A Quebec court recently rejected government-owned Nalcor’s application to set aside the original Upper Churchill contract for unfairness. While there will always be plenty of room to complain about almost every aspect of this project – environmental concerns, the original deal, its subsequent use as a political football by politicians of all stripes – this decision wasn’t a bad one.
From a legal perspective, trying to overturn a contract negotiated between two governments or two large companies as unfair is a Hail Mary pass. It’s worse than pulling the goalie. It almost never works because it shouldn’t. It’s a last resort, a move of desperation. You’ve got nothing left to lose, so go for it.
And like most Hail Marys, this one didn’t work either. Nalcor’s argument was based on the view that contracts have to be negotiated in good faith. But what does it mean to negotiate a contract in good faith? The law is more precise than ordinary language, so what judges and lawyers mean – or, rather, what good judges and good lawyers ought to mean – when they talk about good faith is based on how that concept works in the law. To learn that, we have to look at how courts and legislatures have interpreted “good faith” before.
At law, good faith has two main components. As the judgment makes clear, a contract has to be “equitable” and it has to “reflect the relationship of the parties.” You can probably start to see the problem with learning and teaching law here. Each of these two standards are vague themselves, and so Nalcor and Hydro Quebec can honestly disagree while each claiming that their actions have been equitable and reflect the relationship of the parties.
The main problem is this. Nalcor wanted the court to adopt a broad version of these standards, and in particular they wanted the court to decide that they applied, not just to when the contract was negotiated, but also to how the contract has ultimately worked. Hydro Quebec, on the other hand, wanted the court to adopt a narrow version of the standards and apply them mainly to the negotiation of the contract.
Hydro Quebec won because the principle of “good faith” does not operate in a vacuum. It operates alongside other principles, including the principle that contracts are meant to be kept. If courts were constantly overturning contracts, no one would make them. There would be no point, since they’d constantly be open to change.
There’s an important role to good faith in negotiation. If I’m selling you my house and you ask me about leaks, or noise, or the state of the appliances, I’m not negotiating in good faith if I withhold information. This changes, however, when the contract is already done. If you liked the stucco ceilings and wood paneling of my late-70s décor when you bought the house, you can’t re-open the contract because it’s the 90s now and those things are out of fashion.
That’s what the court held happened here. When the contract was negotiated, no one knew what would happen with electricity rates. If they went up, Hydro Quebec would profit. If they went down, Hydro Quebec would be on the hook. Hydro Quebec and the ancestors to Nalcor took the risk. When the price of oil shot through the ceiling in the 1970s (adjusted for inflation, it was still higher then than now), prices went up. While it’s unfair in reality, that doesn’t make it unfair as a matter of law.
The government of the day could have included a windfall clause, but didn’t. As such, the Upper Churchill has turned out to be a really bad deal for Newfoundland and Labrador. But just because stucco went out of fashion that doesn’t mean you can get a rebate on your house a generation later. Making an argument like that is, frankly, in bad faith.
Raymond Critch ain’t passed the bar but he knows a little bit. He teaches with the Philosophy Department at Memorial University, where he is also involved with the Law and Society Program. He has a law degree from University of New Brunswick and a PhD from the University of Edinburgh.
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