Business Law, Real Estate Law

The Supreme Court of Canada Weighs In: For Many Commercial Contracts Including Leases, “A Deal is Usually a Deal”

Nov 19th, 2018

By Daniel Frajman

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My commercial clients, often for example commercial landlords and tenants, frequently ask whether unforeseen market changes can affect their future obligations under the lease or other contract in question.  At least in situations where the contract was at the outset subject to a degree of negotiation, the usual answer is that “a deal is a deal”, and new circumstances do not affect obligations.

Therefore, when dealing with commercial leases for example, a party will want to take care to insert clauses at the outset that speak to and cover future uncertainties and developments, otherwise the terms and conditions that govern likely will not take account of that future development.  For example, a commercial landlord will want to insert clauses that keep future rental adjustments from decreasing due to possible deflation (recall that a period of deflation did occur during the 2008-9 financial crisis), clauses that try to impose limitations on the permitted use of premises in situations such as tenant insolvency (for example, s.84.1 of the federal Bankruptcy and Insolvency Act seems to give a judge discretion to have a bankrupt tenant’s lease rights assigned when appropriate to a solvent and reasonable third party operator), or clauses that oblige the tenant to provide stronger security (for example, a bank guarantee rather than a security deposit) should that become reasonable in the circumstances.  From a commercial tenant’s perspective, it will for example want to try when appropriate to provide for a “go dark” clause (allowing operations to cease due to perhaps a decrease in the tenant’s sales so long as rent continues to be paid), or a clause for rights of first refusal to lease neighbouring premises should they become available.

The Supreme Court of Canada (“SCC”), in a recent decision of November 2, 2018 on appeal from Quebec, in the case of Churchill Falls (Labrador) Corporation Limited v. Hydro-Quebec, 2018 SCC 46 (“Churchill Falls”), though not dealing with a lease but rather a contract for the provision of electricity, made it clear once again that in many commercial situations, a deal is indeed a deal.

Churchill Falls concerns a 1969 contract (set to run until 2041) among Hydro-Quebec (“HQ”) and the Newfoundland and Labrador hydro company (“HN”), by which HN agreed to provide HQ with electricity over a long period at a fixed rate that in addition is actually decreasing over time.  Since the contract was entered into, electrical prices skyrocketed (unforeseen by the parties at the outset), and by some estimates the deal has since delivered more than $27.5 billion in profits to HQ and about $2 billion in profits to HN.  HN went to court to reopen the deal, but lost in this attempt in the recent Churchill Falls judgment.

Some of the principles set out by the SCC in Churchill Falls in upholding the terms of the contract, notwithstanding unforeseen developments arising after the contract was formed, are:

  • “First, and fundamentally, the doctrine of unforeseeability is not recognized in Quebec civil law at this time…”. The SCC further explained that although the French Civil Code (in France) added a provision in 2016 referring to an unforeseeable change of circumstances sometimes obliging the contractual parties to renegotiate, the Quebec Civil Code (“QCC”) and Quebec jurisprudence and commentators, have not adopted this;
  • The SCC spent considerable time discussing the concept of “good and faith and equity” in contracts, referring to the good faith concept at articles 6, 7 and 1375 CCQ and to the common law provinces having recently adapted a similar good faith concept (in the recent SCC case of Bhasin v. Hrynew, 2014 SCC 71), and making reference to some recent Quebec cases that applied the good faith concept to provide recourses to contractual parties perceived to have suffered prejudice (ex, the “Dunkin’ Donuts” case, where a franchisor was held to have breached an implied duty of support causing franchisees to see a collapse of their business; see Dunkin’ Brands Canada Ltd. v. Bertico Inc., 2015 QCCA 624).  Nevertheless, the SCC found no general duty on the part of a contractual party to look out for the best interest of or to share profits with the other party, and held that HQ in the present case had not violated any obligation of good faith and equity.  In this regard, the following quotes of the SCC in Churchill Falls are fascinating:
  • “… good faith cannot be used to impose a new bargain [or] to order the sharing of profits that have in fact been honestly earned.”;
  • “What constitutes unreasonable conduct contrary to the duty of good faith must be determined on a case-by-case basis.”;
  • “[There is] a duty to cooperate that flows from the requirements of good faith…The duty to cooperate means, for example, that one party must look out for the other party’s interest by acting in a reasonably conciliatory…manner…That being said…no court has yet found an obligation to redistribute profits [based on this duty to cooperate];
  • “Hydro-Quebec’s refusal to forego the advantages flowing from the contract is not a departure from the standard of reasonable conduct that could rebut the presumption that a party is acting in good faith.”

Without a doubt then, it is important when preparing a commercial lease or any other contract to look out in advance for potential contingencies and other future scenarios, and to draft appropriate clauses to address those potential future events.  If this is not done, the Supreme Court of Canada tells us in the just decided case of Churchill Falls that it can be very hard to later reopen the terms and conditions of the deal.

Please do contact me to address your particular commercial lease, sale agreement, shareholder agreement, trust, foundation or other commercial or estate planning document.

 

This publication is of a general nature, is as of the date indicated and is not intended to constitute an opinion or legal advice.  The facts and circumstances of your particular situation should be specifically identified and addressed before appropriate legal advice may be given.