Court of Appeal for Ontario

CITATION: PUC Distribution Inc. v. Brascan Energy Marketing Inc., 2008 ONCA 176

DATE: 20080311

DOCKET: C46729

MOLDAVER, LANG and MACFARLAND JJ.A.

BETWEEN:

PUC DISTRIBUTION INC.

Applicant (Respondent)

and

BRASCAN ENERGY MARKETING INC.

Respondent (Appellant)

Alan H. Mark and Kelly L. Friedman for the appellant

James D.G. Douglas and Morgana Kellythorne for the respondent

Heard: February 13, 2008

On appeal from the order of Justice Paul M. Perell of the Superior Court of Justice, dated June 21, 2006, with reasons reported at [2006] O.J. No. 2500.

BY THE COURT:

INTRODUCTION

[1] This appeal relates to the interpretation of a series of contracts for the supply of electrical power. The sole issue on appeal is whether these contracts continue to include a perpetual right to renew a supply of 5000 horsepower of electricity at a preferential rate, as originally provided in the initial 1928 contract. The arbitrator, Earl Cherniak, Q.C., held that the perpetual right to renew had been extinguished. On appeal to the Superior Court of Justice, Perell J. held that the perpetual right to renew remained extant and overturned the arbitrator’s decision. For the reasons that follow, we would allow the appeal and restore the arbitrator’s award, although for reasons that differ somewhat from those expressed by the arbitrator.

BACKGROUND

(a) The Facts

[2] The appellant, Brookfield Energy Marketing Inc., formerly known as Brascan Energy Marketing Inc., is the marketer of power for Great Lakes Power Company, Limited (“GLP”) and is the assignee of the contracts at issue in this appeal. GLP was a supplier of electricity to the respondent, PUC Distribution Inc. (PUC), which is the successor to the Public Utilities Commission of the City of Sault Ste. Marie.

[3] In 1928, the parties entered into a written agreement (the “1928 Agreement”). GLP agreed to supply PUC with 5000 horsepower of electricity at a preferential rate (the “5000 hp block”). Specifically, paragraphs 1(a) and (b) of the 1928 Agreement provided the following:

1. The COMPANY [GLP] AGREES:

(A) To continue to reserve and to supply and deliver to the Corporation [PUC] the four thousand (4000) horsepower hereinbefore referred to, at the rate of Twenty-two Dollars ($22.00) per horse-power per annum;

(B) To reserve, to supply and deliver to the Corporation [PUC] one thousand (1,000) horse-power additional electric energy, within three (3) months from the execution of this agreement, the same to be delivered and to be paid for in amounts as and when used by the Corporation [PUC], at Twenty Dollars ($20.00) per horse-power per annum, for said one thousand (1,000) horsepower;

In addition to the 5000 hp block, the parties agreed that GLP would deliver an additional block of electricity at a separate price.

[4] The 1928 Agreement had a term of ten years, and provided that the entire contract was renewable for three additional ten-year terms. However, it also provided that the 5000 hp block was renewable for successive ten-year terms in perpetuity, provided that written notice was given by PUC to GLP six months before the end of each term (the “perpetual renewal provision”). The terms of renewal were set out in paragraph 12 of the 1928 Agreement as follows:

This contract shall be and remain in full force and effect for a period of ten (10) years from the date hereof and at the expiration of the said ten (10) years the Corporation [PUC] shall have the right to renew the said contract on the same terms and conditions, for a further period of ten (10) years and on the expiration of the said renewal then for further renewals of ten (10) years each up to and including a third renewal so as to make the term of this contract with renewals, optional to the Corporation [PUC], a period of forty (40) years, and in so far as this contract refers to and deals with the blocks of power referred to in clauses "a" and "b" in paragraph 1, hereof, the Corporation [PUC] shall have the right beyond the said forty (40) year period for such further renewal periods of ten (10) years each as the Corporation [PUC], at its option, may decide to enter into. In case of any renewal the Corporation [PUC] shall give the Company [GLP] six (6) months' notice in writing of its intention so to do.

This agreement shall be binding upon and enure to the benefit of the parties hereto and the successors and assigns of the parties hereto. [Emphasis added.]

[5] Further ten-year agreements were entered into between the parties in 1937, 1949, 1959, 1969 and 1979 regarding the provision of the 5000 hp block at the rates specified in the 1928 Agreement and the provision of an additional electricity block.

[6] In 1987, PUC failed to deliver a timely notice of renewal, and therefore the 1928 Agreement lapsed with respect to the 5000 hp block.

[7] However, in 1989, the parties entered into a new ten-year agreement (the “1989 Agreement”) under which GLP agreed to provide electricity to meet all of PUC’s needs. This included supply of the 5000 hp block at the rates specified in the 1928 Agreement, but no provision was made for any right of renewal.

[8] Subsequently, in 1998, the parties entered into a further agreement (the “1998 Agreement”) that amended and extended the 1989 Agreement for a further potential ten-year term (two potential renewals of five years each), dependent on the parties’ agreement on rates. The 1998 Agreement expressly provided that only those provisions of the 1928 Agreement that had been incorporated by reference into the 1989 Agreement continued to exist. As with the 1989 Agreement, the 1998 Agreement made no provision for any right of renewal with respect to the 5000 hp block.

[9] In 2003, the 1989 Agreement as amended by the 1998 Agreement came to an end when the parties could not agree on rates going forward. PUC contended that notwithstanding the termination of that agreement, the 1928 Agreement continued to exist and continued the obligation to supply the 5000 hp block at the rates specified in the 1928 Agreement in perpetuity, subject to the required notice of renewal every ten years. GLP, on the other hand, argued that the 5000 hp block component of the 1928 Agreement, including the perpetual renewal provision, expired in accordance with its terms in 1987; that the 1989 Agreement as amended by the 1998 Agreement did not provide for any further renewals; and that the parties’ entire relationship ended in 2003.

(b) The Arbitrator’s Decision

[10] This dispute was heard by an arbitrator, pursuant to the parties’ contractual agreement to submit disputes to arbitration. In reasons dated February 25, 2005, the arbitrator found in favour of GLP. He found that although the 1989 Agreement was ambiguous as to whether PUC had a separate and perpetual right to renew the 5000 hp block, the 1998 Agreement resolved that ambiguity and made it clear that no such right to renew continued to exist.

[11] On the interpretation of the 1989 Agreement, the arbitrator found at para. 51 of his reasons:

The question to be addressed is whether the 1989 agreement, and by extension the 1998 agreement, entirely apart from the question of waiver, was intended by the parties to renew the 5,000 horsepower block as provided for in the 1928 agreement, or to acknowledge the continued independent existence of the 1928 agreement as it applied to the 5,000 horsepower block. If I was only interpreting the 1989 agreement, I would find ambiguity, because of the conflict between clause 1.0 which reads:

1.0 Term of Agreement

1.1 This Agreement shall commence on the first day of January, 1989, hereinafter referred to as the "Commencement Date" and, subject to paragraph 1.2 hereof, shall continue in force until December 31, 1998, unless earlier terminated in accordance with clauses 5.5 [supply of power after termination deemed not to renew] or 5.7 [right to discontinue supply to safeguard life or property or for construction, etc.] or by mutual agreement.

1.2 In the event that power is supplied by Great Lakes [GLP] to the Commission [PUC] after the expiration of the Term of this Agreement as defined above, the provisions of this Agreement shall continue in full force and effect until this Agreement is terminated by either party by giving written notice of such termination to the other party.

and those clauses of the 1989 agreement which refer to the 1928 agreement as if still extant, including the second preamble, cl. 2.1 (a), cl. 5.2 and clauses 7.3 and 7.4. On the one hand, the 1928 agreement had not been renewed in accordance with its terms prior to the 1989 agreement, and the 1989 agreement provides for termination at the end of December 31, 1998, with no renewal clause, together with the right to remove all its apparatus equipment and works at the end of the term, making it impossible to continue to supply power. On the other hand, the preamble and cl. 2.[1] (a), read with cl. 7.4, seem to acknowledge the continued existence of the 1928 agreement, at least with respect to the 5,000 horsepower block, and to allow for the existence of the 1989 agreement notwithstanding cl. 10 of the 1928 agreement, though the 1928 agreement expired by its terms in 1968, except for the 5,000 horsepower block. There was no evidence of any objective surrounding circumstances or commercial context in the 1989 time frame that would shed light on the parties' intentions to clear up this ambiguity.

[12] The arbitrator then considered whether the 1998 Agreement resolved the ambiguity in the 1989 Agreement. Based on his interpretation of the 1998 Agreement, the arbitrator concluded at para. 54 of his reasons that the terms of the 1928 Agreement that were incorporated by reference into the 1989 Agreement did not include the perpetual renewal provision:

Reading the preamble to the 1998 agreement makes it clear that the 1928 agreement had been “amended and extended” by the 1989 agreement, and when the parties recited that they desired “to further amend and extend the terms of the 1989 agreement”, they were incorporating into that extension and amendment the entire relationship between them, including what remained of the 1928 agreement. That conclusion is reinforced by cl. 5, referring to “those terms of the 1928 agreement incorporated by reference therein” and by clauses 2.1(a) and 5.2 of the 1989 agreement, which had the effect of providing for the 5,000 horsepower block at the prices agreed to in 1928. The circumstances make it clear that the terms of the 1928 agreement that were incorporated in the 1989 agreement did not include the right of renewal. In the economic climate that faced them in 1998, the parties were providing for the short term, with the hope, but not necessarily the expectation, that the relationship could continue beyond the 5 year fixed term they agreed to. In 1989, they had provided for a 10 year term, but no right of renewal.

[13] Moreover, the arbitrator based his conclusion on the commercial sense of the situation, noting at para. 58 of his reasons:

The interpretation advocated by the PUC ... would leave, notwithstanding the termination of the relationship, the requirement for delivery by GLP of a very small fraction of the power requirements of Sault Ste. Marie, while at the same time making it impossible for GLP to exercise its contractual right to remove its equipment, works and apparatus from the city on termination. The continuation of the 5,000 horsepower block first agreed in 1928 made commercial sense as a benefit given to the PUC while GLP was the exclusive supplier of power to Sault Ste. Marie. It made no commercial sense thereafter.

(c) The Appeal Judge’s Decision

[14] PUC appealed the arbitrator’s award to the Superior Court of Justice. In reasons dated June 21, 2006, the appeal judge allowed PUC’s appeal and held that the perpetual renewal right remained extant. As a result, he granted a declaration requiring GLP to sell the 5000 hp block to PUC in accordance with the rates specified in the 1928 Agreement.

[15] Applying the principles of contract interpretation, the appeal judge found that there was no ambiguity in the 1989 Agreement. Rather, he held that the 1989 Agreement included both a right to the 5000 hp block, as well as the perpetual right to renew that right. The appeal judge provided the following reasons for his conclusion:

[74] The recital of the [1989 Agreement] contains the words "is now under original contract bearing date February 8, 1928" which is the identical language found in the [1969 Agreement] and the [1979 Agreement]. The recital, standing alone and supported by the contractual provisions that I will describe momentarily bring me to the conclusion that the parties intended that the [1928 Agreement] in so far as it dealt with the 5,000 units of energy continued to exist, notwithstanding that there is no evidence that PUC gave the formal written notice of renewal as required by the [1928 Agreement].

[75] As a conceptual matter, I do not think it matters whether the un-renewed [1928 Agreement] was dead and revived by the [1989 Agreement] or whether the un-renewed [1928 Agreement] was incorporated by reference into the [1989 Agreement], the continued existence of the [1928 Agreement] is in effect a promise or commitment made by the parties in the [1989 Agreement]. Conceptually, the [1928 Agreement] could exist as a separate contract or as an embedded contract within the [1989 Agreement]. The fundamental point is that the parties promised each other that GLP "is now under the [1928 Agreement]."

The appeal judge noted that this conclusion was confirmed by the recitals and by clauses 2.1(a), 5.2(a), 7.3, and 7.4 of the 1989 Agreement.

[16] Having found the 1989 Agreement to be unambiguous, the appeal judge further concluded at para. 88 of his reasons that:

To the extent that the Arbitrator’s conclusion is an interpretation of the [1998 Agreement], I disagree with it. In my opinion, properly interpreted, the [1998 Agreement] gave the parties the unilateral means to terminate the [1998 Agreement], but it did not give the parties the unilateral means to terminate their “relationship”. In my opinion, the termination of the “relationship” would depend upon PUC releasing GLP from its obligation to supply the 5,000-unit block of energy, pursuant to the [1928 Agreement].

ANALYSIS

[17] The sole issue on appeal is whether the appeal judge erred in interpreting the agreements between the parties as leaving the perpetual renewal provision extant.

[18] For the reasons set out below, we are of the view that the appeal judge erred in failing to give adequate weight to the fact that the 1928 Agreement lapsed in respect of the 5000 hp block in 1987, when PUC failed to deliver a timely notice of renewal. Further, the appeal judge made several errors in his interpretation of the 1989 Agreement and 1998 Agreement in supporting his conclusion that the 1928 Agreement continued to exist with respect to the perpetual renewal provision. As a result, his conclusion that that provision remained extant cannot stand.

(a) Lapse of the 1928 Agreement

[19] In construing the 1989 Agreement and 1998 Agreement as he did, the appeal judge failed to give adequate weight to the fact that the provision in the 1928 Agreement regarding the 5000 hp block lapsed entirely in 1987 due to PUC’s failure to give the required renewal notice. Thus, the perpetual renewal provision was no longer in effect when the parties entered into the 1989 Agreement. Accordingly, the appeal judge’s reliance on the wording of the 1969 and 1979 agreements in construing the 1989 Agreement was misplaced, as the perpetual renewal provision was still in effect for those agreements. As a result, in comparing the language of the 1969 and 1979 agreements to that of the 1989 Agreement and 1998 Agreement, the appeal judge was effectively comparing apples and oranges. The intervening lapse of the 1928 Agreement in 1987 means that the 1969 and 1979 agreements cannot be equated with the later agreements for comparison purposes.

[20] The error becomes especially apparent in light of the unique and highly unusual nature of the perpetual renewal provision. That provision enabled PUC to take advantage of favourable rates in perpetuity. As such, it represented a significant benefit to PUC and an equally significant detriment to GLP. In the circumstances, given the lapse of the perpetual renewal provision with respect to the 5000 hp block in 1987, we are of the view that if the parties intended to resurrect it, clear language was required. No such language exists in either the 1989 Agreement or the 1998 Agreement.

[21] In so concluding, we note that waiver of the 1987 lapse is a non-issue as found by both the arbitrator and the appeal judge.

(b) Interpretation errors

[22] The appeal judge also made several specific errors in his interpretation of the 1989 Agreement that further undermine the finding that the perpetual renewal provision of the 1928 Agreement remained extant.

[23] First, the appeal judge erred in his interpretation of clause 7.4 of the 1989 Agreement, which amended paragraph 10 of the 1928 Agreement. Paragraph 10 provided that “this agreement shall constitute the sole and only contract dealing with the supply of electrical energy between the parties”. However, clause 7.4 of the 1989 Agreement amended paragraph 10 of the 1928 Agreement as follows:

Paragraph 10 of the original contract bearing date February 8, 1928, hereinbefore mentioned, is hereby amended to allow the existence of this present separate contract for the supply of additional power. It is expressly understood and agreed by the parties hereto that the mentioned Paragraph 10 of earlier contract shall in no way act to jeopardize or mitigate any of the provisions of this present contract.

[24] The appeal judge relied heavily on this clause to conclude that all of the terms of the 1928 Agreement were incorporated into the later agreements, including the perpetual renewal provision, unless specifically altered by the later agreements.

[25] In our view, clause 7.4 of the 1989 Agreement cannot operate in the manner suggested by the appeal judge, given the unusual nature of the perpetual renewal provision and the fact that, to the knowledge of the parties, it had lapsed prior to the 1989 Agreement. Rather, clause 7.4 can be explained by the fact that other provisions of the 1928 Agreement remained extant, and to the extent that those provisions were not altered, the parties intended that they be carried forward on the same terms. For example, the definition provision in paragraph 2(e) of the 1928 Agreement would have been carried forward into the 1989 Agreement.

[26] Second, the appeal judge erred in his reliance on clause 7.3 of the 1989 Agreement in support of his conclusion. Clause 7.3 maintained the existing rights of the parties under existing agreements. Specifically, it provided:

It is further understood and agreed that nothing herein contained, save and except for the sale, delivery and use of power, shall affect, abridge, alter or curtail any of the existing rights of the parties hereto under any existing agreement dealing in any way with the relations of the parties hereto or any rights, benefits, or privileges of either of the parties hereto under said agreements, particularly in regard to property rights under said agreements.

[27] In our view, because clause 7.3 refers to “existing rights” under an “existing agreement”, it does not support the appeal judge’s conclusion. The 1928 Agreement was no longer an “existing agreement” except insofar as some of its provisions, like the definition provision in paragraph 2(e), had been carried forward in the later agreements. The perpetual renewal provision was not such a provision, hence it was not an “existing right”; rather, it was a right that had been extinguished.

[28] Third, we are of the view that the appeal judge erred in his reliance on clauses 2.1(a) and 5.2(a) of the 1989 Agreement in support of his conclusion. Clause 2.1(a) provided:

Great Lakes [GLP] agrees:

(a) To continue to reserve for and deliver to the Commission [PUC] the electrical energy hereinbefore referred to and specified in the said original contract bearing date February 8, 1928.

[29] Clause 5.2(a) provided:

The Commission [PUC] shall pay to Great Lakes [GLP] for power hereunder the aggregate of the Demand Charge for the month and the Energy Charge for the month, calculated as follows:

(a) Power Supplied under the Contract dated February 28, 1928

4,000 HP at the rate of $22.00 per HP per year

1,000 HP at the rate of $20.00 per HP per year

[30] In our view, clauses 2.1(a) and 5.2(a) merely relate to the continued supply of the 5000 hp block and not to the perpetual renewal provision. We note that in the 1928 Agreement, the perpetual renewal provision was clearly separated from the supply provision. Accordingly, if the parties had intended to resurrect the perpetuity aspect of the 1928 Agreement, it should have been specifically referred to.

[31] Finally, at a critical point in his analysis, the appeal judge appears to have relied on a recital to the 1989 Agreement that references the 1928 Agreement as evidence of a mutual promise between the parties that the 1928 Agreement was alive. This elevation of a recital to a mutual promise or operative provision was material to the interpretation reached by the appeal judge. With respect, that approach was in error: see Re McKellar, [1972] 3 O.R. 16 at 26 (H.C.J.); aff’d 1973 1301 (ON CA), [1973] 3 O.R. 178 (C.A.).

(c) Other errors

[32] In our opinion, the appeal judge’s reasons disclose two other errors in his general approach to the interpretation of the agreements.

[33] First, we note that PUC did not give the required notice of its intention to renew in 1997, as would have been required by the terms of the perpetual renewal provision in the 1928 Agreement. This fact also belies the appeal judge’s interpretation that the perpetual renewal provision of the 1928 Agreement had been revived.

[34] Second, as a matter of practical concern, on the construction given to them by the appeal judge, the 1989 Agreement and 1998 Agreement are silent as to the timing of the notice required for any future renewal and/or the manner in which the right of renewal is to be exercised. The absence of such important terms, particularly in a clause of this far-reaching nature, is in our view neither reasonable nor commercially sound. This also supports our view that the parties did not intend to resurrect the perpetual renewal provision in the 1989 Agreement and 1998 Agreement.

(d) Conclusion

[35] Properly construed, the 1989 Agreement and 1998 Agreement did not revive the perpetual renewal provision of the 1928 Agreement in relation to the 5000 hp block. On the contrary, these agreements provided PUC with a preferential price for a fixed term only.

DISPOSITION

[36] Accordingly, we would allow the appeal, set aside the decision of the appeal judge and restore the award of the arbitrator.

[37] The costs of the appeal and of the application for leave to appeal are awarded to the appellant in the total amount of $21,000, inclusive of disbursements and GST. Costs below should follow the disposition of this appeal.

RELEASED: March 11, 2008

“M.J. Moldaver J.A.”

“S.E. Lang J.A.”

“SEL” “J. MacFarland J.A.”