ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 10-49377
DATE: 2014-06-10

BETWEEN:

ELLIOTT FALLS POWER CORPORATION
Plaintiff

– and –

ONTARIO ELECTRICITY FINANCIAL CORPORATION, ONTARIO POWER GENERATION INC., HYDRO ONE INC., INDEPENDENT ELECTRICITY MARKET OPERATOR, and ELECTRICAL SAFETY AUTHORITY.

Defendants

Peter Cronyn and Raymond Murray, for the Plaintiff

Timothy Pinos and Emily Larose, for the Defendants

HEARD: May 27- 31, June 4 - 6, 2014 at Ottawa

T.D.RAY, J

Introduction

[1] The plaintiff Elliott Falls Power Corporation (“EF”) brings this action for a declaration and for damages arising out of a contract with the defendants entered into August 21,1990 which provided that the defendants would purchase electricity produced by the plaintiff. The dispute is about the compensation. The action continues against the responsible defendant, Ontario Electricity Financial Corporation (“OEFC”) but was dismissed as against the other named defendants and inherited its liability through corporate restructuring April 1, 1999.

[2] EF is a small power generating company located on the Gull River near Norland, Ontario. It responded to public initiatives undertaken by Ontario Hydro in the late 1980’s which anticipated the need for increased electricity; and encouraged private power producers through the discussion of financial models designed to assure their viability. EF entered into this 50 year contract on the basis of these understandings.

[3] The pertinent portion of the contract appears at schedule C of the contract. It provided for level payments for a 10 year period, and then provisions for the 11th and subsequent years. It is these latter provisions which are in dispute. They read as follows:

1.1 The Capacity Power rates applicable to Power purchases under this Agreement by Hydro at the Commencement Date shall be the higher of the rates described under Section 1.0 of this Schedule “C” or the Capacity Power rates authorized by Hydro for non-utility generators at the Commencement Date

1.2 The Capacity Power rates in the eleventh and subsequent years shall be as authorized by Hydro at the time including any optional rates deemed by Hydro to be appropriate to the Generator …..

1.3.2 The Capacity Power rates in the 11th and subsequent years shall be no less than:

(i) the Time Differentiated Escalating Capacity Power Rate approved by Ontario Hydro’s Board of Directors at the Commencement Date, adjusted annually by the Ontario Consumer Price Index (CPI) as published by Statistics Canada using the year of the Commencement Date as the base year, for each of the first 10 years; or

(ii) the Capacity Power rates –established in accordance with Section 1.1, whichever is greater.

[4] EF says that it clearly means the rates payable for the 11th and subsequent years are to be the rates payable in the 10th year adjusted each year afterwards for inflation. It seeks a declaration to that effect, and damages payable for the shortfall. In addition EF seeks damages for economic loss based on the argument that it had planned to upgrade its facility to produce more electricity but could not do so because of the underpayments by OEFC which prevented EF from upgrading.

[5] OEFC says that it just as clearly means that the rate payable in the 10th year is the rate payable in the 11th and subsequent years without adjustment for inflation. In fact that is what it has paid since 2000 when the 10 year period ended. OEFC says that since EF’s cause of action arose in May 2001, when EF was advised by OEFC as to its position, then this action is barred by the Limitations Act, 2002[^1] since it was not commenced until 2010.

Evidence on Behalf of EF

[6] EF’s principal, Kearon Bennett, is an expert in small electrical power generation companies, and in 1988-1989 when he became involved in starting up EF he already had a good deal of engineering experience in analyzing the technical viability of sites for generating plants. He was a civil engineer by education and a professional engineer. In 1984, Mr. Bennett formed Ottawa Engineering Limited to operate his consulting business to small hydro projects and was involved in close to 300 projects. He had been helped by government grants of $5,000 each for the evaluation of projects. He said that in giving advice he used the standard Hydro contract for non-utility generators or NUGS. He said that he first became involved in the actual development of contracts with Ontario Hydro when he assisted in setting up a generating plant at Casselman. In fact the principal in that operation, Mr. Laplante, became Mr. Bennett’s partner in EF.

[7] Mr. Bennett gave evidence concerning conferences and presentations he had attended at which Ontario Hydro had discussed or distributed brochures regarding the initiative with privately operated power generating plants. The materials that he adverted to in evidence concerned Ontario Hydro brochures from 1987 onwards, since according to him, the options offered in the brochures became the basis on which EF entered into the contract with Ontario Hydro in August 1990. He described a specific paper by Mr. Barnstaple, superintendent of Hydro in March 1987. He used the term ‘avoided costs’ as being the ceiling for compensation to small generation companies and suggested that compensation to private generating companies in excess of what it cost Hydro to produce the same power made no sense. Mr. Bennett interpreted the paper to say that going forward into the 1990’s, it expected higher avoided costs, and hence there would be higher compensation for private generation companies.

[8] The 1990 (and 1989) brochure which was the latest brochure before the contract was entered into described the four compensation options that were offered by Ontario Hydro. Mr Bennett confirmed that EF selected the 4th option, which in general terms described ‘levelized’ payments for the first 10 years of the contract based on a calculation of rates, inflation, calculation of a present day value and then a level payment by Ontario Hydro for the first 10 years of the contract. Mr. Bennett said he knew the base rate – or rate in year one of the calculation- to be the ‘avoided cost’ in that year. The 10 year rate was established by adding projected inflation over the10 year period, calculating a present day value and then ‘levelizing’ it over the 10 year period. Mr. Bennett said that this calculation anticipated that that at the approximate 10 year mark, Hydro’s avoided cost or actual cost would be the same as the compensation paid in that year. He said repeatedly that it only made sense for inflation to be added in the 11th and subsequent years, and said that he interpreted Mr. Barnstaple’s stated Hydro policy to be that his compensation would be protected by inflation. He said that had he known that inflation would not be added to the rates in the 11th and subsequent years, he would not have undertaken the investment. . Mr. Bennett agreed that 1988, 1989, and 1990 brochures said nothing about inflation or escalation clauses after the 10th year of the fixed rate option – which he had selected. In cross-examination, Mr. Bennett acknowledged that his understanding that he would receive a post 10 year inflation escalator was based on workshop and conferences he had attended, although he was unable to identify a specific speaker.

[9] Mr. Bennett said that it was his understanding at the time that Hydro offered that optional manner of calculation to ensure that the payments would be front-ended. This was intended to enable small companies to pay for these start up and equipment costs. By offering a fixed 10 year period, Hydro assisted companies in their search for financing. He pointed to language in the brochures which assured prospective companies of Hydro’s long term commitment to their profitability. In cross-examination, Mr. Bennett agreed that the brochure for 1989 (and 1990) made no reference to a calculation or provision for increased compensation in the 11th and subsequent years of a contract. He did agree that the language of the schedule provided for a floor for payments after the 10 year period.

[10] The Elliott Falls site was actually owned by the Ministry of Natural Resources and EF entered into a 50 year lease. Initially he purchased used pumps which he reengineered as turbines to save costs, but it was designed for higher capacity, and it was always his intention to upgrade the project with better turbines and other engineering upgrades to be able to create more power and hence more revenue. He said he knew that if he could increase power by 25%, that he would be able to get new rates. He pointed to correspondence from Hydro concerning new rates.[^2] However the correspondence makes it clear that Hydro made no commitment.

[11] Mr Bennett arranged bank financing at 90% based on his contract with Hydro, but planned to pay off the debt within the 10 year period.

[12] EF actually started up in March, 1990, before the contract was signed in August. Mr. Bennett said that he had received the draft agreement November 7, 1989, that it was reviewed by his lawyers, and signed copies were returned to Hydro. In September, 1990, Hydro sent back their signed copy dated August, 1990.

[13] In 1997, as the end of the 10 year term approached (2000), Mr. Bennett corresponded with Ontario Hydro enquiring about the compensation that would be paid in the 11th and subsequent years. He said he had become concerned because the changed government seemed bent on cutbacks and de-regulation. He said he read the agreement and realized it could be interpreted to mean that he might get no increases after 2000. He said he spoke to another operator, Mr. deMontmorency, who faxed him a copy of a letter that he had received from Hydro in February, 1997 – his 11th year of a fixed rate contract – advising that his rate would be increased with CPI in the 11th to the 20th year. Mr. Bennett said he was less concerned after seeing that letter. Then after April, 1999, he was advised in correspondence that OEFC had taken the position that the agreement he had signed provided that the ‘levelized’ payment in year 10 would be the payment in year 11 and each year following, subject to rate adjustments from time to time by OEFC.

[14] Mr. Bennett in company with several other small power producers embarked on a public relations and letter writing campaign intended to change the position taken by OEFC. A letter from Minister Sorbara in January, 2007 replying to their complaints reiterated the OEFC position, and said that if they were unhappy they should sell their generating stations. It included lawyers’ letters asserting that OEFC was wrong in its interpretation of the standard agreement. For example, a letter dated November, 2007 from Ogilvy Renault contended that OEFC’s interpretation was wrong. Mr. Bennett agreed that in a March, 2003, written submission to OEFC prepared by his lawyer on behalf of a number of the small producers, with which he agreed, stated that the producers had not looked carefully enough at the language of the compensation portion of the initial agreement; and urged OEFC to consider introducing compensation that they argued would be fair. The submission also acknowledged that the agreements did not provide for inflation escalation of the rates in the 11th and subsequent years, and that the written term was a drafting error.[^3] A letter to Minister Smitherman in January, 2009 did not change the position of the OEFC.

[15] Essentially, Mr. Bennett’s position is and was that without an inflation protection mechanism in the compensation scheme, the investment in EF is worth considerably less, and the rate of return is inadequate. Since 2000, EF has received the same compensation annually that it received in 1999. In 2007, he made a submission for an adjustment, but OEFC said he had not made out a business case and refused.

[16] Mr. Bennett prepared a series of spreadsheets concerning EF’s claim for damages. His claim for damages since 2000 is based on the compensation in 1999 adjusted annually for inflation. It totals $312,209.00.

[17] Mr. Bennett also prepared a spreadsheet for a claim for economic loss based on the assumption that had EF received what it expected to be paid – with the inflation adjustment- that it would have embarked on a significant upgrade program from 700kw to 1000kw. He said that this program would have been a $500,000 program that would have increased the generating capacity, and entitled EF to greater compensation. He said that as a result of not being able to embark on the program, EF has lost past and future income of $933,437.00. He agreed in cross-examination that had he undertaken the upgrade with the current rates, he would have received higher revenues that would have produced a profit, but not as much as he should have received. He said he did not want to invest any more money in it. He denied that the language of the agreement meant that he would not, without approval from OEFC, have been able to increase its capacity beyond 700kw.

[18] The owner of the Casselman generating station, Guy Laplante said he had hired Mr. Bennett to do a feasibility study before he built his own generator in 1988. At the time of his contract, there was no fixed rate. It was an indexed rate to CPI. He amended his contract to a 10 year fixed rate when it was offered a couple of years later but back dated. He said he had become involved in EF in 1990 after being told by Mr. Bennett that he needed his experience. He became a one-third owner. He said he remembered a discussion with Mr. Rawson of Hydro following which he understood that he would receive the fixed rate plus CPI for the 11th and subsequent years of his contract at Casselman. He discussed the EF contract with Mr. Bennett and told him that the fixed rate with indexing in the 11th and following years was the best. In February, 1997, Mr. Laplante wrote to Hydro seeking a number of clarifications, and asking for amendment to his agreement to provide for CPI indexation in the 11th and subsequent years.[^4] Hydro agreed. Mr Laplante has since sold his share in EF.

[19] Jill Medley is retired. She was initially the contract analyst dealing with NUGS, and later became the contract administrator for NUGS at Hydro. Her job included interpreting the NUG contracts, rate calculations, escalators, preparing invoices for the suppliers and making payment. She never participated in the drafting of contracts. They were standard. She said that Schedule C to the EF contract was typical of the standard provision in use from the late 1980’s to the early 1990’s. She said the persistent questions began to be the rates to be paid in the 11th and subsequent years. She said she was first asked in the early 1990’s by a NUG. She didn’t know the answer and she spoke to her supervisor, Mr. Rawson, and Mr. Tong. She said she was told that the rates payable in the 11th and subsequent years would be the fixed rate or the escalating rate, whichever is greater. She said that she had so advised Mr. deMontmorency, and that this position became incorporated at Mr. Laplante’s request in an amending agreement.[^5] She recalled having a discussion with Mr. Bennett in the early 1990’s in which she confirmed the same policy. At the time of the break-up of Hydro, she went with Hydro One even though the actual NUG responsible contract party became OEFC. On February 2, 2001, she advised Mr. Bennett of OEFC’s position that the rate in his 10th year was to be the ongoing rate for the 11th and subsequent years. Her explanation as to why similar contracts were being treated differently was because OEFC was now the decision maker. She acknowledged that the brochure applicable to EF was the 1990 version and that it made no provision for an escalating rate after the 10 year period. She agreed that it became a floor rate provision. Ms. Medley agreed that the decision concerning the post 10 year compensation was not hers, but what she was told; and that Mr. Rawson had been part of the discussion. She said the decision was to offer it on a case by case basis since the contracts were silent on escalating rates. She agreed that Burks Falls (Mr. de Montmorency) and Casselman (Mr. Laplante) were the only ones to have reached their 10th year in order for the policy to apply. She agreed that it was the Board at Hydro that had the authority to change rates, and she was unaware of the Board being aware of the policy arrived at by Mr. Rawson.

[20] Mr. de Montmorency set up the Burks Falls generating station in 1985 following an information campaign by Ontario Hydro to encourage small private generating stations. He ran it for about 16 years. Initially, his contract was an escalating rate contract – increased by inflation each year. He said that in 1986, he attended a seminar run by Mr. Barnstaple of Hydro in which interested parties could change to a fixed rate for 10 years. At the end of the 10 year period, the contract would revert to the escalating rate. He accepted that and switched to a fixed rate. He said that In February 1996, year 9 of his contract, following correspondence, Ms. Medley wrote to him confirming that at the end of the 10 year period and through to the 20th year, his rate would revert to the escalating rate.

Evidence on Behalf of OEFC

[21] Paul Vyrostko was called by OEFC. He retired in 2008, and from Hydro in 1994 to go into private industry. He joined Hydro after University in 1968, worked at a number of positions, and in 1988 became Manager of the newly established NUG Division. At the beginning, there were some 15 employees and when he left the position in 1993, the complement had increased to about 30. The goals of the Division were to promote and establish NUGS and establish rates annually for NUGS which were based on the avoided costs or lower. Mr. Vyrsostko reported to the Vice-President – Corporate Planning. A 1991 organization chart showed the division of responsibilities within the division. Mr. Barnstaple was responsible for pre-contract issues for potential NUGS and Mr Rawson was responsible for contract issues including interpretation for NUGS. Ms. Medley reported to Mr. Rawson. Both Messrs. Rawson and Barnstaple reported to Mr. Vyrostko. During Mr. Vyrostko’s tenure, none of the NUGS had reached the 10 year mark. He attended many industry conferences and information sessions, and said that the question of escalation for inflation after the 10 year period was never raised. Similarly, the issue was never raised within his division. Had it been raised and if a decision had been reached for a change to rates or a term in the contract, he would have had to approve it, it would have had to have been forwarded to the President of Hydro for approval in the same manner as all rate changes. He said no such request ever came to him. He said he had monthly meetings with the group of managers that reported to him – which included Mr. Barnstaple and Mr. Rawson. The issue was never raised at those meetings. Eventually, he had responsibility for 50 to 60 NUGS.

[22] Mr. Barnstaple’s letter of February 6, 2002 was reviewed with him.[^6] He disagreed with the comments by Mr. Barnstaple concerning the post 10 year escalating rates, and said that was simply not true. He said that the 11th year rate would be decided “when we get there”. He said the contract in use was a standard contract prepared by Hydro, approved by the lawyers and by the Board. Changes to the contract could not have been made within his Division without going forward for approval after his recommendation. Only the period of the contract was negotiable.

[23] Mr Vyrostko explained that the business plan for Hydro was that compensation for NUGS was based on the avoided cost to Hydro. This was a calculation based on a number of factors. In the beginning, Hydro’s avoided cost was very low, so an incentive was arrived at by offering as an option a 10 year rate with a CPI calculation, brought to a present day value and then levelized over the 10 year period. He said that the 1992 rates decreased because the avoided costs dropped. He said this was intended to make more money available to NUGS in the early years when they were dealing with major equipment expenditures. The fixed 10 year term permitted the NUGS to get financing at lower costs because of the guaranteed period. This helped NUGS with their capital costs and guaranteed their profitability. He that after the 10 year period, the NUGS were guaranteed that the rate payable to them would never go below the rate in the 10th year. Mr Vyrostko explained that the rates and terms was a balancing of the interests of the NUGS regarding their profitability, and the interests of the Ontario consumer in keeping rates low.

[24] Mr Vyrostko reviewed the information booklet for each year from 1988 to and including 1990, the contents of which were prepared by his Division, and explained the four options available to NUGS. He said the 1990 options were only available to new projects. In cross-examination, he said that the long term avoided cost included an inflation cost factor, but then it was removed from the calculation when the rates were calculated. He said that was a Hydro issue as part of the rate calculation.

[25] Todd Williams was called by OEFC to give opinion evidence concerning EF’s damages calculations. He is employed by Navigant and has had experience over several years with giving advice and opinion on costs and revenues associated with NUGS. He said that approximately 25% to 35% of his practice deals with giving advice to NUGS, and 10% for Ontario Hydro/Ontario Power Authority. Mr. William’s education and training includes an Honours B.Sc. in engineering, and an MBA from Ivey School of Business (Western). He worked for Hydro in a number of capacities for about 10 years doing financial analyses including at one stage the calculation of avoided costs. He then joined his current firm. Since then he has been involved in the energy field conducting financial analyses, and the review of contracts. He has given expert evidence approximately five to seven times, and has been retained as an expert in litigation matters six to eight times. In one, he advised OEFC in connection with a multi-million dollar lawsuit by a NUG. EF agreed that he was competent to give an opinion as an expert in ‘financial and business matters with particular emphasis on hydro-electric facilities’. The parties agreed to have his reports of April 20, 2013 and August 18, 2013 admitted into evidence. In his opinion EF was better off by $214,000 than he would have been if he had elected for the escalating option – up to 2012. He was generally in agreement concerning EF’s calculations of its lost revenue to April 30, 2014 with the exception of the interest calculation. Mr. Williams used the Courts of Justice Act to calculate PJI whereas Mr. Bennett used a 5% rate. As for the business losses described by Mr. Bennett which presumed increased productivity from Mr. Bennett’s proposed upgrade, Mr. Williamson’s opinion was that it would have been a financially viable option without increased rates, that Mr. Bennett’s estimated cost of $500,000 for the upgrades would have been attractive for bank financing with a debt service ratio well in excess of 1.4. With a flat rate contract continuing after the upgrade, he opined that the debt to service ratio was still well in excess of 1.4, and therefore, attractive to a lender. Mr. Williams prepared a spreadsheet for the entire 50 year term, with 27 years remaining, and showed an increase in asset value by $2,000,000 at the end of the contract without the need for shareholder financing.[^7] In cross-examination, Mr. Williams agreed that up to 2012 there was no difference – except the interest calculation – with Mr. Bennett’s calculations. He further agreed in cross-examination that EF might not have known what was going to happen to inflation, but that if inflation had risen rather than fallen, the escalating rate would have been better. He noted that the fixed rates were 23% higher than the escalating rate, and that the fixed rate was a risk to both EF and Hydro. But that with the 23%higher rate, it was a fair choice for EF. Mr. Williams confirmed that in his chart he had estimated costs rising at 2% per annum over the 50 year term of the contract but treated the revenue as flat. He was shown calculations made by Mr. Bennett concerning his estimated capital expenses over the balance of the contract, the down time affecting revenue for these repairs, and financial impact[^8]. He opined that the expense would not be dollar for dollar as against cash flow since the historical output would already have reflected costs of repairs and maintenance to date. He also thought the future costs should be seriously discounted from the present day values.

[26] Andrew Chan is the current Manager of NUGS, Administration and Contracts for Ontario Financing Authority but on behalf of OEFC which he said has no employees. He confirmed that the OFA is responsible for managing the province’s debt, and now he has a mandate to manage the debt and risk of OEFC. He has been in that position since 2005 and was unaware of any Hydro documentation concerning NUGS pre-1999. He sends a rate letter to EF each year after clearing it with the lawyers and the CFO. The rates have not changed since 2005.

[27] Mr. Bennett gave reply evidence concerning his estimate of expenses, and was cross-examined on his 2007 submission to OEFC for increased revenue calculations in which he identified $103,000 incurred for overhaul costs in 2001 and estimated a further $400,000 in years 21 and 36 over the life of the contract.[^9] Mr. Bennett said that a colleague had prepared the calculations for him, and essentially denied responsibility for the calculation.

Issues

[28] The issues are as follows:

a. Ruling concerning the admission into evidence of the ‘Barnstaple letter’.

b. Whether EF is entitled to an inflation escalator in the 11th and subsequent years of the contract.

c. Whether EF’s claim is barred by the Limitation Act 2002,

d. If so, does EF’s claim for a declaration survive the limitation issue?

e. Assuming EF is found to have been entitled to an inflation escalator in the 11th and subsequent years,

i. what damages, if any, has EF sustained?

ii. What, if any, damages have been sustained by EF’s failure to upgrade the generating station, and was his failure to upgrade reasonable?

Analysis

A. Barnstaple Letter Admissibility

[29] The plaintiff sought to introduce into evidence a letter dated February 6, 2002, signed by Allen G. Barnstaple as evidence of the truth of its contents.[^10] Mr. Barnstaple was Manager of Business Development, Non-Utility Generators, Ontario Hydro, from 1988 to 1993. In that capacity, he was responsible for all negotiations and finalization of Power Purchase Agreements with NUGS, including EF. He left Hydro in 1993, and has since passed away. The letter was solicited by Mr. Tacit, of the law firm representing the plaintiff, in January, 2002, to establish the position of Ontario Hydro concerning the calculation of compensation for NUGS like EF after the expiry of the 10th year of the fixed rate. He had a telephone conversation with Mr. Barnstaple in January 2002, and then sent him a draft letter for his approval which he took to be a summary of their conversation. Shortly afterwards, Mr. Tacit received the letter from Mr. Barnstaple. While it dealt with the same subject matter, the letter was far more detailed and responsive to the issues than the draft that had been mailed to him. After hearing submissions, I ruled that the letter met threshold admissibility but that I would await the completion of all of the evidence to determine its ultimate reliability or the weight to be given to it. I also reserved my reasons for ruling on the letter’s admissibility. The relevant portions of the letter provide as follows:

With respect to PPAs’ for less than 5 megawatt capacity generators, like Elliott Falls, the standard rate offers were either an escalating rate that escalated at Ontario CPI for the entire term of the agreement, or a fixed rate for the initial 10 years followed by rates equivalent to the escalating rate after the initial ten years. A generator like Elliott Falls that elected to take the fixed rate would therefore be able to have the identical rates in the eleventh and subsequent tears that it would have if it had elected instead to take the escalating rate over the initial ten years. The initial 10 year fixed rate was designed to increase revenue in the critical early years of the generators debt repayment obligation while having the same financial cost to Ontario Hydro as the escalating rate over the 10 year period.

It was never the intent of Ontario Hydro to reopen negotiation of the payment rate after the 10th year for agreements with the 10 year fixed rate like Elliott Falls. …………..[^11]

[30] I am satisfied that the letter is admissible under the principled approach to the admissibility of hearsay evidence.[^12] I am satisfied, in light of Mr. Tacit’s evidence, that the letter from Mr. Barnstaple was sent following their telephone conversation and the draft sent to Mr. Barnstaple. In short, it is what it purports to be. I am also satisfied that the requirement for necessity has been met. The usual badges of reliability have been established. There is a circumstantial guarantee of trustworthiness to establish threshold reliability. While it is true that Mr. Barnstaple’s letter was written some 9 years after he left Hydro, and 13 years after EF’s contract was signed, there is corporate documentation available for the period in question in order to permit a proper assessment of the weight to be given to the opinions expressed in his letter. The letter is not a smoking gun, or blast out of the blue which would otherwise require a robust cross-examination. In fact, another witness expressed similar opinions during her viva voce evidence. Others, who were as equally well placed, contradicted his opinions. The weight to be given to the contents of the letter is described below.

B. Entitlement to an Inflation Escalator in the 11th and Subsequent Years

[31] EF’s position is that the payments by OEFC for the 11th through 50th years of the contract ought to have been adjusted annually for inflation. It acknowledges that the contract makes no provision for an inflation escalator, but says that such a calculation was represented to its principal, Mr. Bennett, before he entered into the contract. He says that he didn’t read the contract carefully before he signed it; but that evidence of the treatment accorded other NUGS in giving them an inflation escalator after he executed his contract is evidence that binds OEFC as to how he should have been compensated by way of an estoppel.

[32] OEFC’s position is that the contract made no provision for an automatic escalator, and that EF entered into the contract knowing there was no such provision. It denies there were any pre-contract representations to the contrary, and that the treatment accorded two other NUGS were case specific. One sought and was granted an amended contract with an inflation escalator. The other had opted originally for an escalating rate, accepted a 10 year fixed rate when it was offered, and then resumed the escalating rate with the approval of Hydro after expiry of the fixed rate term. In both cases the 11th year occurred before OEFC took over administration of the NUGS from Hydro.

Contract Formation

[33] The law concerning the interpretation of contracts presumes that in the absence of misrepresentation, fraud, or incapacity, people are to be taken to know what they signed, and to have agreed to the terms. However, where there is an ambiguity or alleged misrepresentation, evidence surrounding the misrepresentation and the circumstances of the negotiations of the contract should be considered to try to clarify the ambiguity and identify the true objective intent of the parties. The first step in the analysis is to consider the circumstances surrounding the formation of the contract.[^13]

[34] In 1990, when Mr. Bennett signed the contract with Hydro on behalf of EF, he had been engaged for several years in giving advice to 200 to 300 small generators for their viability to operate a generating station under terms that were offered by Ontario Hydro. These terms were contained in information booklets that were published annually and were intended to be information for new contracts/NUGS for that year. Information sessions had been offered by Hydro from time to time to encourage industry participation in what was a new program in about 1986-7. An Ontario Hydro workshop attended by Mr. Bennett in November 1989, chaired by Mr. Barnstaple and presented by Mr. Marriage entitled ‘Evaluating Non-Utility Generation Purchases’ explained the methodology of the rate structure based on avoided cost to Hydro, and the balancing of profit for the NUGS as against cost savings to consumers. In principle, Hydro was not prepared to pay more than the avoided cost (Hydro’s cost to produce energy) to NUGS. The paper does not, as suggested by Mr. Bennett, assure the NUGS that they would be paid an amount equal to the avoided cost. It merely explained its methodology for calculating the rates offered to NUGS. Similarly, it does not represent that the rates for NUGS would be based on an inflation escalator over 40 years (or the term of a contract).

[35] The information booklet for 1990 gave a prospective NUG four options to choose from for projects like EF. The 1990 booklet stipulated that its rates and terms would govern new contracts in 1990. Option 1 provided for a “standard rate with escalator provisions” based on the CPI for up to 10 years. Option 2 offered a levelized rate for a fixed 10 year period. The fixed rate was higher than the rate for option 1. Option 2 introduced “time differentiated rates” which provided for different rates at different times of the year and indexed at CPI over 10 years. Option 3 offered a 10 year fixed levelized rate based on the “time differentiated rates” but the fixed rate was higher than option 3. (Italicized for my emphasis).The booklet made no provision for rates or compensation beyond the 10 year mark. For these contracts the eleventh year occurred in 2000.

[36] Mr. Bennett selected Option 4.

[37] EF installed the generating station which was up and running March 31, 1990. This was eventually confirmed as the commencement date. In the meantime, Mr. Bennett had consulted his solicitor and provided him with the draft contract received from Ontario Hydro. His solicitor wrote to Hydro November 7, 1989 and addressed a number of issues. Specifically, he asked if the term of the agreement could be extended to 50 years from 20 years so as to coincide with EF’s lease of the property from the Ministry of the Environment. Hydro responded January 2, 1990 and agreed to the longer term. He also asked if EF would benefit from any rate changes during the 10 year levelized term for fixed rates. In its reply, Hydro said no – that the rates are based on the “in-service year of operation”; and that contracts in any following years would receive the rates current for that year – “whether up or down”. With respect to the solicitor’s enquiry about rates, if the generating station increased its output, Hydro replied that the contract could only be opened up if the generating station had capacity to increase by a minimum of 25%, that a rate could be arrived at for the increased capacity, but qualified it by saying “this is not a commitment”. No request was ever made by Mr. Bennett to re-open the contract for consideration of increased capacity. He signed the contract with the extended term, returned it to Hydro and it was executed dated August 22, 1990.

[38] There is no evidence to suggest that Mr. Bennett misunderstood the terms of the contract. There is no evidence that he was misled or that any term was misrepresented. He sought legal advice and any questions or concerns would presumably have been raised by his solicitor with Ontario Hydro. I do not accept his evidence that he thought there was meant to be an inflation escalator for the 11th and subsequent years; and that he would not have signed the contract if he had known there was no protection from inflation for the balance of the contract. EF relies on the evidence of Ms. Medley who said she thought the provision in the contract for payment in the 11th and subsequent years was unclear. In her evidence, she clarified that she meant that beyond waiting for Hydro to determine the rate in the eleventh and each of the subsequent years, one would not know the rates to be paid. The argument presented by Mr. Bennett in a 2003 submission to the OEFC Board that the term as drafted was a drafting error, and not representative of the intent of the parties, is unsupported by the evidence.[^14] For reasons detailed later, I do not find the letter from Mr. Barnstaple of assistance in describing Hydro’s intent at the time, beyond the language of the contract. Mr Rawson’s letter (Ms. Medley’s boss reporting to Mr Vystroko) of July 25, 1990 to Mr. Laplante is pretty clear in stating that nothing had been decided by Hydro with respect to rates for the balance of the contract.[^15]

[39] The terms contained in Schedule C are clear. There is no reference to escalation rates or inflation except in the provision which addresses the 10 year fixed rate. The rate is explicit and clear that an inflation component was only to last for 10 years. There is nothing ambiguous in the language of Schedule C. The rates payable after the 10 year period are the higher of the rate determined by Hydro in a year, and the ‘floor rate’ being the rate paid or payable in the 10th year.

Estoppel

[40] Estoppel may operate to prevent one party from insisting on an interpretation of a contract inconsistent with an understanding which is evident through their course of dealings; and where it would be unjust to permit that party to resile from their common understanding.[^16]

[41] In the later part of the 1990’s, as the 10th year approached, Mr. Bennett became concerned about EF’s post 10 year compensation. I accept that he was alert to public discussion following a change in government that included government cut-backs and de-regulation. He spoke to Mr. deMontmorency about his concerns. Mr. deMontmorency faxed him copies of correspondence with Hydro dated February 5, 1996 that indicated that he (Burks Falls Power Generation) would receive an inflation escalator in his 11th through 20th year of his contract. His 11th year occurred in 1997. Part of the package was a letter dated February 1997 from Mr. Tong who had replaced Ms. Medley at Hydro confirming that the rates for the 11th and subsequent years (1997 through 2006) was the same as the rate in his 10th year. A handwritten note by Mr. deMontmorency on the copy says he spoke to Mr. Tong who would send him a revised letter as per Ms. Medley’s 1996 letter. After receiving this package, Mr. Bennett did not contact Hydro, even though it was clear from Mr. Tong’s 1997 letter that as a matter of policy there would be no escalator built into the rates. It was a reasonable inference at the time from that exchange that Burks Falls got different treatment. In fact, Mr. Bennett did not take up the issue with Hydro until his letter April 25, 2001 in which he argued that the language of the Burks Falls contract was the same as his, should therefore be given similar treatment, and asked for retroactive adjustments for 2000 and 2001. Ms. Medley replied that Burks Falls 11th year had occurred in 1997 and Hydro had made the decision at that time. She explained that OEFC (who had assumed responsibility in April 1999) had determined that the 11th and subsequent years (2000 forward) would be the same as the 10th year (1999)

[42] Mr. Bennett was also aware through this same time period that his partner in EF and proprietor of the Casselman generating station, Mr. Laplante, had written to Hydro in February 1997 seeking a CPI escalator in the 11th (1997) and subsequent years of his contract. It is reasonable to infer that Mr. Laplante knew that his agreement did not provide for a CPI escalator in his 11th and subsequent years, and in accord with section 1.2, was enquiring about the relevant rate. It is hard to understand at that point that Mr. Bennett still believed that his contract contained an inflation escalator after the 10th year; and if he did understand the meaning of his contract, why he had not taken the lead from his partner and at least corresponded with Hydro. It is notable that the 11th year for both Mr. Laplante and Mr. deMontmorency fell in 1997, whereas EF’s was to fall in 2000. In other words, Hydro was making a determination in the year as to the effective rate. By the time it was EF’s 11th year, OEFC had made a different determination which under section 1.1 of the contract it was entitled to make.

[43] Mr. Vyrostoko’s evidence is not very helpful. He left in 1993. There is no doubt that by the time he left, no discussions had taken place and no requests had been made for decisions for the rates for the 11th and following years. No contracts had come even close to their 10 year mark. Mr. Vyrostko’s replacement as manager of the NUG division was not called. Similarly unhelpful is Mr. Barnstaple’s letter. He too left the division in 1993, when he reported to Mr. Vyrostko. I am not prepared to give any weight to the contents of Mr. Barnstaple’s letter. He could not have had a chance to review the relevant documentation and correspondence before providing his recollections.

[44] When Mr. Bennett contacted Ms. Medley to question EF’s rate for 2000 and following, she told him that OEFC had determined that the rates would be the same as in his 10th year.

[45] While the evidence and submissions addressed the interpretation of section 1.3.2 of Schedule C, it seems that section 1.1 is the relevant provision. On a plain reading section 1.3.2 merely establishes a floor below which future payments may not go. Whereas section 1.2 provides that the rates in the 11th and subsequent years “shall be as authorized by Hydro at the time”.[^17] I take that to mean that Hydro had the authority and the obligation to establish rates in each of the 11th and subsequent years. This interpretation is confirmed by the fact that Hydro and then OEFC sent EF an annual rate letter. It is also consistent with Hydro making a rate decision in 1997 for Burks Falls and for Casselman.

[46] I do not find that Ms. Medley’s correspondence on behalf of Hydro to Burks Falls Power Generation is a representation to EF, or that EF could have relied upon it. While Mr. Vyrostko was clear that only the Board of Hydro had the authority to set rates, no evidence was led to demonstrate that a Board decision had or had not been made concerning rates in or after 1997.[^18] I am satisfied that while Ms. Medley’s representation might have been binding for Burks Falls, it was not binding on EF. Neither was it a representation to EF upon which it could reasonably rely. Similarly, I do not find that Mr. Tong’s correspondence to Mr. Laplante was a representation on which EF could have relied. I do not find that there existed a common understanding between Mr. Bennett and Hydro that changed the interpretation to be given to Schedule C of the contract. The estoppel argument fails.

C. Limitations Act Defence

[47] For the reasons that follow, I do not find that EF’s claim is barred by the Limitations Act, 2002. The action was commenced September 10, 2010, and EF’s damages may be claimed from 2008, being 2 years prior to commencement of the claim. Whether the claim arises from a continuing obligation or periodic amounts is to be determined from the nature of the obligation. As noted in paragraph 42 above, the clear language of the contract requires that OEFC (Hydro) determine the rate in each year to be applied in that year. That suggests to me that a fresh cause of action arises each year, and EF’s rights do not crystallize until the year in question.[^19]

D. Claim for a Declaration

[48] Having determined that the Limitations Act, 2002 does not bar EF’s claim, it is unnecessary for me to deal with this issue. Implicit in this decision is my interpretation of the relevant provisions of the contract.

E. Damages

[49] EF prepared a spreadsheet which contained calculations of CPI inflated rates from 2008 to the present. No real issue was taken with those calculations. The damages based solely on a recalculation of rates with CPI totals $263,471.00. EF used a rate of 5% which Mr. Bennett said in evidence was Hydro’s stated rate for outstanding accounts. He was not challenged, except on the basis that the Courts of Justice Act rate of 0.8% should have been charged. Section 7.1 of the agreement provides that outstanding amounts payable by Hydro to EF shall bear interest at “the effective rate set by Hydro”. I accept that the applicable interest rate is 5% bringing the total to $312,209.00 under this head of EF’s claim.

[50] EF also seeks damages for its inability to expand its production on the ground that Hydro did not pay an inflation escalator. It therefore claims loss of profits. I was invited to apply a contingency factor against its assessment of its damages under this head to reflect the percentage probability or possibility that Hydro (or OEFC) would have permitted the increased power.

[51] The evidence is that the only time EF raised the issue of expanding production was in November, 1989 - before the contract was signed. The response from Hydro suggested that if expanded production were approved, that a different rate could be arrived at for the increased part of the production. There was no further correspondence to Hydro enquiring about the possibility of it purchasing increased power, nor feelers about rates, before he was told in 2001 that there would be no inflation escalator. The only other evidence is contained in a letter from Hydro to Mr. Laplante dated March 4, 1997 stating that it had no need of any additional capacity from Casselman Power Generation. On this evidence I have doubts concerning Mr. Bennett’s intentions. His evidence that he could have increased the power output of EF without the authority of OEFC ignores the evidence. He is wrong. I have no evidence that OEFC would have agreed to purchase any increased power. Under these circumstances, a contingency reducing his claim by 85% seems appropriate.

[52] As for EF’s plans to upgrade, Mr. Bennett said in evidence that he had intended to replace the turbines in about 1997 in anticipation of increased production, but in fact he conducted major repairs but not replacements. His total claim derived from his spreadsheet summary amounts to $933,437.00.[^20] This is a highly contingent claim. However, a reduction by 85% provides EF’s damages for loss of profits at $140,000.

Conclusion

[53] The plaintiff’s claim is dismissed. I assess EF’s damages at $452,209.00.

[54] Neither party filed costs outlines at the conclusion of the trial. If they cannot agree on costs, they make submissions of 2 pages or less within 14 days and a further 5 days for reply.

Honourable Justice Timothy Ray

Released: June 10, 2014

Footnotes

[^1]: Limitations Act, 2002, SO. 2002, c-24, Sch B.

[^2]: Exhibit 1, Tab 16.

[^3]: Exhibit 1, Tab 69, page 6.

[^4]: Exhibit 1,Tab 39.

[^5]: Note 4.

[^6]: Exhibit 1,Tab 63.

[^7]: Exhibit 14.

[^8]: Exhibit 15

[^9]: Exhibit 1, tab 77.

[^10]: Exhibit 1, Tab 63.

[^11]: Exhibit 1, tab 63.

[^12]: R v Khelawon, [2006] 2 S.C.R. 787, 2006 SCC 57.

[^13]: Hill v Nova Scotia ( Attorney-General), 1997 SCC, [1997] 1 SCR 69 citing White v Central Trust Co. (1984) NB CA, 54 NBR (2nd) 293 @310-311

[^14]: Exhibit 1, tab 69

[^15]: Exhibit 7. This letter shows that Mr. Laplante was mistaken in his evidence about what he recalled Mr. Rawson telling him.

[^16]: Ryan v. Moore, 2005 SCC 38, 254 DLR (4th) 1 @para 59.

[^17]: See paragraph 3 above.

[^18]: Exhibit 1, tab 8 is the Board resolution for the 1989 rates.

[^19]: Boys v. Shoppers Drug Mart Inc., 2013 ONSC 7026, 2013 CarswellOnt 15613. @ paras 28 and 29

[^20]: Exhibit 1, tabs 92,93,96,97, Exhibits 6 and 14.