Resolute FP loses appeal of Hydro-Québec decision in Supreme Court, must pay levies

SCC’s ruling defines for the first time the legal framework applicable to the assignment of contract

Resolute FP loses appeal of Hydro-Québec decision in Supreme Court, must pay levies
SCC concluded a contract may be a patrimonial asset that may be assigned, says Dominique Ménard.

The Supreme Court of Canada has dismissed the appeal of Resolute Forest Products against Hydro-Québec for charges levied to the paper company by the provincial electricity provider, and providing clarification of assignments of contract under Quebec’s Civil Code.

In a 7/2 decision in Resolute FP Canada Inc. v. Hydro-Québec, the Supreme Court found that the assignment of contracts made by predecessor companies was binding. It also found that Hydro-Québec, as a provincial Crown corporation, was a mandatary of the state as defined in the Civil Code, but had also acquired legal rights it could exercise through its acquisition of private power companies.

The judgement is important in Quebec because “we didn't have any principal decisions about assignment of contract,” says Dominique Ménard, a partner in LCM Avocats Inc. in Montreal and counsel for the respondent Hydro-Québec.

“The judgement will have a real impact on commercial relationships in Quebec,” she says; it “confirms that the free right to contract is a principle that allows the parties to assign [rights and obligations] in advance, as it did in this case, and to decide on some conditions.”

In 1926, Gatineau Power Company, a Quebec electricity generation and distribution company, entered into a contract with a forestry-products company, Canadian International Paper Company (CIP), which preceded Resolute FP, to supply it with electricity. The  contract provided that Canadian International Paper would accept any increases in the price of electricity resulting from future increases in taxes or charges levied by the provincial or federal government on electrical energy derived from water sources.

When Quebec nationalized its electricity production in the early 1960s it bought the assets of a number of private power production companies, including Gatineau Power, which became a wholly owned subsidiary of Hydro‑Québec. In 1965 Gatineau Power sold all its movable property to Hydro‑Québec and leased its immovables for a term of 25 years.

In 1982, Resolute – a corporate successor of CIP -- and Hydro‑Québec entered into a contract for the supply of additional power.

In November 2011, Hydro-Québec sent Resolute an invoice for more than $3 million for electricity provided to its Gatineau mill. This sum comprised three years of hydraulic charges that Hydro-Québec had paid the Government of Quebec since 2008 pursuant to two provincial statutes, the Hydro-Québec Act and the Watercourses Act.

Resolute and Hydro-Québec disagreed about the effect of the 1965 contract on the rights and obligations of the parties to the 1926 contract, and about whether the 1965 contract had assigned the 1926 contract.

Resolute paid, under protest, the amount claimed by Hydro-Québec but sought a declaratory judgment and reimbursement from the Superior Court of Quebec. The Superior Court granted the motion to institute proceedings for a declaratory judgment, and declared that Hydro-Québec could not claim the amount in question, nor claim arrears or administrative fees that related to the levies.

An appeal by Hydro-Québec and Gatineau Power was allowed in part by the Quebec Court of Appeal. It found that the levies in question were taxes or charges that were payable by Resolute to Hydro-Québec under the 1926 contract., which was assigned to Hydro-Québec by Gatineau Power under the 1965 contract, and therefore Hydro-Québec could invoke the price adjustment clause to its own benefit. The appellate court agreed with the trial judge, however, that Hydro-Québec couldn’t claim arrears from before October 2011, and should reimburse those overpayments to Resolute. (That conclusion was not appealed to the Supreme Court.)

In today’s judgment the court found that the 1965 contract did affect an assignment of the 1926 contract, meaning Hydro-Québec is a party to the earlier contract and can therefore invoke a price adjustment clause in its favour.

Justice Nicholas Kasirer, writing for the majority, looked at the common intention of the parties in interpreting the contracts.

“In this case, none of these considerations” – the nature of the contract, the circumstances in which it was formed, the interpretation which has already been given to it by the parties or which it may have received, and usage – “suggest that Gatineau Power and Hydro‑Québec intended to achieve anything other than the assignment contemplated in the text of the contract,” he wrote.

In rejecting Resolute’s argument that Hydro-Québec was merely a mandatary -- or administrator of the property of others -- Kasirer noted that “[a]n essential aspect of the contract of mandate is that mandataries are not personally liable to third persons except in very specific circumstances, in particular when they act in their own names, exceed their powers or commit faults in the performance of their mandates.”

When Gatineau Power sold its movables and leased its immovables to Hydro-Québec in 1965, it transferred its legal rights to Hydro-Québec, which the electricity provider could then exercise in its own interest. This is something a mandatary cannot do.

The court also found that levies imposed by Hydro-Québec are taxes or charges on electricity, within the meaning of the 1926 contract, and so are payable to Hydro-Québec under the agreement.

“Resolute’s argument that the government does not generate any revenue by taxing Hydro‑Québec disregards the distinct juridical personality of the state‑owned enterprise,” Kasirer wrote.

“Although Hydro‑Québec is a ‘mandatary of the State’ … , it is nonetheless a separate entity … . The amounts collected from the taxation of Hydro‑Québec differ from the revenues collected by the government when Hydro‑Québec declares dividends, even though all of Hydro‑Québec’s shares are owned by the government. The government and Hydro‑Québec cannot be lumped together as Resolute proposes.”

In dissenting reasons Justice Suzanne Côté, with Justice Malcolm Rowe agreeing, found that the trial judge’s decision should be upheld since she did not make a reviewable error in finding that Gatineau Power had not assigned the 1926 contract to Hydro‑Québec and that the 1965 contract had instead made Hydro‑Québec a mandatary of Gatineau Power.

In Friday’s decision the Supreme Court of Canada has defined “for the first time the legal framework applicable to the assignment of contract and the opposability of this assignment to the assigned party,” Ménard told Canadian Lawyer in summarizing the ruling.

“Although assignment of contract is a legal transaction and business technique commonly used by legal practitioners and their clients, it was an ill-defined legal concept and a source of uncertainty.”

Now, she says, the court has “confirmed the possibility for a contracting party governed by Quebec law to assign all the rights and obligations arising from a contract, subject to obtaining the agreement of the assigned party, which may be given in advance.

“The Supreme Court's analysis is based in particular on its conclusion that a contract may be deemed to be a patrimonial asset that may be assigned, which is a novelty under Quebec civil law,” Ménard adds. “In this regard, the Supreme Court distinguished the assignment of contract from a sale. It highlighted the malleable nature of the assignment of contract which can be adapted to suit the commercial needs of the parties.”

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