The Corporation of the City of Sudbury v. Union Gas Limited

Union Gas Limited v. The Corporation of the City of Sudbury [Indexed as: Sudbury (City) v. Union Gas Ltd.]

54 O.R. (3d) 439

[2001] O.J. No. 2099

Docket No. C34115

Court of Appeal for Ontario

Morden, Moldaver and Goudge JJ.A.

June 6, 2001

• Application for leave to appeal to the Supreme Court of Canada was dismissed with costs January 31, 2002 (Gonthier, Major and Binnie JJ.). S.C.C. File No. 28770. S.C.C. Bulletin, 2002, p. 157.

Public utilities--Franchises--Extension of franchise--Company owned and operated natural gas distribution system in city pursuant to franchise agreement with city--Franchise agreement provided that city could buy system at any time following termination of franchise--Section 10 of Municipal Franchises Act provides that where franchise agreement is about to expire gas distribution company or municipality may apply to Ontario Energy Board to extend right to operate gas distribution system --Company applied for extension prior to expiration of franchise--City's right to purchase gas distribution system did not arise until end of any extension ordered by Ontario Energy Board--Municipal Franchises Act, R.S.O. 1990, c. M.55, s. 10.

The appellant owned and operated the natural gas distribution system in the municipality pursuant to a franchise agreement with the municipality. Paragraph 22 of the franchise agreement provided that the municipality had the right to buy the distribution system "at any time following the termination of the franchise". Section 10 of the Municipal Franchises Act, R.S.O. 1990, c. M.55 provides that where a franchise agreement is about to expire, either the gas distribution company or the municipality may apply to the Ontario Energy Board ("OEB") to extend the right to operate the gas distribution system. Just prior to the expiry of the franchise agreement, the appellant applied to the OEB to extend its right to operate the system pursuant to s. 10 of the Act. The municipality then sought a declaration that its right to purchase the gas distribution system provided for in para. 22 of the franchise agreement arose on the expiry of the term of that agreement. The appellant brought a cross-application for a declaration that that right did not arise until the end of any extension ordered by the OEB. The municipality's application was allowed. The appellant appealed.

Held, the appeal should be allowed.

The franchise conferred by the agreement was the bundle of rights and privileges granted to the appellant to construct and operate the gas distribution system in the municipality. The appellant's obligation to sell its gas distribution system was explicitly subject to s. 10 of the Act. The clear meaning of para. 22 of the agreement was that if the OEB made an order pursuant to s. 10 of the Act, the franchise was not terminated and the precondition for the municipality's right to compel a sale was not met.

APPEAL from a judgment of Molloy J. (2000), 2000 CanLII 22347 (ON SC), 47 O.R. (3d) 654 granting a declaration that the respondent's right to purchase a gas distribution system from the appellant under a franchise agreement arose on expiry of the term of that agreement.

Cases referred to Union Gas Ltd. v. Dawn (Township) (1977), 1977 CanLII 1042 (ON SC), 15 O.R. (2d) 722, 76 D.L.R. (3d) 613, 2 M.P.L.R. 23 (Div. Ct.) Statutes referred to Municipal Franchises Act, R.S.O. 1990, c. M.55, ss. 9 [as am.], 10 Public Utilities Act, R.S.O. 1990, c. P.52, s. 62 [repealed S.O. 1999, c. 14, Sch. F, s. 9]

Glenn Leslie and Sharon S. Wong, for appellant. John F. Rook, Q.C. and Mahmud Jamal, for respondent.

The judgment of the court was delivered by

[1] GOUDGE J.A.:--The appellant Union Gas ("Union") Limited is the successor company to Northern and Central Natural Gas Corporation Limited. It provides natural gas distribution service to more than 400 municipalities throughout Ontario.

[2] For some 40 years, Union and its predecessor company have owned and operated the natural gas distribution system in the City of Sudbury ("Sudbury") pursuant to two successive franchise agreements with Sudbury and under the regulatory authority of the Ontario Energy Board ("OEB"), the statutory body assigned by provincial law to regulate the natural gas industry in Ontario.

[3] The most recent franchise agreement was made on December 11, 1979. Its 20-year term expired on December 11, 1999. Just prior to that date, in October 1999, Union applied to the OEB to extend its right to operate the natural gas system in Sudbury pursuant to s. 10 of the Municipal Franchises Act, R.S.O. 1990, c. M.55. Sudbury then sought a declaration that its right to purchase the gas distribution system from Union, provided for in para. 22 of the franchise agreement, arose on the expiry of the term of that agreement. Union brought a cross-application for a declaration that this right does not arise until the end of any extension ordered by the OEB.

[4] On April 10, 2000, Molloy J. issued reasons for judgment in favour of Sudbury, which are reported at 2000 CanLII 22347 (ON SC), 47 O.R. (3d) 654. With respect, for the reasons that follow, I have come to the opposite conclusion. I would therefore allow the appeal, dismiss Sudbury's application and allow Union's cross- application.

Statutory and Factual Background

[5] Before turning to an analysis of the central issue in this appeal, namely the proper meaning of para. 22 of the franchise agreement, it is helpful to highlight both the agreement's legislative context and the history leading up to it.

[6] As Molloy J. said, it is clear that the natural gas industry is a closely regulated one. The Municipal Franchises Act and the Ontario Energy Board Act, 1998, S.O. 1998, c. 15 make clear that the Legislature has accorded to the OEB the widest powers to regulate the supply and distribution of natural gas in the public interest. See Union Gas Ltd. v. Dawn (Township) (1977), 1977 CanLII 1042 (ON SC), 15 O.R. (2d) 722, 76 D.L.R. (3d) 613 (Div. Ct.) at p. 734 O.R., p. 625 D.L.R.

[7] More particularly, s. 9 of the Municipal Franchises Act requires that any franchise agreement between a natural gas distribution company and a municipality must be approved by the OEB. Subsections 10(1) and (2) of this Act provide that where such a franchise agreement is about to expire, either the gas distribution company or the municipality may apply to the OEB to extend the right to operate the gas distribution system and the OEB may do so on such terms and conditions as public convenience and necessity appear to require.

[8] Subsections 10(1) and (2) read as follows:

10(1) Where the term of a right referred to in clause 6(1) (a), (b) or (c) that is related to gas or of a right to operate works for the distribution of gas or to supply gas to a municipal corporation or to the inhabitants of a municipality has expired or will expire within one year, either the municipality or the party having the right may apply to the Ontario Energy Board for an order for a renewal of or an extension of the term of the right.

(2) The Ontario Energy Board has and may exercise jurisdiction and power necessary for the purposes of this section and, if public convenience and necessity appear to require it, may make an order renewing or extending the term of the right for such period of time and upon such terms and conditions as may be prescribed by the Board, or if public convenience and necessity do not appear to require a renewal or extension of the term of the right, may make an order refusing a renewal or extension of the right.

[9] The final legislative provision of relevance to this matter is s. 62 of the Public Utilities Act, R.S.O. 1990, c. P.52. It empowered a municipality to acquire at any time a privately owned gas distribution system serving its residents at a price calculated according to a legislated formula. This provision was in effect in 1979 when the franchise agreement was made but was repealed effective January 1, 1999.

[10] The 1979 franchise agreement sets out the following grant to Union in para. 2:

2. Subject to the terms and conditions hereinafter set forth, the Corporation hereby grants to the Gas Company the franchise, right and privilege to construct and operate a gas distribution system within the Municipality and to supply gas to the Corporation and to the inhabitants of the Municipality, and to enter upon any public property for the purpose of the construction, operation, maintenance and repair of the gas distribution system and for the transmission of gas in and through the Municipality and to perform any other services that may be necessary in connection with the transmission and supply of gas in the Municipality.

[11] Paragraph 3 of the franchise agreement provides that the franchise granted shall be for a term of 20 years.

[12] Paragraph 20 gives Union the right, prior to the end of the 20-year term, to give notice requesting the grant of a new franchise on terms to be agreed. It then requires Sudbury to advise whether it is willing to do so. It reads as follows:

20. At any time within the twelve-month period commencing twenty-four months and ending twelve months prior to the termination of the term of the franchise hereby granted, the Gas Company may by notice given to the Corporation request the Corporation to grant to the Gas Company a new franchise upon such terms as may be agreed upon and subject to the approval of the Board. The Corporation shall, by notice in writing given to the Gas Company within three months of the date of the request for a new franchise, advise the Gas Company as to whether or not it is willing to grant a new franchise to permit the Gas Company to carry on its business in the Municipality.

[13] Paragraphs 21 and 22 then address possible outcomes where there is no agreement on a new franchise. These paragraphs are in the following terms:

21. If the Corporation fails to grant a new franchise on terms agreeable to both parties hereto and the Ontario Energy Board has not made an order for a renewal of or an extension of the term of the right, then the Gas Company may, subject to the provisions of paragraph 22 and to section 10 of The Municipal Franchises Act, at its option, either:

(a) sell or dispose of the gas distribution system forthwith to any person, firm or corporation and at such price and on such conditions as the Gas Company may deem advisable; or

(b) within twelve months following such termination of the term of this franchise remove the gas distribution system or any portion or portions thereof from the public property, provided that failure to effect such removal shall not deprive the Gas Company of title to the gas distribution system or any portion or portions thereof.

Should the Municipality, at any time after a lapse of one year from termination, require the removal of all or any of the Gas Company's said facilities for the purpose of altering or improving public property or in order to facilitate the construction of utility or other works in the highway, the Municipality may remove or dispose of so much of the Gas Company's said facilities as the Municipality may require for such purposes, and neither party shall have recourse against the other for any loss or expense occasioned thereby.

22. At any time following the termination of the franchise, the Corporation may, by notice given to the Gas Company, require the Gas Company to sell the Gas Distribution System, or such portion or portions thereof as shall not have been removed as provided in paragraph 21, to the Corporation or to any person, firm or corporation designated in such notice by the Corporation; and with all reasonable dispatch after the giving of such notice, but subject to section 10 of The Municipal Franchises Act, the Gas Company shall sell such system or such portion thereof accordingly, at such price as may be agreed between the parties hereto or, if the parties hereto shall be unable to agree upon such price and one of them shall refer the determination thereof to arbitration under the provisions of paragraph 19 hereof, at such price as the arbitrator or arbitrators appointed under the said paragraph 19 shall fix as fairly representing the value of such gas distribution system or such portion thereof, as a going concern and as though the Gas Company were still entitled to use the public property for the operation of such system or portion.

[14] The language in these two paragraphs was first approved by the OEB in 1978 in a test case involving a franchise agreement for the City of Timmins brought by a group of northern Ontario municipalities including Sudbury. The phrase in para. 22 ". . . but subject to s. 10 of the Municipal Franchises Act . . ." was not in the draft agreement submitted by the parties, but was added without explanation by the OEB when it rendered its decision approving the agreement.

[15] As I have indicated, the 20-year term of Sudbury's franchise agreement was due to expire on December 11, 1999. Prior to that date, Sudbury gave Union notice that it intended to exercise its contractual right to acquire the gas distribution system pursuant to para. 22. However, Union had launched an application before the OEB to extend the term of its franchise. Union asserted that Sudbury's right of acquisition under para. 22 did not arise until the end of any extension ordered by the OEB or until such an extension had been refused. On October 28, 1999, the OEB issued an interim order extending Union's franchise to June 30, 2000 to permit these court proceedings. That interim order was further extended on consent pending this appeal.

[16] In deciding in favour of Sudbury, Molloy J. found the surrounding factual circumstances and statutory provisions of little or no assistance. She focused on the language of the franchise agreement itself and determined that the most reasonable construction of para. 22 is that it provides to Sudbury the right to purchase the gas distribution system upon the expiry of the term of the agreement irrespective of any order that may be made by the OEB under s. 10 of the Municipal Franchises Act. The essence of her conclusion is as follows [at p. 672 O.R.]:

Paragraph 22, as currently drafted, does not clearly reflect the position of either of the parties. However, if para. 22 had been drafted to provide a right to purchase the system upon the "termination of the franchise hereby granted", I would have little hesitation in interpreting the provision as providing to Sudbury a right to purchase the gas distribution system at the expiry of the rights granted under the agreement, whether by the expiry of the 20-year term or otherwise. The addition of the words "hereby granted" is, in my view, a minor amendment. On the other hand, in order to amend para. 22 so as to clearly reflect the meaning advocated by Union Gas, one would have to say that Sudbury's right to purchase arises upon the "termination of the franchise hereby granted if the OEB has not made an order for a renewal or extension under s. 10 of the Municipal Franchises Act, or, if such an order has been made by the OEB, upon the expiry of the term of such order". In my view, this would constitute a much more significant amendment than merely adding the words "hereby granted". Further, the rights granted under para. 21 are expressly stipulated to arise only if "the OEB has not made an order for a renewal of or an extension of the term of the right". If the drafters had intended that the very next paragraph be subject to the same restriction, one would expect them to have said so expressly.

In my opinion, adding the gloss suggested by Union Gas strains the ordinary meaning of the words used beyond what is reasonable in the overall context of the agreement. On the other hand, the interpretation advanced by Sudbury is more consistent with the dealings between the parties, the terms of their earlier contract and the language of the 1979 agreement itself. While in hindsight one can suggest language that would have conveyed this meaning more clearly, I find that the most reasonable construction of para. 22 of the agreement is that it provides to Sudbury the right to purchase the gas distribution system upon the expiry of the rights granted under the agreement, irrespective of any order that may be made by the OEB under s. 10 of the Act.

(Emphasis in the original)

[17] In this court the basic positions of the parties were as they have been throughout these proceedings. Union argued that Sudbury's right to purchase its gas distribution system under para. 22 only arises following the termination of its franchise and that the franchise will not terminate if the OEB orders an extension pursuant to s. 10 of the Municipal Franchises Act. On the other hand, Sudbury argued that the franchise is for a 20- year term expiring on December 11, 1999 at which point it terminates and Sudbury's right to purchase arises, subject to s. 10 of the Act. Thus, if the OEB orders that Union's right to operate the system is extended, Sudbury argued that it will nonetheless have the contractual right to acquire ownership of the system, subject only to Union's right to remain in possession of the system as operator.

Analysis

[18] In my view, an examination of the language of the franchise agreement, in particular para. 22 in the context of the role played by s. 10 of the Municipal Franchises Act, demonstrates that the appellant's position is correct. It is useful to set out para. 22 again, adding emphasis to those parts of it that assist in compelling this conclusion:

22. At any time following the termination of the franchise, the Corporation may, by notice given to the Gas Company, require the Gas Company to sell the Gas Distribution System, or such portion or portions thereof as shall not have been removed as provided in paragraph 21, to the Corporation or to any person, firm or corporation designated in such notice by the Corporation; and with all reasonable dispatch after the giving of such notice, but subject to section 10 of The Municipal Franchises Act, the Gas Company shall sell such system or such portion thereof accordingly, at such price as may be agreed between the parties hereto or, if the parties hereto shall be unable to agree upon such price and one of them shall refer the determination thereof to arbitration under the provisions of paragraph 19 hereof, at such price as the arbitrator or arbitrators appointed under the said paragraph 19 shall fix as fairly representing the value of such gas distribution system or such portion thereof, as a going concern and as though the Gas Company were still entitled to use the public property for the operation of such system or portion.

(Emphasis added)

[19] It is clear that the driving force behind this legal dispute is Sudbury's desire to exercise its right to require Union to sell its system for the distribution of gas to the residents of Sudbury. That right, found in para. 22, arises "[a]t any time following the termination of the franchise . . .". The precondition for Sudbury's right is the termination of the franchise. It is the meaning of that phrase that is at the heart of this case.

[20] I agree with Molloy J. that the interpretative task derives no assistance from the factual context giving rise to the franchise agreement. The only fact of possible relevance is that Union appears to have represented to Sudbury in 1978 that Sudbury would have the right under s. 62 of the Public Utilities Act to purchase the gas distribution system at any time. However, that section was repealed effective January 1, 1999. While the representation was true when it was made, it is of no assistance in giving meaning to the phrase "the termination of the franchise" in para. 22. For that task it is necessary to examine the franchise agreement itself.

[21] Paragraph 2 makes clear that the franchise conferred by the agreement is the bundle of rights and privileges granted to Union to construct and operate the gas distribution system in the City of Sudbury. Paragraph 3 fixes the term of that franchise at 20 years.

[22] Union's obligation to sell its gas distribution system, which is provided for in para. 22, is explicitly subject to s. 10 of the Municipal Franchises Act. Under that section, the OEB has the power to order the renewal or extension of the bundle of rights granted to Union by the franchise agreement. In my view, the meaning of para. 22 is clear: if the OEB makes an order pursuant to s. 10, the franchise is not terminated and the precondition for Sudbury's right to compel a sale has not been met.

[23] Section 10 of the Municipal Franchises Act clearly gives the OEB the power, if public convenience and necessity require it, to renew or extend the right of Union to operate the gas distribution system in Sudbury. The section operates where a franchise agreement reaches the end of its term and the parties have been unable to agree on the conditions for extending it. It protects the interests of those who depend on the gas distribution system by allowing either the municipality or the gas utility company to seek a renewal or extension of the bundle of rights that is the franchise. The OEB may make the order on the terms it determines necessary to protect the public interest. In my view, a purposive reading of the section gives to the OEB a broad power to impose the terms of renewal or extension of the franchise so that service to the public will not be interrupted simply because the municipality and the utility have been unable to agree on the terms for carrying on the service. If the OEB makes such an order in this case, Union's franchise will not have terminated.

[24] In her reasons for judgment, Molloy J. finds that at the end of the 20-year term, Sudbury has the right to require Union to sell the gas distribution system but that under s. 10, the OEB could grant Union the right to operate Sudbury's system thereafter. With respect, I do not agree. The right of Union to operate a gas distribution system owned by Sudbury is not a right which Union had under the franchise agreement and therefore not one which can be renewed or extended pursuant to s. 10. However, it is not necessary to come to a conclusion on this issue. What is clear is that s. 10 does give the OEB the power to renew or extend Union's franchise and if it were to do so, the franchise would not be terminated, and Sudbury's right to require Union to sell would not arise.

[25] In my view, there are three other aspects of the franchise agreement that support this interpretation.

[26] First, under para. 22, if Union and Sudbury cannot agree on a sale price for the gas distribution system, the price is to be fixed by an arbitration valuing the system "as a going concern and as though the gas company were still entitled to use the public property for the operation of such system . . .". The clear implication is that Sudbury would be acquiring both the gas distribution system and the right to operate it. It would not make commercial sense for Sudbury to agree to buy the system without the right to operate it, but to have to pay for it as a going concern. Thus I think the payment formula provided in para. 22 confirms the parties' agreement that Sudbury's right to require Union to sell the gas distribution system arises only when Union's right to operate the system terminates and not simply at the end of the 20-year term.

[27] Second, para. 22 has para. 21 as its companion piece. Both set out what happens when Union's franchise terminates. Paragraph 21 gives Union certain rights at that point to sell or remove the gas distribution system failing which Sudbury may remove it. Paragraph 22 gives Sudbury the right to require Union to sell the system. Paragraph 21 is express in stating that the rights it grants do not arise if the OEB has made an order of renewal or extension under s. 10 of the Municipal Franchises Act. While para. 22 is more succinct, making Union's obligation to sell "subject to s. 10 of the Municipal Franchises Act", I think the meaning is the same. If an order is made under s. 10, the franchise does not terminate, and neither the rights accorded to Union by para. 21 nor the right accorded to Sudbury by para. 22 arises.

[28] Third, the language of para. 20 of the franchise agreement provides a revealing contrast to the language of para. 22. Paragraph 20 demonstrates that when the parties wished to precondition a right simply on the expiry of the 20- year term of the agreement, they did not speak of "the termination of the franchise" but, rather, of "the termination of the term of the franchise hereby granted". Indeed, I agree with Molloy J. that Sudbury's position effectively requires that this wording from para. 20 be read into para. 22. On the other hand, for the reasons I have given, I find that para. 22 as written does not give Sudbury the right it seeks if Union's franchise is renewed or extended pursuant to s. 10 of the Municipal Franchises Act. Unlike Molloy J., I think the language of para. 22 is clear and requires no words to be read in in order to convey this meaning as contended for by the appellant. This meaning must prevail over one that requires words to be read into the text.

[29] In summary, I conclude that Sudbury's right to require Union to sell its gas distribution system arises only on the termination of Union's franchise and if the OEB issues an order of renewal or extension at the end of the 20-year term of the franchise agreement that precondition is simply not met.

[30] I would therefore allow the appeal, set aside the order below and order that Sudbury's application be dismissed and Union's cross-application be allowed. Union is entitled to its costs here and below.

Appeal allowed.