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Be wary any time someone proposes to add just a few words to a contract, because those added words can substantially alter its interpretation and a party’s rights under the contract.
This came to light in a relatively big way via a CBC news article earlier this week when the Alberta government filed a Court Application seeking to quash what Deputy Premier Sarah Hoffman describes as an illegal “secret” clause in Power Purchase Agreements (“PPAs”) between owners of power generating facilities and buyers as part of the province’s energy deregulation efforts in the mid-90s. Here is a link to a scan of the filed Application.
Those PPAs included a “Change in Law” exit provision that allowed buyers of power, like ENMAX, to unilaterally terminate its PPA if the government were to enact a change in the law that would render the PPA “unprofitable” to ENMAX. That original exit provision read as follows at para. 31 of the Application:
Notwithstanding any of the foregoing, to the extent that a Change in Law, after giving effect thereto and to this Section 4.3, could reasonably be expected to render continued performance by the Parties to this Arrangement for the balance of the Effective Term unprofitable to the Buyer in respect of a Unit, having taken account of any compensation entitlement under Section 4.3(i) or any amount due from the Balancing Pool, then the Buyer may terminate this Arrangement and shall not be liable for, nor entitled to any Termination Payment. [emphasis added]
The exit provision was later revised to look like this at para. 40 of the Application:
Notwithstanding any of the foregoing, to the extent that a Change in Law, after giving effect thereto and to this Section 4.3, could reasonably be expected to render continued performance by the Parties to this Arrangement for the balance of the Effective Term unprofitable, or more unprofitable, to the Buyer in respect of a Unit, having taken account of any compensation entitlement under Section 4.3(j) or any amount due from the Balancing Pool, then the Buyer may terminate this Arrangement and shall not be liable for, nor entitled to any Termination Payment.” [emphasis in original]
How this change came about was because of a request from Enron, a then potential PPA bidder, to clarify “unprofitable” in the PPA, because they were worried that, as was then originally written, they might not be able to terminate the contract because a Change in Law did not render the PPA unprofitable because it was already unprofitable from the beginning (see para. 40 of the Application). So Enron requested that “or more unprofitable” be added to “clarify” the language of the exit provision. The Alberta Energy Utilities Board (“AEUB”) was empowered by the government back then to deal with such clarifications, among other things, for these PPAs on behalf of the government. The AEUB, of course, did add the “or more unprofitable” language to the PPAs.
Why this is a big issue for the government is that it recently increased carbon levies for coal power generation, and therefore added costs to buyers, such as ENMAX, under the PPAs. So this triggered the Change in Law provision and now ENMAX and other buyers want out because the contract is now “unprofitable, or more unprofitable” for them, though it’s not completely clear in the Application whether ENMAX’s PPA was unprofitable in the first place.
As the way politics works, the narrative of the current NDP government is blaming the previous PC government for, essentially, malfeasance in trying to hide this “secret” exit clause, and the leader of the PC party is accusing the NDP government of not doing their homework in reading the PPAs before they decided to increase the carbon levies. I won’t comment on the politics of this, but a central item of relief that the government is asking for in the Application is that the Court determine that the AEUB actions in this respect were ultra vires (legalese term for “beyond its power”) when it added “or more unprofitable” to the PPAs because the result of those added words did more than just clarify the contract as Enron requested – those words gave PPA buyers an expanded scope to terminate their PPA beyond what was originally intended by the government.
So, it’s not that the government is suing itself, as some pundits have suggested, and it’s probably not about corruption on the part of the prior government. The real issue here concerns an administrative law question about whether or not the AEUB overstepped its authority when it altered the PPAs by adding “or more unprofitable”.
Once again, I am not commenting on the politics here or who I believe is right in this dispute. However the lesson learned here is to carefully consider any language added to a contract to “clarify” or otherwise and to seek legal advice regarding the consequences of such changes.