Guidance From The Supreme Court Of Canada On Relational Contracts And The Duty Of Good Faith

In the recent decision of Churchill Falls (Labrador) Corp. v. Hydro Québec,1 the Supreme Court of Canada engaged in a discussion regarding franchise law in a non-franchise context.

The Issue Before The Supreme Court of Canada

The core issue before the Court was whether the general duty of good faith under Quebec law could give rise to an obligation to renegotiate a long-term contract to reflect or restore the “equilibrium” of the initial agreement. Specifically, 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.

The Supreme Court of Canada's Analysis

In conducting its analysis, the majority of the Supreme Court considered other categories of “relationship contracts” that have been recognized at law, including franchise relationships.

The Supreme Court referred to the franchise decision of Dunkin' Brands Canada Ltd. v. Bertico Inc., in which the Quebec Court of Appeal explained that the relational nature of a franchise agreement was apparent from the fact that its terms were not stipulated. In rejecting CFL's argument that its contract ought to be defined as a relational contract due to its long-term nature and interdependence of the parties, the Supreme Court reasoned that the more a contract defines the obligations of the parties, the less likely that contract is to be a relational contract.

Having determined that the agreement with Hydro-Québec was not a relational contract, the Supreme Court distinguished the Quebec Court of Appeal's franchise decision in Provigo Distribution inc. v. Supermarché A.R.G. Inc. In that...