that the parties intended to allocate the risk of price fluctuations and that there was an agreement of wills on that specific point.21 In the Court’s view, the risk of price fluctuations, a known variable, was allocated by the contract.22 The Court stated that the parties agreed that it was a variable whose value was, by definition, unknown,23 and the parties being fully aware of this reality nonetheless made a firm commitment without including a price adjustment clause, which confirmed to the majority of the Court, that the contract was to apply regardless of the magnitude of price fluctuations.24 The majority could not find any palpable and overriding error in the trial judge’s findings on this point.25

Essentially, the Court found that the nature of the contract was that the parties undertaking was definite and firm, and for the long-term.26 The Court was of the view that all of the requisite findings of fact were strongly supported by the evidence.27 Since the majority of the Court found that the parties had intentionally allocated the risk of price fluctuations, the circumstances in which the doctrine of unforeseeability could potentially be recognized did not correspond to the circumstances of the parties in the instant case. The Court also noted that the doctrine was not explicitly recognized in Québec civil law at the present time28 and any development of a concept analogous to unforeseeability in Québec civil law must take account of the legislature’s choice not to turn such doctrine into a universal rule.29

The Court also noted that CFL Co. claimed that it was not specifically pleading the doctrine of unforeseeability.30 However, in the majority’s view, CFL Co.’s submissions closely resembled that doctrine and echoed its central theme – although the contract was originally fair and reflected the parties’ intention, it no longer reflected that original intention and had not done so since major unforeseen changes appeared in the electricity market.31 The Court noted that CFL Co.’s general position essentially revolved around its key argument that the difference between the electricity market of the late 1960’s and the electricity market of the present day was so significant and so radical that it would be appropriate to describe the transition from one to the other as a true paradigm shift.32

CFL Co. submitted that its argument was based not on unforeseeability but rather on the concepts of good faith and equity that govern the performance of contractual obligations in Québec civil law.33 With respect to the issue of the general duty of good faith, the Court noted that while such duty serves as a basis for courts to intervene and to impose on contracting parties obligations based on the notion of contractual fairness34, the duty can also temper formalistic interpretations of the words of certain contracts and serves to maximize the meaningful effect of a contract and of the obligations and benefits that are for the parties the object of that contract.35

The Court noted that where the concept of unforeseeability itself had been rejected by the Québec legislature refusing to incorporate that doctrine into the province’s civil law, a protection analogous to it that would be linked only to changes in circumstances without regard for the core conditions of the doctrine as recognized in other civil law jurisdictions could not become the rule in Québec civil law.36 The Court specifically found that nothing about the relationship between CFL Co. and Hydro-Québec would justify an intervention in the circumstances of the instant case as there was neither inequality nor vulnerability in their relationship.37 Both parties to the contract were experienced, and they negotiated its clauses at length.38 The Court concluded that they bound themselves knowing full well what they were doing, and their conduct showed that they intended one of them to bear the risk of fluctuation of electricity prices.39

The Court found that 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 is unreasonable in the circumstances.40 In the instant case, Hydro-Québec’s refusal to forego the advantages flowing to it from the contract was not a departure from the standard of reasonable conduct that could rebut the presumption that a party is acting in good faith.41 Nor, the Court found, did Hydro-Québec’s insistence on adhering to the contract, despite the alleged unforeseen change in circumstances, constitute unreasonable conduct in the absence of other breaches of the duty of fair play or that of collaboration or cooperation.42

The Court further found that Hydro-Québec had done nothing that threatened to disrupt the contractual equilibrium and therefore had no duty to co-operate with CFL Co. to mitigate the effects of the contract.43 The Court found that the evidence did not show that Hydro-Québec was acting in bad faith or refusing to accommodate CFL Co.’s situation, rather it was refusing only to give CFL Co. the benefit itself derived from the contract, which is not a breach of the requirement that it conduct itself reasonably and in accordance with fair play.44 The Court noted that Hydro-Québec does indeed benefit from the contract insofar as it is able to earn a profit as a result of its having participated in the Churchill Falls project rather than undertaking a similar project in Québec in the 1960’s, but that it obtained this benefit in exchange for making substantial investments and assuming significant risks.45 Similarly, the Court found that as for CFL Co., it received what it expected to receive under the contract, mainly the ability to use debt financing for the plant, and a return on its investment that it considered reasonable at the time of the signing of the contract.46

Finally, the Court found that the situation in the instant case did not constitute a breach of an ongoing duty or a continuing fault that is not subject to prescription,47 and considering that the most recent event to have disrupted the electricity market occurred in 1997 at the latest, it was at that time that CFL Co.’s right of action arose.48 Thus, the Court concluded that it had therefore been prescribed since the end of 2000 at the latest. The most recent action being the action taken by the United States Federal Energy Regulatory Commission to effectively require that the market be open to all producers, occurring in 1997 at the latest.49 The Court did not accept CLF Co.’s argument that Hydro-Québec’s breach of its duty of good faith was a continuing fault, but rather found that the right of action in question arose when the events that gave rise to it occurred.

Overall, the Court concluded that the trial judge had properly defined the nature of the relationship between the parties and the paradigm of the contract, and that they never intended to allocate the project’s risks and benefits equally.50 On the contrary, it found that the original intention was that Hydro-Québec would assume most of the risks associated with the construction of the plant owned by CFL Co.51 The Court’s view was that the benefit that CFL Co. characterized as disproportionate, namely to guarantee a fixed price for the purchase of electricity, was seen as a way to have Hydro-Québec assume a risk that CFL Co. did not want to assume. In return, Hydro-Québec was to obtain low fixed prices and a long-term contract.52 The Court concluded the fact that the electricity market had changed significantly since the parties entered into the contract did not on its own justify disregarding the terms of the contract and its nature.53 In its view, CFL Co. was seeking not to protect the equilibrium of the contract but to replace the contract with a new agreement by undoing certain aspects of it while keeping the ones that suited CFL Co. In the majority’s view neither good faith nor equity justified granting those requests.

The Court also interestingly noted that in its view, CFL Co. was asking it to limit the contract’s temporal scope so that it could more quickly enjoy the benefits. It will eventually receive at the end of the contract in 2041, that being a facility estimated to be worth more than $20 billion that it will be able to operate for its own benefit starting September 2041 for many more years to follow.54


On the other hand, Justice Rowe was of the view that the trial judge erred in not finding the contract relational rather than transactional, and that the contract did establish a long-term relationship between the parties premised on cooperation and the promise of mutual benefit.55 Justice Rowe’s view was that since the contract contained no specific mechanism for the allocation of profits that were beyond what was envisioned at the time of the agreement, the parties had an implied obligation to cooperate in defining the terms of their allocation and Hydro-Québec had breached this duty.56 Justice Rowe’s view was that in considering the overall framework of the parties’ rights and obligations set out in the contract, that the true nature of the arrangement was relational rather than transactional.57 He also noted that he did not share the view that relational contracts should be limited to those that leave certain obligations to be defined by the parties at a later date.

In Justice Rowe’s view, based on his finding of the relational nature of the contract, the parties had an implied obligation to cooperate in establishing a mechanism for the allocation of extraordinary profits.58 Furthermore, he found that where a fault continues in time and causes continuing damages, prescription starts running anew each day.59 Therefore, by refusing to enter into negotiations to establish a mechanism for allocating unforeseen profits, Hydro-Québec had been in continuous breach of its obligation to cooperate and CFL Co.’s action was not prescribed.60


This Decision is the latest chapter in the long running dispute over the allocation of benefits deriving from the Upper Churchill hydroelectric project, and provides further guidance for energy and natural resources practitioners who are often called upon to put in place long-term agreements to support project developments. The Supreme Court of Canada has clearly stated that where the evidence, including the language of the contract, supports a finding that the parties clearly put their mind to allocation of a certain risk, even where the valuation of the risk at the time was not clearly known, the contractual commitments in this regard should generally be upheld. Over the long-term, many things can change dramatically in the energy and natural resources markets, and long-term contractual arrangements should be clearly articulated to reflect how the parties have agreed to address the allocation of pricing and other potential changes in such markets. The Supreme Court of Canada, while acknowledging the existence of good faith and equitable arguments in certain circumstances, reconfirmed the sanctity of contracts where the parties have put their minds to and allocated obligations and benefits.

* David MacDougall is a Counsel with McInnes Cooper in Halifax, Nova Scotia. He advises clients in the areas of energy and natural resources, with an emphasis on energy regulatory matters and renewable project developments.

  1.  Churchill Falls (Labrador) Corporation Ltd c Hydro-Québec, 2018 SCC 46.
  2.  Churchill Falls (Labrador) Corporation Ltd c Hydro-Québec, 2014 QCCS 3590.
  3.  Churchill Falls (Labrador) Corporation Ltd c Hydro-Québec, 2016 QCCA 1229.
  4.  Supra note 1 at para 40.
  5.  Ibid at para 41.
  6.  Ibid.
  7.  Ibid at para 42.
  8.  Ibid at para 46.
  9.  Ibid at para 66.
  10.  Ibid at para 71.
  11.  Ibid.
  12.  Ibid at para 42.
  13.  Civil Code of Quebec, LQ 1991, c 64, art 6.
  14.  Supra note 1 at para 43.
  15.  Ibid at para 37.
  16.  Supra note 13 art 1434.
  17.  Supra note 1 at para 75
  18.  Ibid at para 76.
  19.  Ibid.
  20.  Ibid at para 79.
  21.  Ibid at para 80.
  22.  Ibid.
  23.  Ibid.
  24.  Ibid.
  25.  Ibid at para 81.
  26.  Ibid at para 82.
  27.  Ibid.
  28.  Ibid at para 93.
  29.  Ibid at para 96.
  30.  Ibid at para 84.
  31.  Ibid.
  32.  Ibid at para 45.
  33.  Ibid at para 85.
  34.  Ibid at para 103.
  35.  Ibid.
  36.  Ibid at para 106.
  37.  Ibid at para 109.
  38.  Ibid.
  39.  Ibid.
  40.  Ibid at para 118.
  41.  Ibid at para 119.
  42.  Ibid.
  43.  Ibid at para 123.
  44.  Ibid at para 124.
  45.  Ibid.
  46.  Ibid.
  47.  Ibid at para 135.
  48.  Ibid.
  49.  Ibid at para 134.
  50.  Ibid at para 136.
  51.  Ibid.
  52.  Ibid.
  53.  Ibid at para 137.
  54.  Ibid.
  55.  Ibid at para 142.
  56.  Ibid at para 145.
  57.  Ibid at para 167.
  58.  Ibid at para 180.
  59.  Ibid at para 185.
  60.  Ibid at para 186.

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