Maintaining Equilibrium: The Supreme Court Defines the Boundaries of Good Faith

  • February 04, 2019
  • Colin Pendrith, Cassels Brock & Blackwell LLP

In the recent decision of Churchill Falls (Labrador) Corp. v. Hydro Québec[1], the Supreme Court of Canada considered the scope of the duty of good faith to re-write a contract, touching upon the heightened duty that can exist in “relational contracts”, such as franchise agreements.

The Issue Before The Supreme Court of Canada

A core issue before the Supreme Court was whether the general duty of good faith under Québec law could give rise to an obligation to renegotiate a long-term contract to reflect or restore the “equilibrium” of the initial agreement. The Supreme Court considered whether the contract at issue - which required Hydro-Québec to purchase electricity from a hydro-electric plant owned by Churchill Falls (Labrador) Corp. (CFL) over a 65 year period - was a “relational contract” giving rise to a higher standard of good faith. The dispute arose because the purchase price for electricity set in the contract was well below current market price.