SUPERIOR COURT

CANADA

PROVINCE OF QUÉBEC

DISTRICT OF MONTRÉAL

No. 500-17-056518-106

DATE : July 24, 2014

______________________________________________________________________

IN THE PRESENCE OF : THE HONOURABLE JOEL A. SILCOFF, J.S.C.

______________________________________________________________________

CHURCHILL FALLS (LABRADOR) CORPORATION LIMITED

Plaintiff

v.

HYDRO-QUÉBEC

Defendant

JUDGMENT

______________________________________________________________________

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B.The May 21, 1953 Agreement for Exploration and Development of Newfoundland and Labrador, the Hamilton Falls Power Corporation Limited (Lease) Act, 1961 and the May 16, 1961

C. Events and Exchanges Preceding the Signature of the Letter of Intent of October 13, 1966 ..10

D.Evolving Demands of the Project and of the Financial Institutions During the Intervening

F.Prior Litigation and Historical Grievances of Newfoundland and of CFLCo in Connection with

(2)The Upper Churchill Water Rights Reversion Act Reference (“Reversion Act Reference”) .22

L.The “Summary of the Discussions” of March 9, 1998 and the Agreements Entered into

i

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M.Pronouncements by Representatives of Newfoundland Regarding the Alleged Inequities in the Principal Agreement, the Lease Act and the Power Contract and in the Resulting Inadequate

A.CFLCo’s Motion de bene esse for Authorization to Produce Documents and Hydro-Québec’s

B.CFLCo’s Motion to Declare a Document Admissible as Written Testimony (Art. 2870 C.C.Q.)53

C.Hydro-Québec’s Objections to the Admissibility of the Statement of Intent and Other

(b)Has settlement privilege attaching to the Statement of Intent been waived by those to

ii

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(2)The Origins of the Present Proceedings & the Similarity with Previous Disputes Regarding

iii

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(2)CFLCo’s Motion to Declare a Document Admissible as Written Testimony (Article 2870

(3)Hydro-Québec’s Objection to Admissibility of the Statement of Intent Based on Privilege

iv

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I.Introduction

[1]Widely recognized as the realization of a long standing dream of Newfoundland and

Labrador, conceived many decades ago, the Churchill Falls (Labrador) Corporation Limited (“CFLCo”) hydro-electric power generating station (the “Generating Station”)1 has nonetheless been the object of a juridical and political saga since at least the early

1960’s.

[2]The dispute and resulting claims giving rise to the present proceedings are but the latest episode in this ongoing saga. They relate to the pricing terms contained in the contract signed by the parties on May 12, 1969 (the “Power Contract”), in virtue of which CFLCo agreed to supply and Hydro-Québec agreed to purchase substantially all of the power emanating from the Generating Station for an initial term of (44) forty-four years and for an additional term of (25) twenty-five years terminating in 2041. The price to be paid by Hydro-Québec was to be calculated based upon and, if necessary, adjusted to reflect the final capital cost of the project.

[3]CFLCo describes its claim in the following manner:

19.CFLCo’s submission in brief is that given the immense and wholly unforeseen increase in energy prices in the years following execution of the Power Contract, i.e. beginning in the early 1970s, which was directly contrary to the expectation of the parties, the subsequent emergence of competitive energy markets, the legislative changes in Québec which gave Hydro-Québec full access to export markets, and the US open access regulations which gave other parties access to Hydro-Québec’s transmission network:

(i)The Québec civil law principle of good faith in the negotiation and execution of contracts, and particularly in the context of extremely long-term contracts, requires modification of the pricing terms of the Power Contract for the future so as to provide a fair and equitable purchase price to CFLCo;

(ii)Refusal by Hydro-Québec to agree to a fair and equitable purchase price

for the future constitutes an abuse of rights requiring modification of the contract price for the future; 2

[emphasis added; footnotes omitted]

[4]Notwithstanding what might first appear from the characterization of its claim in the manner described above, CFLCo contends in its Written Argument: (“CFLCo’s Written Argument”) “Hydro-Québec’s duty of good faith and collaboration in this case does not turn on the adoption or rejection of the “théorie de l’imprévision” in Québec law.”3 [emphasis added]

1Sometimes also referred to herein as the “Plant”, as defined in the Power Contract.

2Amended Particularized Motion to Institute Proceedings (the “Motion”).

3CFLCo’s Writen Argument, Section III. A. vi., at p. 53. Both parties, nonetheless, raise the issue of the applicability of the “théorie de l’imprévision” at length in their respective arguments. The Court will accordingly address their respective positions in Section XI. of this judgment.

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[5]Rather, “CFLCo is asking this Court to recognize that the duty of good faith and the reasonable exercise of rights require a party to renegotiate when the effect of enforcing the contract is incompatible with the nature of the relationship.”4

[6]Accordingly, for the reasons more fully described in the Motion, CFLCo asks the Court to:

DECLARE that in the circumstances of this case the civil law principle of good faith in all its forms, including without limitation abuse of rights, the “spirit of justice” and “fair play” requires modification for the future of the contract price set out in the Power Contract entered into between Plaintiff and Defendant so as to provide a fair and equitable purchase price to Plaintiff;

DECLARE that, in all the circumstances, a fair and equitable purchase price to the Plaintiff requires as a minimum that for the future the commercial value of the power generated by the Churchill Falls project be shared between CFLCo and Hydro-Québec in a reasonable manner consistent with the current realities and the continued existence of the Power Contract and in consequence;

ORDER that the pricing terms of the Power Contract be modified as of November 30, 2009 so as to provide that the mill rate payable by Hydro-Québec to CFLCo in each calendar year for energy purchased from CFLCo shall equal the sum of the following:

[emphasis added]

in accordance with a formula more fully described.

[7] Subsidiarily, CFLCo asks that the Court:

ORDER that the Power Contract be resiliated with effect six (6) months from the date of judgment.

[8]Hydro-Québec seeks the dismissal of the Motion. It contends, notwithstanding

CFLCo’s assertions to the contrary, that what is sought in these proceedings, in fact and in law, is relief based upon the application of the “théorie de l’imprévision”5, a legal concept which was expressly rejected by the legislator at the time of the most recent reform of the Civil Code of Québec.

[9]It argues:

245.Lors de la réforme du Code civil du Québec, le législateur québécois a rejeté une recommandation de l’Office de révision du Code civil qui proposait d’introduire la théorie de l’imprévision dans le droit du Québec.

246.La Requête demande au tribunal de s’autoriser du principe de la bonne foi et de la théorie de l’abus de droit pour réviser le Contrat, sur le fondement de circonstances prétendument imprévisibles. Il s’agit là d’une tentative inadmissible

de modifier indirectement le droit positif en invitant le pouvoir judiciaire à

4Ibid., at para. 268.

5Sometimes referred to in the English language as the “Theory of unforseeability or unpredictability”.

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renverser un choix législatif à la fois délibéré et récent, soit celui de refuser d’admettre la théorie de l’imprévision dans le droit du Québec.

247.À tout moment au cours de sa relation contractuelle avec CFLCo, la conduite d’Hydro-Québec a été empreinte de bonne foi et à tous égards conforme aux exigences de la bonne foi.

248.CFLCo ne cherche pas à rétablir l’équilibre contractuel convenu par les parties lors de la conclusion du Contrat, mais à obtenir du tribunal la création d’un nouvel équilibre contractuel. En effet, CFLCo ne cherche pas à ajuster ce qu’elle reçoit en vertu du Contrat en fonction de ce à quoi elle était en droit de s’attendre lors de la conclusion de celui-ci, mais plutôt à rouvrir le Contrat et à obtenir du tribunal qu’il enlève à Hydro-Québec une partie des avantages qui reviennent à cette dernière en vertu du Contrat, soit de l’énergie et de la puissance dont le prix est stable et basé sur les coûts du projet. Par ailleurs, la prétendue iniquité invoquée par CFLCo au soutien de sa demande est celle dont le gouvernement de Terre-Neuve se plaint depuis 1976, non pas celle qui résulterait prétendument des circonstances imprévisibles alléguées dans la Requête.

249.Les circonstances invoquées par CFLCo n’étaient pas imprévisibles lors de la négociation du Contrat et certaines ont effectivement été envisagées par les parties avant la conclusion du Contrat. Quoi qu’il en soit, la plus récente de ces circonstances étant survenue en 1997, le recours de CFLCo est prescrit.

250.À tout événement, aucune de ces circonstances n’a privé CFLCo des revenus auxquels elle était en droit de s’attendre lors de la conclusion du Contrat, et CFLCo n’allègue pas être menacée de ruine.

251.Par ailleurs, les conventions intervenues entre CFLCo et Hydro-Québec en 1999 emportent confirmation du Contrat et comportent une reconnaissance par CFLCo de la validité de ses modalités, notamment celles relatives au prix et

ce, jusqu’en 2041. Ces conventions, de même que le Recall PSA, constituent une fin de non recevoir à la demande de CFLCo en l’espèce.6

[emphasis added]

II.Glossary of Defined Terms – Lexique

[10]For the purposes of this judgment and unless otherwise defined or the context so requires, the defined terms used herein shall have the meaning described in the bi-

lingual “Glossary of Defined Terms – Lexique” prepared and agreed to by counsel for the respective parties, annexed hereto as Annex I.7

6Défense amendée et précisée (“Défense”), at paras. 245-251.

7Certain clerical errors in the original Glossary of Defined Terms – Lexique have been corrected by the Court.

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[11]As well, and to the extent applicable, unless otherwise defined in the “Glossary of

Defined Terms-Lexique” and where the context so permits, the defined terms contained in the Power Contract are adopted by reference to apply mutatis mutandis herein.

[12]Finally, unless the context otherwise so requires, in the interests of brevity,

(i)the “Government of Newfoundland and Labrador” and the “Province of Newfoundland and Labrador” will be referred to respectively as the “Government of Newfoundland” and “Newfoundland”; and

(ii)the “Government of Québec” and the “Province of Québec” will be referred to respectively as the “Government of Québec” and “Québec”.

III.The Parties

A.CFLCo

[13]CFLCo (formerly known as Hamilton Falls Power Corporation (“HFPCo”)), was

incorporated as a wholly owned subsidiary of the British Newfoundland Corporation Limited (“Brinco”) on January 31, 1958.8 For ease of reference, HFPCo and CFLCo will be sometimes referred herein collectively as CFLCo.

[14]As described in Annex III hereto, the shareholders of Brinco changed from time to time since its incorporation.

[15]On October 8, 1958, the Board of Directors of Brinco approved the acquisition by

Shawinigan Engineering Company Limited (“Shawinigan Engineering”) of a 20 % interest in the shares of the capital stock of CFLCo.9

[16]In March 1963, the Québec Hydro-electric Commission nationalized substantially all of the existing electricity producers in Québec, including Shawinigan Water and Power Company Limited, the parent of Shawinigan Engineering. Accordingly, following

a corporate reorganization, the shares of CFLCo owned by Shawinigan Engineering were ultimately transferred to Hydro-Québec, as it became known.10

[17]For reasons which will subsequently become evident, the composition and collective business acumen of the shareholders and of the members of Boards of Directors of CFLCo and of Brinco in the years immediately preceding the signature of the May 12, 1969 Power Contract, is both most impressive and relevant.

[18]By the fall of 1967, the shareholders of CFLCo and their respective percentage interests were as follows:

Brinco: 63.3%

8Exhibit D-024/14.

9Exhibit D-325/1.

10Exhibit D-151.04/6 and 13.

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Hydro-Québec: 16.3%

Rio Algom: 10.4%

Newfoundland Ministry of Economic Development (“MED”): 10%.11

[19]By the summer and early fall of 1968, the shareholders of CFLCo and their respective percentage interests were as follows:

Brinco: 64.3%

Hydro-Québec: 25.7%

Newfoundland MED: 10%.12

[20]By November 1968, the shareholders of CFLCo and their respective percentage interests were as follows:

Brinco: 55.8%

Hydro-Québec: 34.2%

Newfoundland Ministry of Economic Development (“MED”): 10%.13

[21]Brinco remained majority shareholder of CFLCo until June 27, 1974, at which time Newfoundland Industrial Development Corporation (“NIDC”) acquired the shares of CFLCo owned by Brinco as well as its remaining water rights on the Churchill River. NIDC then transferred its shares of CFLCo to Newfoundland and Labrador Hydro (“NLH”). The shareholders of CFLCo and their respective percentage interests became as follows:

NLH: 55.8%

Hydro-Québec: 34.2%

MED: 10%.14

[22]On November 7, 1975, NLH acquired the MED 10% interest in CFLCo. From that time until the present, the shareholders of CFLCo and their respective percentage interests remained as follows:

NLH: 65.8%

Hydro-Québec: 34.2%.15

[23]On June 18, 1999, NLH, Hydro-Québec and CFLCo entered into a shareholders

agreement defining their rights and obligations inter se (the “Shareholders’ Agreement”).16 The Shareholders’ Agreement expires in 2041.

11Exhibits D-331/3, 6 to 8 and D-260/4.

12Exhibits D-182/2, D-260/4, D-021.01, D-181/6 and D-275/7.

13Exhibits D-023/1, D-023.01/1 and D-024.02.05/30.

14Exhibits D-260/2 and D-195/55.

15Exhibit D-260/2.

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[24]CFLCo owns and operates the Generating Station. It has a generating capacity of approximately 5,428 megawatts of power and produces an average of 33.8 billion kilowatt hours of energy per annum. This generating capacity may have increased over the years.

B.Hydro-Québec

[25]Hydro-Québec is a State agent corporation of Québec created in 1944 under the name: Commission hydroélectrique du Québec / Québec Hydro-electric Commission

(“Hydro-Québec”). Its mandate and powers have been amended by statute from time to time since its creation.17

C.Brinco

[26]Although not, as such, a party to these proceedings, until 1974 and at all relevant times prior thereto, it was the controlling shareholder of CFLCo and, as such, a significant participant in the events and negotiations which gave rise to the signature of the Power Contract and the ultimate realization of the Generating Station.

[27]Brinco was incorporated under the laws of Newfoundland in 1953 by a consortium of seven British and Canadian industrial, banking and mining companies, under the leadership of N. M. Rothschild & Sons.

[28]At all times relevant to the present proceedings, Brinco was a public corporation; its shareholders included major multi-national corporations and investors from Canada, the United Kingdom and elsewhere in the world.

[29]The identity of the shareholders of Brinco during the relevant period is summarized in Demonstrative Exhibit HQ-B/1 Revised (English version) with appropriate source references, copy of which is annexed hereto as Annex III.

[30]The composition of the Boards of Directors of both Brinco and CFLCo during each of the relevant periods is described in Exhibit D-386. Appropriate biographical information for substantially all of the directors mentioned in Exhibit D-368 is filed as Exhibits D-368.01 to D-368.19. In brief, summarizing the content of the foregoing exhibits, it can be said that the respective Boards included among their members, a virtual “who’s who” at the time of the experienced and elite titans of industry, both North

American and European.

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A.Chronologie – Churchill Falls / Churchill Falls Time Line (Annex II)

[31]Considering the complexity of the relevant facts and the volume of exhibits admitted in evidence in support thereof, the Court suggested the parties attempt to agree on a “Time Line” chronicling the facts and events so admitted. It was proposed that this Time Line would serve as a historical and contextual overview and form part of the judgment to be rendered.

[32]CFLCo’s Written Argument was filed on November 25, 2013. Annexed was a Time Line of events with corresponding references to exhibits forming part of the record and testimony given on behalf of the respective parties (the “November 25, 2013 Time Line”). The November 25, 2013 Time Line includes extensive references to the Massell Report (Exhibit P-39), to the Reliance Materials produced under reserve of Hydro- Québec’s objections (Exhibits P-39.1 to P-39.160) as well as to testimony given by Dr. Massell in support of his Report.

[33]In a letter dated December 2, 2013, counsel for Hydro-Québec advised opposing counsel that, seeing its objections to the admissibility in evidence of the Massell Report and the Reliance Materials and in light of its reserves as to the reliability of Dr. Massell’s testimony, it could not agree to the November 25, 2013 Time Line.

[34]On January 17, 2014, Counsel for Hydro-Québec advised the Court that the parties had agreed upon a revised Time Line, copy of which was annexed to its letter (the “Revised Time Line”). The Revised Time Line chronicles three categories of entries, (i) those with which both parties agree; (ii) those with which both parties agree but are unable to agree as to its formulation; and (iii) those which CFLCo wishes to include and to which Hydro-Québec objects principally based on relevance. If and to the extent deemed necessary, in referring in this judgment to any one or more entries, the Court will address these differences.

[35]Counsel further noted, however, that as agreed with CFLCo, the Revised Time Line does not replace the November 25, 2013 Time Line to which Hydro-Québec objected. If CFLCo objected to Counsel’s submissions in this regard or to the Revised

Time Line, it was invited to so advise the Court. No such objection has been received. Rather, following a request by the Court for a clarification of CFLCo’s position, in a letter addressed to the Court on March 4, 2014, counsel wrote:

Regarding the question of whether annexing a copy of the table prepared by the attorneys for Hydro-Québec regarding the timeline would be misleading, my answer is no.

[36]Accordingly, seeing the extensive references in the November 25, 2013 Time Line to the Massell Report, the Reliance Materials and to testimony given by Dr. Massell in support thereof, considering the concerns of the Court hereinafter expressed, regarding the admissibility, reliability and probative value of the Massell Report and the Reliance Materials, the Court considers the Revised Time Line reflects, in a more

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neutral and appropriate manner, the admissions agreed to by the parties and the reserves expressed regarding those facts which are not admitted.

[37]For these reasons, the Revised Time Line will be retained by the Court and annexed in full to this judgment to form part hereof as Annex II.

[38]Certain events referred to in the Revised Time Line necessarily warrant particular consideration and a more detailed analysis. They are fundamental to the questions raised for determination in these proceedings and constitute the contextual foundation upon which rest the arguments of the respective parties. They will necessarily be addressed in greater detail below.

B.The May 21, 1953 Agreement for Exploration and Development of Newfoundland and Labrador, the Hamilton Falls Power Corporation Limited (Lease) Act, 1961 and the May 16, 1961 Lease between Newfoundland and CFLCo

[39]On May 20, 1953, the House of Assembly of Newfoundland, in Legislative

Session, enacted The Government-British Newfoundland Corporation Limited – N. M. Rothchild & Sons (Confirmation of Agreement) Act, 195318 authorizing the Lieutenant- Governor in Council to sign an agreement with Brinco granting it an option to explore, investigate and develop the hydro-electric resources in the designated areas of Labrador, including the Hamilton River (as it was then known). On May 21, 1953, the

parties signed the Agreement for Exploration and Development of Newfoundland and Labrador authorized the previous day (the “Principal Agreement”).19

[40]The Principal Agreement contemplated an undertaking by Brinco to expend a sum of not less than CAD $1,250,000 within a period of 5 years on the exploration and investigation of the resources in question. In exchange for this undertaking, Brinco was

granted exploration and development options exercisable during a period of 20 years, covering a large portion of Labrador.20

[41]Should Brinco elect to exercise its option in one or more of the areas in question, it was required to:

...give notice to the Government and shall thereupon be obliged to commence and proceed with due diligence with the development of the supply of electricity from the area or areas to which such notice relates and the Government shall grant to the Corporation the exclusive right and concession accordingly for a term of 99 years renewable at the option of the Corporation for a further period of 99 years in respect of the said area or areas.21

18S.N. 1953, No. 63 (Exhibits P-4 and D-006).

19Exhibits P-4 and D-005.

20Exhibits P-4, s. 1 and D-005, clause 1.

21Ibid., s. 9(2).

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[42]On January 31, 1958, Brinco caused Hamilton Falls Power Corporation Limited (“HFPCo”) (now “CFLCo”) to be incorporated as a wholly owned subsidiary.

[43]On June 30, 1958, Brinco assigned to HFPCo a portion of its rights under the Principal Agreement.22

[44]On May 26, 1960, HFPCo exercised its option pursuant to Clause 9 of the

Principal Agreement “...to take an exclusive right and concession to harness and make use of

the watershed of the Upper Hamilton River as above described and to be vested with all hydro electric and hydraulic power rights in to and in respect of the same [...]”.23

[45]On March 13, 1961, the House of Assembly of Newfoundland, in Legislative

Session, enacted The Hamilton Falls Power Corporation Limited (Lease) Act, 1961 (the

“Lease Act”)24 approving the 1961 Lease between Newfoundland and HFPCo (the

“1961 Lease”).

[46]The 1961 Lease granted HFPCo, for a period of 99 years, renewable at the option of HFPCo for a further 99 years, “...full right and liberty to use exclusively all usable

waters upstream of the point of intersection of the Hamilton River with the meridian of 63° 40' west of Greenwich and...”25

[47]The Lease Act and the 1961 Lease were subsequently amended on several occasions.26 Save for the amendments enacted in virtue of The Churchill Falls

(Labrador) Corporation Limited (Lease) (Amendment) Act, 1967-67 (the “1967 Lease Act”) and the corresponding amendments to the 1961 Lease,27 these amendments are not material to these proceedings.

[48]The 1967 Lease Act and the corresponding amendments to the 1961 Lease authorized thereunder purported to assure CFLCo, for the duration and subject to the conditions stipulated therein, an exemption from any increase in taxes, rents or royalties or other assessments otherwise payable. Hydro-Québec was not party to the 1967 Lease Act or the 1961 Lease amending agreement.

[49]The sole consideration payable by CFLCo to Newfoundland under the 1961

Lease, as amended, were: (i) “...a (fixed) rental in each year during the subsistence of this Agreement equal to 8 per centum of the net profits of the Corporation as hereinafter defined”28; and (ii) a fixed (non-indexed) “...annual tax at a maximum rate equal to 50 Canadian cents per installed horse power multiplied by the average load factor of the preceding year.”29 [emphasis added]

22Exhibit D-007.

23Exhibit D-065.

24Exhibits P-5 and D-008.

25Ibid., s. 1.

26See footnotes 5, 6 and 7 of Revised Time-Line, Annex II.

27Exhibit D-30, at pp. 8-10.

28S.N. 1961, No. 51 (Exhibits P-5 and D-008); Exhibits P-4, s. 16(1) and D-005, clause 16(1).

29Ibid., clause 17 (1) (c).

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[50]It is to be noted that Hydro-Québec was not a party to the Principal Agreement. The Agreement was signed shortly before Hydro-Québec was even first approached regarding a possible interest in the Churchill Falls project and long before the signature of the Power Contract.

[51]Other than through the payment of the fixed rentals and the 8% royalties due under the respective agreements, neither the Principal Agreement nor the 1961 Lease provide for a sharing, with the Government of Newfoundland, of profits earned by HFPCo (CFLCo) on the sale of power from the Generating Station. Similarly, there is no contractual basis for a sharing of profits with the Government of Newfoundland by a client of CFLCo, such as Hydro-Québec, on the resale by the latter of power emanating from the Generating Station.

C.Events and Exchanges Preceding the Signature of the Letter of Intent of October 13, 1966

[52]Although the hydro-electric potential of the Upper Churchill River had long been recognized, it was only in the early 1960’s that concrete efforts were made to tap its resources.

[53]Writing for the Supreme Court of Canada in Reference re Upper Churchill Water Rights Reversion Act (the “Reversion Act Reference”), McIntyre J. contextualized the situation:

Until the early 1960’s there were two obstacles that stood in the way of developing the water resources of the Churchill River. The first was the problem of transmitting electricity over great distances from the source at Churchill Falls to the nearest market in southern Quebec and the United States without undue loss of power. In the 1960’s a feasible means was developed by engineers of Quebec Hydro-Electric Commission (hereinafter referred to as Hydro-Quebec) using high voltage transmission lines (over 700KV) to transmit electricity over long distances without a substantial loss of power. The second obstacle in the way of Churchill Falls development was financial. In order to finance the project CFLCo had to find a credit-worthy purchaser of its electricity, one that would undertake to purchase electric power on a regular basis whether it was needed or not. 30

[emphasis added]

[54]The analysis of McIntyre J. cited above and to be referred to below is consistent with and supported by the evidence in the present proceedings.

[55]Hydro-Québec had both the requisite technology and was one such “credit- worthy purchaser”.

[56]Preliminary discussions between Brinco and Hydro-Québec took place on March 6, 1961. These discussions materialized on March 23, 1961 in a submission by CFLCo

30[1984] 1 S.C.R. 297, at 303 (Exhibit D-211).

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(HFPCo) to Hydro-Québec of a proposal for the supply of 1 million horsepower of continuous energy for a term of 25 years starting in 1965.31

[57]Hydro-Québec rejected the proposal. In a letter dated May 15, 1961, it advised:

The Commission has decided that, under present economic conditions, it is preferable to go ahead with the development of its own hydraulic resources

on the Manicouagan River. This would, therefore, relegate to a later date the import of energy from Hamilton Falls, if it is still available. 32

[emphasis added]

[58]In the ensuing years, several unsuccessful discussions were pursued between the parties as well as among one or both of them and potential purchasers in Ontario,

New York (Consolidated Edison) and New England regarding the eventual purchase of CFLCo power.33

[59]By July 1964, negotiations had completely broken down and Hydro-Québec resumed work on its other potential sources of power. In a “Déclaration” issued on July

8,1964, Premier Lesage wrote:

C'est dans cet esprit que nous avons considéré les propositions qui nous ont été faites par HFPCo. Après les avoir longuement examinées, nous devons constater qu'il est présentement impossible d’en arriver à une entente.

Le programme d'immobilisations établi par Hydro-Québec, avant même que ne commencent les conversations au sujet des chutes Hamilton, sera poursuivi avec vigueur. L'aménagement complet des rivières Manicouagan et aux Outardes sera terminé. En plus, on activera l'étude des possibilités d'aménagement des rivières de la Baie James, en même temps que celle des coûts comparatifs de l'énergie thermique et de l'énergie nucléaire, afin de faire appel à ces sources d'énergie selon que les facteurs de rentabilité les rendront utiles. 34

[60]Discussions resumed in the spring and early summer of 1965. Draft letters of

intent between HFPCo and Hydro-Québec prepared by one or other of them were exchanged.35 Pending these discussions, Hydro-Québec adjusted its “programme d’équipement” regarding the development of alternative sources of power in Québec. As

reflected in its annual report of 1965, the construction of Manic-3 was “...susceptible d’être différée si les travaux débutaient bientôt aux chutes Churchill.”36

[61]By the summer of 1966, the parties appeared to have agreed upon the elements of an agreement in principle to be embodied in a Letter of Intent, the signature of which

31Exhibit D-070/1 and 2.

32Exhibit D-070/3.

33Exhibits D-010.01 and D-112.

34Exhibit D-139.

35Exhibit D-145/1 to 23 and D-145/24 to 45.

36Exhibit D-024.02.02/22.

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was to be subject to the approval of the Governmental authorities of the respective Provinces.37

[62]The requisite approvals having been received38, on October 13, 1966 the parties signed the Letter of Intent.39

[63]In CFLCo’s Written Argument, counsel refers to the Letter of Intent as having “crystallized the bargain”. He notes:

185.The bargain having been crystallized in the Letter of Intent and both parties being keenly aware that construction could not await the signing of the formal Power Contract, in a quintessential act of good faith and cooperation,

CFLCo began working on the site within fifteen (15) days of the signature of the Letter of Intent.40

[emphasis added]

[64]The characterization of the crystallizing and binding effect of the Letter of Intent is often repeated in CFLCo’s Written Argument and oral arguments. This characterization is disputed by Hydro-Québec.

[65]Although Hydro-Québec acknowledges that substantial amounts were invested prior to the signature of the Power Contract, it disputes that the Letter of Intent had

“crystallized the bargain”.

[66]In this regard, in Hydro-Québec’s Mémoire counsel writes: (The emphasis in the extract below is that of the Court. The original footnotes have been renumbered to follow the sequence in the present judgment. The style and form have been preserved.)

147.Bien qu’il ne s’agisse pas d’un contrat définitif, lequel reste à être négocié et convenu41, la Lettre d’intention, qui prévoit un approvisionnement important et de longue durée, est convenue entre deux

parties sérieuses, qui sont bien engagées dans des discussions devant conduire à un contrat définitif42.

148.Sur la foi de la Lettre d’intention mais avant la signature du Contrat en

mai 1969, CF(L)Co commence à investir des sommes pour entreprendre la construction de la Centrale, dépensant environ 132 millions de dollars entre la signature de la Lettre d’intention et la signature du Contrat. Pendant cette même période, Hydro-Québec interrompt et reporte des projets et contribue au total une somme de 115 millions de dollars aux fonds disponibles de CF(L)Co43. Comme

37Exhibits D-165 and D-160.

38Exhibits D-167 and P-16.

39Exhibit D-016.

40CFLCo’s Written Argument, at para. 185.

41La prétention de CF(L)Co à l’effet que la Lettre d’intention « crystallized the bargain » ne repose pas sur la preuve : paragraphe 185 des Notes et autorités de CF(L)Co.

42Témoignage de T. Vandal, 28 oct. 2013, p. 209, l. 15 à p. 210, l. 4.

43Témoignage de T. Vandal, 29 oct. 2013, p. 150, l. 19 à p. 159, l. 16; témoignage de R. Boyd dans l’Action des 800 MW, pièce D-206, pp. 85 et 86; pièces D-274.01, p. 9, D-274.02, p. 8, D-274.03, p. 8, D-22 et D-23. Il est à noter que dans ses Notes et autorités, CF(L)Co réfère aux dépenses engagées

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l’explique M. Vandal, « les parties s’engageaient de plus en plus, de façon de plus en plus importante ensemble »44.

[...]45

[67]The Court will address in greater detail in Sub-sections XI. A. and B. below, the nature and extent of the obligations assumed by the parties under the Letter of Intent and under the Power Contract.

D.Evolving Demands of the Project and of the Financial Institutions During the Intervening Period Between Signature of the Letter of Intent and the Power Contract

[68]In the intervening period between the signature of the Letter of Intent in 1966 and that of the Power Contract in 1969, there were several determinative developments which necessitated further negotiations between the parties and modifications to what

CFLCo contends was the “crystallized bargain”. Serious projected cost overruns and resulting difficulties in securing financing for the project required Hydro-Québec to assume certain additional responsibilities and financial risks not originally contemplated.

[69]Testifying on behalf of Hydro-Québec in first instance in the Recall Action (hereinafter defined) regarding discussions between the parties during the intervening period in question, Robert Boyd who was in charge of the negotiations recalled:

Well, there is quite a difference between a Letter of Intent and a firm agreement, especially when you talk about financing. The great problem was financing the project and this is what took the greatest part of the period between October the 13th, ’66 and, I think it is, May 1969, when the contract was signed…

[...]

Other points were discussed also which are something like, for instance, adding an eleventh unit and also the extension of the contract for a 25-year period. I don't remember all of them, but there were a number of things that we had to discuss in that period.46

[70]Boyd’s recollections of the issues which arose following the signing of the Letter of Intent are corroborated by the evidence in the record in the present proceedings.

[71]The evolution of discussions between the parties to address the new demands of the Project and those of the financial institutions involved in providing the necessary capital are described in the following extract of the Minutes of a Joint Meeting of the Executive Committees of the Boards of Directors of Brinco and CFLCo held on April 10, 1968.

par CF(L)Co mais passe sous silence le fait que c’est Hydro-Québec qui a contribué 115 des 132 millions de dollars dépensés : paragraphe 187 des Notes et autorités de CF(L)Co.

44Témoignage de T. Vandal, 28 oct. 2013, p. 199, l. 4 à p. 200, l. 13 et p. 210, l. 5 à p. 213, l. 1 et 29 oct. 2013, p. 5, l. 12 à p. 10, l. 4; pièce D-274.01, p. 4.

45Mémoire, at paras. 147-149.

46Exhibit D-206/83.

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b)The Power Contract

Mr. McParland emphasized that there had been three fundamental changes in the deal since the signing of the Letter of Intent. These were :

(i)The cost of the project was now estimated to exceed $900 million, whereas the estimate in 1966 was in the range of $800-850 million. As a consequence of this, the power price was substantially higher. The savings which Hydro-Quebec envisaged as a result of their buying Churchill power versus development of their own projects were not as substantial. Moreover, their transmission line costs alone were now estimated at $569 million versus $400 million in 1966.

(ii)They had been asked and had agreed to give an unlimited completion guarantee, which was deemed an essential factor to the financing.

(iii)The financial mix was vastly different than that contemplated in 1965 and 1966 and particularly the bridging position was extended.

Arising from recent negotiations, there were five points which Hydro-Quebec insisted upon. In presenting these five points to the meeting, Mr. McParland reported that the demands of Hydro-Quebec in this regard had been substantially reduced from those originally presented; that each of the points had been discussed extensively; and that Hydro-Quebec's position in respect thereto was very firm.

The points were as follows:

1.Renewal of the contract

Hydro-Quebec wished to be able to project a lower mill rate than the present draft of the contract permitted. Due to increased costs and escalation the effect of the present term of 44 years from first delivery or 40 years from completion indicated an average mill rate considerably in excess of that contemplated in 1966. Accordingly, they had requested a 25 year extension of the contract on a flat mill rate basis suggested at two mills per kilowatthour. They wished this to be in the form of an option. This would produce a gross revenue of $60-65 million per annum. There would be no debt outstanding. Should CFLCo attempt to qualify the rate by the addition of escalators or make any provision for its tax position, the purpose of the extension would be defeated. Although the Churchil [sic] project was marginally more attractive then [sic] nuclear power today, it was conceivable that it would not be in 40 years’ time. It was obvious that a commitment on the extension was preferable to an option and it also appeared desirable to endeavour to have the mill rate expressed in either U.S. or Canadian funds at the option of' CFLCo in order to afford the greatest protection against serious devaluation of the Canadian dollar. [...]

[...]

Mr. McParland informed the meeting that in respect to the above-mentioned matters, although considerable negotiations had taken place, no commitment had been made to Hydro-Quebec, nor was Hydro-Quebec able to be absolutely firm on these points.

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The meeting unanimously endorsed the positions taken by the negotiating team as outlined to the meeting and authorized them to proceed to conclude the negotiation of the Power Contract accordingly.47

[72]The Minutes of a subsequent Joint Meeting of the Executive Committees of the Boards of Directors of Brinco and CFLCo held on May 14, 1968, reflect the nature and extent of the ongoing negotiations between the parties. Copies of an April 29, 1968 draft of the Power Contract which addressed the five points previously raised by Hydro- Québec were distributed to those present. The meeting was told that the draft was to be

subject to approval by the Québec cabinet and possible compliance with other legal or procedural requirements.48

[73]Following a review of the Hydro-Québec April 29, 1968 draft and of other related agreements, the Executive Committees of both Brinco and CFLCo approved their execution on behalf of each of the corporations.

[74]The members of the Executive Committees participating in these deliberations were: Messrs Val Duncan, Henry Borden, Maurice Bourget, Donald Gordon, Sam Harris, D.J. McParland, M.F. Nicholson, E.L. de Rothschild and A.S. Torrey, all

experienced business executives representing the multi-national shareholder corporations of Brinco.49

[75]The events which followed are described by Hydro-Québec in counsel’s Mémoire. The description is supported by the evidence cited. Although CFLCo disagrees with the characterization of the evidence by Hydro-Québec, the evidence, as such, is not seriously contested. (The emphasis in the extract below is that of the Court. The original footnotes have been renumbered to follow the sequence in the present judgment. The style and form have been preserved.)

172.À l’été 1968, après que les négociations relatives à la clause de reconduction aient été complétées, Hydro-Québec, avec l’autorisation du gouvernement du Québec, donne son accord à la conclusion du Contrat,

conditionnellement à ce que CF(L)Co obtienne le financement nécessaire pour le projet50. À l’été 1968, CF(L)Co approuve également le Contrat51.

173.En donnant son accord à la conclusion du Contrat, Hydro-Québec

accepte d’assumer la quasi-totalité des risques de développement du projet du Haut Churchill52, par le truchement d’importantes garanties nécessaires au financement du projet, dont une garantie « Take or Pay », une garantie de parachèvement des travaux, une garantie relative aux

47Exhibit D-033/4, 5, 8 and 9.

48Exhibit D-278.

49See Exhibits D-368.00 to D-368.19 for a biographical description of the individuals in question.

50Pièce D-181.

51Pièces D-278 et D-182; témoignage de T. Vandal, 29 oct. 2013, p. 145, l. 14 à p. 148, l. 24.

52M. Dalton reconnaît qu’Hydro-Québec « absorbed many of the risks associated with the development of the Churchill Falls project. » : témoignage de J. Dalton, 30 sept. 2013, p. 66, l. 22 à p. 67, l. 1 et p. 68, l. 3 à l. 25. Voir aussi le rapport de C. Lapuerta, pièces D-270, par. 20 et 22, D-286 et D-286A.

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exigences du service de la dette et des dépenses, une garantie relative aux fluctuations du taux de change et une garantie relative aux fluctuations des taux d’intérêt.

174.M. Martin a admis que « the pricing terms of the Power Contract

reflected, among other things, the risks that Hydro-Québec assumed under this contract »53.

175.L’accord d’Hydro-Québec à la conclusion du Contrat est déterminant

dans l’obtention par CF(L)Co du financement nécessaire au projet de développement du Haut Churchill54, lequel, pour citer M. Mercer, « would not have happened without them [Hydro-Québec] »55.

176.Afin de mettre en place le financement requis, CF(L)Co envisage procéder à la vente d’obligations portant première hypothèque représentant

500 millions de dollars américains et 50 millions de dollars canadiens. Un

«offering memorandum » très détaillé est préparé par les conseillers financiers de CF(L)Co, Morgan Stanley56.

177.Pour que les obligations puissent être vendues, outre l’accord d’Hydro- Québec à la conclusion du Contrat, il est exigé que CF(L)Co ait préalablement en mains au moins le tiers de cette somme, soit au moyen de souscriptions à

son capital-actions, soit au moyen d’obligations prenant rang après les obligations portant première hypothèque57.

178.Afin de permettre à CF(L)Co de satisfaire à cette exigence préalable, Hydro-Québec accepte d’injecter 115 millions de dollars dans le projet58.

179.Le 25 juillet 1968, Hydro-Québec investit 15 millions de dollars dans le

capital-actions de CF(L)Co, portant celui-ci à environ 83 millions de dollars et sa propre part à 25,7 %59 et accepte de s’engager à acquérir, sur offre de CF(L)Co,

pour 100 millions de dollars en obligations portant hypothèque générale de CF(L)Co60. L’offre de CF(L)Co est présentée en novembre 1968, déclenchant l’obligation d’Hydro-Québec d’acquérir lesdites obligations61. Les sommes y reliées sont déboursées par Hydro-Québec entre décembre 1968 et juin 196962.

180.En octobre 1968, forts de ces engagements et de l’accord d’Hydro-Québec à la conclusion du Contrat, les courtiers de CF(L)Co mettent en

vente les obligations portant première hypothèque sur les marchés américain (500 millions de dollars américains) et canadien (50 millions de dollars)63.

53Témoignage au préalable de E. Martin, pièce D-251B, pp. 5 et 6.

54Pièces D-18, D-19, D-20, D-21, D-193, p. 19 et D-203, p. 8.

55Témoignage au préalable de D. Mercer, pièce D-252, p. 20.

56Pièce D-24.

57Pièce D-181, p. 10.

58Voir notamment pièce D-181, p. 12.

59Pièce D-182.2.

60Pièce D-22.

61Pièce D-23.

62Pièces D-23.1 et D-23.2.

63Pièce D-24.

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E.The Power Contract of May 12, 1969

[76]The Power Contract was formally signed effective May 12, 1969, although agreed to sometime before. In addition to the provisions dealing with the supply of power by CFLCo and the payment therefore by Hydro-Québec and as required by the financial institutions involved in the financing of the Project, Hydro-Québec agreed to provide certain financial guarantees and to assume additional financial and operational risks associated with the Project.

[77]McIntyre J. summarized the salient elements of Power Contract in the Reversion Act Reference. His summary is supported by the evidence in the record in these proceedings.

[...] It is a lengthy and detailed document. Under the contract CFLCo agreed to supply and Hydro-Quebec agreed to purchase virtually all of the power produced at Churchill Falls for a term of forty years, which was renewable [sic] [at the option of Hydro-Quebec]64 for a further term of twenty-five years. The price to be paid for the electricity was to be based on the final capital cost of the project. Provision was made for CFLCo to retain a fixed amount of power for use within Labrador by its subsidiary Twin Falls Power Corporation. In addition CFLCo could recall on three years’ minimum notice up to 300 megawatts (MW) to meet the needs of the Province of Newfoundland.

The importance of the relationship between CFLCo and Hydro-Quebec to the success of the Churchill Falls development is made evident by a reading of the Power Contract. Each party was to be responsible for the construction of transmission lines on its side of the Quebec-Labrador boundary. To ensure compatibility of the two systems, the

[Page 306]

contract provided that transmission lines and related facilities were to be built according to Hydro-Quebec’s specifications. Hydro-Quebec was given a supervisory role over CFLCo with respect to maintenance of the development and also acquired the right to operate the plant in the event of CFLCo’s failure to do so. For its part Hydro-Quebec agreed to make funds available for the completion of the project over and above the $700 million to be raised by CFLCo in exchange for mortgage security. If CFLCo lacked the funds necessary to meet debt service payments, Hydro-Quebec agreed to advance the necessary monies in exchange for debentures and shares of CFLCo. The Quebec utility also agreed to pay the difference between six per cent and any greater rate of interest payable by CFLCo on its obligations. Although Hydro-Quebec owns only 34.2 per cent of the issued shares of CFLCo (the remaining 65.8 per cent owned by Newfoundland and Labrador Hydro, a Newfoundland Crown corporation), a voting trust arrangement provides that no substantial changes in the financial or other obligations of CFLCo can be made without the consent of 75 per cent of the shareholders.

64Inadvertent reading of the Power Contract.

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The Power Contract also provided that it would be governed and interpreted in accordance with the laws of Quebec and that only the courts of Quebec would have jurisdiction to adjudicate disputes under the Power Contract, subject to ordinary appeal rights and procedures.65

[emphasis added]

[78]The rights and obligations of the parties under the Power Contract, in particular the respective risks assumed and corresponding benefits obtained, will be discussed in greater detail in Section X below in the Court’s analysis of the expert evidence of

Messrs. Dalton and Lapuerta.

F.Prior Litigation and Historical Grievances of Newfoundland and of CFLCo in Connection with the Principal Agreement, the Lease Act and the Power Contract

[79]CFLCo contends that the prior litigation is of historical interest only and is not relevant to the relief sought in the present proceedings. Counsel argues:

While the backdrop is similar, this case is between different parties and it raises different legal and factual issues that involve the specific application of Quebec civil law to the Power Contract. These issues have never been addressed by a court.66

[80]Counsel for the respective parties addressed the principles of res judicata applicable to this matter and provided jurisprudential authority in support of their respective pretentions.

[81]The Court accepts that the conclusions of fact and of law contained in the previous judgments emanating from the courts of Newfoundland and of Québec as well as from the Supreme Court of Canada, in both the Recall Case and the Reversion Act Reference, may not necessarily have the authority of res judicata with respect to the issues raised for determination in the present proceedings. Similarly, the findings of fact and of law as reflected in the judgments relating to the “Final Capital Cost” of the Generating Station and the determination of the resulting mill rate payable by Hydro- Québec under the Power Contract may not necessarily bind the Court in these proceedings.

[82]Nevertheless, and to the extent supported by the evidence in this Court record, the analysis and characterization of the facts by the lower Courts and by the Supreme Court of Canada in deciding the issues raised for determination in the previous proceedings are relevant and of assistance to this Court in contextualizing the subject matter and the object of the relief now sought by CFLCo.

[83]Accordingly the judgments in question will be admitted in evidence for the purpose only of corroborating and complementing the evidence in this Court record.

65[1984] 1 S.C.R. 297, at 305-306 (exhibit D-211).

66CFLCo’s Written Argument, at para. 369.

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They may assist the Court in placing in context and providing background against which the evidence as to the intentions, expectations and underlying motives of the respective parties, both prior to and following the execution of the Power Contract, can be assessed and determined.

(1)The Recall Case

[84]In a letter dated January 6, 1976, NLH formally requested Hydro-Québec to

make available to it a total of 600 MW of power from the Generating Station in addition to the Recall Block of 300 MW already contemplated in the Power Contract.67 Hydro- Québec declined. In a letter dated January 30, 1976, it advised NLH: “...it is practically

impossible for us to face a reduction of 600 MW from our generating capacity without considering a possible modification in our planning and/or our construction program.”68

[85]On May 18, 1976, Frank D. Moores, Premier of Newfoundland wrote to Robert

Bourassa, Premier of Québec. By then, NLH’s request had increased to 800 MW. He informed Premier Bourassa, in a rather menacing tone:

... I am advising you that unless we receive a favourable response by Monday, May 31st, 1976., to our request for an additional 800 megawatts of power by 1982, without prejudice to any other rights we have, and at the same costs as are paid by Hydro-Quebec, I shall have no alternative but to terminate all work on the transmission lines and tunnel and to announce institution of the necessary steps to seek clarification of our legal rights, by appropriate Court action.

As I have stated earlier, it is still my hope that this matter can be resolved in an equitable and fair manner, without recourse to the Courts. I am also mindful of the fact that any prolonged period of litigation could be harmful. Once any right of access is established, the Province could conceivably eventually take the entire output of Churchill Falls. I am, however willing to negotiate regarding this Province's right of access to Churchill Falls power with a view to a fairer apportionment of the benefits to both Quebec and Newfoundland.69

[emphasis added]

[86]It is significant that Premier Moores refers “...to a fairer apportionment of the benefits to both Quebec and Newfoundland” from the Churchill Falls project accruing to the Province of Newfoundland and not to CFLCo. As will be seen further in this judgment, this concept of “...a fairer apportionment of the benefits”, is a recurrent theme of the Government of Newfoundland, with many refrains. It has its genesis in the early 1970’s following a change in government and has re-surfaced repeatedly in the on-going disputes among the various interested parties, during the years that followed, this time and in these proceedings through the intermediary of CFLCo.

67Exhibit D-036/1 and 2.

68Exhibit D-036/3.

69Exhibit D-036/8.

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[87]Premier Bourassa responded to Premier Moores on May 25, 1976 advising that

he considered Newfoundland’s claim unfounded but that he was prepared to consider any reasonable proposal which served the best interests of both Provinces.70

[88]It would appear, the parties failed to reach an agreement regarding Premier

Moores’ demands.

[89]On August 6, 1976, the Executive Council of Newfoundland adopted Order-in-

Council No. 1001-’76 ordering CFLCo to supply NLH a total of 800 MW of power commencing October 1, 1983 (the “Recall Order-in-Council”).71

[90]CFLCo declined to comply with the Recall Order-in Council. In a letter dated August 31, 1976, CFLCo advised the Hon. John C. Crosbie, Minister of Mines and Energy:

By reason of the limitations on the amount of power that can be withheld from Hydro Quebec under the existing provisions of the Power Contract, however, we are unable to satisfy in full from power generated at the Company's existing facilities at Churchill Falls the Government's request for the delivery of 800 megawatts commencing on October 1, 1983. We are furthermore advised by counsel that meeting the terms of such request with power generated at the existing plants would constitute a default by CFLCo under both the Power Contract and the First Mortgage Trust Deed. Such a default would, among other things, entitle the bondholders to demand immediate payment of the more than $500 million of First Mortgage Bonds now outstanding and would have other consequences that we do not believe would be in the best interests of the Company, its shareholders or the Province.72

[91]Seeing CFLCo’s refusal to respect the Recall Order-in Council, the Government of Newfoundland sought relief before the Courts of that Province and Hydro-Québec sought a declaratory judgment on the same matter before the Courts of Québec.

(a)Before the Courts of Newfoundland

[92]On September 13, 1976, the Government of Newfoundland instituted proceedings against both CFLCo and Hydro-Québec before the Newfoundland Supreme Court Trial Division. It sought declaratory relief based upon its alleged

entitlement, under the 1961 Lease Act and the signed Lease appended thereto, to receive the 800 MW of power requested (the “Recall Case”).73

[93]By judgment dated June 13, 1983, Goodridge J. concluded: “...the Government is unsuccessful. It is not entitled to the relief which it claims.”74

70Exhibit D-036/10.

71Exhibit D-037.

72Exhibit D-038/2.

73Exhibit D-039.

74Newfoundland (Attorney General) v. Churchill Falls (Labrador) Corp., [1983] N.J. No. 142 (QL) at para. 1268 (Nfld. SCTD) (Exhibit D-042).

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[94]On October 25, 1985, the Supreme Court of Newfoundland - Court of Appeal dismissed the Government’s appeal.75 Certain passages of Mifflin C.J.N.’s, reasons for judgment warrant reproduction. They are relevant to and are supported by the evidence in the Court record in these proceedings.

There can be no doubt that the Government of the day participated in the negotiations leading up to the execution of the Power Contract and that the provision therein for the "recapture" of 300 megawatts of power was negotiated to take care of the future requirements of the Government.76

[...]

The Government of the day was fully aware of this deal. Thus, despite any protestations to the effect that the Government was not a party to the Power Contract and therefore not bound by it, it is clear that the Government was fully consulted on and fully cognizant of its contents. The ultimate results of the business deal, be they favourable or unfavourable cannot affect the Court's decision.77

[emphasis added]

[95]On June 9, 1988, the Supreme Court of Canada dismissed the Government of

Newfoundland’s appeal. 78 The Court concluded:

We are all of the view that the Trial Division of the Supreme Court and the Court of Appeal have both arrived, albeit by different routes, at the correct construction of Clause 2(e) of Part I of the Lease executed and delivered pursuant to The Churchill Falls (Labrador) Corporation Limited (Lease) Act, 1961, S.N. 1961, c.51.

(b)Before the Courts of Québec

[96]On May 27, 1977, while the Recall Case was still before the Courts of Newfoundland, Hydro-Québec instituted an action before this Court by way of Motion for

Declaratory Judgment regarding the extent of CFLCo’s obligation to supply power to

Hydro-Québec under the Power Contract.79

[97]In a judgment dated August 4, 198380, Beauregard J. declared that the failure by CFLCo to sell to Hydro-Québec all of the power produced by the Generating Station, subject to permissible “Recapture” as defined in Section 6.6 of the Power Contract would constitute a breach.

75Newfoundland (Attorney General) v. Churchill Falls (Labrador) Corp., [1985] N.J. No. 80 (QL) (Nfld. C.A.) (Exhibit D-313).

76Ibid., at p. 5 (Exhibit D-313/5).

77Ibid., at p. 6 (Exhibit D-313/6).

78Newfoundland (Attorney General) v. Churchill Falls (Labrador) Corp., [1988] 1 S.C.R. 1085 (Exhibit D- 216).

79Exhibit D-041.

80Hydro-Québec c. Churchill Falls (Labrador) Corporation Limited (4 août 1983), Montréal 500- 05011130-778 (C.S.) (Exhibit D-043).

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[98]By judgment dated February 18, 198581, the Québec Court of Appeal dismissed the CFLCo appeal from the Beauregard J. judgment. The following extract of the reasons for judgment of Kaufman J.A. bear reproduction. It assists in placing in context, the relief now sought by CFLCo in the present proceedings. His views are relevant to and are supported by the evidence in the Court record in these proceedings.

Hydro-Québec was not a party to the Lease between the Appellant and the Government of Newfoundland; Newfoundland was not a party to the Power Contract entered into between the Appellant and the Respondent. The Appellant, however, was a party to both, and it must, therefore, be presumed that it signed

the second agreement — the Power Contract — with full knowledge of the contents of the Lease.

As the trial judge noted, CFLCo.,

étant partie au bail, ... ne pouvait ... ignorer que le Gouvernement de

Terreneuve était en mesure de réclamer éventuellement toute l'énergie qu'il pouvait avoir besoin pour sa propre consommation. CFLCo se retrouvait donc dans l'alternative suivante: où alors elle avait l'assentiment du Gouvernement de Terreneuve (ce qui semble le cas, bien que la Cour n'ait pas à statuer sur ce point) ou n'ayant pas obtenu l'autorisation du Gouvernement, elle a commis une imprudence importante en s'étant commise envers deux personnes différentes à la fois pour la même quantité d'énergie: une clause de force majeure ne peut sûrement point relever CFLCo de son propre défaut, ayant agi de propos délibéré.

[99]CFLCo appealed the February 18, 1985 Court of Appeal judgment to the Supreme Court of Canada. By judgment dated June 9, 1988, the Court dismissed CFLCo’s appeal. The Court concluded:

In view of the judgment handed down today in Newfoundland (Attorney General) v. Churchill Falls (Labrador) Corp., [1988] 1 S.C.R. 1085, this appeal is moot.82

(2)The Upper Churchill Water Rights Reversion Act Reference

(“Reversion Act Reference”)

[100]On December 17, 1980, the Government of Newfoundland enacted The Upper

Churchill Water Rights Reversion Act, the Act No. 40 of the Statutes of Newfoundland, 1980, (the “Reversion Act”).83

[101]The contextual background to the Reversion Act is described in a memorandum published by the Government of Newfoundland dated November 21, 1980, entitled:

“The Energy Priority of Newfoundland and Labrador: Fairness and Equity in the

81Churchill Falls (Labrador) Corporation Limited c. Hydro-Québec, J.E. 85-255 (C.A.) (Exhibit D-312).

82Exhibit D-314.

83N.S. 1980, No. 40.

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Utilization of The Churchill Falls Hydro Resource” (the “Memorandum”).84 The following extract succinctly reflects the Government’s perspective at the time, and presumably to this day as expressed through CFLCo, of the issues raised for determination in these proceedings. It helps shed light on and place in historical perspective, the level of dissatisfaction of the Government of Newfoundland, initially not necessarily that of CFLCo, regarding both the Lease Act and the Power Contract. It describes the Government’s motives in enacting both the Recall Order-in-Council and the Reversion Act, the latter due to what the Government claimed, at the time, were the “...unpredictably lengthy and inadequate...court actions which have been underway since 1976:”

The legal basis upon which CFLCo developed the Churchill Falls generating site is contained in a 1961 Lease between CFLCo and the Government of Newfoundland and Labrador (the "Government"). The Lease specifically provides that the consumers of electricity of Newfoundland be given priority to the output of the plant. Since 1976, the Province has been attempting to access 800 MW of power from Churchill Falls under this provision of the Lease but has encountered legal obstacles. Hydro-Quebec claims, despite this provision of the Lease, the right to virtually all of the power from Churchill Falls in accordance with a 65 year Power Contract it entered into with CFLCo in 1969.

The Government deems it necessary and essential that it be permitted to exercise its legal rights under the Lease. The Government has concluded that agreement with Hydro-Quebec is unachievable and that court actions which have been underway since 1976 are unpredictably lengthy and inadequate for the purpose of meeting urgent requirements to access Churchill Falls power on a timely basis. As a consequence, the Government is left with no option but to initiate alternative legal proceedings to bring about an early resolution of the matter.

On November 21, 1980, the Government therefore introduced legislation into the Provincial House of Assembly to provide for repeal of The Churchill Falls (Labrador) Corporation Limited (Lease) Act, 1961 and for the reversion to the Province of the rights and liberties leased or granted to CFLCo under the Lease. The legislation provides that it will come into force on a day to be fixed by proclamation but not prior to the exhaustion of all rights of appeal in the courts by affected parties.85

[...]

The foregoing financial estimates have been included here to illustrate the harsh inequity created by the Power Contract since 1972. This inequity will clearly magnify to unconscionable proportions and amounts over the remaining 61 years of the Power Contract. It is this very Power Contract which Hydro-Quebec is using to deny Newfoundland's right to access 800 MW of Churchill Falls power at this time. The increasing inequity of the Power Contract adds impetus to the

Government's determination to reach a resolution to its right of access.

84Exhibit D-203.

85Ibid., at D-203/3 p. 3.

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Such access would only begin to reduce the inequity and to move towards a fair and equitable utilization of the Churchill Falls resource.86

[emphasis added]

[102]It is noteworthy or perhaps only coincidental that the Memorandum chose to refer to: “...the harsh inequity created by the Power Contract since 1972.” As is indicated in the

Churchill Falls Timeline (Annex II), it was on January 18, 1972 that: “Smallwood’s Liberal

Government in Newfoundland falls to Frank D. Moores’ Progressive Conservatives.”

[103]Although the Government cites the refusal of CFLCo and Hydro-Québec to comply with the Recall Order-in-Council as one of the reasons for enacting the Reversion Act, it is to be recalled that the Reversion Act was enacted on December 17, 1980, long before the June 13, 1983 judgment had even been rendered in first instance in the Recall Case and before that of the Supreme Court of Canada of June 9, 1988. It is also to be recalled that, although there were exchanges and threats of reprisals of an economic nature between the respective premiers of the provinces, it was CFLCo and not Hydro-Québec that ultimately refused to comply with the Recall Order-in-Council.

[104]On March 5, 1982, following a reference by the Lieutenant-Governor in Council to the Newfoundland Supreme Court – Court of Appeal regarding the constitutional validity of the Reversion Act, the Court of Appeal declared the Act intra vires the powers of the Province.87

[105]CFLCo, Hydro-Québec, the Attorney General of Québec, Royal Trust Co. and General Trust of Canada, (the latter two each representing, as trustee, the holders of bonds issued by CFLCo), appealed the Court of Appeal decision to the Supreme Court of Canada. The appeal was heard between September 28 and October 1, 1982. Upon conclusion of oral argument, judgment was reserved by the Court.

[106]On August 26, 1983, counsel for the Attorney General of Newfoundland, with the consent of all the Appellants, wrote to the Registrar of the Supreme Court of Canada advising that: “The Governments of Newfoundland and Quebec have very recently agreed that

negotiations be commenced to attempt to settle the issues involved in this appeal” and asking that the Court defer judgment until December 31, 1983.88

[107]At the request of counsel for the Attorney General of Newfoundland with the

consent of all of the Appellants, the request for a deferral was granted and was subsequently extended by consent until March 31, 1984.89

[108]On February 1, 1984, after months of protracted negotiations, NLH and Hydro-

Québec signed a document entitled “Statement of Intent” (the “Statement of Intent”)90

86Ibid., at D-203/10.

87Reference re: Upper Churchill Water Rights Reversion Act (Nfld.), [1982] N.J. No. 8 (QL) (Nfld. C.A.) (Exhibit D-311).

88Exhibit D-336/1.

89Exhibits D-336/3 and D-336/5.

90Exhibit P-9.

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wherein they described the general framework within which further without prejudice negotiations would continue in the hope of resolving their various disputes. The Statement of Intent was the culmination of several exchanges of earlier drafts prepared by one or other of the parties and commented on by the opposing party.91

[109]Hydro-Québec objects to the admissibility in evidence of the Statement of Intent on the grounds of settlement privilege. The Court will address the Statement of Intent and the merits of this objection in Sub-sections IV. I. and VI. C. below.

[110]Further negotiations were pursued for a short period of time following the

signature of the Statement of Intent. On March 23, 1984, Hydro-Québec delivered to CFLCo, a without prejudice proposal for a comprehensive offer of settlement92. CFLCo did not respond to the offer. The Hydro-Québec offer of settlement would be later described, on May 18, 1984, by the Honourable William Marshall, President of the

Council and Minister responsible for energy of Newfoundland, “...as amounting to no more than a token gesture”.93

[111]On March 27, 1984, counsel for the Attorney General of Newfoundland advised the Registrar of the Supreme Court of Canada that negotiations failed to achieve a

settlement, that he does not intend to seek a further extension of time and that accordingly he awaited delivery of judgment.94

[112]The Supreme Court of Canada rendered its judgment in the Reversion Act Reference, on May 3, 198495. Writing for the Court McIntyre J. found:

...that the pith and substance of the Reversion Act is to interfere with the rights of Hydro-Quebec outside the territorial jurisdiction of Newfoundland, it is my opinion that the Act, taken as a whole, is ultra vires of the Legislature of Newfoundland. Question 9 of the Reference must be answered accordingly. It therefore becomes unnecessary to answer the other eight questions.96

[113]He concluded:

The appellants argued that the Reversion Act is colourable legislation aimed at the Power Contract. In support of this argument reference was made to the extrinsic evidence which has already been mentioned. That part of the evidence which I have held to be reliable and therefore admissible indicates the true purpose and intent of the Act. Newfoundland attempted to recall more power than was provided for in the Power Contract, first by a request to Hydro-Quebec and then to the Quebec Premier. These attempts failed. A demand to CFLCo by

91Exhibits D-350, D-351 (two versions), D-352 (two versions) and P-9. The evolution of the language of the various drafts is reflected in a Table prepared by Hydro-Québec for cross-examination of Victor Young, produced as Exhibit D-371. All of these exhibits were produced under reserve of Hydro-

Québec’s objections regarding the privileged nature of the Statement of Intent.

92Exhibit D-045.

93Exhibit D-213/3.

94Exhibit D-336/6.

95[1984] 1 S.C.R. 297 (Exhibit D-211).

96Ibid., at 335.

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Order in Council was also refused. A whole section of the government pamphlet, “The Energy Priority of Newfoundland and Labrador”,97 deals with the price paid by Hydro-Quebec for Churchill Falls power under the Power Contract and the benefits realized by Hydro-Quebec from its investment.

[...]

Another section is entitled, “Newfoundland’s Case for Fairness and Equity”, and outlines Newfoundland’s attempt to renegotiate the Power Contract in terms of both price and Newfoundland’s access to Churchill Falls power.

Even the Reversion Act itself provides for compensation to shareholders and creditors directly, rather than the CFLCo, thus depriving the company of any assets upon which recovery by Hydro-Quebec for breach of the Power Contract could be effected. As soon as the Reversion Act came into force, Hydro- Quebec’s right to receive power according to the terms of the Power Contract would be effectively destroyed. Even if the flow of electricity to Quebec continued at the same rate and for the same price after the coming into force of the Act, it would then be in the form of a privilege rather than an enforceable right. All of this, in my opinion, points to one conclusion: the Reversion Act is a colourable attempt to interfere with the Power Contract and thus to derogate from the rights of Hydro-Quebec to receive an agreed amount of power at an agreed price.98

[emphasis added]

G.The Amendments to the Hydro-Québec Act99 of 1981 and 1983

(1)The 1981 Amendment

[114]On December 19, 1981, the Assemblée Nationale du Québec adopted An Act to Amend the Hydro-Québec Act100 (the “1981 Amendment”). The objects of the 1981 Amendment are described in the Notes explicatives prefacing the French language text of the 1981 Amendment.

Ce projet de loi a pour objet de modifier la Loi sur Hydro-Québec afin principalement :

1.de doter Hydro-Québec d’un fonds social autorisé de 5 000 000 000 $, divisé en 50 000 000 d’actions d’une valeur nominale de 100 $ chacune;

2.de prévoir que les actions de la Société font partie du domaine public du Québec;

97Previously cited as Exhibit D-203.

98Supra note 95 at 332 and 333.

99R.S.Q., c. H-5.

100S.Q. 1981, c. 18 (Exhibit D-377/1).

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3.d’imputer le total des réserves101 de la Société au 31 décembre 1980 au paiement totale de 43 741 090 actions attribuées au ministre des Finances;

4.de déterminer les mécanismes de déclaration et de paiement du dividende sur les actions afin de respecter des exigences de couverture d’intérêt et de capitalisation.

[...]

[115]Section 6 of the 1981 Amendment amended Section 22 of the Hydro-Québec Act so as to read:

Object to supply power

22.The object of the Corporation is to supply power to the municipalities,

industrial or commercial undertakings and citizens of Quebec.

[formerly“...the lowest rates consistent with sound financial administration.”] 102

Rates and conditions.

The rates and conditions upon which power is supplied must be consistent with sound financial management.

The rates and conditions shall be fixed by by-law of the Corporation for each category of customers or determined by special contracts between the Corporation on the one hand and municipalities, electricity cooperatives or industrial or commercial undertakings, as the case may be, on the other. Such by-laws and contracts are subject to the approval of the Government.

[emphasis added]

[116]Hydro-Québec contends the removal of the words “...at the lowest rates” from Section 22 of the Hydro-Quebec Act was of no consequence to the method by which it negotiated its contracts with its suppliers of energy. At all times regardless of the wording of Section 22, as it may have existed from time to time, not surprisingly, Hydro-

Québec sought to obtain its supply of energy under the best conditions and at the lowest price possible.103 This practice is not unusual in the commercial world and moreover is uncontradicted by the credible evidence.

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(2)The 1983 Amendment

[117]On June 22, 1983, the Assemblée Nationale du Québec once again adopted An

Act to Amend the Hydro-Québec Act and the Act Respecting Exportation of Electric Power104 (the “1983 Amendment”).

[118]Section 15 of 1983 Amendment further amended Section 22 of the Hydro- Québec Act by removing the previously existing limitations (with exceptions) to the markets supplied by Hydro-Québec to only Québec and by broadening its mandate. The re-amended Section thus read:

Objects

22.The objects of the Corporation are to supply power and to pursue endeavours in energy-related research and promotion, energy conversion and conservation, and any field connected with or related to power or energy.

[119]The 1983 Amendment came into effect shortly after the coming on-stream of Phase 1 of the James Bay facilities. However, Hydro-Québec’s previous projections as to the anticipated demand were seriously overestimated and accordingly, it was expected there would be a surplus of energy and an inadequate domestic demand for some time. This situation had serious adverse effects on the financial condition of Hydro-Québec and on the planned construction of future generating stations.

[120]To address this situation, Hydro-Québec adopted a “plan d’action” involving two strategies: (i) an increase over the short to medium term of exports over existing transmission facilities in order to absorb the excess energy flowing from Phase 1 of James Bay, and (ii) the acceleration in the construction of already planned generating stations, and the signature of long term contracts with neighbouring markets to absorb the surplus energy so produced. The 1981 Amendment and the 1983 Amendment assisted in realizing these strategies.

[121]The evidence regarding the implementation of this “plan d’action” and the relative success or failure of this strategy is cited and analyzed in Counsel’s Mémoire d’Hydro- Québec at pages 80 and following. Certain extracts, with the references to the corresponding testimony of the witnesses in question are reproduced below. (The language and numbering of the original footnotes in the cited passages referring to the testimony of the various witnesses and the exhibits produced in evidence have been modified, solely to follow the sequencing in this judgment.)

295.En réponse à la seconde stratégie, qui avait été mise de l’avant en 1982,

l’amendement de 1983 est proposé par le gouvernement pour

«régulariser la situation, c’est-à-dire l’ampleur nouvelle que prenaient les

exportations, ainsi que la proposition d’Hydro-Québec de devancer des équipements pour continuer à exporter à plus long terme »105. M. Maillé a confirmé que la seconde stratégie d’Hydro-Québec n’a eu qu’un succès

104S.Q. 1983, c. 15 (Exhibit D-377/7).

105Témoignage de E. Maillé, 30 oct. 2013, p. 172, l. 1 à l. 18; pièce P-24, p. 18.

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relatif, et qu’Hydro-Québec n’a pas atteint les objectifs qu’elle s’était fixés

à cet égard, loin de là106.

296.La preuve, non contredite, est à l’effet que le changement de 1983 à l’article 22 de la Loi sur Hydro-Québec n’a pas eu d’incidence sur les exportations d’Hydro-Québec. La pièce D-292 démontre de façon non

équivoque qu’Hydro-Québec exporte de l’énergie de manière continue depuis 1964, quoique les quantités varient d’année en année. La prétention de CF(L)Co dans ses Notes et autorités à l’effet que, en raison

de la législation en vigueur à l’époque de la signature du Contrat, l’« ability to export [of Hydro-Québec] was severely constrained »107 est non supportée par la preuve.

297.M. Vandal a fourni au Tribunal le ratio des exportations d’Hydro-Québec par rapport à ses approvisionnements totaux en énergie électrique aux quatre dates suivantes :

a)en 1977, après la mise en service complète de Churchill Falls : environ 15 %;

b)en 1987, après les modifications de 1981 et 1983 à la Loi sur Hydro-Québec : environ 16 %;

c)en 1997, après l’ouverture des marchés : 8,3 %; et

d)en 2007 : environ 9 %108.

298.Il appert donc que le ratio des exportations d’Hydro-Québec par rapport à ses approvisionnements totaux était similaire en 1977 et 1987, et ce,

malgré les changements législatifs de 1981 et de 1983, et qu’il a diminué après l’ouverture des marchés en 1997 et 2007109.

299.Tel qu’indiqué précédemment110, la preuve non contredite démontre également qu’Hydro-Québec se proposait, dans le milieu des années 1960, soit bien avant les changements à son mandat de 1981 et de 1983, de vendre à l’exportation entre 1 250 et 2 000 MW à ConEd et Niagara Mohawk, dégageant une marge sur cette revente qui revenait entièrement à Hydro-Québec, et ce, à la connaissance de CF(L)Co.

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H.Other Disputes and Grievances

(1)Final Capital Cost of the Plant

[122]The determination as to the “Final Capital Cost of the Plant”111 had a direct bearing on the mill rate payable by Hydro-Québec under the Power Contract.112 Unable to agree as to the amount in question, the dispute was submitted to arbitration. Not satisfied with the initial Arbitration Award dated June 30, 1981, CFLCo instituted

proceedings by way of a Motion for Declaratory Judgment before the Superior Court of Québec113. On October 11, 1983, Desjardins J. dismissed CFLCo’s Motion on

procedural grounds but noted that the arbitration award could be re-examined by “...le Tribunal compétent”.114

[123]On October 30, 1984, CFLCo commenced a second proceeding before this Court, this time seeking condemnations in the amount of $11,197,784 and a declaration that the Final Capital Cost of the Plant under the Power Contract be fixed at $945,063,589.

[124]Following a judgment in first instance favourable to Hydro-Québec and while still pending before the Court of Appeal, this matter was resolved by the parties out of Court on December 21, 1987. They agreed that the Final Capital Cost of the Plant be fixed at $900 million for the purposes of article 8.2 of the Power Contract.

(2)Exclusion of Representatives from the Board of CFLCo

[125]At the Annual General Meeting of Shareholders of CFLCo held on April 5, 1983, NLH, being its majority shareholder, voted its shares to elect only representatives of

NLH to the Board of Directors. Representatives of Hydro-Québec were accordingly excluded from the management of the affairs of the Corporation.115 This policy, although in strict accordance with corporate law, went against the informal practice which had been agreed to and in existence since the late 1960’s, notwithstanding the absence, at

the time, of a Shareholders’ Agreement providing for representation on the Board by

Hydro-Québec.116

[126]It would appear that this decision was taken by NLH and the Government of Newfoundland as a form of sanction or retribution of Hydro-Québec for its refusal to renegotiate the pricing terms of the Power Contract which the Government considered

“unjust and inequitable”.

111As defined in article I.1 (Definitions), paragraph VI (Concerning Rates and Rate Adjustments) of the Power Contract.

112Exhibit P-1, art. 8.2.

113Churchill Falls (Labrador) Corp. Ltd. c. Commission Hydroélectrique du Québec (11 octobre 1983), Montréal 500-05-003560-834 (C.S.) (Exhibit D-354/3).

114Ibid., (Exhibit D-354/6).

115Exhibit D-207/7.

116Exhibit D-207/1.

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[127]Hydro-Québec only resumed representation on the Board of CFLCo in the fall of 1983,117 concurrent with a renewal of negotiations between the parties culminating, eventually, in the execution of the Statement of Intent.118

I.The Statement of Intent of February 1, 1984 (Under Reserve)

[128]At the outset, Hydro-Québec objected to the admission in evidence of the Statement of Intent as well as of any testimony in connection therewith invoking immunity from production on the basis of settlement privilege. The objection was taken under reserve.

[129]The relevant evidence was accordingly entered and the examinations of witnesses in connection therewith were conducted under reserve of the objection. Subject to and under reserve of Hydro-Québec’s objection, the Court will describe briefly the Statement of Intent, the circumstances giving rise to the negotiations preceding its signature and the context in which the negotiations were conducted.

[130]The merits of this objection will be addressed in Sub-section VI. C. below. For the reasons therein expressed, the Court will maintain Hydro-Québec’s objection.

[131]As previously mentioned, on August 16, 1983, the respective Ministers of Energy of the Governments of Newfoundland and of Québec met in Montreal to discuss the possibility of further negotiations in the hope of settlement of the outstanding litigation as well as other disputes.

[132]Seeing the uncertainty as to the ultimate outcome of the pending litigation before the Supreme Court of Canada and the potential serious consequences which could result to one or other of the parties arising from an unfavourable judgment to such party, NLH, presumably on behalf of CFLCo and the Government of Newfoundland and Hydro-Québec undertook to negotiate a Statement of Intent as a framework in which further settlement negotiations would proceed.

[133]Michel Labonté was engaged by Hydro-Québec in October 1983 as “...conseiller spécial au bureau du président directeur général ” (monsieur Coulombe). His mandate was to develop a strategy for the forthcoming negotiations to be pursued by the parties. As to why Hydro-Québec had agreed to participate in this process at this point in time, Labonté testified:

... essentiellement, je pense que c’est une sage gestion de risques de la part d’Hydro-Québec, parce que c’était blanc ou c’était noir, le jugement de la Cour suprême. Ou bien non c’était constitutionnel, ce que Terre-Neuve voulait faire et,

àtoutes fins pratiques, la position d’Hydro-Québec était exproprier, ou Hydro- Québec avait raison puis là, bien, le contrat continuait comme… comme avant.119

117Exhibits D-210 and D-274/18.

118Exhibit P-9.

119Testimony of M. Labonté, October 31, 2014, transcript at page 146, lines 13 to 20.

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[134]The object of the process was: “...d’essayer d’en arriver à une entente négociée de manière à lever l’inconnu mais qui était énorme de se voir exproprié dans ce contrat-là.”120

[135]What followed were exchanges of draft statements of intent prepared by one or

other of the parties which gave rise, ultimately, to the agreement and signature, on February 1, 1984, of the Statement of Intent.121

[136]The process was further described in the opening paragraph of the Statement of

Intent:

Following meetings in Montréal and in St. John’s during which Newfoundland and Labrador Hydro and Hydro-Québec had extensive discussions, it was suggested that, as a meaningful step in negotiations between the parties, a general framework should be established within which the negotiations could be carried out.

The purpose of the present document is to define this general framework which is to be used as a reference within which the negotiations are to be pursued in good faith, the whole without prejudice to the respective positions and rights of the parties should they fail to reach a final definitive agreement. 122

[emphasis added]

[137]It is not seriously disputed that the Statement of Intent is an agreement entered into in the context of settlement negotiations. The following stipulation confirms the intentions of the parties in this regard:

2.7The Settlement of Actions

The parties recognize the necessity, within the framework of a negotiated settlement, to put an end to any and all actions or claims between them either before the Courts of Justice or before administrative boards such as the National Energy Board.

In this context, the parties agree that as part of any final settlement, the following would occur:

(i)the parties would put an end to the cases presently before the Courts;

(ii)Newfoundland would cause the Water Rights Reversion Act to be revoked;

(iii)the undertaking of Newfoundland for a determinate period, not to obstruct the demands of Hydro-Québec to the N.E.B. in connection with the export and sale of power and energy.

[emphasis added]

120Testimony of M. Labonté, November 4, 2013, transcript at page 154, lines 14 to 17.

121Exhibit P-9.

122Ibid.

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[138]Although, CFLCo acknowledges the Statement of Intent qualifies as a document to which settlement privilege would normally apply, it contends Hydro-Québec has

waived privilege by referring to it in paragraphs 193 to 201 of its Défense without reservation.123

[139]As previously stated, the merits of Hydro-Québec’s objection will be addressed in Sub-section VI. C. below.

J.The Hydro-Québec Offer of Settlement of March 23, 1984

[140]On March 23, 1984, Hydro-Québec delivered to CFLCo and the Government of Newfoundland a without prejudice and conditional comprehensive offer of settlement.124 It indicated its willingness to request a further suspension of the délibérée pending before the Supreme Court of Canada in the Reversion Act Reference in order to pursue further discussions.

[141]Hydro-Québec estimated the value of its global offer at the time would be approximately $716 million in 1984 dollars.125

[142]Neither CFLCo nor the Government of Newfoundland acknowledged the offer. No counter proposal was ever delivered in response to the Hydro-Québec offer. Rather and as previously mentioned, on March 27, 1984, counsel for the Attorney General of

Newfoundland advised the Supreme Court that he does not intend to seek a further extension of time and that accordingly he awaited delivery of judgment.126

[143]The Supreme Court of Canada rendered its judgment in the Reversion Act Reference, on May 3, 1984.127

[144]As previously mentioned, in a statement issued on May 18, 1984, the

Honourable William Marshall, referred to Hydro-Québec’s offer as “what can only be regarded as a less than token proposal”.128

K.The Proposals, Counter-proposals and Negotiations: August 1985 – March 1998

[145], Further settlement proposals were exchanged between the parties in the months following the judgment of the Supreme Court of Canada in the Reversion Act Reference. On August 14, 1985, a group headed by Cyril J. Abery, President, Vice- Chairman and C.E.O. of NLH met with their counterparts of Hydro-Québec to deliver and discuss a document entitled “Proposal by Newfoundland to Quebec Regarding Energy Matters” bearing the inscriptions “Secret” and “Ad Referendum” on the first page

123Me Mitchell, December 10, 2013, transcript at page 56, lines 16 to 23.

124Exhibit D-045.

125Exhibit P-20, at p. 2.

126Exhibit D-336/6.

127[1984] 1 S.C.R. 297 (Exhibit D-211).

128Exhibit D-213/15.

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(the “Secret Proposal”).129 Although bearing the inscription “Secret”, the document was not produced in these proceedings under seal.

[146]The preamble to the Secret Proposal made by NLH to Hydro-Québec is descriptive of the past efforts and is self-explanatory:

Over the last ten years there have been a number of attempts to settle the differences between Newfoundland and Quebec with regard to the Upper Churchill development. These attempts have included discussion of a number of other potential developments such as Gull Island and Muskrat Falls on the Lower Churchill River and sites on the five Lower North Shore Rivers. For various reasons all of these efforts have failed.

[147]It is suggested that the stipulations made by the parties in the February 1, 1984 Statement of Intent should serve as a background or starting point for renewed and expanded negotiations to be pursued involving not just the Power Contract and the Upper Churchill Falls facilities but as well the development and realization of the Lower Churchill Falls projects, the latter being only in the preliminary planning stage.

[148]The Secret Proposal contemplated, inter alia, the following elements:

1.That Newfoundland receive the sum of $75 million per annum, escalating each year by the rate of increase in Hydro-Quebec’s selling price for electricity, for rentals and royalties from the Upper Churchill development, with payments to be made on a monthly basis by energy purchasers to CF(L)Co commencing in the month in which the agreement is signed. These funds would be transferred by CF(L)Co to Newfoundland as a special non- shareable dividend.

2.That Newfoundland be granted access to an additional 1200 MW of capacity and 9.5 billion kilowatthours of energy annually from Churchill Falls at prices no less favourable than those being paid by Hydro-Quebec. This additional capacity and energy (i.e. exclusive of the TWINCo block and the existing 300 MW recall) to be subject to realistic notification periods [...];

3.That there be a review of the terms and conditions of the Power Contract at the completion of the initial forty year period, i.e. in the year 2016;

4.That provisions be made so that CF(L)Co remains a financially sound enterprise providing a 15% return to its shareholders through an appropriate adjustment in rates presently charged for energy and by reaching agreement on such matters as the Final Capital Cost, the financing of extraordinary capital expenditures, a dividend policy, the rates payable for sales of energy, the various elements of the Power Contract which pertain to the long-term capabilities of the Churchill Falls plant, such as the calculation of the Annual Energy Base, spillages, responsibility for reservoir management, and so on;

5.That the hydroelectric potential of Gull Island and Muskrat Falls be exploited to the benefit of both Newfoundland and Quebec at the earliest opportunity.130

129Exhibit D-046.

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[emphasis added]

[149]In a letter dated August 28, 1985, Jean Bernier, Secrétaire général of Hydro- Québec acknowledged receipt of the Secret Proposal, reminded Mr. Abery that the Statement of Intent referred to therein was drawn and executed in the context of settlement negotiations and noted:

...Newfoundland has modified its previous position on rentals and royalties, rescheduled its demand for access to different quantities of power and energy, requested changes in certain terms of the contract and proposed a major commitment on the part of Hydro-Quebec to purchase Gull and Muskrat power and energy. This would have a considerable impact on the operations, construction programs and development plans of Hydro-Quebec for the years to come which, consequently, would require careful analysis both on the financial and operational standpoints.

[...]

I would suggest that we could perhaps meet in St. John’s, at your convenience, during the 3rd week of September in order to pursue the examination of the

proposal.131

[150]Presumably, a meeting did take place, as proposed by Mr. Bernier, on September 17, 1985, during which representatives of Hydro-Québec asked specific

questions regarding the Secret Proposal. On February 4, 1986, Newfoundland apparently responded in writing to these questions.132 The following question and response by Newfoundland are relevant to the present proceedings as they may help shed light on the underlying motivations for the relief now sought by CFLCo, indirectly on behalf of the Government of Newfoundland:

1.Q. Quebec has asked Newfoundland to set out a detailed justification for the proposal that Newfoundland receive the sum of $75 million per annum, escalating each year by the rate of increase in Hydro-Quebec's selling price for electricity, for rental and royalties from the Upper Churchill Development.

A.

[...]

Newfoundland believes that these unanticipated benefits should be shared between Newfoundland and Quebec. While elaborate formulae can be developed to rationalize sharing, the Government of Newfoundland put forward a specific proposal which it believes is realistic and attainable from the perspective of both parties. The Government of Newfoundland believes that in the final analysis the willingness to share unanticipated benefits, and the degree to which these benefits are to be shared, is a political matter. It is not a matter to be determined or defended by complex formulae.

130Ibid., at D-046/4 and 5.

131Exhibit D-047.

132Exhibit D-048.

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[double underline emphasis added]

[151]The position expressed by the Government of Newfoundland in the Secret Proposal regarding the required increases in rentals and royalties to be paid to the Government of Newfoundland as owner of the resource is a cause for concern. It raises questions as to whether the relief now sought by CFLCo in the present proceedings, financed by the Government of Newfoundland, is really nothing more than a further colourable attempt to obtain that elusive and oft-mentioned “...fair and equitable return to Newfoundland as owner of the Churchill Falls resource...” sought since the early

1970’s.

[152]Further discussions between the parties proved fruitless and they were abandoned.

[153]On January 14, 1991, Hydro-Québec and CFLCo entered into an Operating Agreement (the “1991 Operating Agreement”)133 in virtue of which CFLCo undertook to provide and Hydro-Quebec undertook to purchase during the periods mentioned therein, the additional capacity of all eleven (11) generating units of the Generating Station, less certain amounts required to meet the requirements stipulated in the Power

Contract during the “First Availability Period” and subject to the provisions of Section 11 and the “Second Availability Period” (as therein defined).134

[154]On November 21, 1991, Hydro-Québec delivered to NLH a detailed Letter of Intent and related draft agreements,135 concerning the purchase of power from facilities to be constructed on the Lower Churchill River and concerning the purchase of new services or additional power from the Generating Station. According to Hydro-Québec, the projects contemplated in the Letter of Intent would have provided CFLCo with substantial additional revenues.

[155]NLH refused to pursue the negotiations along the lines contemplated by the latest Letter of Intent. In a letter dated March 3, 1992,136 addressed to Jacques Guevremont of Hydro-Québec, David Mercer, President and C.E.O of NLH, explained the reasons for refusing the Hydro-Québec proposal. He acknowledged that:

The documentation presented clearly reflected the significant progress which has been made to date and demonstrated Hydro-Québec’s good will and imagination in conceptualizing complex commercial agreements.

[156]He went on to point out, however:

... that Hydro-Québec’s November 21st offer contained three features which were considered unacceptable to Newfoundland, namely:

133Exhibit D-060.

134Although dated January 14, 1991, the 1991 Operating Agreement was effective retroactive to November 1, 1990 (Article XI) (Exhibit D-060/28).

135Exhibit D-222.

136Exhibit D-223.

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(1)The proposal provided explicit enhancements to Hydro-Québec with respect to the Upper Churchill arrangements. While from Hydro-Québec’s perspective such enhancements (after 2016) may seem desirable, it has always been Newfoundland’s position that such direct or indirect enhancements are not acceptable as part of these negotiations.

[...]

[emphasis added]

[157]During an examination before plea of Mr. Mercer conducted on January 13,

2011, he explained what was meant by CFLCo’s “...objective of never directly or indirectly enhancing CFLCo’s position.”137

“... from CFLCo’s perspective, we would like winter availability to go out to the year two thousand forty-one (2041) ...” but if we put that in, that means we’re guaranteeing that that renewal period is going to continue. And that’s contrary to our objective of never directly or indirectly enhancing CFLCo’s position. …

Q. [626] So from your perspective and Mr. Abery’s perspective, agreeing a guaranteed availability contract for the duration of the power contract, including the renewal period was a recognition of the renewal term...

A. Continuation, yes.

Q. [627] ... continuation of the power contract?

A.Yes.

Q.[628] And you were uncomfortable with that?

A.Yes.

[...]

Q. [632] ... the example you gave of point 1, which was the, having the GWAC with a term similar than the term of the power contract including the renewal.

A. Yes. I think there were other, there was other language. It is not articulated in this letter, but it was to the effect that the parties recognized that the output of the Churchill Falls plant would continually be given to Hydro-Quebec over the full contract period, up to two thousand and forty-one (2041). That again was an enhancement, a recognition enhancement of a benefit to Hydro-Québec.

Q. [633] In what way?

A. The Newfoundland’s [sic] Government wanted to have the arrangements terminated in two thousand and sixteen (2016).

Q. [634] It wanted to change the contract?

137Exhibit D-252/50 and 51 (examination on discovery of D. Mercer, January 13, 2011, transcript at page 191, lines 5 to 24 and page 192, lines 7 to 25).

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A. Yes.

[emphasis added]

[158]The NLH March 3, 1992 letter effectively terminated negotiations between the parties. There was no counter proposal submitted by either party.138

[159]It is relevant to note that on June 18, 1999, some six (6) years later, NLH and

CFLCo appear to have modified their position regarding any possible “enhancement” of Hydro-Québec’s position regarding the validity of the renewal term of the Power

Contract. Hydro-Québec and CFLCo entered into the “Guaranteed Winter Availability Contract” (the “GWAC”) and the “Shareholders Agreement” (the “Shareholders’ Agreement”). Both agreements expire on August 31, 2041, concurrently with the expiration of the renewal term of the Power Contract. The significance of these two agreements and of their termination dates will be further discussed and analyzed in Sub-section IV. L. (2) below.

[160]Negotiations between the parties resumed once again in 1995. By June 4, 1996

they had broken down once again. On October 8, 1996, Hydro-Québec presented a new proposal139, revised on October 22, 1996140 and December 10 1996141 contemplating: (i) the execution of a Shareholders Agreement along the lines therein described, (ii) the renewal of the existing Operating Agreement, (iii) the costs of maintenance of new equipment installed by Hydro-Québec, (iv) open access to CFLCo over Hydro-Québec’s transmission lines to wheel approximately 130 MW of energy to markets outside Québec and (v) a Guaranteed Winter Availability Contract (GWAC) to come in force no later than 2008 following the expiration of an extended Operating Agreement until such time.

[161]In the October 22, 1996 letter addressed to Norman Whalen, Chairman of the Board of CFLCo, Claude Dubé on behalf of Hydro-Québec wrote:

I remind you that we insist that this offer be presented formally to the Board of Directors of the Churchill Falls (Labrador) Corporation Limited for its consideration. We believe this to be important, the fact being that we started this round of negotiations on the basis that the board members were highly concerned about their fiduciary responsibility.142

[162]Testifying before the Court, M. Dubé explained his reasons for insisting the offer be presented to the Board of CFLCo.

R- Bien, j’insiste parce que je croyais que leur devoir de fiduciaire les entraînerait à accepter cette offre-là. C’est une offre qui était bonne pour

138Ibid., at D-252/55 (transcript at page 205, lines 5 to 18); Testimony of C. Dubé, November 5, 2013, transcript at page 145, lines 12 to 15.

139Exhibit D-231/5.

140Exhibit D-050.

141Exhibit D-051 (Letter dated December 19, 1996).

142Exhibit D-050.

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l’entreprise et Bill Wells le reconnaissait lui-même que c’était une offre qui était bonne pour CFLCo.

Q- À l’époque, est-ce comme ça l’est aujourd’hui, c’est-à-dire que les administrateurs désignés par NLH sont en majorité au conseil d’administration de CFLCo?

R- Exact, oui.

Q- Et quelle était l’expectative, la vôtre, en fait, quant au respect par les administrateurs de CFLCo de leur devoir fiduciaire?

R- Bien, je pense qu’ils devaient se prononcer sur cette offre-là et je pense qu’ils avaient pas le droit de l’ignorer étant donné que ça répondait à une requête première du conseil d’administration.

Q- Et à l’époque, Monsieur Dubé, à l’automne ninety-six (96), y a-t-il des prises de position par le gouvernement de Terre-Neuve quant au contrat avec Hydro-Québec?

R- Oui, le Premier Ministre de Terre-Neuve, monsieur Tobin à l’époque, a pris plusieurs tribunes au Canada pour dénoncer le contrat et menaçant de débrancher Hydro-Québec: « We could pull out the plug » he said.143

[emphasis added]

[163]In a letter dated November 4, 1996, addressed to the members of the Boards of Directors of both NLH and CFLCo., referring to Hydro-Québec’s October 8, 1996 offer, R. Andrew Grant, Vice-President Finance & Chief Financial Officer of NLH noted:

1.CF(L)Co's projected financial position would improve significantly;

2.CF(L)Co would avoid cash deficiencies and would be able to maintain a substantial annual cash balance to 2041;

3.The return on equity would be approximately 8% to 2016 and 9.3% to

2041;

4.Both Preferred and Common Dividends would continue without interruption and would increase;

5.The incremental benefit to Newfoundland, in 1996 dollars, would be $133 million to 2016, and $210 million to 2041. Compared with Hydro-Quebec's November 1995 offer, these amounts are lower by $11 million in both cases.

[...]

The 1996 offer by Hydro-Quebec solves the impending financial problems of CF(L)Co and significantly improves its ROE. At the same time it increases the return to Newfoundland, although to a lesser degree than the 1995 offer.

[...]144

143Testimony of C. Dubé, November 5, 2013, transcript at page 164, line 6 to page165, line 4.

144Exhibit D-052/2.

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[164]The parties met on December 10, 1996. In a summary of the discussions prepared by M. Dubé and forwarded to William Wells, President and C.E.O. of NLH, in a letter dated December 19, 1996, he noted:

•CF(L)Co and Newfoundland and Labrador Hydro evaluated the October 8, 1996 offer made by Hydro-Québec.

•They communicated the results to the members of the CF(L)Co Board : Hydro- Québec's offer is good for CF(L)Co.

•The CF(L)Co Board took no decision.

•The NLH Board did not accept the offer.

•The Government of Newfoundland is not prepared to settle anything beyond 2016. The real issue is the resource rent. Given the Government of

Newfoundland agenda in relation with the Upper Churchill, it is expected that the offer will be refused by the Government.145

[emphasis added]

[165]M. Dubé’s analysis proved to be correct. Regarding the refusal by the

Government of Newfoundland, M. Dubé testified:

...l’objectif ultime, ou le seul objectif du gouvernement de Terre-Neuve, c’était de rouvrir le Contrat. Les propositions qu’on faisait pour améliorer la situation, pour augmenter les revenus de l’entreprise, ne semblaient pas avoir aucune importance, c’était pas la fin qui était importante, c’était les moyens, la réouverture du contrat146.

Ça a toujours été la même chose.

On arrivait à des accords commerciaux, puis finalement, le gouvernement [de Terre-Neuve] disait : Non, c’est pas ça qu’on veut, on veut réouvrir le contrat. C’était classique147.

[emphasis added]

[166]There were no meaningful exchanges between the parties following the December 10, 1996 meeting until March 1998.

L.The “Summary of the Discussions” of March 9, 1998 and the Agreements Entered into Pursuant Thereto

[167]On March 9, 1998, William E. Wells, President and C.E.O. of NLH sent Thierry Vandal, at the time Vice-President, Strategic Planning and Development of Hydro- Québec, a summary of the discussions (as of March 6, 1998) concerning further hydro

developments in Labrador and related projects in Québec (the “Summary of

145Exhibits D-051/1 and D-051/2.

146Testimony of C. Dubé, November 5, 2013, transcript at page 166, line 23 to page 167, line 5.

147Testimony of C. Dubé, November 6, 2013, transcript at page 71, lines 17 to 21.

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Discussions”).148 The Summary of Discussions was to serve as a “framework” under which further negotiations would ensue. Mr. Vandal confirmed to Mr. Wells that day his agreement that the document correctly summarized the discussions.149

[168]The Summary of Discussions documented the elements of exploratory discussions and conclusions agreed to between the parties regarding the potential joint development of three additional hydro projects located on the Lower Churchill River in Labrador and the increase of the capacity of the existing Generating Station. The discussions also related to a series of contracts to be negotiated aimed at assuring the long term financial viability of CFLCo and regularizing the relations between the parties as shareholders of CFLCo.

[169]Regarding the Power Contract, the summary expressly stipulated:

4. Power Contract

-None of these arrangements will alter the Upper Churchill Power

Contract or the positions of the parties with respect to the Upper Churchill Power Contract. 150

[170]In an address to the Province by Brian Tobin, Premier of Newfoundland, made on March 9, 1998 and reproduced in a news release issued by the Executive Council that day, Premier Tobin referred to two groups of proposals contained in the

“framework”, (i) those of interest to CFLCo dealing with the Upper Churchill River and

(ii) those dealing with the Lower Churchill River. His characterization of the various proposals involving the Upper Churchill River is most relevant to the issues raised in the present proceedings.

The proposal before us today regarding the Upper Churchill has four important elements.

1.First, Newfoundland and Labrador has not, despite many past attempts by Quebec, has not agreed to extend past 2016 any further protection for

Hydro Quebec against taxation on the export of the sale of electricity. We have preserved all of our rights in this regard.

2.Quebec has agreed effective today's date, to waive recall provisions on a block of 130 m.w. of power - which is the remainder of a block of 300 m.w. that we are entitled to receive under the original contract. The original contract required us to give Quebec three years notice of recall of this power. It also restricted us to use the 300 m.w. of power in Newfoundland and Labrador. Since we have only been able to use 170 m.w. of the 300 m.w. block in Labrador - Quebec has had the benefit of the remaining 130 m.w. of power.

148Exhibits D-053/1 and D-053/2.

149Exhibit D-053/10.

150Exhibit D-053/9.

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Effective today, Quebec has waived recall rules and has transferred ownership of this 130 m.w. of power to Newfoundland and Labrador and has agreed to allow us to sell it for use in the North American market place.

Since we are acquiring this block at very low Upper Churchill contract rates of 2.7 mils and reselling it at today's market prices - Newfoundland and Labrador will gain an additional 23 million dollars a year in revenue from this transaction. This measure is not tied to the completion of formal negotiations. It is unconditionally provided to us effective today at our request, as a first step in building a better relationship with Quebec.

3.The third measure we have negotiated is a guaranteed winter availability contract. This is a new contract that will run beside the current Upper Churchill contract until 2041. In this new contract, Quebec agrees to pay on average an additional $34 million a year, beginning this November for guaranteed peak power during winter months.

This measure alone adds another $1 billion to our bottom line at the Upper Churchill.

4.The last and, I believe, most significant change to the Upper Churchill Power system is a plan to construct at the Upper Churchill Power site, a new power house and two new turbines to add 1,000 new m.w. of power to the existing 5200 m.w. of capacity at the Upper Churchill.

[...]

The Upper Churchill Diversion project and construction of a new power house will be financed at a cost of $1.3 billion by Quebec and from project revenues. Quebec will guarantee a floor price for the power. Quebec will receive no royalties for its water. The equity in the project will be 65.8% Newfoundland and Labrador - 34.2% for Quebec.

This project will provide, at today's prices, another $1.1 billion to Newfoundland and Labrador from the Upper Churchill system.

Taken together, these new initiatives- the recall of 130 m.w. of power worth $23 million a year; the Guaranteed Winter Availability Contract with average revenues of $34 million a year; and a 65.8 percent equity in 1,000 m.w. of new power at the Upper Churchill will move Newfoundland and Labrador from a loss position today on the Upper Churchill system to a gain for Newfoundland and Labrador of $2.6 billion dollars on the Upper Churchill

River system.151

[emphasis added]

[171]Premier Tobin’s comments cited in paragraph 1 of the above extract, regarding the refusal by the Government of Newfoundland “...to extend past 2016 any further protection for Hydro-Québec against taxation on the export of the sale of electricity...” must be read in conjunction with the stipulation referred to in paragraph 4 of the Summary of

151Exhibit D-235/2 and 3.

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Discussions, also cited above, regarding the non-alteration of the Power Contract or the positions of the parties with respect thereto.

[172]As will be seen below, two other important matters referred to in the Summary of

Discussions, the negotiation of the Guaranteed Winter Availability Contract (“GWAC”)152 and the Shareholders’ Agreement,153 were successfully concluded with the parties being in agreement as to termination dates which coincide with that of the Power Contract in 2041 and not in 2016.

[173]The position now taken by CFLCo in these proceedings, supported by the Government of Newfoundland, regarding their dissatisfaction with the agreed mill rate payable during the renewal period of the Power Contract and their insistence of renegotiating the pricing terms is inconsistent with that expressed by Premier Tobin in his March 9, 1998 news release and, moreover, perplexing.

[174]The Government of Newfoundland and CFLCo now appear to have broadened their concerns regarding the renewal period from those expressed in 1998 by Premier Tobin when he appears to have limited his objections with the Power Contract to only the: “...protection for Hydro-Québec against taxation on the export of the sale of electricity” beyond the expiration of the initial term in 2016.

[175]Although the parties failed to arrive at an understanding regarding the additional projects on the Lower Churchill River and elsewhere, they did succeed in concluding three important agreements regarding the existing facilities on the Upper Churchill River: the 130 MW recovery of the 300 MW Recall Bloc, the GWAC and the Shareholders Agreement.

(1)The 300 MW Recall Bloc

[176]Pursuant to Section 6.6 of the Power Contract, CFLCo was entitled to recapture capacity and associated energy not to exceed 300 MW and 2.363 TWh per year

(“300,000 kW and 2.362 billion kWh”). As of 1998, CFLCo was only recapturing a capacity and associated energy of approximately 170 MW per year.

[177]In September 1998 the parties entered into an agreement entitled Notice of Recapture and Waiver, with effect retroactive to March 9, 1998, in virtue of which CFLCo formally notified Hydro-Québec of its intention to immediately recall the

remaining recapture capacity and associated energy and Hydro-Québec waived the prior notice requirements under Section 6.6 of the Power Contract in this regard.154

[178]Hydro Québec received no compensation for this renunciation.155

152Paragraph 2 of the Summary of Discussions expressly provided the “...GWAC termination to coincide with the termination of the ...Power Contract.” Exhibit D-053/8.

153Exhibit D-236/11.

154Exhibit D-054.

155Exhibit D-262.

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[179]On September 25, 1998, CFLCo entered into an agreement with NLH, retroactive to March 9, 1998, for the sale of the 300 MW Recall Bloc (the “Recall PSA”)156. The Recall PSA replaced the existing 1976 NLH/CFLCo Power Contract.157

[180]The term of the Recall PSA runs from March 9, 1998 and terminates on August 31, 2041, concurrently with the Power Contract.158The Recall PSA having been filed under seal, except for the details expressed above, the Court will abstain from further disclosing its content. Save to say: (i) the Court has taken note that the price payable by NLH to CFLCo for the 300MW Recall Bloc is in the amount as was confirmed by Ed Martin, President and C.E.O. of CFLCo and NLH during his testimony before the Court; and (ii) the recaptured capacity and associated energy was resold to Hydro-Québec at a profit for NLH equal to the spread between NLH’s purchase price under the Recall PSA and the three PSA’s with Hydro-Québec.

[181]In light of the concerns as to the allegedly precarious financial viability of CFLCo

consistently raised by it and accordingly, contrary to what one might have expected, the profit was earned by NLH rather than by CFLCo.159

[182]Following the execution of the Notice of Recapture and Waiver and the Recall PSA, NLH entered into three successive Purchase and Sale Agreements (“PSA”) with Hydro-Québec for the sale of the surplus capacity of the 300 MW Recall Bloc not

required in Labrador by NLH. The first PSA was effective from March 9, 1998 until March 8, 2001.160 It was succeeded and replaced by an Amended and Restated Purchase and Sale Agreement dated February 19, 2001161 and again by a Purchase and Sale Agreement dated March 31, 2004.162

[183]The March 31, 2004 PSA expired on March 31, 2009 and was not renewed.

Since then, NLH has sold the surplus of the 300 MW Recall Bloc on the export markets in Eastern Canada and in the northeast United States rather than to Hydro-Québec.163

This energy sold is wheeled, by agreement, through the transmission lines of Hydro- Québec TransÉnergie.164

(2)The GWAC and the Shareholders’ Agreement

[184]The GWAC and the Shareholders’ Agreement were presented for approval to a

Special Meeting of the Board of Directors of CFLCo held on May 18, 1999. The members of the Board nominated by Newfoundland were given a briefing earlier that

156Exhibit D-055 (Confidential) & D-268.

157Exhibit D-040.

158Exhibit D-055, art. 2.01.

159Testimony of Ed Martin, September 10, 2013, transcript at page 145, lines 5 to 24.

160Exhibit D-056 (Confidential).

161Exhibit D-057 (Confidential).

162Exhibit D-058 (Confidential).

163Testimony of Ed Martin, September 10, 2013, transcript at page 40, line1 to page 42, line 22.

164Exhibit D-309/17.

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day as well as subsequently on March 22, 1999. Messrs. Vandal and Nadeau, representatives of Hydro-Québec were absent from the Meeting of the Board.165

[185]William Wells, at the time CEO of CFLCo and Chair of the meeting advised:

.. that the revenue projected to flow to CF(L)Co from the GWAC would be sufficient to keep CF(L)Co financially viable until the end of the Power Contract, 2041, barring any extraordinary unforeseen events. It was agreed that

the Chair would send to the Directors a memo outlining the results of these financial projections.166

[emphasis added]

[186]Both the GWAC and the Shareholders Agreement were unanimously approved by the directors present at the Meeting.

[187]As he undertook at the May 18, 1999 meeting, in a letter dated June 17, 1999, Mr. Wells transmitted to all the Directors of CFLCo “...an opinion as to the effect that the Guaranteed Winter Availability Contract (“GWAC”) with Hydro-Québec (“HQ”) would have on the ongoing financial viability of CF(L)Co through the term of the Power Contract to 2041.”167

[188]He wrote:

In my view, and in the best judgment of the Management of CF(L)Co, the GWAC addresses the issue of CF(L)Co’s financial viability and will keep the company whole and financially viable through the period of the Power Contract with HQ. The issue of CF(L)Co’s financial viability has been under consideration by the Board of Directors of CF(L)Co for some years. The GWAC provides the solution to that issue, providing direct and tangible results which could only be upset by some major unpredictable, unforeseen and unfortuitous (sic) events, or series of events, which cannot be reasonably contemplated in making a rational forecast.

While there can be no guarantees and any forecast must include certain assumptions, the GWAC does produce a very positive financial result for CF(L)Co when compared to not having the GWAC. Attached to this memo is a Case Series Summary prepared by Hydro's Rates & Financial Planning Department, indicating the effect of the GWAC compared to the status quo. As you will see from a review of Tables 1 and 2, the effect of the GWAC is to substantially alter the financial picture of CF(L)Co during its term. You will note in Table 2 that the total common dividends paid up to 2041 provide a substantial margin with respect to the company's financial viability in the event of negative, unforeseen circumstances arising. In addition, the Reserve Fund provides a significant level of protection in dealing with unforeseen events.

[emphasis added]

165Exhibt D-061.

166Ibid., at D-061/2.

167Exhibit D-237/3.

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[189]The general assumptions upon which he based his opinion were described in the

“Case Series Summary” annexed to his June 17, 1999 letter.168

[190]Questioned as to the reasons for approving the GWAC, Victor Young, former Chairman and CEO of CFLCo, explained:

[…]But here was a new arrangement between Hydro-Quebec and CFLCo that the management was presenting to the board, that said that the guaranteed winter availability contract with Hydro-Quebec, this new contract, would have an impact on the ongoing financial viability, that’s that whole issue of what is the financial viability of CFLCo.

It would have an ongoing impact through to the end of the contract, twenty forty-one (2041). So this was not presented by management as a masked or a short-term band-aid, this was something being presented that would last till the end of the contract […]

So what this says is, with this new arrangement, with this side agreement, that whole issue of the financial viability of CFLCo would be resolved [...] You’ll note in table 2 that the total common dividends paid up to twenty forty-one (2041), that this agreement would not only allow for the financial stability, not only allow for the operating, not only allow for capitals, but would also allow for the payment of the dividend.

So the real question would be, if I hadn’t voted for this, why would you not vote for something that was solving for the remainder of the contract or purported to solve for the remainder of the contract the issues that had been subject to debate for some time.169

[emphasis added]

[191]The net result of the Recall PSA, the GWAC and the Shareholders’ Agreement was to: (i) procure for CFLCo and NLH170 until 2041 a source of substantial additional revenue; (ii) assure the long term financial viability of CFLCo171; (iii) address Hydro-

Québec’s demand for additional power during the winter months; and (iv) presumably normalize the relations between NLH and Hydro-Québec inter se and as shareholders of CFLCo. This last result was unfortunately only short-lived.

[192]CFLCo argues that the GWAC and the Shareholders Agreement are not relevant to the issues raised for determination in the present proceedings.172 Ed Martin, its President and CEO argues that CFLCo’s recourse in the present proceedings seeking a reopening of the Power Contract is not based upon the financial non-viability of CFLCo

168Exhibit D-237/4 to 9.

169Testimony of V. Young, September 12, 2013, transcript at page 126, lines 10 to 12 and page 128, line 5 to page 130, line 2.

170Through the three Purchase and Sale Agreements (collectively the “Three PSA’s”) and thereafter on the open market using the Hydro-Québec TransÉnergie network. (Exhibit D-245; Testimony of T. Vandal, October 22, 2013, transcript at page 89, line 9 to page 90, line 5).

171Exhibit D-061/2.

172CFLCo’s Answer to Plea, at paras. 120 and 122.

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but rather due to the need, based on good faith, to adjust the Power Contract due to changes which “...could not have been reasonably foreseen”.173 Thus, he contends, the beneficial effects and financial consequences of these two agreements are not relevant to the recourse now sought. This position was also repeated by CFLCo’s counsel in representations made on October 28, 2013.174

[193]Hydro-Québec agrees that the financial viability of CFLCo is no longer in issue, but contends that the timing and the circumstances giving rise in this condition are indeed relevant. It argues CFLCo has become financially viable due to: (i) the additional revenues received directly or indirectly by it and by NLH from the Three PSA’s; (ii) the subsequent resale of some or all of the unused recovery from the 300 MW Recall Bloc on the open market by wheeling using the Hydro-Québec TransÉnergie network; and (iii) by the revenues received from the GWAC, all agreed to, in good faith, by Hydro- Québec.

[194]Hydro-Québec argues, specifically, that the timing and subject matter of these agreements are indeed relevant to the legitimacy of the grounds of defence raised by it. It contends: (i) they were negotiated and signed after the occurrence of the alleged

“...radical and unforeseen change in circumstances” referred to by CFLCo in its Written Reply175 and elsewhere; and (ii) that they constitute an acknowledgement by the parties of the enforceability of the Power Contract in accordance with its terms for the full duration of the Renewal Period, except as modified by the express terms thereof. This issue will be analyzed and discussed in greater detail, to the extent necessary, in Section XI. below.

M.Pronouncements by Representatives of Newfoundland Regarding the Alleged Inequities in the Principal Agreement, the Lease Act and the Power Contract and in the Resulting Inadequate Apportionment of Benefits Accruing to Newfoundland as Owner of the Resource

[195]Since the early 1970’s, the various disputes among CFLCo, the Government of

Newfoundland and Hydro-Québec have the same underlying and recurrent theme, the alleged refusal on the part of Hydro-Québec to renegotiate the pricing structure of the

Power Contract so as to effect what CFLCo’s counsel now refers to as an “equitable sharing of the risks and benefits”176 and “a more equitable return”.177

[196]However, when Premier Moores and other representatives of the Government of

Newfoundland referred to “...a fairer apportionment of the benefits to both Quebec and

173Testimony of E. Martin, September 10, 2013, transcript at page 197, lines 9 to 22; Exhibit D-251C/34 to 36 (examination on discovery of E. Martin).

174Me Mitchell, October 28, 2013, transcript at page 82, lines 12 to 15.

175At para. 29.

176CFLCo’s Written Argument, Section III. A. v. a. iii), at p. 37.

177Ibid., at para. 358.

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Newfoundland”178 they were not only referring to the alleged inequities in the Power Contract.

[197]In fact what, the evidence tends to demonstrate, was of equal or perhaps paramount concern to them, possibly legitimately so, was Newfoundland’s perception of

the inadequate rent and royalties received by it as owner of the hydraulic resources, from CFLCo pursuant to the 1953 Principal Agreement179 and the 1961 Lease.180

[198]In the Budget Speech delivered on March 7, 1978, by the Honourable Alex Hickman, Minister of Finance, he referred to the Power Contract as “...this inequitable contract”. He added: “It is our hope that Québec will be reasonable in re-negotiating this contract.” Then he goes on to add what was, perhaps, his true underlying objective:

Recapture of our fair share of this economic loss would significantly alter the overall financial position of Newfoundland and Labrador, improve our credit rating and ensure absolutely our ability to finance our resource development potential particularly as it relates to hydro sites at Gull Island and Muskrat Falls.181

[emphasis added]

[199]It is worthy of note that Mr. Hickman refers to the “...overall financial position of Newfoundland and Labrador” and to “...improve our credit rating”. His concerns do not appear to be related to those of CFLCo. This characterization by Mr. Hickman of what was sought leads the Court to question whether his concerns, as well as those expressed in these proceedings, are but another attempt to right the perceived injustice to the Province resulting from the alleged inadequacy of the consideration payable by CFLCo (Brinco) for the rights under the 1953 Principal Agreement and the 1961 Lease. It is to be remembered that Hydro-Québec was not a party to either of these two agreements. This question will also be addressed further in Section XI below.

[200]It is relevant to note that, as Deputy Minister of the Treasury Board at the time,

Victor Young was involved in all parts of the 1978 budget referred to above as well as in the preceding budgets since 1968.182

[201]Mr. Young was appointed Chairman and CEO of NLH and CEO of CFLCo later in 1978, which position he held continuously until the fall of 1984.183

[202]In a Statement issued on May 18, 1984 concerning the “Negotiations Between Québec and Newfoundland on the Upper Churchill”, William W. Marshall, then Minister Responsible for Energy, clearly and appropriately identified the “problem” and the source of the alleged injustice:

178Exhibit D-036/8.

179Exhibit P-4.

180Exhibit P-5.

181Exhibit D-370/3.

182Testimony of V. Young, October 3, 2013, transcript at page 15, lines 13 to 20.

183Testimony of V. Young, September 12, 2013, transcript at page 13, lines 18 to 23.

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The problem commenced in 1961 when the Newfoundland Government leased for 99 years to Churchill Falls Labrador Corporation (then owned by Brinco) the right to transmit and export all power generated from the Upper Churchill. The price payable to the Province was stated to be a fixed yearly rental of 8% of net profits of CFLCo before taxes and a fixed royalty of 50c per horsepower year generated and sent out of Churchill Falls. There were no

reopeners. [...]184

[emphasis added]

[203]In its Mémoire, counsel for Hydro-Québec addresses this issue in the following manner. The references to the testimony of Ed Martin given on September 11, 2013 are accurate and appropriate in the context cited. (The emphasis in the extract below is that of the author. The footnotes have been renumbered to follow the sequence in the present judgment. The original style and form have been preserved):

76.Compte tenu de ce qui précède, lorsque Terre-Neuve et/ou NLH font valoir depuis des décennies, tout comme CF(L)Co aujourd’hui185, l’insuffisance des bénéfices découlant de l’exploitation hydraulique du

Haut Churchill qui échoient à Terre-Neuve à titre de propriétaire de la ressource, ce n’est pas au Contrat qu’elles doivent s’en prendre186.

77.De l’opinion même de Brian Peckford, premier ministre de Terre-Neuve à l’époque de l’adoption de la Reversion Act :

[...] it was the lease given by the Government of Newfoundland to CFLCo

which formed the cornerstone of this development. Without it nothing could have been done.187

[...] I think this is the crucial aspect to the whole development, to the whole problem to the whole situation, and it has been overlooked and this legislation [Reversion Act] tends to get us back on the rails again to the beginning of this development and it was when this legislature passed an act which gave a lease to CFLCo, a subsidiary, a wholly owned subsidiary then really of BRINCO, for the development of the Upper Churchill and the sale of power from the Upper Churchill. That was the key document,

that was the key agreement, that was the key move; it was the legislature of this Province providing through legislation, a lease to CFLCo.188

[nous soulignons]

184Exhibit D-213/6.

185Par. 35 (iv) de la Requête.

186Témoignage de E. Martin, 11 sept. 2013, p. 18, l. 12 à 18. Voir aussi témoignage au préalable de D. Mercer, pièce D-252, p. 21 où M. Mercer a admis que « as between the Water Lease and the Power Contract, what determined the benefits to Newfoundland as the resource owner was the Water Lease » et témoignage de V. Young, 3 oct. 2013, p. 75, l. 1 à l. 12.

187Pièce D-203, p. 32.

188Pièce D-203, pp. 49 et 50. Voir aussi pièce D-213, p. 6, où W. Marshall, alors ministre de l’Énergie de Terre-Neuve, reconnaissait également, en 1984 : « The problem commenced in 1961, when the Newfoundland Government leased for 99 years to Churchill Falls Labrador Corporation (then owned by BRINCO) the right to transmit and export all power generated from the Upper Churchill ».

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[204]The various other pronouncements made in the political arena by spokespersons for the Government of Newfoundland regarding the alleged “...inequitable outcome of the

Churchill Falls development” as it was characterized in the 2003 Royal Commission on

Renewing and Strengthening Our Place in Canada189 also assist in identifying the source of this perception. They shed light on an another perceived cause of the alleged inequities in the Churchill Falls Project, that is the refusal of the Government of Canada to intervene in the dispute and its allegedly “...standing on the sidelines as an observer of a situation.”

[205]The 2003 Royal Commission, concluded, at pages 16 and following:

The inequitable outcome of the Churchill Falls development, together with successive failures to develop the other sites on the Churchill River, has profoundly affected Newfoundlanders' and Labradorians’ perceptions of their place in Canada. Despite the passing of more than 30 years since power was first generated, the outcome of the Churchill Falls development covers Newfoundland and Labrador's place in Canada with a long dark shadow.

[...]

The inequities of Churchill Falls have been argued with great passion for more than three decades. Some argue that it was flawed national energy policy and the lack of a power corridor through Quebec that denied Newfoundland and Labrador any opportunity to export its energy and capture the economic rent. Others call the deal a home-grown disaster, the fault of Premier Smallwood who championed the project and never asked for a power corridor nor insisted on a re-opener clause. Others argue that it is a simple case of "a contract is a contract." Still others argue that the unintended outcome of the contract was so radically different from that envisaged at the time that simple decency demands its renegotiation.

In the view of the Commission, Churchill Falls is fundamentally about whether or not fairness and equity exist in the Canadian family. It is about the Government of Canada standing on the sidelines as an observer of a situation where, due to unforeseen circumstances, Quebec currently reaps a windfall profit of approximately $850 million a year from a hydroelectric resource located in, and owned by, Newfoundland and Labrador. The first question asked by Newfoundlanders and Labradorians was: "If the situation had been reversed in the late 1960s, would not the Government of Canada have intervened in the national interest and allowed a power corridor through Newfoundland and Labrador for the export of Quebec power?" The second question asked was: "Why, in the absence of the power corridor has the federal government refused to facilitate a reasonable sharing of the windfall profits between the two Provinces?"

[internal footnotes omitted, emphasis added]

189Royal Commission on Renewing and Strengthening Our Place in Canada, Our Place in Canada, Main

Report, (St. John’s, NF: 2003) (the “2003 Royal Commission”) (Exhibit D-339).

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[206]It is relevant to note that the 2003 Royal Commission was chaired by Victor Young; as previously mentioned, Chairman and Chief Executive Officer of NLH and CFLCo from 1978 to 1984.

V.Positions of the Parties

[207]The positions are succinctly stated below and elaborated upon in Section XI of this judgment.

A.CFLCo

[208]For the reasons more fully expressed in CFLCo’s Written Argument, it:

...calls upon this Court to recognize that in the circumstances of this relationship, Hydro-Québec has a duty, based on good faith, cooperation and the reasonable

exercise of rights, to re-negotiate the pricing terms of the Power Contract for the future.190

[209]It contends, in particular:

A.The duty to renegotiate is the practical application of the duty of good faith and the reasonable exercise of rights in the circumstances of this case, despite the fact that a duty to renegotiate is not specifically codified or written in the contract

[...]

v.Given the nature of the relationship between the parties and the extraordinary transformation of the conditions in which the Contract was concluded, Hydro-Québec has a duty to renegotiate the pricing terms of the Power Contract

vi.Hydro-Québec’s duty of good faith and collaboration in this case does not turn on the adoption or rejection of the theory of imprévision in Quebec law

[...]

[210]CFLCo does not seriously contest the fairness of the Power Contract at the time and in the context in which it was negotiated. Rather, what is challenged is the alleged unjust and unreasonable refusal on the part of Hydro-Québec to re-negotiate the pricing terms of the Power Contract for the future or, at the very least, for the twenty-five (25) year renewal term.

B.Hydro-Québec

[211]The following extracts of its “Aperçu” (Outline), as elaborated upon at some length in its Mémoire, reflect the salient elements of its contentions :

190At para. 376.

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1.Le droit que Churchill Falls (Labrador) Corporation Limited (« CF(L)Co ») demande au Tribunal de créer – car ce droit n’existe pas en droit positif québécois – ne saurait être un droit taillé sur mesure aux faits que CF(L)Co est parvenue à prouver. À supposer même qu’il existe, ce droit, comme tout droit d’action, doit être sujet à des conditions d’ouverture, et dans le cadre d’un recours prétendant l’exercer, CF(L)Co doit pouvoir démontrer que son recours est bien fondé en faits et en droit.

[...]

12.Il en est de même d’une demande fondée sur la bonne foi contractuelle. Pour juger du bien-fondé d’un tel recours, le Tribunal doit inévitablement scruter le comportement des parties. Il s’agit encore là d’une analyse de nature foncièrement factuelle.

[...]

14.Or, la preuve démontre sans contredit que le recours de CF(L)Co est mal fondé en faits. La preuve démontre que le Contrat constituait un marché

équitable et raisonnable lors de sa conclusion, en 1969, et qu’il le demeure à tous égards aujourd’hui, malgré les circonstances soi-disant imprévisibles invoquées par CF(L)Co.

[...]

16.Insatisfaite du fait qu’elle reçoit le rendement escompté lors de la conclusion du Contrat, et qui reflète pourtant l’équilibre de celui-ci, CF(L)Co cherche par son recours à enlever à Hydro-Québec des bénéfices qui lui reviennent aux termes du Contrat. Or, la preuve a démontré que ces bénéfices ne sont que la contrepartie des risques importants assumés par Hydro-Québec – risques qui ont permis la création d’un actif ayant une valeur résiduelle immense, et qui produira des profits importants pour CF(L)Co pendant de nombreuses années après l’expiration du Contrat.

[...]

[original footnotes omitted]

VI. Objections and Incidental Motions

[212]The following incidental motions and objections were pleaded during the course of the hearings on the merits and were taken under advisement at the time, with judgment to be rendered concurrently with and to form part of the final judgment.

A.CFLCo’s Motion de bene esse for Authorization to Produce Documents and Hydro-Québec’s Objection to the Admissibility in Evidence of the Massell Report and the Reliance Materials

[213]By its Motion de bene esse for Authorization to Produce Documents (the “Motion de bene esse”), CFLCo seeks permission to produce the primary and

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secondary source materials, (the “Reliance Materials”)191 referred to in the 333 footnotes contained in a report dated November 30, 2011, prepared by Dr. David P. Massell entitled the “Churchill Falls Narrative”, (the “Massell Report”)192.

[214]Hydro-Québec contests, on procedural grounds, the Motion de bene esse as it relates to the Reliance Materials. Moreover, it objects to the admissibility in evidence of both the Massell Report and the Reliance Materials on both substantive and procedural grounds.

[215]The Court will address the merits of the procedural grounds at this time. Hydro-

Québec’s objections regarding the admissibility of the Massell Report and the Reliance

Materials, based on substantive grounds, will be addressed below in Sub- section X. A. (1) in its analysis of the expert evidence offered by Dr. Massell.

[216]Regarding the procedural grounds, CFLCo contends the Massell Report and the Reliance Materials were validly communicated to Hydro-Québec in a timely fashion, although perhaps due to inadvertence, not necessarily in strict accordance with the manner prescribed by law. Subsidiarily, in the event that this Court should find that they were not properly identified and communicated, it seeks authorization to do so at this time.

[217]It contends that it is in the interest of justice that such authorization be granted for the following reasons:

15.First, Plaintiff submits that to the extent it may have failed to identify the Reliance Materials (not to mention the Massell Report) as "exhibits" in its Rule 15, this failure was due to an entirely inadvertent error as regards the application of Rule 15.2 R.P.S.C.;

16.Second, Plaintiff submits that the Defendant would suffer no prejudice at

all if this oversight is now addressed;

17.Indeed, while these documents are essential to contextualize and support the Massell Report, their "late" production would not cause any prejudice to the Defendant, who received communication of the Reliance Materials well over a year and a half ago, who prepared a counter-expertise to critique the Massell Report in which specific and repeated reference is made to the Reliance Materials, and who has known ever since the Massell Report was served that Plaintiff fully intended the Reliance Materials to form part of the Court record;

[...]

19.Third, Plaintiff submits that it has conducted its case in an entirely fair, transparent an diligent manner ever since institution of these proceedings, something which should be a further reason for the Court to relieve it from its "default", if any, to produce the Reliance Materials "properly";

[...]

191Exhibits P-39.1 to P-39.160.

192Exhibit P-39.

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21.Finally, Plaintiff submits that the importance of the issues at stake in this case militates in favour of allowing production of the Reliance Materials, such that the Court may have at its disposal as much relevant information as possible

in assessing and determining the important questions raised by Plaintiff's action;193

[emphasis added]

[218]Hydro-Québec does not seriously contest CFLCo’s assertions that its failure “...to identify the Reliance Materials (not to mention the Massell Report) as "exhibits" in its Rule 15, [...] was due to an entirely inadvertent error as regards the application of Rule 15.2 R.P.S.C.”

[219]Similarly, Hydro-Québec cannot seriously contend that this obvious procedural inadvertence should be sufficient, for this reason alone, to constitutes a fin de non recevoir to the filing of the Massell Report and the Reliance Materials in the record.

[220]In its Plan d’argumentation...au soutien de son objection à la recevabilité...

Hydro-Québec appropriately characterizes the Motion de bene esse in the following manner :

21.La requête de CF(L)Co du 29 août 2013 intitulée Motion de bene esse for authorization to produce documents ne visait pas à obtenir l’autorisation de la Cour afin que les documents visés soient reçus en preuve en vertu de l’article

2870 C.c.Q. Cette requête visait simplement à relever CF(L)Co du défaut d’avoir communiqué les pièces P-39.1 à P-39.160 au préalable afin de lui offrir l’opportunité de les déposer en preuve conformément aux règles d’admissibilité de la preuve applicables.

[emphasis added]

[221]The Court concurs. Borrowing an observation of Riordan J. in Conseil québécois sur le tabac et la santé c. JTI-MacDonald Corp. “...Le Tribunal ne peut permettre qu'une

possible omission procédurale par des avocats serve de barrage à l'écoulement de toute l'information requise pour rendre justice.”194

[222]Accordingly, without pronouncing on the substantive grounds of objection raised by Hydro-Québec, to the extent that same may be necessary, the Court will grant CFLCo authorization to produce both the Massell Report and the Reliance Materials. For greater certainty, however, this authorization does not:

(i)address the admissibility in evidence of the Massell Report under the substantive criteria established by the appropriate authorities referred to below; or

(ii)sanction or permit the introduction in evidence of the exhibits forming part of the Reliance Materials, not otherwise properly in the record, save in accordance with and adherence to the applicable rules of evidence.

193Motion de benne esse for Authorization to Produce Documents, at p. 3.

1942012 QCCS 4433, at para. 41.

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[223]As will be seen below, with the exception of 11 of the exhibits forming part of the Reliance Materials, CFLCo has not otherwise complied with the appropriate rules of evidence in order that they be introduced and form part of the record.

[224]See in this regard: Brochu c. Loto-Québec195 and Professor L. Ducharme,

L’administration de la preuve.196

B.CFLCo’s Motion to Declare a Document Admissible as Written Testimony

(Art. 2870 C.C.Q.)

(1)The Motion

[225]CFLCo asks the Court to declare the following three exhibits, upon which it intends to rely, admissible as written testimony, presumably to prove the veracity of their content, without having been produced by a witness whose identity is unknown:

P-25: Document entitled "Dossier Bas-Churchill" dated October 20, 1989 emanating from “Secteur Énergie”;

P-26: Document entitled "L'électricité au Labrador" dated November 10, 1989 emanating from "Direction de l'électricité, DGÉA-secteur Énergie";

P-29A197: Document entitled "Négociation avec Newfoundland and Labrador Hydro concernant le contrat d'achat avec CF(L)Co" including annexes 1, 2, 3 and 4, as well as document entitled “Revue du dossier Churchill Falls”, which were sent together as a single fax transmission on September 24, 1996, en liasse;

[226]CFLCo clearly describes its intentions and purpose for seeking the relief sought by way of its Motion. It alleges:

1.CFLCo intends to rely on the following three documents at trial: [...]

1952009 QCCS 4676, at paras. 44 and 46.

196Léo Ducharme, L’administration de la preuve, 4th ed. by Léo Ducharme and Charles-Maxime Panaccio, (Montreal: Wilson & Lafleur, 2010), at p. 300.

197As appears from Aileen Baird’s affidavit in support of the present motion, Exhibit P-29 includes four documents. However, these four documents were part of a single fax transmission, which occurred on September 24, 1996 and included six documents. The two documents that were not included in Exhibit P-29 (i.e., the documents entitled “Annexe 2” and “Revue du dossier Churchill Falls”) are filed with the present motion and constitute, together with the other four documents already filed, Exhibit P-29A.

2014 QCCS 3590 (*)

5.The purpose of these three exhibits is to establish the real objectives of Hydro-Québec and the Québec government during their negotiations with CFLCo and the Newfoundland government. Therefore, documents emanating from Hydro-Québec and the Québec government constitute the best evidence.

[emphasis added]

[227]During oral argument counsel described CFLCo’s intentions regarding these documents:

They’re useful to you, to my mind, to reflect the state of mind of Hydro-Quebec in dealing with the upcoming crunch that everybody knows is coming, in the early nineteen nineties, with regard to CFLCo’s financial viability.198

(a)Exhibits P-25 and P-26

[228]For the reasons more fully described in its Motion, CFLCo argues it has been unsuccessful in identifying the authors of Exhibits P-25 and P-26. Accordingly, it contends, it is impossible for them to appear as a witness and that the first criterion in Article 2870 C.C.Q. is thus satisfied. As for the second criterion, the circumstances which guarantee the reliability of the documents, CFLCo cites the following elements which, it submits, are sufficient to meet the test:

∙Both documents appear to have been drawn up in the ordinary course of business of the Ministry, and therefore, their reliability is presumed;

∙The documents are not indicated to be drafts;

∙Exhibit P-25 bears the mention "Classé" [sic];

∙Both documents were faxed to someone, which suggests that there [sic] are in final form;

∙Both documents were retained by the Ministry and were subsequently filed in the Archives Nationales du Québec; and

∙The content of Exhibits P-25 and P-26 is consistent with other documents

which Hydro-Québec has recognized as being admissible evidence for the purposes of this trial.199

(b)Exhibit P-29A

[229]Similarly and for the reasons more fully described in its Motion, CFLCo argues it has been unsuccessful in identifying the author of Exhibit P-29A. Accordingly, it contends, it is impossible for them to appear as a witness and that the first criterion in

198Me. D. Mitchell, December 10, 2013, transcript at page 49, lines 7 to 11.

199CFLCo’s Motion to Declare a Document Admissible as Written Testimony, at para. 9.

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Article 2870 C.C.Q. is thus satisfied. As for the second criterion, CFLCo cites the following elements which, it submits, are sufficient to meet the test:

∙The document appears to have been drawn up in the ordinary course of business of Hydro-Québec, and therefore, its reliability is presumed;

∙The document appears to be complete;

∙There is no indication on the document that it is a draft;

∙As appears from the documents, they were sent in a single fax transmission to someone, which again suggests that it is a document in final form;

∙A copy of the document was preserved by someone within government and was later filed in the Archives Nationales du Québec; and

∙The content of Exhibit P-29A is consistent with other documents which

Hydro-Québec has recognized as being admissible evidence for the purposes of this trial.200

[230]Hydro-Québec originally objected to the production of the three exhibits on the grounds that: (i) they fail to respect the essential conditions provided for in Article 2870 C.C.Q., (ii) substantial portions of each of the documents constitute opinion evidence on the part of the unknown authors, (iii) CFLCo is unable to prove that the authors of the documents had a personal knowledge of the facts reported in each of them, (iv) the authors purport to refer to the strategic positions of third parties without indicating their sources of such knowledge and (v) the documents are privileged.

[231]In the course of oral argument on the Motion, counsel for Hydro-Québec advised

it was waiving privilege for the three documents but that it was maintaining its objection and was not otherwise agreeing to their production in evidence.201

(2)The Criteria of Article 2870 C.C.Q.

[232]In a second more recent decision in Conseil québécois sur le tabac et la santé v. JTI-MacDonald Corp.202 Riordan J. had occasion to examine the criteria applicable to the exception to the hearsay rule contained in Article 2870 C.C.Q. The Court adopts by reference, his analysis reproduced below. (The language and numbering of the footnotes have been modified, solely to follow the sequencing in this judgment.)

LA PORTÉE DE L'ARTICLE 2870 C.C.Q.

[14]Avant d'analyser chaque document, étudions la portée des principes établis à l'article 2870, dont le texte se lit ainsi :

200Ibid., at para. 12.

201Me Bienvenu, December 10, 2013, transcript at page 50, lines14 to 19.

2022013 QCCS 20 (“JTI-MacDonald”).

2014 QCCS 3590 (*)

2870. La déclaration faite par une personne qui ne comparaît pas comme témoin, sur des faits au sujet desquels elle aurait pu légalement déposer, peut être admise à titre de témoignage, pourvu que, sur demande et après qu'avis ait été donné à la partie adverse, le tribunal l'autorise.

Celui-ci doit cependant s'assurer qu'il est impossible d'obtenir la

comparution du déclarant

comme témoin, ou déraisonnable de l'exiger, et que les circonstances entourant la déclaration donnent à celle-ci des garanties suffisamment sérieuses pour pouvoir s'y fier.

Sont présumés présenter ces

garanties, notamment, les documents établis dans le cours des activités d'une entreprise et les documents insérés dans un registre dont la tenue est exigée par la loi, de même que les déclarations spontanées et

contemporaines de la survenance des faits.

2870. A statement made by a person who does not appear as a witness, concerning facts to which he could legally testify, is admissible as testimony on application and after notice is given to the adverse party, provided the court authorizes it.

The court shall, however, ascertain that it is impossible for the declarant to appear as a witness, or that it is unreasonable to require him to do so, and that the reliability of the statement is sufficiently

guaranteed by the circumstances in which it is made.

The reliability of documents drawn up in the ordinary course of business of an

enterprise, of documents entered in a register kept as required by law and of

spontaneousand contemporaneous statements concerning the occurrence of facts is, in particular, presumed to be sufficiently guaranteed.

2014 QCCS 3590 (*)

c.La déclaration ne peut être fondée sur du ouï-dire lorsque la véracité est en question;

d.La déclaration doit être pertinente aux faits en litige;

e.La déclaration ne peut constituer une opinion d'expert ou tenir lieu du témoignage de l'expert;

f.Dans sa décision sur l'autorisation de la demande en vertu de cet article, le Tribunal exerce sa discrétion.204

[16]Quant au deuxième alinéa, le Tribunal résume ainsi sa compréhension des deux conditions qui y sont énoncées, soit la difficulté de présenter un témoin et la fiabilité de la déclaration :

a.Les exigences en vertu des notions de nécessité et de fiabilité doivent s'appliquer avec souplesse afin de favoriser la recherche de la vérité;205

b.Le décès du déclarant n'est pas le seul cas d'impossibilité prévue et l'incapacité de retrouver la personne après des recherches raisonnables dans les circonstances suffit;

c.Le geste visé par la notion d'impossibilité dans ce contexte n'est pas celui d'obtenir l'élément de preuve en question, mais plutôt celui d'obtenir la comparution du témoin (« impossible d'obtenir la comparution du déclarant comme témoin »). De la même manière, lorsque l'article mentionne le cas où il serait « déraisonnable de l'exiger », cela réfère au fait qu'il serait déraisonnable d'exiger la comparution du déclarant;

d.La notion de la proportionnalité joue un rôle important quant à l'appréciation des limites du raisonnable à exiger la présence d'un témoin au procès. Ainsi, les tribunaux n'hésitent pas à dispenser de la comparution un témoin, même si ce dernier est relativement disponible, dans le cas où son témoignage n'ajouterait rien au document qu'il déposerait;

e.La détermination qu'un document est suffisamment fiable dans ce contexte n'est pas garant de sa force probante. En effet, les circonstances l'entourant, y compris le fait qu'il puisse contenir du ouï-dire, peuvent également en affecter sa force probante.

[17]Ensuite, notre analyse du troisième alinéa nous amène aux constatations suivantes :

a.Une déclaration peut être considérée comme un document;

b.Même si un document établi dans le cours ordinaire des activités d'une entreprise est présumé rencontrer les garanties de fiabilité énoncées, ceci n'est pas limitatif. Autrement dit, il est possible que les documents d'une entreprise qui ne sont pas établis dans le cours ordinaire puissent quand même être considérés fiables aux fins de cet article;

204Voir: Iredale v. Stroll, EYB 2008-136123 (C.S.), paragraphes 17-19.

205Royer, Jean-Claude et Lavallée, Sophie, La preuve civile, 4e édition (2005), Cowansville, Les éditions Yvon Blais inc., paragraphe 726, à la page 580.

2014 QCCS 3590 (*)

c.Il n'est pas nécessaire que la personne faisant la déclaration soit une partie au litige et les documents de tiers, tels des factures, des registres, etc., sont souvent admis en preuve en vertu de l'article 2870;

d.Un déclarant peut aussi bien être une personne morale qu'une personne physique selon le type de document en question;

e.Le fait que le déclarant ne puisse être contre-interrogé par la partie adverse n'est pas un obstacle à l'admission de la déclaration.

La preuve du contenu du document ou de sa simple existence

[18]Les Compagnies exigent que les demandeurs expliquent le but de chaque déclaration. Les demandeurs répondent que leur intention en déposant la majorité de ces 19 documents, loin d'établir la véracité de leur contenu, est de démontrer la fausseté et la mauvaise foi des propos des représentants des Compagnies.

[emphasis added]

(3)Application

[233]While concurring with and adopting by reference the principles described and the analysis of Riordan J. referred to above, the Court does not arrive at the same conclusions in their application to the admissibility of the documents sought to be produced in these proceedings.

[234]The factual and contextual circumstances giving rise to the determination of the admissibility of the documents in JTI-MacDonald Corp are quite different from those in the present proceedings. From a reading of the judgment and, in particular, from the extracts cited below, it would appear that what was sought by the Plaintiffs in JTI- MacDonald Corp was not to establish the veracity of the contents of the exhibits in question but rather to, inter alia,

(i)démontrer la fausseté et la mauvaise foi des propos des représentants des Compagnies

(para. 18);

(ii)démontrer l'attitude et les connaissances des cadres des Compagnies (para. 43); and

(iii)le but poursuivi n'est pas d'en établir la véracité, mais uniquement d'exposer les attitudes et connaissances des cadres de ITL (para. 67).

[235]In the present proceedings, the purpose sought in producing the exhibits in question is not simply to prove their existence. Rather CFLCo seeks to prove the veracity of their content in order: (i) “...to establish the real objectives of Hydro-Québec and the Québec government during their negotiations with CFLCO and the Newfoundland government...”206 and (ii) “...to reflect the state of mind of Hydro-Quebec in dealing with the

206CFLCo’s Motion to Declare a Document Admissible as Written Testimony, at para. 5.

2014 QCCS 3590 (*)

upcoming crunch that everybody knows is coming, in the early nineteen nineties, with regard to CFLCo’s financial viability.”207

[236]Moreover, much if not most of the content of the exhibits in question constitutes opinion evidence not known to the presumed authors or hearsay evidence regarding the thoughts and statements of third parties.

[237]The purpose for which the documents are sought to be produced by CFLCo’s is relevant to a determination as to their admissibility.

[238]In R. v. O’Brien, writing for the Court, Dickson J. stated:

lt is settled law that evidence of a statement made to a witness by a person who is not himself called as a witness is hearsay and inadmissible when the object of the evidence is to establish the truth of what is contained in the statement; it is

not hearsay and is admissible when it is proposed to establish by the evidence, not the truth of the statement but the fact that it was made.208

[emphasis added]

[239]In the same vein, Professor Royer stated:

690 – Distinction entre l’existence et le contenu d’une déclaration extrajudiciaire

– La recevabilité ou non d’un témoignage extrajudiciaire dépend du but poursuivi par le plaideur qui l’offre en preuve ou de l’utilisation qu’il désire en faire. En principe, une déclaration extrajudiciaire est inadmissible pour prouver la

véracité des faits qu’elle relate, mais admissible pour établir son existence.209

[emphasis added]

[240]Apart from the decision in JTI-MacDonald Corp, in which, the circumstances and context can be distinguished from those in the present case, there does not appear to be any case law emanating from Québec dealing specifically with the admissibility in evidence of an extrajudicial writing for the purpose of proving the veracity of the contents and the state of mind of the parties when:

(i)the identity of author is unknown; and

(ii)much of which constitutes opinion evidence not known to the presumed authors or hearsay evidence regarding the thoughts and statements of third parties.

[241]Even if the identity of the authors were known, which is not the case, the remaining element, in and of itself, would be sufficient reason for the Court to deny

CFLCo’s Motion.

207Supra., note 198.

208[1978] 1 S.C.R. 591 at 593.

209Jean-Claude Royer, La preuve civile, 4th ed. by Jean-Claude Royer and Sophie Lavallée, (Cowansville : Yvon Blais, 2008), at p. 545.

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[242]See as well in this regard: Bouchard-Cannon c. Canada (Procureur général), Chamberland JA.:

[37]L'article 2870 C.c.Q. constitue une exception à la règle générale de l'exclusion du témoignage écrit comme moyen d'établir un fait matériel (article 2843 C.c.Q.). L'écrit qui rapporte un fait matériel ne sera admis en preuve que dans des circonstances exceptionnelles. L'article 2870 C.c.Q. énonce les conditions permettant que la déclaration écrite d'une personne qui ne comparaît pas comme témoin soit admise à titre de témoignage : (1) la déclaration porte sur des faits au sujet desquels le déclarant aurait pu légalement déposer, (2) la déclaration est fiable et enfin, (3) la comparution du déclarant est impossible ou déraisonnable.

[38]Les trois rapports font état de faits dont plusieurs – par exemple, les circonstances précédant immédiatement l'écrasement du planeur – ne sont clairement pas à la connaissance personnelle du DSV ou de ses enquêteurs. Il ne s'agit donc pas de faits au sujet desquels le DSV aurait pu légalement déposer vu la règle interdisant le ouï-dire.

[...]

[44]Les rapports contiennent enfin l'opinion du DSV ou de ses enquêteurs quant aux causes de l'accident. S'agissant d'opinions et non de faits, elles ne peuvent pas être reçues en preuve sans que l'enquêteur responsable de l'enquête

témoigne à titre d'expert. En effet, l'article 2870 C.c.Q. restreint la définition de témoignage aux faits, à l'exclusion de l'avis de l'expert. 210

[243]Exercising its discretion and for the reasons expressed, CFLCo’s Motion to

Declare a Document Admissible as Written Testimony (Article 2870 C.C.Q.) will be dismissed.

C.Hydro-Québec’s Objections to the Admissibility of the Statement of Intent and Other Documents Referred to Below Based on Privilege

[244]Hydro-Québec initially objected to the production in evidence of the following exhibits:

(i)Exhibit P-9: Statement of Intent dated February 1, 1984;

(ii)Exhibit P-19: « une note de M. Yves Duhaime, ministre de l’Énergie et des Ressources Naturelles, à l’intention du Conseil des ministres, laquelle est datée du 30 novembre 1983 »,

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(iii)Exhibit P-20 : « une autre note de M. Yves Duhaime, ministre de l’Énergie et des Ressources Naturelles, à l’intention du Conseil des ministres, laquelle est datée du 20 mars 1984. » and

(iv)Exhibits P-25, P-26, P-27, P-28 and P-29A, being a series of memoranda and reports relating to the negotiations between the parties and their respective governments.

[245]On December 2 and December 16, 2013, Hydro-Québec desisted, for the purposes of these proceedings only, from its objections to the production in evidence of Exhibits P-25, P-26, P-27, P-28 and P-29A and Exhibits P-19 and P-20.

[246]What remains to be decided is Hydro-Québec’s objection to the production in evidence of Exhibit P-9, the Statement of Intent.

[247]CFLCo referred to the Statement of Intent in paragraph 55 and following of its Amended Particularized Motion to Institute Proceedings in support its contention that

Hydro-Québec had recognized “...that the terms of the Power Contract were not fair or equitable...”211

[248]The Statement of Intent was negotiated at a time when several disputes were pending between the parties to these proceedings and among the parties and the Government of Newfoundland before the Courts of Newfoundland and of Québec. These included the Recall Case, the Reversion Act Reference, the Motion for Declaratory Judgment Regarding the Final Capital Cost of the Plant and the Motion for

Declaratory Judgment regarding CFLCo’s obligations to sell and supply power to Hydro- Québec under the Power Contract, the latter two before the Superior Court of Québec. The Reversion Act Reference had already been pleaded before the Supreme Court of Canada at the time, had been taken under advisement on October 1, 1982 but had not yet been decided.

[249]In the context of the pending litigation, being at various stages and before different levels of the Court system, both in Newfoundland and Québec and, seeing the uncertainty as to the outcome in one or more of the proceedings, Hydro-Québec, NLH (representing its own interests and presumably those of CFLCo and the Government of Newfoundland) undertook to commence negotiations in the hope of settling their differences. The preamble to the Statement of Intent reflects this objective.

Following meetings in Montréal and in St. John’s during which Newfoundland and Labrador Hydro and Hydro-Québec had extensive discussions, it was suggested that, as a meaningful step in negotiations between the parties, a general

211At para. 58.

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framework should be established within which the negotiations could be carried out.

The purpose of the present document is to define this general framework which is to be used as a reference within which the negotiations are to be pursued in good faith, the whole without prejudice to the respective positions and rights of the parties should they fail to reach a final definitive agreement. 212

[emphasis added]

[250]Clause 2.7 of the Statement of Intent confirms the objective of the parties to put an end to all actions or claims pending between them.

2.7 The Settlement of Actions

The parties recognize the necessity, within the framework of a negotiated settlement, to put an end to any and all actions or claims between them either before the Courts of Justice or before administrative boards such as the National Energy Board.

In this context, the parties agree that as part of any final settlement, the following would occur:

(i)the parties would put an end to the cases presently before the Courts;

(ii)Newfoundland would cause the Water Rights Reversion Act to be revoked;

(iii)the undertaking of Newfoundland for a determinate period, not to obstruct the demands of Hydro-Québec to the N.E.B. in connection with the export and sale of power and energy.

[251]Clause 3 contemplates a deadline for the completion of negotiations.

3. Conclusion of negotiations

The parties hereby agree that they are willing to pursue the negotiations within the general framework hereinabove described, seeking to achieve a settlement prior to March 30, 1984.

[252]As previously mentioned, the March 30, 1984 deadline was to coincide with the

expiry of several delays granted by the Supreme Court of Canada to the parties, at their joint request,213 in order to attempt to settle their dispute in the Reversion Act Reference. Failing settlement, it was agreed the Court would render judgment in the matter previously argued by the parties and reserved.

[253]Paragraph 5 provided for the secrecy of the Statement of Intent.

5. Secrecy Clause

Both parties agree that neither party will make public or communicate this Statement of Intent to any third party without the consent of the other.

212Exhibit P-9, at p. 1.

213Exhibits D-336/1, D-336/3 and D-336/5.

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(1)Positions of the parties

(a)Hydro-Québec

[254]Hydro-Québec contends that, in contravention of the secrecy clause contained therein and in disregard of the settlement privilege which attaches to the Statement of Intent, CFLCo inappropriately referred to it in detail in paragraphs 55 to 58 of its Amended Particularized Motion to Institute Proceedings and in paragraph 242 of

CFLCo’s Written Argument. It objects to CFLCo’s attempts to introduce the Statement of Intent in evidence in order to support its pretentions regarding the allegedly prejudicial admissions made by Hydro-Québec as to the inequities contained in the Power Contract.

[255]For the reasons described at length in its Plan d’Argumentation dealing specifically with the objection to the admission in evidence of the Statement of Intent as well as in its overall Mémoire dealing with all of the issues raised for determination in these proceedings, Hydro-Québec argues it:

(i)constitutes a document prepared in the context of settlement negotiations;

(ii)is a document protected by settlement privilege and accordingly is inadmissible in evidence and that its content “...lui est inopposable”

(iii)has never waived privilege; and consequently

(iv)should be struck from the record. 214

(b)CFLCo

[256]CFLCo recognizes that the Statement of Intent is a settlement document and that in normal circumstances, settlement privilege would apply to it.215 However, in its written Submissions on Objections and Preliminary Motions, counsel argues:

90.[...] While on their face these documents would appear to attract settlement privilege, CFLCo submits that Hydro-Québec has waived any possible privilege it might invoke in their connection.

91.Specifically, Hydro-Québec has waived, either expressly or implicitly, any possible privilege it might invoke in connection with the 1983-84 Exhibits by:

a.Alleging at length in its own Defence, without any reserve of any kind, the 1983-84 negotiations (see paragraphs 191 to 201);

b.Alleging at paragraph 203 of its Defence, and actually producing into the record, a subsequent “SECRET” offer from Newfoundland

214Défense, at paras. 46 and 198; Art. 403 C.C.P., affidavit of Me. S. Melchers, October 29, 2012, at para. 7; Objection of Me. P. Bienvenu, September 12, 2013, transcript at page 82, line 4 to page 84, line 15.

215Me Doug Mitchell, December 10, 2013, transcript at page 56, lines 16 to 18.

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& Labrador Hydro (Exhibit D-46) which itself refers to and quotes extensively from the Statement of Intent (Exhibit P-9);

c.Producing into the record the speaking notes of Newfoundland & Labrador Premier Brian Tobin (Exhibit D-230), in which he revealed both the existence and contents of the Statement of Intent;

(2)Discussion

[257]It is not seriously contested that, barring express or implied renunciation or waiver on the part of Hydro-Québec, the Statement of Intent would be inadmissible in evidence or, at the very least, could not be set up (“inopposable”) against it.

[258]It is a document or agreement, intended by the parties to be kept confidential, prepared in the context of “without prejudice” settlement negotiations regarding outstanding litigation pending or threatened at the time. Accordingly, barring renunciation, it is protected by this immunity.

[259]David Mercer, former President and C.E.O. of NLH, participated in the

discussions leading to the signature of the Statement of Intent. He acknowledged

“...those were settlement discussions”.216

[260]What is contested, however, is whether:

(a)seeing that CFLCo is not a named signatory to the Statement of Intent, it having been signed only by NLH and Hydro-Québec, it is exempt from the restrictions imposed by the secrecy clause contained therein and, consequently at liberty to invoke it in support of its proceedings; and

(b)Hydro-Québec has, expressly or implicitly, waived settlement privilege regarding its contents.

(a)Scope of privilege attaching to the Statement of Intent

[261]Although CFLCo was not a signatory to the Statement of Intent, the document was intended to serve as a general framework to a resolution of the various outstanding disputes regarding the rights and obligations of CFLCo and Hydro-Québec under the Power Contract as well as those under the various agreements giving rise to the other pending disputes between Hydro-Québec and the Government of Newfoundland. There can be no doubt as to the role and interests of NLH in the negotiation of the Statement of Intent. NLH was both majority shareholder of CFLCo and as such presumably acted on its behalf, with its consent and in its best interests.

[262]NLH was, however, also the representative of the interests of the Government of Newfoundland, a role which some might suggest, in the context of these proceedings, posed certain difficulties of possible conflict of interests.

216Exhibit D-252/34 to 36 (examination on discovery of D. Mercer, January 13, 2011).

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[263]CFLCo cannot seriously contend it was not an interested party in the Statement of Intent and that accordingly it was not bound by the secrecy clause.

[264]In its Plan d’argumentation in support of its objection, cited below, Hydro-Québec argues, with justification, that CFLCo was indeed bound by this clause. (The footnotes in the following extract have been renumbered to follow the sequence in the present judgment. The original style and form have been preserved.)

36.Il serait en effet trop facile pour une société d’échanger des documents avec son adversaire en vue d’en arriver à la solution d’un litige, mais de permettre à sa filiale d’invoquer ces mêmes documents au soutien d’un recours connexe entrepris par cette dernière.

37.Si telle était la situation, les parties ne seraient pas encouragées à négocier une entente de règlement, par crainte que le compromis qu’elles avancent puisse, par la suite, leur être reproché dans le cadre d’un recours distinct intenté par une partie liée. L’intérêt public à ce que les litiges se règlent de manière privée s’en trouverait fortement menacé.

[...]

40.C’est d’ailleurs l’approche qui a été préconisée par la Cour d’appel de Colombie-Britannique dans Middelkamp c. Fraser Valley Real Estate Board, 1992 * 4039 (BC CA). Dans cet arrêt, la Cour mentionne que l’existence du privilège relatif aux discussions de règlement s’explique par le fait qu’une partie qui transmet une proposition de règlement à la partie adverse perd, de ce fait, le contrôle sur l’information contenue dans le document :

3.I am, however, hesitant to establish an immunity other than privilege because parties to negotiations, such as the Appellant in this case, have no control over without prejudice communications once they are sent off to the other side, and documents of the kind in question in this case can easily find their way into the hands of strangers to the dispute being settled. There is no effective protection against the prejudice caused by such communications unless they are characterized as privileged. […]

20.In my judgment this privilege protects documents and communications created for such purposes both from production to other parties to the negotiations and to strangers, and extends as well to admissibility, and whether or not a settlement is reached. This is because, as I have said, a party communicating a proposal related to settlement, or responding to one, usually has no control over what the other side may do with such documents. Without such protection, the public interest in encouraging settlements will not be served.

41.Ainsi, même si les documents échangés dans le cadre de discussions de règlement tombent entre les mains de tiers, ces derniers ne sont pas, pour autant, autorisés à les invoquer dans le cadre d’un litige distinct. Dans La preuve civile, le professeur Royer reconnaît d’ailleurs que le privilège relatif aux discussions de règlement peut être invoqué par l’un des signataires dans le cadre d’un litige impliquant un tiers :

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1133 – Titulaire du privilège et preuve secondaire – Ce privilège peut être soulevé tant par celui qui transmet la communication que par celui qui la reçoit. Il peut également être invoqué dans un autre litige à l’égard d’un tiers.217

42.Dans The Law of Evidence in Canada, les auteurs J. Sopinka, S. Lederman et A. Bryant mentionnent, eux aussi, que les titulaires du privilège relatif aux discussions de règlement peuvent invoquer celui-ci dans le cadre d’un litige distinct impliquant un tiers. Ils ajoutent que le privilège ne s’éteint pas du seul fait que le litige initial a pris fin :

§14.331 If it is accepted that the basis of the privilege is a public policy to encourage settlement, then it follows that the privilege should extend to subsequent proceedings not related to the dispute which the parties attempted to settle. Any possibility of subsequent adverse use could deter full and frank discussions. The principle “once privileged, always privileged” applies.218

(b)Has settlement privilege attaching to the Statement of Intent been waived by those to whom the privilege attaches?

[265]Settlement privilege is a jointly held privilege benefiting all interested parties to the agreement sought to be protected. Accordingly, the agreement could not be entered in evidence without the consent of all the parties. See in this regard:

∙Tucker-Lester v. Lester, 2012 SKQB 443;

∙Squires v. Corner Brook Pulp and Paper Ltd., 1999 * 18967 (NL SCTD).

∙B.C. Children’s Hospital v. Air Products Canada Ltd., 2003 BCCA 177.

[266]Although emanating from the Courts of common law provinces, the foregoing authorities find application and are consistent with the relevant principles applicable in Québec. Whether the Statement of Intent is protected by the common law principle of settlement privilege or that of immunity, the same results obtain.

[267]Professor Léo Ducharme, qualifies this immunity as: “une immunité d’opposabilité.”219

[268]He specifies :

497.- Quatre conditions sont requises pour que l'immunité s'applique : l'existence d'un litige, une communication ayant pour objet le règlement de ce litige, faite sous la

217J.-C. Royer, La preuve civile, 4ième édition, Cowansville, Éditions Yvon Blais, 2008, p. 998.

218J. Sopinka, S. Lederman et A. Bryant, The Law of Evidence in Canada, 3ième édition, Toronto, Lexis Nexis, 2009, p. 1037.

219Léo Ducharme, L’administration de la preuve, 4th ed. by Léo Ducharme and Charles-Maxime Panaccio, (Montreal : Wilson & Lafleur, 2010), at para. 504, p. 195.

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condition expresse ou implicite qu'elle demeurera confidentielle et n'ayant pas donné lieu

àune transaction.220

[269]The Statement of Intent complies with all four conditions. It is untenable to assert that Hydro-Québec has waived settlement privilege.

[270]In its Plan d’argumentation, supported by the authorities cited, Hydro-Québec argues with justification:

65.Face à une telle façon de procéder, Hydro-Québec ne pouvait simplement invoquer le privilège relatif aux discussions de règlement, laisser au dossier les extraits du Statement of Intent cités hors contexte par CF(L)Co et ignorer la prétention de cette dernière que le Statement of Intent contiendrait une admission de la part d’Hydro-Québec quant au caractère inéquitable du Contrat.

66.Hydro-Québec se devait de réagir et il lui était loisible de le faire sans pour autant renoncer à invoquer le privilège relatif aux discussions de règlement. Hydro-Québec soumet qu’il serait contraire à l’équité que de permettre à une partie d’enfreindre la confidentialité des discussions de règlement en invoquant celles-ci dans le corps de ses procédures, puis de l’autoriser ensuite à plaider que la partie adverse a renoncé au privilège en réagissant, de manière justifiée, à la contravention initiale.

67.Adopter cette approche équivaudrait à récompenser la partie contrevenante, à punir celle qui respecte la confidentialité des discussions de règlement et à dépouiller le privilège relatif aux discussions de règlement de toute valeur.

68.Il est totalement inacceptable pour une partie de contrevenir à la confidentialité des échanges visant à régler un litige en invoquant, de manière erronée, le contenu de ces échanges, puis de conclure à une renonciation par la partie adverse lorsque celle-ci corrige la version inexacte des faits suggérée initialement.

[...]

71.Hydro-Québec n’a jamais, de sa propre initiative, invoqué le Statement of Intent au soutien de sa position quant au fond du litige. Hydro-Québec a tout simplement répondu aux allégations fausses contenues à la Requête e CF(L)Co afin de rétablir le contexte à l’intérieur duquel le Statement of Intent avait été signé et de répondre à la prétention erronée de CF(L)Co que ce document constituait une admission de la part d’Hydro-Québec quant au caractère inéquitable du Contrat.

72.La jurisprudence reconnaît qu’une partie ne renonce pas au privilège en répondant tout simplement à une invitation par la partie adverse de se prononcer quant à l’impact d’un document privilégié.

[...]

220Ibid., at para. 497, p. 192.

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77.En l’espèce, Hydro-Québec n’a jamais invoqué le contenu des négociations entourant le Statement of Intent afin de justifier le comportement qui lui est reproché. Hydro-Québec s’est contenté de replacer le Statement of Intent dans son contexte, tout en réservant son droit d’invoquer le privilège. Une telle attitude de la part d’Hydro-Québec ne dénote aucune intention claire et sans équivoque de renoncer au privilège. Hydro-Québec a d’ailleurs pris soin de préciser, à de nombreuses reprises dans sa défense, que le Statement of Intent avait été signé dans le contexte de discussions de règlement :

46 (b) Elle précise que le Statement of Intent a été préparé dans le contexte de négociations entre Hydro Québec, Terre-Neuve et NLH visant à régler les litiges alors pendants devant les tribunaux, et qu’il a été convenu sous réserve des positions et droits de celles-ci advenant qu’elles ne parviennent pas à conclure un règlement final. (…)

193.Tel qu’il est plus amplement exposé ci-après, le Statement of Intent, dont CFLCo prétend erronément qu’il contient une admission quant au caractère inéquitable du Contrat, a été signé dans le contexte de négociations de règlement des litiges alors pendants entre Hydro Québec, NLH et Terre-Neuve, sans que CFLCo n’y soit partie.

194.À l’automne 1983, Hydro Québec a accepté d’entamer des négociations de règlement à la condition que NLH revienne sur une décision récente de ne pas élire de représentants d’Hydro Québec au conseil d’administration de CFLCo, rompant ainsi avec une pratique constante depuis 1969. NLH a accepté cette condition et des représentants d’Hydro-Québec ont été élus au conseil d’administration de CFLCo le 20 octobre 1983.

195.À la suite des demandes conjointes des parties afin de leur permettre de poursuivre les négociations de règlement en cours, la Cour suprême du Canada a accepté de suspendre le prononcé de sa décision dans le cadre du Renvoi sur la Reversion Act, d’abord jusqu’au 31 décembre 1983, puis jusqu’au 31 mars 1984. (…)

198.Le 1er février 1984, Hydro Québec et NLH ont signé le Statement of Intent. Ce document est intervenu dans le contexte de négociations de règlement et il a été exécuté sous réserve des positions et droits respectifs des parties advenant qu’elles ne parviennent pas à conclure un règlement final. Celles-ci avaient alors pour objectif de conclure un règlement avant le 30 mars 1984, soit la veille de l’expiration du second report de jugement accordé par la Cour suprême du Canada dans le cadre du Renvoi sur la Reversion Act. (…)

204.En réponse à cette proposition, Hydro Québec a d’entrée de jeu replacé le Statement of Intent dans son contexte, soit celui des tentatives de règlement des litiges pendants, tel qu’il appert d’une lettre

à NLH du 28 août 1985, dont copie est communiquée comme pièce D

[271]Under reserve of counsel’s and the Court’s views expressed above, the Court would, in any event, strike the document from the record on the grounds of relevance. On the face of it, the Statement of Intent is nothing more than an agreement between the parties to negotiate in good faith on a without prejudice basis, the basis of a

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comprehensive resolution of their various disputes. There is no evidence the parties acted otherwise than in good faith in furtherance of their respective obligations assumed thereunder; unfortunately they were unsuccessful in their negotiations and no binding agreement ensued.

[272]For the reasons expressed above, the Court will maintain Hydro-Québec’s objection to the admissibility in evidence of the Statement of Intent.

VII. Questions in Issue

[273]The questions in issue in these proceedings can be summaried in the following manner:

(1)In the circumstances giving rise to the negotiation and signature of the Power Contract and in light of the events occurring subsequent thereto, in refusing to renegotiate the pricing structure for the future, is Hydro-Québec in breach of its civil law duties of good faith and cooperation and that of exercising its contractual rights in a reasonable manner?

(2)In the affirmative, can the Court intervene in order to grant what it considers appropriate equitable relief?

(3)In the affirmative, what is the appropriate relief?

(4)Under reserve of the forgoing, is CFLCo’s claim prescribed or otherwise barred by waiver, ratification, fin de non-recevoir or other similar doctrine?

VIII. Admissions

[274]The agreement of the respective parties regarding the admissibility in evidence of the numerous exhibits filed in the Court record prior to the commencement of the hearings is described in the Joint Declaration that a File is Complete signed by counsel on March 13, 2013.

[275]The additional exhibits admitted in evidence by consent during the course of the hearings are described in the Procès-verbaux of each of the days in question.

A.Criteria for the Admission of Expert Evidence

[276]The applicable criteria regarding the admissibility or the exclusion of expert evidence has been dealt with extensively in the jurisprudence. Counsel for the respective parties appear to be in agreement regarding the appropriate criteria. It is in the application of the criteria that they have divergent opinions.

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[277]The Supreme Court of Canada in its seminal decision rendered in R. v. Mohan,221 identified the following criteria to be applied in determining the admissibility of expert evidence: (1) relevance; (2) necessity in assisting the trier of fact; (3) the absence of any exclusionary rule and (4) a properly qualified expert.

(1)Relevance

[278]Regarding “relevance”, Sopinka J. stated at page 20: “Relevance is a threshold requirement for the admission of expert evidence as with all other evidence. Relevance is a matter to be decided by a judge as question of law.”[...]

[emphasis added]

(2)Necessity in Assisting the Trier of Fact

[279]Regarding “necessity”, he stated at pages 23 ff.:

In R. v. Abbey, supra, Dickson J., as he then was, stated, at p. 42:

With respect to matters calling for special knowledge, an expert in the field may draw inferences and state his opinion. An expert's function is precisely this: to provide the judge and jury with a ready-made inference which the judge and jury, due to the technical nature of the facts, are unable to formulate. "An expert's opinion is admissible to furnish the Court with scientific information which is likely to be outside the experience and knowledge of a judge or jury. If on the proven facts a judge or jury can form their own conclusions without help, then the opinion of the expert is unnecessary" (Turner (1974), 60 Crim. App. R. 80, at p. 83, per Lawton L.J.)

This pre-condition is often expressed in terms as to whether the evidence would be helpful to the trier of fact. The word "helpful" is not quite appropriate and sets too low a standard. However, I would not judge necessity by too strict a standard. What is required is that the opinion be necessary in the sense that it provide information "which is likely to be outside the experience and knowledge of a judge or jury": as quoted by Dickson J. in R. v. Abbey, supra. As stated by Dickson J., the evidence must be necessary to enable the trier of fact to appreciate the matters in issue due to their technical nature. In Kelliher (Village of) v. Smith, [1931] S.C.R. 672, at p. 684, this Court, quoting from Beven on Negligence (4th ed. 1928), at p. 141, stated that in order for expert evidence to be admissible, "[t]he subject-matter of the inquiry must be such that ordinary people are unlikely to form a correct judgment about it, if unassisted by persons with special knowledge". [...]

[emphasis added]

221[1994] 2 S.C.R. 9 (“Mohan”).

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(3)Absence of any Exclusionary Rule

[280]Regarding “absence of any exclusionary rule”, he stated at page 25 :

Compliance with criteria (a), (b) and (d) will not ensure the admissibility of expert evidence if it falls afoul of an exclusionary rule of evidence separate and apart from the opinion rule itself.

[281]This criterion is not applicable in the present proceedings as there is no applicable exclusionary rule.

(4)Properly Qualified Expert

[282]Regarding the need for a “properly qualified expert”, he also stated at page 25 :

Finally the evidence must be given by a witness who is shown to have acquired special or peculiar knowledge through study or experience in respect of the matters on which he or she undertakes to testify.

****************

[283]The criteria established in Mohan have been consistently applied. This matter

was recently revisited by Rochette JA., in his reasons for judgment on behalf of the Court of Appeal (Québec) in Perreault c. R.222 He stated (The numbering, sequencing and style of the footnotes have been modified to follow the sequencing in this judgment.):

[61]Les parties conviennent que l'application de deux critères énoncés dans l'arrêt Mohan223 est en cause ici : la pertinence du témoignage de l'expert et l'absence d'une règle d'exclusion.

[62]Le juge Sopinka y précise, pour la Cour suprême, qu'une preuve d'expert

est admissible, à première vue, « si elle est à ce point liée au fait concerné qu'elle tend à l'établir »224. L'on parle alors de la pertinence logique. Néanmoins, cette preuve peut être exclue si sa valeur probante est surpassée par son effet préjudiciable, « si elle exige un temps excessivement long qui est sans commune mesure avec sa valeur ou si elle peut induire en erreur en ce sens que son effet

sur le juge des faits, en particulier le jury, est disproportionné par rapport à sa fiabilité »225. Voilà l'expression de la règle générale d'exclusion qui doit être utilisée dans l'appréciation de l'admissibilité de la preuve d'opinion.

[63]Dans une affaire Aitken, la Cour d'appel de Colombie-Britannique a

rappelé les développements récents à ce sujet en se reportant notamment à l'affaire Abbey226 :

2222013 QCCA 834.

223R. c. Mohan, supra, note 223.

224R. c. Mohan, supra, note 223, 20-21.

225Ibid., 21.

226R. v. Abbey, 2009 ONCA 624.

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[72]Under the first step of the inquiry as structured in Abbey, the trial judge must conduct a “ rules-based ” analysis to assess compliance with certain “ preconditions to admissibility ”. These preconditions are set out at para. 80 :

•the proposed opinion must relate to a subject matter that is properly the subject of expert opinion evidence;

•the witness must be qualified to give the opinion;

•the proposed opinion must not run afoul of any exclusionary rule apart entirely from the expert opinion rule; and

•the proposed opinion must be logically relevant to a material

issue.

[…]

[76]The second step of the analysis as structured in Abbey consists of what Doherty J.A. termed “ the ‘gatekeeper’ phase of the admissibility inquiry ” (para. 78). In this phase, the trial judge must exercise judicial discretion to determine whether the benefits associated with the evidence outweigh the costs. This determination involves consideration of necessity (para. 93), which is not the central issue here, but which requires that the expert opinion convey information “ which is likely to be outside the experience and knowledge of a judge or jury ” (Mohan at p. 23, citing R. v. Abbey, 1982 * 25 (SCC), [1982] 2 S.C.R. 24).

[77]The cost-benefit analysis also requires consideration of the legal relevance of the proposed evidence, meaning that its probative value must outweigh its prejudicial effect (Mohan at p. 20). As stated by Doherty J.A., “Evidence that is relevant in the sense that it is logically relevant to a fact in issue survives to the ‘gatekeeper’ phase where the probative value can be assessed as part of a holistic consideration of the costs and benefits associated with admitting the evidence” (Abbey, para. 84).

[78]Consideration of the probative value of expert opinion evidence requires consideration of its reliability :

When one looks to potential probative value, one must consider the reliability of the evidence. Reliability concerns reach not only the subject matter of the evidence, but also the methodology used by the proposed expert in arriving at his or her opinion, the expert’s expertise, and the extent to which the expert is shown to be impartial and objective (Abbey, para. 87).227

[emphasis added]

[284]The criteria enunciated in Mohan, regarding the use and admissibility of expert evidence, were recently reviewed in the reasons for judgment of Beveridge JJ.A., on

227R. v. Aitken, 2012 BCCA 134.

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behalf of the majority of the Nova Scotia Court of Appeal, in Abbott and Haliburton Company v. WBLI Chartered Accountants.228

[285]Beveridge JJ.A. refers to additional and perhaps somewhat controversial criteria to be applied regarding admissibility: being those of impartiality, objectivity and freedom from bias. He noted:

76It is the common law that governs the admissibility of expert evidence. The principles are uncontroversial. They were authoritatively settled in the decision of the Supreme Court of Canada in R. v. Mohan1. A party proposing to call expert evidence must satisfy four criteria: relevance; necessity in assisting the trier of fact; the absence of any exclusionary rule; and a properly qualified expert. There is no suggestion in these criteria that a party must also demonstrate that the proposed expert satisfies some additional criteria about being independent, objective, free from bias or appearance thereof. Nonetheless, trial judges have a discretion to exclude proffered expert opinion evidence if, on a cost-benefit analysis, the potential prejudicial effect outweighs its probative value (see Sopinka, Lederman & Bryant, The Law of Evidence in Canada, 3rd ed. (Toronto: LexisNexis, 2009) at paras. 12.104-112); and the discussion by Doherty J.A. in R. v. Abbey at paras. 75-96).

[emphasis added]

[286]These additional criteria are very much a concern in the present proceedings regarding, in particular, the expert evidence offered by Massell.

[287]Leave to appeal the decision in WBLI was granted by the Supreme Court of Canada. A tentative hearing date has been set for the fall of 2014.229 No doubt, the Court will have occasion to address the relevance and value of these additional criteria in determining admissibility. The Court may very well consider these additional criteria of impartiality, objectivity and freedom from bias as being factors determinative of admissibility or, at the very least, ones which have a bearing on the expert’s qualifications. This issue remains to be definitively revisited and resolved by the Supreme Court of Canada in this pending appeal.

[288]In his text L’expert230, Donald Béchard enumerates, with appropriate authoritative references, certain fundamental principles regarding the admissibility of expert evidence. Among those mentioned, the following find particular application to the experts heard in the present proceedings:

8.L’expert usurpe le rôle du juge lorsqu’il analyse la preuve et le comportement des témoins :231

2282013 NSCA 66 (“WBLI”).

229Abbott and Haliburton Company v. WBLI Chartered Accountants, 2013 NSCA 66, leave to appeal to S.C.C. granted, 35492 (November 21, 2013).

230Donald Béchard with the collaboration of Jessica Béchard, L’expert, (Cowansville, Que: Yvon Blais, 2011).

231Ibid., at p. 91.

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12.L’opinion du témoin doit rester dans les limites de son expertise et ne pas empiéter sur ce qui est du ressort exclusif du juge :232

22.L’utilité de l’expertise, la qualification et l’impartialité du témoin expert sont des conditions préalables à la recevabilité de son témoignage :233

[289]In assessing the qualifications of an expert, Béchard, identifies the following principles supported by the authorities therein cited:

6.Le fait qu’un tribunal permette à un témoin de témoigner comme expert ne

l’empêche pas de lui dénier par la suite cette qualité afin d’écarter son témoignage:234

9.Le témoignage de l’expert qui témoigne dans un domaine qui ne relève pas de son véritable domaine d’expertise aura peu de valeur probante, surtout

lorsqu’il est contredit par des experts spécialistes dans le domaine en question :235

B.Duties and Responsibilities of Expert Witnesses

[290]In Vidéotron Ltée v. Bell ExpressVu, l.p. the Court had occasion to analyze the

relevant authorities regarding (i) the duties and responsibilities of expert witnesses; and (ii) the assessment of credibility, reliability and probative value of expert witnesses.236

[291]The analysis of the authorities referred to in Vidéotron regarding the duties and responsibilities of expert witnesses are adopted in part by reference and reproduced in this sub-section B. (The numbering and sequencing of the footnotes have been modified to follow the sequencing in this judgment.)

[426]The duties and responsibilities of expert witnesses were discussed at length by Cresswell, J. in the 1993 seminal and frequently cited237 U.K. Queen’s

Bench Division (Commercial Division) judgment in National Justice Compania Naviera S.A. v. Prudential Assurance Co. Ltd. (“The Ikarian Reefer”)238.

The duties and responsibilities of expert witnesses in civil cases include the following:

1.Expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of litigation (Whitehouse v. Jordan, [1981] 1 W.L.R. 246 at p. 256, per Lord Wilberforce).

232Ibid., at p. 94.

233Ibid., at p. 100.

234Ibid., at p. 149.

235Ibid., at p. 150.

2362012 QCCS 3492, at paras. 426 ff. (appeal pending, 500-09-022950-150) (“Vidéotron”).

237See, inter alia,: Widdrington (Estate of) v. Wightman, 2001 QCCS 1788 (appeal pending)(“Widdrington”); Comptables agrees (Ordre professionnel des) v. Blouin AZ-50775157, para. 111.

238[1993] 2 Lloyd’s Rep. 68 at pp. 81-82.

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2.An expert witness should provide independent assistance to the Court by way of objective unbiased opinion in relation to matters within his expertise (see Polivitte Ltd. v. Commercial Union Assurance Co. Plc.,

[1987] 1 Lloyd’s Rep. 379 at p. 386 per Mr. Justice Garland and Re J,

[1990] F.C.R. 193 per Mr. Justice Cazalet). An expert witness in the High Court should never assume the role of an advocate.

3.An expert witness should state the facts or assumption upon which his opinion is based. He should not omit to consider material facts which could detract from his concluded opinion (Re J sup.).

4. An expert witness should make it clear when a particular question or issue falls outside his expertise.

5.If an expert’s opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one (Re J sup.). In cases where an expert witness who has prepared a report could not assert that the report contained the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report (Derby & Co. Ltd. and Others v. Weldon and Others, The Times, Nov. 9, 1990 per Lord Justice Staughton).

6.If, after exchange of reports, an expert witness changes his view on a material matter having read the other side’s expert’s report or for any other reason, such change of view should be communicated (through legal representatives) to the other side without delay and when appropriate to the Court.

7.Where expert evidence refers to photographs, plans, calculations, analyses, measurements, survey reports or other similar documents, these must be provided to the opposite party at the same time as the exchange of reports (see 15.5 of the Guide to Commercial Court Practice).

[427]In a Discussion Paper of the Federal Court’s Rules Committee on Expert

Witnesses entitled “Expert Witness in the Federal Courts”239, referring with approval to the analysis of Cresswell J. in the Ikarian Reefer, the Committee wrote at page 1:

Background

The role of the expert witness is to assist the court through the provision of an independent and unbiased opinion about matters coming within the expertise of the witness. This duty is paramount. It overrides the obligations of the witness to the party on whose behalf he or she is called to testify. The evidence of an expert witness should be the independent product of the expert and should not be unduly influenced, in either form or content, by the exigencies of litigation.

239http://www.fca-caf.gc.ca/bulletins/notices/ExpertWitness_Discussion_en.pdf.

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[292]The application of the analysis in Vidéotron regarding the assessment of credibility, reliability and probative value is best dealt with separately in sub-section C below.

C.Assessment of Credibility, Reliability and Probative Value of Expert Evidence

[293]In assessing the credibility and reliability of expert evidence, Béchard, identifies the following principles supported by the authorities therein cited:

1.L’expert doit être impartial. Son rôle est d’éclairer le Tribunal et non de se constituer l’avocat d’une partie :240

[...]

4.La crédibilité du témoignage de l’expert s’évalue en fonction de divers

critères, dont son objectivité, ou inversement, son partie pris démesuré en faveur d’une des parties :241

[294]In determining probative value, Béchard identifies the following “...questions fondamentales concerning la force probante”:242

17.Questions fondamentales concernant la force probante :

[…]

2.Au-delà de la qualification initiale de l’expert, quelle est la qualification réelle de l’expert par rapport au point en litige?

3.Quelles sont les qualifications de l’expert? A-t-il une expérience pratique suffisante au-delà de ses qualifications académiques?

4.Quelle est l’approche de l’expert face aux théories apportées par les autres experts? Y apporte-t-il des éléments?

5.Le travail de l’expert est-il sérieux et peut-on suivre son cheminement? (2842-1733 Québec inc. c. Allstate du Canada, cie d’assurances, [1998] R.R.A. 596, REJB 1998-04516 (C.S.)).

6.L’expert a-t-il fait preuve d’objectivité? (2842-1733 Québec inc. c. Allstate du Canada, cie d’assurances, [1998] R.R.A. 596, REJB 1998-04516 (C.S.); Caisse populaire Desjardins de Drummondville c. Lévesque, B.E. 2001BE-344 (C.S.)).

[…]

10.L’expertise est-elle contredite? (Simard c. Soucy, [1972] C.A. 640, 645).

11.L’expertise et le témoignage sont-ils basés sur des faits plutôt que sur des généralités? (2842-1733 Québec inc. c. Allstate du Canada, cie d’assurances, [1998] R.R.A. 596, REJB 1998-04516 (C.S.)).

240Béchard, supra, note 230, at p. 182.

241Ibid., at p. 184.

242Ibid., at p. 660.

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[...]

14.Existe-t-il une preuve de faits positifs par rapport à la preuve scientifique théorique? (General Accident Insurance Co. c. Cie de chauffage Gaz Naturel, [1978] C.S. 1160).

[…]

17.L’expert avait-il en sa possession tous les documents nécessaires à son expertise? (Bélanger c. Robert (29 juillet 1993), C.S. Québec, no 200-05- 000966-908, j. St-Julien).

18.L’expert a-t-il manifesté un parti pris démesuré? (M. (D.) c. B. (D.), REJB 1999-11836 (C.S.); Fortin c. Compagnie d’assurances Wellington, B.E. 2000BE-416 (C.S.)).

[…]

[295]Béchard also identifies certain restrictive notions relevant to an assessment of probative value.243 The following find particular application to the experts heard in the present proceedings. These notions are elaborated upon, with appropriate authoritative references.

8.L’expert a l’obligation d’être neutre et objectif (Bardiaux c. Leduc, 2009

QCCS 2194, j. Richer, par. 46 et 47; Audet c. Landry, 2009 QCCS 3312, j. Hardy-Lemieux, par. 61 à 64, 93).244

13.Le juge n’est pas lié par les témoignages d’experts, et n’est pas tenu de justifier pourquoi il retient un élément plutôt que l’autre, surtout lorsqu’il est en présence d’une preuve d’expertise contradictoire (Entreprises d’électricité Rial inc c. Lumen, division de Sonepar Canada inc., 2010

QCCA 655, j. Dalphond, Dufresne et Kasirer, par. 28; Rouillard c. St- Martin, 2009 QCCA 2321, j. Dufresne, Léger et Rochon JCA, par. 7).245

15.Plus le témoignage de l’expert est basé sur du oui-dire, plus sa valeur

probante est faible (Dulude c. St-Martin, 2010 QCCS 73, j. Dumas, par. 49).246

21.La valeur probante de l’opinion d’un expert se mesure d’abord en

fonction des faits prouvés (Dicaire c. Chambly (Ville de), 2008 QCCA 54, j. Gendreau, Rochon et Robert, par. 38).247

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X.Analysis of the Evidence – Expert Witnesses

A.CFLCo

[296]Two expert witnesses testified on behalf of CFLCo, Dr. David Massell (“Massell”) and Mr. John Dalton (“Dalton”). Massell testified under reserve of Hydro-

Québec’s objection.

(1)Massell

[297]Massell was qualified at the request of CFLCo, under reserve of Hydro-Québec’s objection, as:

An expert in history, particularly the history of hydroelectricity in Quebec and, specifically, an expert regarding the events and circumstances which gave rise to the negotiation and ultimate execution of the Power Contract entered into between CFLCo and Hydro-Quebec. 248

[298]His report, entitled “Churchill Falls Narrative” dated November 30, 2011 (previously defined as the “Massell Report”), was filed in evidence as exhibit P-39. The materials upon which he purported to rely, in part (previously defined as the “Reliance Materials”) were filed as exhibits P-39.1 to P-39.160, all under reserve of Hydro-Québec’s objection.

[299]He obtained a Ph.D., majoring in history, from Duke University in 1997. His dissertation is entitled: “Amassing Power in a Northern Landscape: J. B. Duke and the Development of the Saguenay River.”

[300]He is presently and has been a full Professor of Canadian and Canadian- American history at the University of Vermont since 2012. He previously taught a variety of courses and seminars offered by the Department of History in various capacities, as Associate-professor, Assistant-professor and Visiting Assistant-professor. He is the recipient of several professional awards, grants for research as well as of publication and institutional grants.

[301]He has no prior experience regarding the history of the second half of the twentieth century relating to the subject matter of his Report. More particularly, he has

no previous experience or particular knowledge relating to the activities of Hydro-

Québec and the “Quiet Revolution” which took place in Québec in the 1960’s.249 He is not an economist, has no formal education in economics, finance, accounting or law.250

[302]This mandate marks the first time he was engaged to analyze and summarize a long term commercial contract.251

248Me Kurt A. Johnson, September 23, 2013, transcript at page 46, line 16 to page 47, line 6.

249Cross-examination of Massell, September 23, 2013, transcript at page 58, lines 3 to 14.

250Ibid., at page 62, lines 2 to 12.

251Ibid., at page 84, lines 14 to 23.

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[303]Massell was assisted in the preparation of his Report by a research historian, Aileen Baird, employed by Public History Inc., an Ottawa, Ontario consulting firm. She is not a signatory to the Massell Report.

[304]Ms. Baird was engaged by counsel for CFLCo prior to Massell’s engagement.

She had gathered two thirds of the source material referred to by him in the preparation of the Massell Report. He subsequently, both with and independently of Ms. Baird, gathered the remaining one third. This fact was only first revealed in his cross examination in Court.

[305]Massell intends to publish a book for retail distribution from an expanded version of the Massell Report. It was one of his stated considerations and conditions in accepting the mandate. To this end, he requested and obtained from counsel for

CFLCo, permission to pursue this intention following the termination of these proceedings.252

(a)Summary of Findings and Opinion

[306] Massell describes his mandate in the following manner:

I have been engaged by the Montreal law firm of Irving Mitchell Kalichman (IMK) as an expert witness in connection with a claim by the Churchill Falls (Labrador) Corporation Limited, against Hydro-Quebec, regarding the Churchill Falls Power Contract. I was retained to conduct independent research and review existing archival records and reports with a view to preparing a summary of the events and circumstances which gave rise to the negotiation and ultimate execution of the Power Contract of 1969: in essence, to prepare and provide to the Court a narrative of this important historical event.253

[307]The Massell Report takes the form of an historical narrative from the perspective of the author. It purports to trace the origins and ultimate realization of the Churchill

Falls Project from 1952 to 1969. In Massell’s words at page 2, “So what follows is one historian’s effort to summarize a strenuous and much-protracted set of negotiations, which led to the signature of the Churchill Falls agreement.”

[308]He describes his methodology in the following manner:

To undertake this task, I have comprehensively reviewed published accounts, in French and English, that deal directly or tangentially with the events or personalities of the Churchill Falls story. This includes works of journalism (that benefitted from personal contacts with the principal players), the memoirs of the players themselves, as well as scholarly (footnoted) works that have explored aspects of the history via the documentary record. Having read the secondary

source material, I moved to primary sources themselves: including correspondence, memoranda and reports produced from the early 1950s at the time of the formation of the British-Newfoundland Corporation Limited (Brinco),

252Ibid., at page 79, line 8 to page 80, line16.

253Massell Report, at p. 1.

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through the consummation of the contract nearly two decades later. In all, and employing well over two thousand primary sources – ranging in scale from brief handwritten notes recording a phone conversation between civil servants, to full- length engineering reports on the power potential of Churchill Falls, and in nature from the public press releases of provincial premiers, to Brinco Board of Directors’ confidential Minutes summarizing contract discussions – I have begun to piece together the multi-perspective history of what has become a highly controversial energy contract.

Still, and however voluminous, I should note that this record is not yet complete. For example, there must certainly be important documentation of the Churchill Falls contract talks in the files of Hydro-Quebec, which any responsible researcher must examine to more accurately assess the maneuvers and motives leading to the 1969 accord. This report has been prepared prior to the examination of this material. Nonetheless, I believe I have a clear picture of the context and the motivations of the respective parties to the Power Contract, as well as the political motivations that are present throughout the negotiations. In particular, the papers of Michel Bélanger, the principal advisor to René Lévesque, heretofore not publicly available, provide clear insight into the motivations of the Québec side of the negotiating table at least through 1966.254

[ephasis added]

[309]Although some of the interested parties involved in the negotiation process at the time or in the years immediately following the realization of the Project are still alive and presumably were available to him, Massell did not think it necessary to interview any of them. His narrative is based solely on his consultation of the primary and secondary source materials he or Ms. Baird thought relevant. On this basis he claims to “...have a clear picture of the context and the motivations of the respective parties to the Power Contract.”

[310]He begins his narrative at page 3 under the heading: “Origins, 1952-1960” with the description of a 1952 visit to Britain by Premier Smallwood and his audience with Prime Minister Churchill at 10 Downing Street in London.

[311]He then proceeds to describe and analyze the ensuing periods and events under the following headings:

PHASE 1: OFFERS MADE AND REJECTED, Winter 1961-Summer 1962

PHASE 2: HOPES RAISED, ULTIMATELY DASHED, Autumn 1962-Summer 1964

PHASE 3: TOWARD A LETTER OF INTENT, Spring 1965-Fall 1966

PHASE 4: TOWARD A BINDING CONTRACT, Fall 1966-Spring 1969

[312]Massell concludes his narrative with the following somewhat astonishing and dramatic observations:

254Ibid.

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The Power Contract of 1969 was far more than a commercial contract. It embodied the hopes and dreams of several of the era’s most influential personalities: Smallwood’s dreams for Newfoundland, Lévesque’s for Quebec, and Pearson’s for Canada. It was bound to the historical aspirations of the residents of two provinces: for economic development as a means of modernization and self-sufficiency, and, for Quebecers, as a vehicle or perhaps a hindrance to post-colonial liberation during the Quiet Revolution.

[...]

The presence of multiple players and multiple polities complicated the closure of the contract across many years. Hydro-Quebec and CFLCo were hardly alone in the negotiating process. Within Quebec, as we have seen, HQ’s position on the prospect of Churchill Falls power often conflicted with that of elected officials of both the Lesage and Johnson governments. For CFLCo, similarly, negotiations were complicated, often hampered, by what CFLCo perceived to be the troublesome interference or impolitic statements of the Smallwood Government. [...] Beyond the Canadian border, U.S. state governments and/or private utilities in New England and New York had much to say about the success or failure of HQ-CFLCo talks...

[...]

Well above and beyond other players and polities, Quebec possessed the geo-political leverage to block Churchill Falls’ development or to let it proceed. It was Lévesque and then Lesage’s repeated refusals to permit transmission across Quebec territory that unequivocally weakened Brinco’s bargaining position. It was Lévesque himself who set out to stall contract talks by way of sharpening Brinco’s hunger to make a deal....

[...]

It is critical to note that the negotiators do not appear to have foreseen windfall profits from the 1969 accord. To the contrary, every indication in the 1950s and 1960s was that the price of energy in North America would continue to fall incrementally, as it had done across the postwar period and indeed across the entire twentieth century, due to increases in both the efficiency and the scale of power generation. This was the lived experience and thus the unstated assumption of all the principal players in this narrative. Meanwhile, as we have indicated, the prospect of nuclear power undercutting the price of hydroelectricity seemed real indeed to many who were knowledgeable in the power industry, on both the Quebec and Newfoundland sides.

In all of these respects, then, the Contract was a particular product of its place and time, sculpted not merely by issues of demand and supply, or by arguments over mills and kilowatthours. It was fashioned by the unique historical moment in which it was negotiated. History made this document. Perhaps how history has unfolded since – the coming of the oil shocks and the resulting spike in energy prices, the unanticipated financial and environmental costs of nuclear power, the growing energy interconnections within the Eastern Canadian-Northeast U.S. region, and the development in the U.S. power

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marketing arena via FERC orders and oversight – should continue to shape its implementation. But that is for the lawyers to argue and for the court to decide.255

[internal footnotes omitted; underlined emphasis that of the Court; non-underlined emphasis, that of the author]

(b)Admissibility in Evidence: Relevance, Necessity and Qualifications of Massell

[313]The Court need only address three of the four criteria for admissibility prescribed in Mohan: (i) relevance, (ii) necessity and (iii) qualifications of the expert. Save for the procedural arguments raised and disposed of in sub-section VI. A., above, there does not appear to be any valid exclusionary rule applicable to the Massell Report.

(i)Relevance

[314]As mentioned above, Massell describes his Report as: “...one historian’s effort to summarize a strenuous and much protracted set of negotiations which led to the signature of the Churchill Falls agreement.”256 In CFLCo’s Submissions on Objections and Preliminary

Motions, counsel suggests:

The narrative of the negotiations which led to the execution of the Power Contract can provide insightful context into the issues at trial. The connection

between the Massell Report and the cause of action in the present case cannot be denied.257

[emphasis added]

[315]On this basis and for this threshold criterion of “relevance”, subject to compliance with the other criteria, one might be incline to agree that the Massell Report would be prima facie admissible, as it purports to relate to a fact in issue upon which it claims to opine. However, does it really relate to a fact in issue and to “...the cause of action in the present case...”? The Court thinks not.

[316]CFLCo does not seriously dispute the material facts and circumstances giving rise to the negotiation and signature of the Power Contract. In the CFLCo’s Written

Argument, counsel notes:

6.Though the parties may disagree on many aspects of this case, the important facts are not contested. As a result of circumstances that neither party foresaw, the power produced by Churchill Falls has an average value today that is approximately 20 times greater – representing hundreds of millions in unexpected annual revenues for Hydro-Québec – than what both parties contemplated when all the known risks and benefits were allocated

255Ibid., at pp. 91 to 93.

256Ibid., at p. 2.

257At para. 25.

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under what was supposed to be, at its core, a long-term, mutually beneficial, equitable relationship.

[317]Moreover, CFLCo does not seriously contest the legitimacy or the fairness, at

the time, of the agreement struck between by the parties as reflected in the Power Contract.258 The overwhelming evidence supports the conclusion that, in the context and circumstances of that time, the agreement was both fair and equitable.

[318]What is disputed, however, is whether, in light of the allegedly significant and unforeseeable events occurring subsequent to the signature of the Power Contract, “...Hydro-Québec has a duty, based on good faith, cooperation and the reasonable exercise of rights, to re-negotiate the pricing terms of the Power Contract for the future.”259

[319]The Massell Report is not temporally relevant and accordingly is not necessary. It does not address the events occurring subsequent to the signature of the Power Contract. His Report sheds no light on these events and provides the Court with no assistance or insight in deciding the issues raised for determination. The same can be said for the Reliance Materials.

[320]Although interesting, the history of the negotiations leading up to the signature of the Letter of Intent and those preceding the Power Contract is really not relevant to a determination of the issues raised for determination in these proceedings.

[321]Moreover, to the extent that the Massell Report might have been of assistance in interpreting any ambiguity in the Power Contract or, to the extent relevant, the 1966 Letter of Intent, there is no such ambiguity in the provisions of either agreement relevant to the relief sought in the present proceedings.

[322]The Court would conclude, accordingly, that the Massell Report fails to pass the threshold test of relevance and accordingly, for this reason alone, should be struck from the record. However, under reserve, and since it has been argued by the parties, the Court will examine the Report under the other criteria as well.

(ii)Necessity

[323]The criterion of “necessity” is described succinctly by Sopinka J. in Mohan, previously referred to herein at paragraph [279

[324]In a similar manner, Professor Paciocco, in The Law of Evidence, stated that expert evidence will not ordinarily be admissible simple because it is “helpful”.

4.2 Necessity in Assisting the Trier of Fact

“The same understanding of necessity applies in both criminal and civil cases.” This “necessity” requirement is intended both to prevent experts from testifying about matters that triers of fact can figure out for themselves, and to ensure that

258See by way of example: Testimony of J. Dalton, October 1, 2013, transcript at page 114, lines 11 to13.

259CFLCo’s Written Argument, at para. 376.

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the kinds of problems expert evidence can present are not created needlessly.

(…)

While this standard is not to be applied “too strict[ly]”, it is clear that expert evidence will not be admissible simply because it may be helpful. It must truly be “necessary”. Expert evidence can be necessary where the expert deals with a subject-matter that ordinary people are unlikely to form a correct judgment about without assistance [...] By contrast, if normal experience enables triers of fact to cope, expert evidence should not be received. [...]260

[internal footnotes omitted; emphasis added]

[325]See as well in this regard: R. v. D.D., [2000] 2 S.C.R. 275, at paras. 46-47.

[326]Massell’s analysis and preparation of: “...a summary of the events and circumstances which gave rise to the negotiation and ultimate execution of the Power Contract...”261 and of the extensive documentation exchanged over the years between the parties in connection therewith are neither “helpful” to nor “necessary” for the Court in these proceedings.

[327]With the assistance of the experienced and highly qualified counsel of record in the present proceedings, the Court would have been reasonably able to consult the relevant documents produced either by consent or by witnesses duly heard and appropriately filed in the record, and thereafter draw its own conclusions regarding the entire process culminating in the signature of the Power Contract.

[328]The interpretation of these documents does not require any expertise or any specific technical or scientific knowledge beyond the presumed knowledge of the Court. Massell all but acknowledged that the nature of the work performed and the process followed by him in the preparation of the Massell Report was, in all respects, the same as that normally performed by the Court in any contentious litigation; the process being

one of analyzing the primary and secondary source evidence properly in the record, weighing its probative value and drawing its conclusions.262

[329]To cite once again and reiterate the words of Dickson J. in R. v. Abbey, p. 42, regarding the role of an expert witness:

An expert's function is precisely this: to provide the judge and jury with a ready- made inference which the judge and jury, due to the technical nature of the facts, are unable to formulate.

[330]In the Plan d’argumentation d’Hydro-Québec counsel contends, with justification:

82.En déposant le narratif du professeur Massell à titre de rapport d’expertise, CF(L)Co tente de conférer à un simple résumé de certains faits le statut d’une preuve d’expert. Cette façon de procéder est contraire

260David M. Paciocco and Lee Stuesser, The Law of Evidence, 5th ed., (Toronto: Irwin Law, 2008), at pp. 196-197.

261Massell Report, at p.1.

262Testimony of D. Massell, September 23, 2013, transcript at page 35, line 21 to page 46, line 20.

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aux règles de preuve et a été dénoncée par les tribunaux canadiens à plusieurs reprises.263

[331]See as well in this regard: Dhaliwal v. Bassi, 2007 BCSC 549; Surrey Credit Union v. Willson, (1990), 45 B.C.L.R. (2d) 310 (S.C.); and Neudorf v. Nettwerk Productions Ltd., 1998 * 6643 (BC SC).

[332]Hydro-Québec contends moreover, also with justification: “ ...Admettre le narratif du professeur Massell en preuve équivaudrait donc à conférer à l’argumentation juridique de CF(L)Co le statut d’une preuve d’expert.” 264

[333]See as well in this regard: Sengbusch v. Priest, 1987 * 2796 (BC SC) at paras. 48 to 51; and Roe v. Dabbs, 2004BCSC 957 at paras. 51, 54, 61 and 62.

[334]The relevant evidence and circumstances in these proceedings are dissimilar from those sometimes prevalent in certain native claim litigation. In such instances, evidence given by an expert historian is the only means available to prove the intentions, context and circumstances under which a particular agreement or treaty may have been concluded. The circumstances prevalent in such cases and the jurisprudence in connection therewith concerning the necessity of expert evidence by a historian are clearly not applicable in these proceedings.

[335]Under reserve of the Court’s views as to “necessity”, or the lack thereof, and the appropriate role of an expert witness and its report, there is another serious concern regarding the risks involved in interposing an expert and his report between the evidence and the Court.

[336]To require the Court, as it is being asked to do, to accept the analysis and synthesis of the evidence by a historian as an accurate narrative of these complex economic and politically motivated events, effectively is to permit an expert to usurp its functions and obligations to evaluate the evidence and draw its own conclusions in fact and in law based upon such evidence. It is to allow the expert, based upon his own judgment regarding relevance and probative value, to interpose himself between the evidence, be it documentary or oral, and the Court. To do so would wrongly usurp the principal and fundamental functions of the Court.

[337]Massell described the process followed by historians in general and by him in particular as that of an intermediary in synthesizing primary and secondary source materials over a protracted period and arriving at a historical narrative of particular events. He described the process in the following manner.

...a historian needs to be aware of what other historians, and/or journalists, or anybody else has written about those events of the past before simply diving into the primary sources. And then once one has mastered, to the best of one’s ability, what others have said, described, interpreted about those events, into the

263Plan d’argumentation d’Hydro-Québec au soutien de son objection à la recevabilité de certains documents, incluant le narratif rédigé par le professeur Massell, at para. 82.

264Ibid., at para. 85.

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primary sources we go, and then it is our responsibility to make just as comprehensive, broad and comprehensive a search and reading, and careful reading of the primary source base as we possibly can, as we begin to tease out circumstances, conclusions, patterns that can be conveyed to readers of the present.

And then in terms of the responsibility to readers of the present, we’re talking about, well let’s use the example of the current mandate, the negotiations for the power contract, we could say, began in earnest in… the chronology begins in earnest in nineteen fifty-two (1952) and they come to an end in May sixty… May-June sixty-eight (’68), or we could say May sixty-nine (’69) for the final signing of the contract. That’s a good seventeen (17) year period which we do not have time to relive in this courtroom.

So obviously, I need to make some kind of condensation of the past. I’m not a stenographer of the documents that I’m finding, I have to find some way to structure that material, to narrate it so that it makes sense to a human being who opens, in this case, my report and wants to know how the events transpired. 265

[emphasis added]

[338]This description is precisely the Court’s concern. Massell would appear to confuse the role of an expert with that of an historical novelist.

[339]In the present case, this process and the characterization of the events described in the Massell Report, if accepted by the Court, could have proven unfortunate and misleading.

[340]Seeing Massell’s (i) admitted serious errors and omissions in interpreting the events, (ii) arbitrary and distorted references in the interpretation of the events or documents, and (iii) unsubstantiated evaluation of the accuracy and reliability of the evidence he considered, the Court cannot accept as accurate, what he referred to as his “condensation of the past”.

[341]See in particular in this regard concerning the concerns expressed above, the following extracts of Massell’s testimony at trial during examinations in chief and in cross-examination:

∙September 23, 2013, transcript at page 177, line 22 to page 178, line 15.

∙September 24, 2013, transcript at page 154, line 20 to page 155, line 20 and at page 159, line 8 to page 160, line 20.

∙September 25, 2013, transcript at page 6, lines 1 to 10, at page 18, line 25 to page 26, line 18, at page 48, line 10 to page 53, line 25 and at page 59, line 4 to page 70, line 17.

265Testimony of D. Massell, September 23, 2013, transcript at page 33, line 25 to page 35 line 3.

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(iii)Qualifications of Massell

[342]Under reserve of the Court’s views and conclusions regarding the (i) relevance and the (ii) necessity of the Massell Report, it is appropriate to address (iii) the qualifications of Massell, being the third criteria defined in Mohan.

[343]As previously mentioned, Massell was qualified by the Court under reserve of Hydro-Québec’s objection.266

[344]It is to be recalled that, by his own admission, he has no previous experience or

particular knowledge relating to the activities of Hydro-Québec and the history of the “Quiet Revolution” in Québec in the 1960’s267 Nor has he any experience in negotiating long term power contracts268, in finance, accounting or in law269.

[345]The qualifications or lack thereof of expert witnesses should be examined not only by reference to their academic and practical experience and expertise. In determining qualifications, one must also examine the degree of independence, objectivity, reliability, transparency and the absence of prejudices which the expert displays in the performance of his mandate. In many instances pointed out in cross- examination, Massell fails to demonstrate such characteristics.

[346]An example of Massell’s lack of objectivity, and of his deciding an issue which he should appropriately have considered was one of the “ultimate issues” to be decided by the Court, is reflected at page 78 of his Report. Referring to the relationship between Power Contract and the Letter of Intent he stated: “In important ways, it [the Power Contract] diverged from the Letter [of Intent], to the long-term disadvantage of CFLCo and Newfoundland”. [emphasis added]

[347]Massell admitted that he was speaking with hindsight and that this comment was based upon allegations made by CFLCo in its action and was not an expression of his independent views or of the expertise requested. The cross-examination at trial culminating with the following exchange is most relevant:

Q – … do you consider that you are more qualified than anyone else sitting in this room today to tell us whether the changes between the LOI and the power contract were or not in the long-term interest of CFLCo and Newfoundland?

A – No, and that is absolutely not in any way a central focus of my report. And given the discussion we’re having right at this moment, I’d be delighted to go back and omit that comment, and obviously, that’s impossible. I put myself in this situation by answering these words here.270

[348]For these additional reasons, the Court must conclude, once again, that the Massell Report fails to respect yet another of the criteria enunciated in Mohan, that of

266Me Kurt A. Johnson, September 23, 2013, transcript at page 46, line 16 to page 47, line 6.

267Testimony of D. Massell, September 23, 2013, transcript at page 58, lines 3 to 14.

268Ibid., at page 62, lines 13 to 18 and at page 84, lines 14 to 23.

269Ibid., at page 62, lines 1 to 12.

270Testimony of D. Massell, September 25, 2013, transcript at page 90, line 2 to page 97, line 18.

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the lack of qualifications of the expert in question and that accordingly it should be struck from the record.

(c)The Probative Value

[349]Seeing the Courts conclusions regarding the Massell Report described above, it is not necessary to address the probative value of its contents as an additional stand- alone issue. However, once again under reserve of the foregoing, referring to and

applying the “Questions fondamentales concernant la force probante” identified by Béchard, referred to in the extract above271 and applying, in particular, the questions listed under numbers 2, 3, 4, 5, 6, 10, 11, 14, 17 and 18 of his enumeration to the Massell Report, the Court would assess little probative value to the findings and conclusions expressed therein.

(d)The Reliance Materials

[350]Considering the Court’s views regarding the admissibility of the Massell Report, it is not necessary to address the substantive grounds raised by CFLCo regarding the admissibility of the Reliance Materials. Nevertheless, and under reserve of the foregoing, the Court would, in any event, grant Hydro-Québec’s objection to the admissibility of the Reliance Materials (other than as it relates to those exhibits independently and appropriately in the record).

[351]There was some confusion as to the identity of the exhibits forming part of what is referred to as the Reliance Materials. This confusion was clarified in a letter dated January 9, 2014 addressed to the Court by CFLCo’s counsel. The relevant extract is cited:

[...] it occurred to us that there might be some misunderstanding as to what the expression “well over a hundred (100) sources footnoted” in para. 18 of the Motion de Bene Esse referred to. We would like to provide the following clarification:

There are 333 footnotes in the Massell Report. In each of these footnotes, one or several documents may be cited, and of course, the same documents can be, and often were, cited in more than one footnote. The “Reliance Materials” was the term used in the Motion to refer to all documents cited in these footnotes (para. 3). In these footnotes, there was over one hundred references to P- or D- Exhibits already in the Court Record. By means of example, if you turn to the Table of Concordance at Footnote 6 you will see that the document cited therein was produced as Exhibit D-4. Similarly, at Footnote 7, one of the documents referred to therein was produced as Exhibit P-4.

[...]

Mindful of the quantity of documents already before the Court and with a view to avoid duplication of exhibits, only the documents of the Reliance Materials which

271Béchard, supra, note 230, at pp. 660 to 661.

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had not already been assigned a specific exhibit number were numbered from P-

39.1to P-39.160 (please note that some of these documents were produced as one exhibit en liasse where it proved more convenient to do so) (please see the second conclusion of the Motion). However, upon reviewing the documents in response to your e-mail, we came across eleven occurrences where a document was submitted as a P-39.xx Exhibit when it had already been numbered as an

exhibit, or where the same document had been produced in a different language in the record. We attach a table detailing these occurrences.272

With the exception of these eleven duplications, none of the other documents identified as Exhibits P-39.1 to P-39.160 were previously in the record as numbered exhibits. In our submissions, however, they formed part of the record as annexes to the Massell Report.

[emphasis added]

[352]Other than these eleven duplications, none of the other documents identified within exhibits P-39.1 to P-39.160 were ever entered in evidence in the appropriate manner. Accordingly, and for the reasons expresses above, and to the extent necessary, they will be struck from the record. They do not make proof of their content and are only viewed by the Court as constituting some of the exhibits, not in the record, but allegedly consulted by Massell and referred to in his Report.

[353]Although, during the Court’s délibéré, the parties did engage in discussions regarding the admissibility of some of the Reliance Materials, they did not reach an agreement.

(2)Dalton

[354]Dalton was qualified at the request of CFLCo, without objection, as an:

Expert in electricity market analysis, policy development and analysis, price

forecasting, power procurement and power contracting, cross-border sales of electricity between the United States and Canada and power project valuation.273

[355]His revised expert report entitled “Evaluation of the Power Purchase Contract for the Churchill Falls Project when Negotiated and under Current Market Conditions” dated October 8, 2010 (the “Dalton Report”) was filed in evidence as exhibit P-40 (A).

[356]He obtained a MBA degree from Boston University in 1987.

[357]Dalton has extensive professional experience in market assessment, market structure development and evaluation, project valuation, power procurement support, transmission facility review and pricing proceeding support and renewable energy policy development and evaluation. He has advised numerous Provincial governments in

272Exhibits P-39.65 = D-112; P-39.78 = D-116/2; P-39.85 & P-39.94 = D-0.6; P-39.90 = D-13; P-39.105 = D-139; P-39.119 = D-145; P-39.128 = D-156; P-39.140 = D-16; P-39.153 = D-24.2.4; P-39.158 = D- 181 and P-39.159 = D-278.

273Me Doug Mitchell, September. 30, 2013, transcript at page 20, line 17 to page 21, line 14.

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Canada, State governments and power authorities in the United States, as well as those located in Australia in these and related fields.

[358]He has had frequent speaking engagements at conferences, forums and seminars and has provided expert testimony on twenty-two occasions before the Courts and Regulatory authorities in both Canada and the United States in these and related fields.

[359]He is described in his revised Résumé as:

A senior electricity market analyst and electricity policy consultant with over twenty five-years of experience in energy market analysis, power procurement, project valuation, and strategy development. Experienced in the evaluation and analysis of electricity markets and the competitive position of generation technologies and projects within these markets including the assessment of the competitiveness of the underlying market, the development of power market price forecasts, the implementation of power procurement processes, and the

development and evaluation of renewable energy policies. Frequent speaker on these subjects at energy industry conferences.274

(a)Summary of Findings and Opinion

[360]His mandate is described on page 4 of the Dalton Report:

[...] I have been engaged to review the market conditions during the negotiation of the Contract and how wholesale electricity markets have evolved since that time. Specifically, I was asked to assess whether these power market conditions have changed since the Contract was originally negotiated and, if so, summarize the principal changes in North American wholesale electricity markets and assess their implications on the value of the Contract from the perspective of the buyer, Hydro-Québec, and the seller, CFLCo. I was also asked to assess the implications on Hydro-Québec of the relief requested by CFLCo.

[361]Dalton further described the nature and scope of his mandate during his testimony at trial. Unlike Hydro-Québec’s expert, Carlos Lapuerta, he does not appear

to have performed: (i) an economic and financial analysis of the Power Contract as such, 275 (ii) an analysis of CFLCo’s financial position under the Power Contract,276 (iii)

an analysis as to the sufficiency of the revenues from the Power Contract to cover its ongoing costs,277 or (iv) an analysis as to the sufficiency of the GWAC to address

CFLCo’s financial requirements in later years.278 These matters were not within the scope of his mandate.

274Exhibit P-48/1.

275Testimony of J. Dalton, September 30, 2013, transcript at page 48, lines 7 to 15.

276Testimony of J. Dalton, October 2, 2013, transcript at page 91, lines 6 to 12.

277Testimony of J. Dalton, September 30, 2013, transcript at page 139, lines 11 to page 140, line1.

278Testimony of J. Dalton, October 2, 2013, transcript at page 92, line 20 to page 93, line 5.

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(i)Contextual Review the Power Contract

[362]Dalton described the electric utility industry prior to and during the period in which the Power Contract was negotiated. At the time:

The electric utility industry generally was subject to cost-based regulation at the time the Contract was negotiated. Electricity prices were established based on the underlying cost of providing the service. One element of this cost was a return on capital which recognized the relative risk of the investment. With rates based on the costs of providing the service, electric utility risks and the corresponding allowed rates of return were low. With the capital investment depreciating over time, the costs of facilities gradually declined as the assets depreciated.279

[emphasis added]

[363]He described the challenges that were implicit in all large energy projects, such as was the Churchill Falls Project.

In summary, all these large energy projects had similar development challenges stemming from significant capital requirements. These challenges included raising the required capital given less developed capital markets and the lack of liquid markets (deep markets that could support significant sales of energy without significant declines in prices) for the sale of energy produced by the projects. Therefore, unless the projects were being developed by well capitalized electric utilities, lenders required assurances that revenues would be sufficient to cover debt and operating costs. For large generation projects this often required a take-or-pay contract with a credit-worthy buyer and in some instances resulted in direct financial support by the federal government.280

[emphasis added]

[364]In examination in chief, he elaborated upon and identified the particular challenges associated with the Churchill Falls Project.

Q- [...] So can you describe to the Court the challenges that are implicit in the Churchill Falls project and, ultimately, how those challenges get allocated and dealt with in the power contract?

A- Certainly. The first point, I think, that needs to be made was that, given the location of the project [...]

So we’re talking about a project that was over five thousand megawatts

(5,000 MW), and this is, [...] larger than any electric-generating project that we have in New England by about three (3) times and these are all projects, the larger projects that I’m talking about were developed in the late nineteen eighties (1980’s).

279Dalton Report, at p. 6.

280Ibid., at p. 9.

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So a very large project that was going to produce a significant amount of power, the first thing that recognizing who was the developer of this project

Brinco which became CFLCo, they did not have a balance sheet, they didn’t have the capability to finance this based on internally generated funds or funds they had available to them.

So they needed to find a buyer for the output of this project. And one needs to, you know, begin to look in terms of what are the potential markets that would be available to them.

[...]

Q- What about the province of Newfoundland?

A- Electricity loads there were, you know, a portion of the total output of the project. So, Newfoundland would not be home for the output of the project. It was clear.

Another possibility that I think was given some consideration but was potentially industrial developed close to the project. This is something that’s also been looked at for some of the Lower Churchill Falls projects, Gull Island for example and the development aluminum smelters there. I think that the challenge might be just the, once again, the size of the project, the number of smelters that one might need and the sequencing of those.281

[emphasis added]

[365]Dalton addressed the particular features of Project in general, the financing requirements, the Power Contract, the risks assumed by each of the parties thereunder and the basis for the price structure during both the initial period and renewal period.

[366]He identified the provisions of the Power Contract under which Hydro-Québec assumed risks to the benefit of CFLCo and to the bond holders: Sections 5.1, 5.4, 8.2, 12.1, 12.4, 14.1 and 15.1.

[367]Regarding the allocation of risk as between the parties, he stated the Power Contract effected an “...efficient allocation of risk”.

A- [...] I mean, I think that if you step back and look at it in terms of the perspectives and the objectives of the parties, Hydro-Quebec was focused in terms of obtaining the lowest possible cost and my feeling is that, by absorbing these risks, it was able to obtain the lowest possible cost.

The alternative, if CFLCo was going to be responsible for bearing the exchange rate risk, for example, there would have to be a margin in the power contract price to cover off the uncertainty regarding what exchange rates would be. And lenders would look at, you know, what could exchange rates be in the future and would do what ifs and pause at a worst case scenario, and they would need to be certain that, under this worst case scenario, or a reasonable worst case scenario, that the project would continue to be able to pay off its debt.

281Testimony of J. Dalton, September 30, 2013, transcript at page 58, line 23 to page 60, line16.

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So if these risks are going to be born by CFLCo, you would require a risk premium in the contract price. And what happens is, if these risks don’t, at the end of the day, transpire, then CFLCo is left with a higher return.

Q- They pocket the risk premium.

A- They pocket the risk premium. So I think that it was an efficient risk allocation from Hydro-Quebec’s perspective to require… excuse me, from Hydro- Quebec’s part to bear these risks. It satisfied their…

Q- Was it also an efficient allocation of risks from CFLCo’s perspective?

A- It was. Yes, I mean, CFLCo was not in a position to bear these risks. It could do so, once again, some of them that could do so, but it would require a higher purchase price.

Q- Okay. And was it in the lenders’ interests as well?

A- Yes, I think the lenders, you know, had a contract that served them, they had a creditworthy counterparty, the buyer, who is in a position to manage these risks.

Q- And so do I understand, then, that the benefit that Hydro-Quebec gets its lowest price?

A- Exactly.

Q- Okay. Consistent with its mandate.

A- Yes.

Q- What does CFLCo get?

A- Primarily, it’s able to build the project, it needed a power purchase agreement if it was going to build this project. So it gets to build the project and it gets to achieve kind of its return objectives.282

[emphasis added]

[368]He also identified the following provisions of the Power Contract under which Hydro-Québec secured corresponding benefits: Sections 11.2, 22.1, Article XX and a contingency Voting Trust Agreement.