We have all envied, or maybe abhorred, the skilled professional athlete who suddenly demands, and receives a contract enhancement or extension. The impetus is often some other similar athlete being awarded an extravagant sum in contractual negotiations which alters the fair market value of the contracts in that sport.

Well, if it works in professional sports, does it work in everyday contracts? Can there be a duty to renegotiate in circumstances where the deal is no longer fair or reflective of the fair market? For instance, if I purchased a home but the market has collapsed, and the product I am contracted to buy no longer has any room for profit-can I ask to renegotiate?

A Commercial Example

In 1969 a hydroelectric plant was built in Labrador by the Churchill Falls (Labrador) Corporation (CF) with debt financing lent on the strength of the commitment by Hydro Quebec (HQ) to assume the risks of construction including overruns, and to, purchase the electricity produced by the plant at fixed prices, regardless of demand, for the next sixty-five (65) years. The negotiations were protracted and involved  sophisticated and experienced parties.

The contract when made was clearly fair and workable for both companies. HQ had a stable source of electric power to sell and CF was able to finance and slowly acquire the equity in its new asset. Both companies took some risk but the greater risk was clearly taken by HQ.

Eventually, however, the situation became very different. CF still had its ongoing operating costs but was obligated to sell its product at a fixed price which was by now far below market value. HQ, on the other hand, had survived the risks of construction and was able to generate huge profits from the sale of the cheap electricity it was able to purchase. The contract was due to continue for another fifteen years.

The Appeal to The Courts

CF sought the assistance of the civil law courts in Quebec. Its argument was essentially that the contracts equilibrium had been shattered by market forces and conditions beyond the control of either party. The equilibrium’s balance was now solely in favour of HQ. As a result, it argued, HQ had a duty in civil law to agree to renegotiate the contract to restore the initial equilibrium. It argued a breach of the duty of good faith and cooperation

CF lost at all levels. In a 7-1 decision, the Supreme Court of Canada (SCC) decided simply that each party got what they bargained for.  There was no wrongdoing on the part of HQ. As a result, the court did not have the power to change the content of the contract, to force HQ to renegotiate or to restore the profitability equilibrium.

Common Law Application

Although the case is a civil law precedent, the message of the SCC has lessons for all commercial contracting parties.

Good Faith and Equity

Here there were two, equal and sophisticated corporations who negotiated a deal over many months. There was no inequality of bargaining power or vulnerability. HQ took the risk of fluctuating electricity prices which proved to be a wise investment. What room or space was there for equity or the concept of good faith to intervene? The answer was clearly none. A change in circumstances is always possible. Such a possibility becoming an actuality was no reason in law to alter the contract absent any wrongdoing or unreasonable behaviour by HQ.

A Deal is a Deal

Contracts are meant to be certain and to be binding. Risks are always associated with such contractual relationships and investments. Risks are taken in anticipation of rewards. Where the rewards favour one party they are said to have made a good deal. The other side took that chance and would not likely have complained if the price of electricity had dropped precipitously after the contract was signed. The party on the bad end of the deal is stuck.

Negotiate Carefully

If you worry about a change in market values and the impact they may have on your business future,  you should ensure that a remedy is found in the contract. Parties are free to negotiate a review or renegotiation clause to become operable on the happening of certain events.

If you find yourself in a contractual dispute and require legal representation, contact the highly skilled  Toronto litigators at Milosevic & Associates.  Our team of exceptional Toronto business law lawyers provide both proactive contract review and drafting services, as well as skillful representation of clients involved in all types of contractual disputes. We have helped businesses of all sizes across various sectors manage potential pitfalls and address them through litigation where necessary. We are the lawyers other lawyers turn to for litigation. Call us at 416-916-1387 or contact us online for a consultation.