1544656 Ontario Ltd. v. Independent Electricity System Operator
2020 ONSC 509
COURT FILE NO.: 19-632070-CL
DATE: 20200124
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
1544656 Ontario Ltd.
Applicant
– and –
Independent Electricity System Operator
Respondent
COUNSEL:
S. Brown-Okruhlik and M. Richmond, for the Applicant
M. Jilesen and A. Wheeler, for the Respondent
HEARD: January 14, 2020
JUDGMENT ON APPLICATION
C. Gilmore, J.
overview
[1] In this contract interpretation dispute, the applicant (“154”) claims damages from the respondent (“the IESO”) totalling $1,468,293.40. The damages relate to two Solvation Contracts (“the contracts”) between the parties. 154 alleges that IESO drafted contracts that it did not understand. 154 further alleges that as a result of ambiguity in the contracts, the IESO required it to rebuild its projects for which it incurred costs, and a resulting diminished earning potential.
[2] The IESO’s position is that 154 has not suffered any damages as there is no ambiguity in the contracts and the IESO was entitled to require the rebuild. The IESO characterizes this litigation as 154 trying to take advantage of a perceived loophole in the contracts to gain a financial advantage.
BACKGROUND FACTS
[3] The IESO is a not-for-profit entity established in 1998 by Ontario’s Electricity Act, 1998, S.O. 1998, c. 15, Sch. A. It merged with the Ontario Power Authority (“OPA”) in 2005 and was re-named the IESO. Its mandate is to plan for and procure electricity supply from diverse sources for the benefit of Ontario residents consistent with the energy policy of the provincial government. The IESO’s mandate includes the authority to enter into contracts for the procurement of electricity as long as those contracts are consistent with provincial government’s energy policies.
[4] In 2009 the OPA was tasked with developing and administering a feed-in-tariff program (“FIT Program”) to promote the development of renewable energy sources. Successful applicants were offered FIT contracts to feed-in energy to Ontario’s electricity grid. The FIT program was introduced to increase the capacity of renewable energy, enable new green industries, and provide incentives for investment in renewable energy.
[5] 154 is a corporation which installs solar projects in Ontario. It entered into two contracts with the IESO with respect to solar panel projects which it developed with Vigor Clean Tech Inc. (“Vigor”) in Blind River, Ontario. Contracts 4054 and 4055 are the contracts in issue in this application.
[6] Vigor was 154’s contractor for the design, engineering, procurement, and installation of the projects. However, 154’s President and Director was the signatory and counterparty for the contracts. The contracts were sold to Community Energy Development Co-Operative Ltd. (“CEDCOL”) on January 1, 2016. Mr. Brian Unrau, President of Vigor between 2008 and 2016, swore the affidavit to support the application. Mr. Unrau is the President and a Director of CEDCOL. Part of 154’s damages claim relates to a claim for lost profits with respect to the sale from 154 to CEDCOL.
[7] The contracts were entered into on January 27, 2014 with amending agreements signed on March 24, 2014. The contracts incorporated a number of standard contract documents, including:
a. Schedule 1, General Terms and Conditions, version 2.1 (“General Terms and Conditions”);
b. The Exhibits listed on the FIT Contract cover page (“Exhibits”);
c. Appendix I, Standard Definitions, version 2.1 (“Standard Definitions”); and
d. The FIT rules, version 2.1.
[8] The Standard Definitions incorporated certain Prescribed Forms and permitted the IESO to amend or replace the Prescribed Forms from time to time without notice to the supplier. The Prescribed Form is defined in the contracts as:
“Prescribed Form” means, in relation to a form, the latest version of the corresponding form appearing on the Website, as may be amended or replaced by the OPA from time to time and without notice to the Supplier.
THE 120% RULE
[9] For a solar project such as the one in this case, the solar panels are connected together on installation. Their DC electricity output is fed into inverters, which convert the DC output into AC electricity. The AC electricity is then fed into the Ontario electricity grid.
[10] The 120% rule is a ratio of the DC capacity to the AC capacity of the inverters. To comply with the 120% rule, the ratio must be 1.2 or less. The reason for the 120% rule is to ensure a maximum energy yield per panel. If the ratio is above 1.2 the project is less efficient overall but there can be higher returns for suppliers. IESO submits that for that reason, some suppliers do not like the 120% rule because it is seen to limit their profits.
[11] It is important in this application to understand the relationship between the 120% rule and solar panel ratings. The output of a solar panel is determined by the amount of light reaching the panel (“irradiance”), temperature, and the panel’s electrical load.
[12] To effectively compare and understand how much power a panel can produce, standard reference conditions were developed to rate the capacity of solar panels. These reference conditions are known in the industry as Standard Test Conditions (“STC”) to allow meaningful comparison of panel power production capacity.
[13] 154 takes the position that it is permitted to comply with the 120% rule using any capacity rating supplied by the panel manufacturer. This would include a capacity rating other than STC, such as Nominal Operating Cell Temperature (“NOCT”). STC conditions yield a higher capacity rating for a given solar panel than NOCT for the purposes of the 120% rule. This means a supplier using STC must use fewer solar panels to comply with the 120% rule. Both ratings are used in Canada but IESO requires that STC be used.
[14] 154’s position is that the FIT contract does not specify whether STC, NOCT, or some other rating must be used to comply with the 120% rule and it is therefore entitled to use any capacity rating. The IESO’s position is that STC is required, and if the NOCT rating is used, a supplier can install more solar panels and generate more power more often. However, according to the IESO, using NOCT increases the 120% rule to approximately 140% and is therefore outside the rule and the required contract compliance.
THE FIT CONTRACT
[15] The main dispute in this application is whether the requirement to use STC, NOCT, or some other rating standard is contained in the FIT contract in order to comply with the 120% rule. There is no dispute that the 120% rule is clearly set out in the contract.
[16] 154 relies on section 2.6(a)(iv)(D) of the contract which sets out as follows:
(D) in the case of a Solar (PV) Facility:
(1) the sum of the manufacturer’s capacity ratings (in DC kW) for normal operation (e.g. continuous output ratings) of the installed solar modules (i.e. panels) of the Facility;
May not exceed 120% of:
(2) the sum of the manufacturer’s capacity ratings (in AC kW) for normal operation (e.g. continuous output ratings) of the installed inverters of the Facility;
[17] 154 submits that a plain reading of the 120% rule in the contracts permits the use of NOCT. 154 purchased solar panels with manufacturer’s capacity ratings listed in NOCT and built the projects to comply with the 120% rule measured in NOCT. An independent engineer certified the projects’ compliance with the 120% rule.
[18] IESO’s position is that 154 and Vigor are experienced with the FIT program and have had involvement in over 30 FIT projects. 154 understood when it entered the contracts that the 120% rule required compliance using the STC rating. The IESO provided examples of 154, through Vigor, attempting to circumvent the 120% rule including an attempt to alter the Required Supplier’s Certificate by using a “mocked up” version of it and submitting COD packages containing Required Supplier’s Certificates using both STC and NOCT ratings. 154 was required to resubmit their application packages showing compliance with the 120% rule using STC before Commercial Operation would be granted.
THE EXPERT EVIDENCE
[19] 154’s expert, Mr. Anton Driesse, was cross-examined on his report. He conceded that only one reference condition can be used and agreed that STC is the commonly-accepted universal default standard. While Mr. Driesse reported that the FIT rules and definitions do not explicitly identify the reference conditions to be used, he was not provided with a copy of the Prescribed Form which explicitly requires suppliers to rate panels using STC.
[20] Mr. Driesse was referred to the standards of the International Electrotechnical Commission, a recognized authority in the solar power industry. Manufacturers are required to provide clearly marked solar power ratings directly on the panel on what is known as the panel “nameplate”. The panel nameplate shows the reference condition as STC. Mr. Driesse conceded this was the case.
Was 154 Permitted to Comply with the 120% Rule Using the NOCT Rating?
Issue One – Contract Ambiguity
[21] 154 argues that the wording of the 120% rule unambiguously permits 154 to comply with it by using a capacity rating supplied by the manufacturer which includes NOCT. 154 relies on the wording of s. 2.4(6)(a)(iv)(D)(1) (reproduced above) which it submits means that suppliers are only restricted to a capacity rating provided by the manufacturer. Further, the drafters of the 120% rule avoided a specific rating standard to ensure the required flexibility based on site conditions.
[22] 154 also argues that the evidence of IESO’s expert, Mr. Otal, that STC is the exclusive universal standard, should be disregarded. Mr. Otal’s conclusion in this regard depends entirely on his definition of “capacity” for which he cites no authority.
[23] 154 submits that IESO cannot rely on the mention of STC in any of the Prescribed Forms to the contract because it is not relevant to the construction of the 120% rule and in any event, the Independent Engineering Certificate (“the IEC”) is the only relevant form for compliance with the 120% rule. The IEC initially obtained by 154 certified compliance with the 120% rule. Delegation of this assessment was specifically made to an engineer as IESO does not have the technical knowledge to make such an assessment.
[24] It further submits that IESO’s reliance on the standard forms in an attempt to interpret the contract are misplaced because IESO could change them at any time and without notice to the supplier. As such, the forms are not an interpretative aid to the initial contract.
[25] Finally, 154 argues that if there is any ambiguity it should be resolved in its favour based on the doctrine of contra proferentem.
[26] IESO makes several arguments with respect to the requirement of compliance with STC as follows:
a. The requirement for Suppliers to certify the Facility’s capacity in STC has been in place since the FIT contract version 1 as per the Metering Plan Form which was Schedule A to Required Supplier’s Certificate (part of the Incorporated Schedules to the FIT contract).
b. Mr. Brian Unrau is the President of Vigor and has been the signatory on 25 FIT contracts which were approved for Commercial Operation. Nine of those projects were in operation at the time of these contracts and all of those projects showed a Facility Capacity using the STC rating.
c. IESO submits that 154 made deliberate attempts to circumvent the use of the STC standard as follows:
i. In April 2015, Vigor provided IESO ratings for four projects (including the two in issue in this application) using a NOCT rating including a “mocked up” version of Schedule A of the Required Supplier’s Certificate in which STC was crossed out and other wording substituted. IESO informed Vigor by email on August 14, 2015 that they were not permitted to change a contract form.
ii. Vigor sent IESO panel spec sheets for the project for Heliene photovoltaic modules. The spec sheets referenced a NOCT standard. Mr. Unrau’s evidence in cross-examination was that Heliene used STC in their spec sheets. They changed their spec sheets at Mr. Unrau’s request. He agreed that solar panel suppliers typically use STC on their spec sheets. Heliene was asked to change the reference from STC to NOCT to “avoid confusion”.
iii. While it is true that there was an IEC from March 2016 confirming compliance with the 120% rule for the projects, Schedule A of the Supplier’s Commercial Operation Certificate dated May 20, 2016 indicated that an NOTC rating had been used. IESO wrote to Vigor in June of 2016 to advise that it was not in compliance with the 120% rule. The result was that Vigor disconnected the extra solar panels, resubmitted their Commercial Operations package using the STC standard on August 31, 2016 and were approved for Commercial Operation on September 1, 2016.
d. The FIT contract contains three specific references to the 120% rule as follows:
i. The FIT rules set out specific eligibility requirements in order to participate in a FIT program. Rule 2.2(d) requires compliance with the 120% rule.
ii. The FIT contract contains General Terms and Conditions which are incorporated into the main contract. Section 2.1(g) of the General Terms and Conditions requires that solar panel facility must be designed with capacity ratings that do not exceed 120%.
iii. Section 2.1(a)(iv)(D) of the requirements for Commercial Operations also makes reference to the 120% rule.
iv. The Required Supplier’s Certificate forms part of the package for Commercial Operation.
e. There can be no dispute that STC is the universal standard and default standard. Both Mr. Unrau, the principal of Vigor, and 154’s expert agreed this was the case. Despite this universally accepted standard, 154 insists that NOTC can be used because it is provided by the manufacturer. However, IESO’s position is that no supplier has attempted to use anything other than STC until Vigor’s aborted attempt in 2016. 154 points out that California uses a different standard which puts into question the “universality” of STC. IESO responds that the STC is so widely accepted that California had to legislate a different standard.
[27] While IESO takes the position that there is no ambiguity in the contract, if there is any ambiguity, IESO argues that the subsequent conduct of the parties may be examined to interpret the written agreement. Such conduct indicates that both parties understood that the STC standard was required to comply with the 120% rule.
[28] IESO was always clear with 154 and Vigor that to achieve Commercial Operation compliance, the contracts had to comply with the 120% rule using STC. IESO entirely rejected Vigor’s attempts to provide an “amended” Required Supplier’s Certificate. After Vigor changed its project and demonstrated compliance with the 120% rule using STC, their project was approved for Commercial Operation the following day.
Issue Two – Commercial Reasonableness
[29] The IESO submits that 154’s interpretation of the 120% rule is commercially unreasonable. If a supplier is permitted to choose a capacity rating based on what a manufacturer provides, this would lead to uncertainty and inconsistency. Further, such an interpretation would render the 120% rule meaningless.
[30] The planning structure of the FIT program would also be in flux if suppliers were not restricted to the STC rating. That is, the IESO would not be able to predict how much electricity an individual supplier would provide to the electricity grid, how much money to budget for suppliers, or how much total energy all FIT projects would produce.
[31] 154 submits that the IESO’s view is wrong. Its requirement that only STC may be used will inhibit projects in indigenous communities and rooftop solar projects. Further, the parties’ subjective understanding is inadmissible. A standard form contract does not permit the court to rely on surrounding circumstances to interpret its meaning. The court is restricted to interpreting the contract based on the words within it.
[32] The IESO was not entitled to refuse to acknowledge Commercial Operation in the face of 154’s compliant IEC certificates. The FIT 2 contract provided for an independent and qualified third party to determine compliance with the 120% rule. Where such compliance has been obtained through the required IEC, the IESO cannot unilaterally ignore it. The only valid interpretation of the IEC certificates is that Vigor was compliant with the 120% rule and should have been permitted to commence operations without any changes to their projects.
[33] 154 also argues that this entire case is not about STC or the 120% rule, it is really about IESO restricting supplier’s output because in hindsight it realizes that the contracts were too rich. The IESO’s expert admits this. The IESO denies that allegation, but its actions as a bully contradict such a denial.
Issue Three – Is 154 Entitled to Damages?
[34] The IESO submits that 154 is contractually prohibited from claiming damages. The General Terms and Conditions exclude either party’s liability for “any special, indirect, incidental, punitive, exemplary or consequential damages, including loss of profits.” Further, section 13 of the FIT rules specify that IESO is not responsible for any damages related to the submission of an application or participation in the project. Applicants must agree that their damages against the OPA are limited to the amount of their application fee. The majority of 154’s claimed damages ($1,045,000) relate to lost profit. They are precluded from claiming such damages under the General Terms and Conditions and the FIT rules.
[35] As for the balance of the claimed damages, they are characterized as remediation work costs ($13,509.19) and the carrying costs ($409,7784.21), Vigor did not invoice 154 for these amount until September 1, 2018. There is no evidence that 154 paid the invoices and therefore cannot claim to recover such an alleged loss.
[36] 154’s response to the above is that the rules cited relate only to applicants with respect to the pre-application process. They are not intended to apply to “suppliers” like 154, who had already signed a contract. Further, the $1,045,000 part of 154’s claim for damages relates to a diminished sale price based on what the projects would have earned over their lifetime and are therefore direct damages.
ANALYSIS
[37] 154 is a supplier who has decided to take a stand against the IESO. Their “we aren’t going to take it anymore” attitude includes the view that the IESO simply bullies suppliers into compliance through its statutory monopoly and its power to decide what the FIT contracts mean.
[38] While 154 may not like the imbalance of power between supplier and the IESO, I find that such circumstances do not entitle it to damages when the contracts in issue are clear and unambiguous.
[39] Addressing 154’s complaints in turn, I make the following findings. There is no doubt that the contracts refer to the 120% rule in several locations and that there is no specific ambiguity in that rule. 154 does not dispute that. The issue is whether the contracts are clear that compliance with the rule requires the use of the STC rating.
[40] Standard contract interpretation principles require that a contract provision should not be read as standing alone but in light of the entire agreement and other provisions thereof.[^1] I find that in this case, it would be incongruous to read the 120% rule without reference to the structure within which it is contained. As such, I reject 154’s contention that they should be able to rely solely on the IEC for compliance. Rather, consideration of entire contractual matrix includes reference to the Required Supplier’s Certificate. That Certificate makes reference to it forming part of the FIT contract. The Certificate also makes reference to 154 being required to specify the STC rating of each solar module.
[41] I reject 154’s attempts to interpret “manufacturer’s capacity rating” in section 2.6(a)(iv)(D) as meaning that it was entitled to use any capacity rating provided by a manufacturer. This interpretation led to 154 providing a “mocked up” Schedule A and spec sheets which 154 asked the manufacturer to change to advance its position. Had NOCT been an accepted rating by the IESO, 154 would not have had to take such steps.
[42] 154’s position with respect to capacity ratings has the potential to result in uncertainty and commercial absurdity, with different suppliers using different ratings thereby leaving IESO to deal with outputs which may vary greatly from project to project. Further, if the IESO cannot determine how a supplier has complied with the 120% rule, it cannot assess whether Commercial Operation should be granted. In short, 154’s position would leave the IESO guessing as to what rating was used by a supplier. That is contrary to the intention of the FIT contracts which require uniformity for the IESO to be able to gauge output, compliance, and deficiencies.
[43] I find that STC is the universally accepted standard default rating as confirmed by both experts and 154’s affiant, Mr. Unrau. Given the uniform agreement on this point, I find that as per Laurie & Morewood v. Dudin & Sons,[^2] where a certain usage is pervasive and so well known, everybody doing business must be assumed to know it and contract subject to it. Applying that case law to this trade usage, I find that those in the solar industry would expect to comply with the 120% rule using STC even if no specific capacity rating were stipulated.
[44] The fact that the State of California has decided to legislate a different capacity rating does not affect this court’s view. This court is not obliged to consider that rating as determinative, just as other suppliers outside of Ontario are not bound by FIT contracts.
[45] 154 was never in a position to feign shock or surprise at IESO’s insistence on the use of the STC rating. As far back as April 2012, Vigor wrote to the OPA lobbying for a relaxation of “restrictions on nameplate capacity for both microFIT and FIT”.[^3] Further, the nine prior FIT contracts submitted by Vigor which reached Commercial Operation before these contracts had Required Supplier’s Certificates signed by Mr. Unrau using the STC rating.[^4]
[46] I find that 154 knew exactly what was required in terms of compliance with the 120% rule. Their attempts to undermine this and then characterize IESO as an unreasonable bully are without foundation.
[47] 154 also argued that the contra proferentem rule should apply in its favour given the ambiguity in the contracts. The IESO responds that the FIT contract specifically does not permit reliance on the contra proferentum rule. Contra proferentem is a rule of last resort and cannot be applied if no ambiguity is found in the disputed provision and when all other rules of construction fail (Consolidated-Bathust v. Mutual Boiler, 1979 CanLII 10 (SCC), [1979] SCJ No 133). Further, the court cannot apply the contra proferentem rule unless the examination of the contract as a whole in light of commercial realities failed to yield an answer (32262 B.C. Ltd. v. 271617 B.C. Ltd., 1996 CarswellBC 1177 (B.C. C.A.), at paras. 18-19). Given my findings, namely that there is no ambiguity in the disputed clause and that 154’s interpretation would lead to commercial absurdity, the contra proferentem rule finds no application in this case and the issue of whether the IESO can contract out of the contra proferentem rule is moot.
[48] The IESO relies on section 13.3 of the FIT Rules for its position that if there was a breach of the contracts, 154 is not liable for damages above the limit of the application fee. While such a prohibition applies, it is reserved for “applicants”. I agree with 154 that it was not an applicant as defined in the Standard Definitions to be used in the FIT rules and the FIT contracts. In fact, 154 had already been approved for and signed the FIT contracts at the time the STC issue arose.
[49] However, section 13.3(h) enlarges this definition by prohibiting any claim for damages not just for the application process, but also “during the development of the Project whether or not the application is accepted or terminated…” I agree with IESO that this can be interpreted to include the participation of 154 in the contracts. Therefore, if I am wrong with respect to the interpretation of the contracts as whole, I find that 154 would not be entitled to damages in any event.
FINAL ORDER AND COSTS
[50] The parties agreed at the conclusion of the hearing that the successful party would be entitled to $100,000 in partial indemnity costs. After writing this decision, I received Offers to Settle from the parties in a sealed envelope on January 17, 2020. I have reviewed the Offers and see no reason to deviate from the agreed upon quantum of costs. As such, given all of the foregoing I make the following orders;
a. The application is dismissed.
b. The applicant shall pay the respondent costs of $100,000 forthwith.
Gilmore J.
Released: January 24, 2020
2020 ONSC 509
COURT FILE NO.: 19-632070-CL
DATE: 20200124
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
1544656 Ontario Ltd.
Applicant
– and –
Independent Electricity System Operator
Respondent
REASONS FOR JUDGMENT
C. Gilmore, J.
Released: January 24, 2020
[^1]: See Scanlon v. Castlepoint Development Corp., [1992] CarswellOnt 633 at para. 88. [^2]: (1926), 95 L.J.K.B. 191 (C.A.), at p. 193. [^3]: Exhibit N to the affidavit of Adam Greer sworn May 28, 2019. [^4]: See affidavit of Adam Greer, at paras. 68-69.