Part 1: Canadian Sanctity of Contract case offers hope for Guyana
Introduction
Contrary to the clear wishes of the Ali Administration and its sidekick ExxonMobil, the call for the renegotiation of the 2016 Production Sharing Agreement (Exxon PSA) will not likely end soon. I would not be surprised if a cohort of youths in the year 2040 would be asking why Raphael Trotman signed such a diabolical Agreement and why Attorney General of the stature and ability possessed by the incumbent Anil Nandlall S.C. often takes Exxon’s side in any litigation involving the company. We will answer both questions later in this mini-series in which I am again making the case for renegotiation of the Agreement. I do so prompted by a letter written by Terence M. Yhip, a member of the Guyana Diaspora appearing in the 15th. December 2024 Sunday Stabroek, highlighting a compelling parallel between two agreements: Canada’s Churchill Falls hydropower contract (Churchill Falls) and the Exxon PSA.
Ironically, the only error in Mr. Yhip’s letter is his assertion that the Exxon PSA’s life cycle is twenty years and, therefore, ends in 2036. In fact, as of today, it ends in 2057 after including a ten-year exploration period, a one-year COVID-19 force majeure, and a thirty-year production period.
The two agreements, each with its own facts but subject to similar legal systems, demonstrate the long-term implications of resource contracts negotiated under imbalanced conditions. While Churchill Falls is a tale of financial inequity that emerged over decades, Guyana’s PSA presents a broader set of challenges – economic, procedural and constitutional – that were evident from the outset.
Background
The Churchill Falls agreement, signed in 1969, was transformative for the Canadian province of Newfoundland and Labrador. The province wanted to monetise its vast hydroelectric potential but lacked the financial resources and technical expertise to develop the Churchill Falls hydropower plant. Hydro-Québec offered to finance the necessary infrastructure in exchange for the right to purchase most of the electricity generated at fixed prices for 65 years. For the province, the deal brought immediate development benefits. For the company, it guaranteed a stable and affordable energy source to support Quebec’s industrial expansion.
Initially, the agreement appeared equitable. Both parties assumed risks, and Newfoundland lacked other options to unlock its hydroelectric potential. However, as global energy prices rose sharply in subsequent decades, the fixed pricing terms became increasingly unfavourable for Newfoundland. Hydro-Québec profited immensely, earning billions by reselling Churchill Falls electricity at market rates, while Newfoundland’s revenues remained tied to terms negotiated decades earlier.
By the 2010s, this disparity had become untenable for Newfoundland. The province sought renegotiation of the agreement under the principle of good faith, which requires contracting parties to act honestly and fairly toward one another. Newfoundland argued unsuccessfully that the economic inequities undermined the agreement’s spirit and intent.
The judgment
However, in 2018, the Supreme Court of Canada upheld the agreement under the doctrine of sanctity of contract, which prioritises stability over fairness.
Interestingly, while the judgment shows Chief Justice McLachlin as present, it also states -without offering any reason – that he took no part in the judgment. As we shall soon see, the ruling was not unanimous.
The court’s majority opinion emphasised:
“Good faith does not compel a party to forego advantages freely negotiated in the contract. Courts cannot rewrite contracts to address inequities that arise over time.”
Despite affirming the enforceability of contracts, the decision was not unanimous, failing to address the ethical concerns surrounding resource inequities. Justice Malcolm Rowe, a native of Newfoundland, dissenting, warned against the rigidity of this approach, arguing that
“Equity cannot be divorced from justice. A rigid application of contractual terms may serve the letter of the law, but it can erode public confidence in the fairness of resource agreements.”
The judicial loss did not deter Newfoundland, which persisted. It brought the parties together to successfully renegotiate the contract in 2024, resulting in improved revenue-sharing terms while preserving Quebec’s energy stability. This outcome demonstrated that even the most rigid agreements can be revisited through persistence and negotiation.
The Churchill Falls case also offers valuable lessons in the power dynamics of resource contracts. The court also considered the extensive negotiation between the parties, the absence of any provision for adjusting the rate for the electricity supplied, and any renegotiation clause.
Conclusion
The Churchill Falls case illustrates that a court loss is not the end of the road. Public pressure, combined with strategic persistence, can compel change even in the face of rigid legal doctrines like the sanctity of contract. Newfoundland’s eventual success in renegotiating its agreement in 2024 underscores the power of public sentiment, sustained advocacy, and strong leadership to overcome inequities.
The next column will address the Exxon 2016 Agreement drawing comparisons and differences with the Churchill Falls Agreement.