Jul 23rd, 2020
Jan 22nd, 2020
By Laurent Debrun
Hydro-Québec v. Construction Polaris Inc. 2019 QCCA 990
Polaris obtained from HQ a contract to build a road leading to the La Romaine hydroelectric facility. Quickly, cost overruns occur and, gradually, Polaris claims an amount of 24.7M$ from HQ. HQ demands an audit, fully supported by forensic documentation in support of the additional costs. During this time, Polaris is experiencing financial problems precisely because it was faced with these unsuspected costs it had to finance all the while continuing to build the road. The bank recalled the financing and revolving credit. The situation became dire and Polaris faced bankruptcy.
A meeting took place between HQ, Polaris and its surety, Axa. Polaris was looking for an immediate payment of 4M$ by HQ to avoid bankruptcy and allow it to complete the project while the parties analyzed the merits of the 24.7M$ claim. However, at this meeting, HQ asked Polaris to accept a one-time payment of 10M$ against a release of all current and future claims, including in relation to the 24.7M$ claim for additional costs. Polaris felt that it did not have any choice and it took the offer. Either it accepted it or it was bankrupt. Under Quebec law, a transaction is a contract by which the parties prevent a future contestation, put an end to a lawsuit or settle difficulties arising in the execution of a judgment, by way of mutual concessions or reservations (art. 2631 Civil Code of Quebec (CCQ)). A transaction has, between the parties, the authority of res judicata (art. 2633 CCQ). But until such time that the transaction is homologated by the court as a judgment, it cannot be the subject of forced execution. It remains a private contract over which the court can exercise supervisory jurisdiction.
The trial judge annulled the transaction and the release that it contained. The court found that the consent of Polaris was obtained through fear and under undue pressure, HQ knowing that Polaris had no option but to accept. HQ gave Polaris 2 hours to accept or reject its “offer”, never before announced and running contrary to Polaris’ reasonable expectation that an advance payment of 4M$ would be confirmed by HQ at the meeting rather than a one-sided ”take it or leave it” deal.
HQ acted in bad faith, held the trial judge. HQ took advantage of Polaris’ vulnerability to extract from it an unfair concession (art. 1404 CCQ provides that consent to a contract the object of which is to deliver the person making it from fear of serious injury is not vitiated where the other contracting party, although aware of the state of necessity, is acting in good faith.). The concession included not only a renunciation to cost overrun of over 15M$ for the work completed but also a renunciation by both Polaris and Axa, the surety, to any claim for additional costs relating to the future completion of the project. The trial judge added that what HQ extracted was an “extraordinary deal” for HQ.
HQ argued on appeal that the judge committed an error in interpreting the wording of the transaction. HQ contested that the transaction contained a release by Polaris preventing it to make a claim relating to future work. Yet, HQ’s in-house counsel, who drafted and negotiated the transaction, testified at trial that this was indeed the meaning and scope of the transaction. For the Court of appeal, the trial judge could rely on this evidence to conclude that the transaction gave HQ an « extraordinary benefit » which could only result from undue pressure.
We can compare this latter finding to that of a different formation of the Quebec Court of Appeal in Invenergy Wind Canada v. Eolectric Inc. (2019 QCCA 1073) where the Court held that what matters is the parties’ true intent, not the wording of an agreement. The testimony of HQ’s in-house lawyer was found to be binding on HQ despite the latter’s attempt at distancing itself from it by relying on the wording of the agreement.
Concerning the annulment of a contract, the Court of Appeal reminds us that the fact that one of the contracting parties is in a difficult financial situation is not per se a ground to set aside a deal made. A party is in a state of “circumstantial necessity” if, when entering into a transaction or releasing the other party, the other party, acting in bad faith, takes undue advantage of it; in such a case the victim can invoke fear and duress. The burden of proving that a person acted in good faith rests on the party intending to invoke the release contained in a transaction so as to benefit form it.
The Quebec civilist approach can be compared with the solution under the common law. While it is important for the court to determine whether the party relying on the waiver or transaction was in good faith or not as to the legality of its actions, bad faith remains an elusive concept in a commercial context.
In Times Travel (UK) Limited v Pakistan International Airlines Corp (2019 EWVA civ 828) the English Court of Appeal allowed an appeal by Pakistan International Airlines Corporation (PIAC) against the setting aside of a contract based on lawful duress. PIAC had entered into a contract with the Respondent, Times Travel (UK) Limited (Times Travel) as an agent for the sale of flight tickets on terms that included a waiver by Times Travel of its claims for unpaid commission under prior arrangements. The business of Times Travel was almost exclusively the sale of flight tickets to members of the Pakistani community in and around Birmingham for travel to and from Pakistan, and as, at the relevant time, PIAC was the only airline operating direct flights between the United Kingdom and Pakistan, Times Travel’s business was largely dependent on its ability to sell PIAC tickets (for which it needed a contract with PIAC). In 2012, a significant number of agents had commenced or were threatening proceedings to recover substantial sums said to be due by way of commission. In September 2012, PIAC terminated all existing contracts and entered into new contracts only if agents waived their existing claims. Times Travel accepted PIAC’s terms (although many other agents rejected these or renegotiated more favourable terms). In 2014, Times Travel brought proceedings to recover the commissions and other payments which it said were due under the earlier arrangements. PIAC relied, inter alia, on the waiver given by Times Travel (the equivalent agreement to that of the Quebec Civil Code transaction). The Court of Appeal had to decide whether economic duress can, in a commercial context, arise where lawful acts or threats are made by A in support of a demand which A genuinely believes he is entitled to make. If that belief is reasonably, as well as genuinely, held, there is no basis on which a claim of economic duress can succeed. The same applies even where the belief is unreasonably held. This position is consistent with the principle that contractual certainty should be respected. The Court of Appeal held that lawful act duress is difficult to establish in a commercial context, particularly if the defendant is acting in good faith. The court confirmed that the doctrine of lawful act duress does not extend to lawful pressure if the defendant believes that they are acting in good faith, regardless of whether this belief is reasonably held.
At common law, Illegitimate pressure must be proved in order for there to be a successful claim in economic duress, which is often easier to prove if the defendant is threatening an unlawful act. In this case, PIAC threatened not to enter the contract unless Times Travel accepted the new terms of the 2012 contract, which was lawful. Crucially, no evidence of bad faith on the part of PIAC was found by the court as PIAC had genuinely believed that it could legitimately demand a waiver in this fashion.
While PIAC used its position as a monopoly supplier of plane tickets from the United Kingdom to Pakistan to apply economic pressure, the common law position has historically rejected that use of a monopoly position is ground for a contract to be set aside. Furthermore, while PIAC was able to exert the pressure that it did due to its monopoly position, it was not the role of the courts to seek to control the lawful use of monopoly power, which should instead be left to statute.
The important point which the English Court of Appeal stressed was that the position which PIAC adopted in negotiations was lawful; had PIAC sought to exert pressure over Times Travel which was unlawful then the Court of Appeal would have considered allowing the claim and might have reached a different decision. An example of unlawful pressure given by the Court of Appeal was criminal blackmail (for example, threatening to report a crime unless a sum of money is paid). If a party holds a truly dominant or monopoly position in a market (rather than just in its relationship with the other party) and seeks to abuse that position in negotiations, such conduct may be scrutinized by courts as being in breach of competition rules or amounting to an abuse of right.
In truly commercial dealings between experienced actors, courts favour certainty, resisting attempts to get dragged into ruling after the event what would have been “fair” in the circumstances or allowing one party to depart from the agreed terms because it later argues that the deal is unfair, not what it really wanted to accept or, in many cases, simply because they misunderstood or misapprehended the terms of the transaction.
The view that commercial courts usually take is that ultimately each party is expected to weigh up whether the consequences of entering into a contract are outweighed by the consequences of not entering into that contract and make an informed decision accordingly. It appears, however, that despite a similar weighing of the relevant circumstances, the common law may be less favorable to a successful claim of undue duress or unlawful pressure to set aside a transaction than is the case under the Quebec Civil Code.
This article was originally published on Thelawyersdaily.ca