Contract assigned to Hydro-Québec authorizes them to collect fees from Resolute FP Canada in Resolute FP Canada v Hydro-Québec
When a contract was signed almost 100 years ago and the original parties have been amalgamated into or become new entities, who are the parties to that contract, and can they act on it? In a nutshell, this is what was at issue in Resolute FP Canada Inc v Hydro-Québec, 2020 SCC 43 [Resolute v Hydro-Québec]. In this case, Resolute FP Canada Inc. (“Resolute”) was charged a very high fee by Hydro-Québec, under art. 20 of a contract signed in 1926 (“1926 contract”) between Canadian International Paper Company (“CIP”) and Gatineau Power Company (“Gatineau Power”). CIP eventually became Resolute while Hydro-Québec acquired Gatineau Power Company in 1965. Hydro-Québec argued that the contract was assigned to them upon the acquisition of Gatineau Power, while Resolute argued that they were a mandatory of the contract. With little legislative guidance and only one other case of significance to rely on— NC Hutton Ltd v Canadian Pacific Forest Products Ltd, 1999 CanLII 13538 (QC CA), 1999 CarswellQue 3843 [Hutton]—the Supreme Court of Canada (“SCC”) gave some jurisprudential exposure to the assignment of contracts.
“Assignment” vs. “Mandate” of a Contract
The nature of commercial activity is such that parties to a contract may be acquired by or turned into new corporations, leaving in question who the contracting parties are. As a means of making the complexity of business simpler, the notion of assignment has been developed. Assignment allows one party to a contract, the assignor, to transfer all rights and responsibilities under the contract to the entity that has acquired them. The acquiring entity is called the assignee. So long as the contract remains the same and consent is given by the other party to the contract, business continues as usual.
Assignment can be perfect or imperfect. If the assignor is acquired and ceases to exist, the assignment is perfect. If the assignor remains a subsidiary of the assignee, the assignment is imperfect. This is important because there is some debate in the scholarship about whether consent from the other party is necessary for both perfect and imperfect assignment.
The concept of a “mandate” is not exclusive to commercial life in the way that assignment is. When a contract is mandated, full control is not ceded from one party to another. Rather, a third party may only act in the interest of the party that they are a mandatory for. There is no enrichment on the part of the third party and they do not act in their own interest.
Since assignment has developed as a common law tool for organizing commercial activity, there is little guidance in the Civil Code of Québec [CCQ], as to what assignment is and when it applies. The case at hand does not question whether assignment is a legitimate tool (para 7). Instead, the decision focuses on whether it applies in this case.
In 1926, Gatineau Power signed a contract with forest products company CIP to provide electricity. The contract had a 40-year term, with an option to renew every 10 years. In the early 1960s, Québec wanted to nationalize the electricity sector (para 9). Through Hydro-Québec, they began purchasing the stock of privately-owned power companies, including Gatineau Power. In 1965, Hydro-Québec entered into a contract with Gatineau Power, (“1965 contract”), to formally unify the management of the two companies (paras 12-13). This was also done with all other companies whose stock was purchased in this nationalization effort. As part of the 1965 contract, all moveable property belonging to Gatineau Power was sold to Hydro-Québec, while all of its immovable property was leased (para 13). Hydro-Québec would also assume responsibility for Gatineau Power’s debts and would “benefit from the revenue derived from Gatineau Power’s power contracts” (headnote, 3).
In 2007, Hydro-Québec had two provincial levies imposed on them through s. 32 of the Hydro Québec Act, CQLR, c. H-5 [HQA] and s. 68 of the Watercourses Act, CQLR, c. R-13 [WA]. This money was collected by the government to reduce Québec’s public debt. In 2011, Hydro-Québec sent AbiBow Canada Inc., which is now Resolute and the successor of CIP, a bill for $3 million as a result of these levies (para 21). Hydro-Québec relied on art. 20 of the 1926 contract, which says that CIP will accept an increase in the cost of electricity the results from “increased taxes or charges levied by the provincial or federal government on electrical energy generated from waterpower” (headnote, 3). Resolute paid the fee but asked for a review by the Québec Superior Court.
The Québec Superior Court found in Resolute’s favour, stating that Hydro-Québec could not claim costs related to the levies. The trial judge stated that Resolute’s contract with Gatineau Power had not been assigned to Hydro-Québec. According to her interpretation of the 1965 contract, it was intended that Hydro-Québec be a mandatory of the contract, not an assignee. Alternatively, even if the contract was meant to be assigned to Hydro-Québec, it was invalid because there was no notice given to Resolute (para 25). Such an assignment would require Resolute’s consent. Finally, the trial judge found that the HQA and WA levies, which were to be used to reduce the public debt, did not meet the meaning of “tax or charge” under art. 20 of the 1926 contract (para 28).
Hydro-Québec appealed the decision to the Québec Court of Appeal (“QCCA”) and the court unanimously allowed the appeal, arguing that the trial judge made reviewable errors in her decision. According to the QCCA, the trial judge erred when she said that the HQA and WA levies were not “taxes and charges” under art. 20 of the 1926 contract (para 29). The QCCA said that this was an incorrect interpretation that did not adhere to the meaning of the words. The court found that “taxes and charges” includes the levies that were imposed by the provincial government through the HQA and WA. The QCCA also held that the trial judge made a reviewable error when she said that the contract was mandated to Hydro-Québec rather than assigned to it. They argued that the contract was sold to Hydro-Québec as moveable property (para 33). The QCCA used as evidence the fact Hydro-Québec retained the revenue generated from 1926 contract (para 33). This action was entirely in keeping with the fact that they were an assignee. Had they been a mandatory, that revenue would have been remitted to the mandator, Gatineau Power.
Resolute asked the SCC to reverse the decision of the QCCA and reinstate the Superior Court decision. Resolute had two main arguments. The first was that they are party to the contract with Gatineau Power, not Hydro-Québec, because the contract was not assigned. Moreover, even if the contract had been assigned, the assignment was not valid because they did not consent. Second, Resolute argued that the levies imposed on Hydro-Québec were not “taxes or charges” under art. 20 of the 1926 contract. Writing for a strong majority, Kasirer J. dismissed the appeal and took the opportunity to give some clarity to the issue of assignment.
The SCC finds that the 1926 Contract was Assigned to Hydro-Québec
Resolute’s most pertinent arguments for overturning the QCCA’s finding of assignment was that the QCCA had no authority to overturn the trial judge’s interpretation without a “palpable and overriding” error and that they erred in determining that assignment occurred as part of the sale of moveable property. Kasirer J. agreed that there must be a palpable and overriding error in the trial judge’s interpretation of a contract in order to review it (Uniprix inc v Gestion Gosselin et Bérubé inc, 2017 SCC 43, para 40) However, he found that the QCCA was justified in its review of the trial judge’s interpretation because the trial judge did, in fact, make a palpable and overriding error. Due to this error, the trial judge incorrectly found Hydro-Québec to be a mandatory of the 1926 contract as opposed to an assignee.
To explain this, Kasirer J. examined the 1965 contract signed between Hydro-Québec and Gatineau Power. He argued that “key clauses of [the 1965] contract, the effect of which was to assign the 1926 contract, are incompatible with the very essence of the concepts of mandate and administration of the property of others” (Resolute v Hydro-Québec, para 69). Kasirer J. noted that this is especially clear given that Hydro-Québec “undertakes personally to perform obligations and acts in its own interest in exercising its rights” as it relates to the 1926 contract (para 69). A mandatory has absolutely no authority to act in such a way regarding a contract it mandates. Kasirer J. found that for all intents and purposes, the 1965 contract intended for Hydro-Québec to take over the obligations of Gatineau Power as part of the province’s effort to nationalize electricity.
For Assignment, Whether Perfect or Imperfect, Consent is Necessary
As for the issue of consent, Resolute argued that even if the contract was assigned to Hydro-Québec, it was not valid because they did not consent. As discussed earlier, consent in assignment is something that has been debated in the jurisprudence and scholarship (Hutton, para 132). Most of it rests on the distinction between whether the assignment was perfect or imperfect. In perfect assignment, when the assignor no longer exists and is completely replaced by the assignee, consent is required. With imperfect assignment, the assignor still exists in some form and consent is assumed to not be required, though this is debated in legal scholarship. Hydro-Québec and Gatineau Power had an imperfect assignment. Accordingly, Hydro-Québec argued that consent was not necessary. Kasirer J. expressed concern with this assumption, as it conflicts with the principles of binding force and relativity of contract. The principle of binding force is the idea that a contract that is validly entered into is binding upon the parties, while relativity of contract means that it creates rights and obligations between the parties. For these principles to be effectively realized, consent is necessary (Resolute v Hydro-Quebec, para 139). Thus, Kasirer J held that even for imperfect assignments, the other party should give consent (para 141). In this case, he found that the 1926 contract validly offered advance consent to future assignment, thereby making the assignment to Hydro-Québec valid.
The QCCA decision stands; Resolute must pay the fees
Given that Kasirer J found that there was an assignment and Hydro-Québec was an assignee, they were entitled to enforce art. 20 of the 1926 contract. He rejected Resolute’s argument that the HQA and WA levies were not “taxes and charges.” The dissent, led by Côté J., found that the trial judge did not make a palpable and overriding error in her interpretation of the contract. As a result, Côté J would have reinstated the Superior Court’s decision. Nonetheless, only Rowe J. concurred with her dissent, and therefore the SCC upheld the QCCA decision and found in Hydro-Québec’s favour.
With this decision, the SCC reaffirmed the possibility of assignment, but also took time to ensure that it was rooted in the core principles of contracting. Due to freedom of contract, there is no one way to approach assignment; for example, extrinsic factors, such as how the parties behaved, may have more or less importance in depending on the circumstances. Since commercial actors are generally free to craft agreements as they wish, courts will need to ascertain their intentions through thorough contractual interpretation. In this case, Kasirer J. felt that the principles of binding force and relativity of contract had been neglected. Agreeing with the scholarship and other jurisprudence, the SCC held that not requiring consent in imperfect assignment is antithetical to these principles. It made clear that consent should be attained from the other party, in both perfect and imperfect assignments. This guidance from the SCC makes no effort to interfere with what is already common practice in commercial life. Nonetheless, its affirmation ends the debate and conjecture and provides welcome certainty.