September 8, 2020
The Government of Ontario appears to be serious about strictly enforcing and interpreting energy contracts.
The recent Ontario Court of Appeal decision in Grasshopper Solar Corporation v. Independent Electricity System Operator upheld this approach in a FIT contract where the supplier was unable to meet the contractually agreed upon Milestone Date for Commercial Operation (MCOD).
Typically the contracts provide for an option for the IESO to terminate if commercial operation is not achieved within 18 months of the MCOD.
The contracts state that “time is of the essence”, therefore strict compliance may be required.
Under the previous Liberal administration, a policy or practice seemed to have developed not to terminate in spite of delay. In 2013, the predecessor of the IESO had published a memorandum on their website which stated, in short, that in cases of default, suppliers would be sent a notice letter stating that the IESO would NOT act on the default and terminate the contract.
The same notice stated that “This information does not constitute a waiver of any actual or potential default…”. The memorandum also stated that it was “informational only” and “shall not be relied upon by suppliers”.
In March 2019, Grasshopper and others, who had all entered into contracts after 2013, received notice of default letters. These letters indicated that, contrary to the indication in the 2013 memorandum, the terms of the contract would be strictly enforced.
The suppliers, not surprisingly, took the position that the 2013 memorandum created a waiver or an estoppel which prevented the IESO from terminating their contracts. Estoppel is a doctrine of equity which prevents someone from arguing something or asserting a right that contradicts what they previously said or agreed to in certain situations. It is intended to protect people who act on those statements if the original speaker changes their position again.
Estoppel requires three things to be found in order to apply:
- the parties’ dealings must have been based on a shared assumption of fact or law, though implied estoppel may be created by silence.
- a party must have acted in reliance on the shared assumption, resulting in a change in its legal position
- it must be unfair or unjust to allow the other party to then depart from the shared assumption. The party seeking to rely upon estoppel must therefore prove that it will suffer a detriment as a result of the departure from the shared assumption.
The suppliers applied to court for a determination of their rights, and it went to appeal after the IESO was successful before a Superior Court judge. Although that judge felt that the result was “unfair” given the millions of dollars in losses that the suppliers suffered, the judge found that there was no mutual or shared assumption in a changed set of facts – the language of the memorandum did not waive rights of strict compliance, but was merely a statement of a policy at a particular time, with no promise that it would remain the same policy going forward.
Failure to meet the MCOD was a breach of contract by the suppliers, and the IESO had the right to terminate the contracts.
The Court of Appeal agreed with the motion judge that the memorandum was not evidence of a shared assumption that IESO would not strictly enforce the contract. The policy in 2013 regarding earlier contracts did not create an estoppel regarding later contracts.
The suppliers may have thought that time limits did not matter, but IESO did. Thus, no shared assumption. No estoppel.
Interestingly, the doctrine of good faith performance of contracts was not argued in the Grasshopper case, unlike in the Quickie Convenience Stores Corp. v. Parkland Fuel Corporation case, discussed in a recent article on our website.
If you are a supplier faced with termination, arguments of bad faith might be a last resort, but based on the Grasshopper decision, you should assume that IESO has a right to terminate if you do not meet your MCOD or otherwise are in breach of the strict letter of the contract.