(October 6, 2016) The implication that cancelling odious solar and wind contracts would scare off investors defies history and lacks credibility.
Those who don’t know history are doomed to repeat it. Those who misunderstand the law are doomed to make ill-informed investments. Two prestigious law firms — misunderstanding history and the law — could benefit from a lesson in both.
“Once a contract has been entered into in a country where the rule of law is respected, it’s expensive to break it,” wrote Ron Clark, an energy lawyer at Aird & Berlis, on this page yesterday. He was disputing my recent column — one of several I’ve written in the last few years — arguing that the Ontario government should rip up the outrageous agreements it entered into with firms in the renewable energy industry. If Ontario did rip up these contracts, Clark suggested, it risked being shunned by investors, just as investors shun the likes of Russia, China and Venezuela. The previous day, Osler, Hoskin & Harcourt’s Jacob Sadikman asserted in a letter to FP Comment that “developers’ rights when participating in government procurement programs are often limited until the contract is executed, at which point their rights are enshrined in the contract.”
What Sadikman didn’t write was that this is true as long as the government doesn’t decide to rip up the contract to appease an angry electorate and save its own skin. Had he added that, he would have been less likely to inadvertently mislead the lay reader. Sadikman and Clark, both lawyers at major firms, surely are aware that the Supreme Court of Canada has stated that “the legislature may have the extraordinary power of passing a law to specifically deny compensation to an aggrieved individual with whom it has broken an agreement.” As Patrick J. Monahan, author of Constitutional Law and former Dean of Osgoode Hall Law School wrote after the federal government ripped up the scandalous Pearson Airport contract in 1994,“no legal commentators have ever expressed any doubts about Parliament’s unlimited authority to deny compensation for breaches of contract.” (Monahan, now Ontario’s deputy attorney general, did go on to become his own exception, as he did eventually express personal doubts.)
The law does not support Sadikman’s bald assertion that rights enshrined in contracts are unlimited. Neither does history. Especially in Ontario. Especially in the power sector, which has for more than a century been highly politicized. The great developers who built power plants, transmission lines and public transit systems at the turn of the last century on the basis of what they thought were iron-clad contracts learned this only when the government nullified those contracts.
The developers had more than contracts as assurance; they even had legislation specifically designed to enforce their contractual rights. That legislation proved as worthless as the contracts did, when a new government amended the legislation in response to public outrage over monopoly pricing. The privately owned Electrical Development Company — a massive enterprise created to bring power from Niagara Falls to Toronto — was soon eviscerated. The related Toronto Power Company would also be eviscerated, without even having its day in court; to cut off any argument it might want to make, the province passed a law denying it legal redress. “If the Legislature says, it is your duty not to try such and such an action, it is my duty not to try it,” Justice W. R. Riddell explained at the time. “I am here to carry out the laws.”
The Ontario government nullified its agreements over the objections of the developers’ foreign financiers, who warned that the government’s “confiscation” of their rights would make a shambles of the province’s credit rating. Ontario’s credit rating, in the end, was unaffected. The government argued, persuasively, that it had not acted arbitrarily; it was only effecting the will of the people, as unambiguously shown by election results. The foreign financiers accepted this explanation — it was, after all, accurate — and continued their lending, helping to make Ontario an economic powerhouse. In the 1930s, another provincial power scandal involving other cancelled contracts also led to a lenders’ revolt, but it too was fleeting.
The implication that cancelling power contracts would lead investors to view Ontario as another Venezuela defies history and lacks credibility. Ontario would be acting within its moral as well as legal authority in cancelling clearly odious contracts between naïve politicians (there is no other charitable way to describe the actions of recent Ontario premiers) and opportunistic developers selling power at several times the market price. Moreover, the cancellation would be protecting the many scrupulous investors in other sectors of the provincial economy who strengthen, not weaken, Ontario industry. The only future investors who would and should view their capital as at risk would be those embarking on equally odious development schemes. The notion that investors would single out Ontario for punishment is all the more far-fetched given that power contracts are being ripped up throughout Europe as the public there, too, awakens to the harm done by their own naïve politicians.
In a democracy, the people are sovereign. Contracts are inviolate only when the public, through the legislature, agrees. This applies also to the United States, which unlike Canada has enshrined property rights in its constitution. “Unless you can so conduct your business as to get the good will of the community in which you are working, you might as well shut up shop and move away,” explained Samuel Insull, the great Chicago industrialist who pioneered America’s power industry. This is advice all developers must weigh before investing in odious projects. This is the ultimate rule of law.