In its recent decision, Grasshopper Solar Corporation v. Independent Electricity System Operator, 2020 ONCA 499, the Ontario Court of Appeal considered the application of the doctrine of estoppel by convention as articulated by the Supreme Court of Canada in Ryan v. Moore, 2005 SCC 38 (“Moore”).
The appellants were renewable energy companies that entered into Feed in Tariff (“FIT”) Contracts in 2016 with the respondent, the Crown agency responsible for Ontario’s power system, for the construction of solar facilities that would provide energy to the Ontario electricity grid. The contracts provided that “time is of the essence” and that the appellants (who are called “Suppliers” in the contracts) achieve commercial operation “in a timely manner” and by a defined “Milestone Date”, which was in September 2019. The contracts provided that if the Suppliers failed to perform any material covenant or obligation under the contracts, the respondent could terminate the contracts.
In 2013 (three years before the appellants entered into the FIT Contracts), the respondent’s predecessor agency, Ontario Power Authority (“OPA”), had published a bulletin advising that OPA would not act upon its termination rights arising in the FIT Contracts if a Supplier did not attain commercial operation by the Milestone Date. However, the 2013 bulletin indicated that it was “for informational purposes only and shall not be relied on by Suppliers” and that “[t]his information does not constitute a waiver of any actual or potential default, nor does it amend the FIT Contract”.
In March 2019, the respondent sent a letter to Suppliers to remind them of the September 2019 Milestone Date for commercial operation and making clear that the respondent would terminate FIT Contracts with any Suppliers that did not meet the deadline. In response, the appellants brought applications for a determination of their rights under the FIT Contracts.
The court concluded that the provisions of the FIT Contracts, properly construed, gave the respondent the right to terminate the contracts without any compensation if Suppliers failed to attain commercial operation by the Milestone Date. Of particular importance to the court was the “time is of the essence” provision, which the court held was a material covenant.
The court rejected the appellants’ arguments that the respondent was estopped from terminating the FIT Contracts, either under estoppel by convention or promissory estoppel. With respect to the latter, the court concluded that at no time did the respondent promise that it would not terminate the contracts if the appellants missed the Milestone Date. In fact, communications from the respondent, including the 2013 bulletin, consistently made clear that the respondent was not waiving any rights it had under the contracts.
With respect to estoppel by convention, the court noted that it was a “relatively rare form of estoppel” that must be applied with care, especially in the context of commercial relationships between sophisticated parties represented by counsel.
The court referred to the test for estoppel by convention that was articulated by the SCC in its decision in Moore, and specifically: (1) the parties’ dealings must have been based on a shared assumption of fact and law; (2) a party must have acted in reliance on the shared assumption, resulting in a change of its legal position; and (3) the party will suffer a detriment if the other party is allowed to resile or depart from the common assumption.
The court recognized that a shared assumption may be based on a mistake. The court also recognized that a shared assumption could be implied from a party’s silence. However, the court concluded that the record supported the application judge’s conclusion that there was no shared assumption, either that the respondent would not terminate the contracts if the appellants did not attain commercial operation by the Milestone Date, or that the respondent would not terminate the contracts without first giving notice that it was changing its position, both of which were argued by the appellants. In the court’s opinion, the 2013 bulletin that was said to give rise to the shared assumption made clear that it was “for informational purposes only”, could not be relied upon by Suppliers, and that the respondent was not waiving any defaults or varying the terms of the FIT Contracts.
Of interest in this case is the fact that the court stayed within the four corners of the test for estoppel by convention and was not swayed by arguments based on the significant economic impact of the terminations on the appellants. The appellants had argued that the respondent had no commercial interest in terminating the contracts that was proportionate to the millions of dollars in construction costs that would be lost by the appellants as a result of the termination. The appellants argued that the circumstances cried out for some form of equitable remedy. They appeared to argue that, even if there was no shared assumption, they at least satisfied the second and third elements of the Moore test – i.e. to demonstrate reliance and detriment. The court rejected any appeal for equitable relief based merely on reliance and detriment. In the court’s view, a shared assumption is not merely one of three elements but the element that gave rise to the need for equitable relief. The court stated that without a shared assumption, the appellants had no right to equitable relief.