Reference re Upper Churchill Water Rights Reversion Act

Is section 4 of the Reversion Act ultra vires the Legislature in whole or in part, and if so, in what particular or particulars and to what extent?

Insofar as section 4 of the Reversion Act is intra vires the Legislature to what extent does it:

a) repeal The Churchill Falls Labrador Corporation (Lease) Act, 1961;

b) repeal the Statutory Lease as defined in section 2(d) of the Reversion Act;

c) determine the Statutory Lease as defined in section 2(d) of the Reversion Act as contemplated by clause 6(a) of Part II of the Statutory Lease;

d) cause the determination of the leases, described in paragraph 9 of the Statement of Facts attached hereto as Appendix II (‘the said Leases’), of Crown Lands authorized and issued pursuant to clause 7 of Part III of the Statutory Lease by virtue of the provisions of clause 7(2) of Part III of the Statutory Lease and the termination clauses contained in the said Leases or either or both of such clauses;

e) cause to be vested in Her Majesty in right of Newfoundland the improvements made by the lessee on the Crown Lands described in the said Leases and leased pursuant to clause 7 of Part III of the Statutory Lease by virtue of clause 6(a) of Part II of the Statutory Lease or by virtue of the nature of the said

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Leases themselves or either or both of them.

Is section 5(1) of the Reversion Act ultra vires the Legislature in whole or in part, and if so, in what particular or particulars and to what extent?

Insofar as section 5(1) of the Reversion Act is intra vires the Legislature to what extent does it:

a) determine the Statutory Lease as defined in section 2(d) of the Reversion Act;

b) cause the determination of the said Leases of Crown Lands authorized and issued pursuant to clause 7 of Part III of the Statutory Lease by virtue of the provisions of clause 7(2) of Part III of the Statutory Lease and the termination clauses contained in the said Leases or either or both of such clauses;

c) cause to be vested in Her Majesty in right of Newfoundland the improvements made by the lessee on the Crown Lands described in the said Leases and leased pursuant to clause 7 of Part III of the Statutory Lease by virtue of clause 6(a) of Part II of the Statutory Lease or by virtue of the nature of the said Leases themselves or either or both of them.

Is section 7(1) of the Reversion Act ultra vires the Legislature in whole or in part, and if so, in what particular or particulars and to what extent?

Insofar as section 7(1) of the Reversion Act is intra vires the Legislature to what extent does it:

a) determine the said Leases of Crown Lands authorized and issued pursuant to clause 7 of Part III of the Statutory Lease;

b) cause to be vested in Her Majesty in right of Newfoundland the improvements made by the lessee on the Crown Lands described in the said Leases and leased pursuant to clause 7 of Part III of the Statutory Lease by virtue of clause 6(a) of Part II of the Statutory Lease or by virtue of the nature of the said Leases themselves or either or both of them.

Is section 8 of the Reversion Act ultra vires the Legislature in whole or in part and if so, in what particular or particulars and to what extent?

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Insofar as section 8 of the Reversion Act is intra vires the Legislature to what extent does it:

a) vest in Her Majesty in right of Newfoundland the hydro-electric works (as defined in section 2(c) of the Reversion Act) attached to the lands held under the said Leases authorized and issued pursuant to clause 7 of Part III of the Statutory Leases?

Is the Reversion Act ultra vires the Legislature in whole or in part and, if so, in what particular or particulars and to what extent?

I

The vast hydro-electric potential of the waters of Labrador has long been recognized. It is, however, only recently that steps towards its exploitation have been taken. In 1958 a company named Hamilton Falls Power Corporation was incorporated by federal letters patent with the following objects:

1. To produce or otherwise acquire and to transmit and sell electricity.

2. To harness or otherwise make use of water for the purpose of producing hydro‑electric and hydraulic power and for any other purpose.

In the same year the new company acquired an option from Her Majesty the Queen in Right of the Province of Newfoundland, at that time the owner of all water rights in Labrador, to develop the water resources of the Hamilton River in Labrador. In 1960 the company exercised its option and obligated itself to develop the hydroelectric resources of the Hamilton River. The river was renamed the Churchill River and in 1965 the company name was changed to Churchill Falls (Labrador) Corporation Limited (hereinafter referred to as CFLCo). The option having been exercised, the Legislature of Newfoundland on March 13, 1961 enacted what is now The Churchill Falls (Labrador) Corporation Limited (Lease) Act, 1961 (Nfld.), c. 51. This Act was amended in 1963-64, 1966-67, 1968, 1969, and 1970 and the Act, together with its amendments, will be referred to as the Lease Act. The Lease Act authorized the Lieutenant Governor in Council to execute and deliver a lease to CFLCo, the terms of

[Page 303] which were to be substantially similar to the terms of a draft lease set out in the schedule to the Act. This lease, called the Statutory Lease, was executed and delivered on May 16, 1961. It was specifically approved in the Lease Act. It granted to CFLCo full right to the exclusive use of certain waters of the Churchill River and its watershed for the generation of hydro‑electric power, together with the right to transmit the power throughout the Province and to export it from the Province. Other leases were also granted by Her Majesty the Queen in Right of Newfoundland to CFLCo in 1968 covering lands and easements necessary for the Churchill Falls project, including leases for the power site itself where the main generating facilities were built, as well as for roads, transmission lines and an airport. These additional grants were referred to in argument as Crown leases.

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.

In 1963 discussions began between Hydro-Quebec and CFLCo regarding the development of Churchill Falls and the transmission of power to Quebec. As a result of these discussions a Letter of

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Intent was signed by the parties on October 31, 1966, whereby they expressed an intent to enter into a contract which was to be called the Power Contract for the purchase of hydro‑electric power by Hydro-Quebec. The Letter of Intent recognized that the purchase of power by Hydro-Quebec was essential to the feasibility of the project and that the Power Contract would have to meet the requirements of lenders regarding the security for the repayment of debt. The Power Contract and the performance of its various provisions were therefore essential to the completion of the project and after completion it was of fundamental importance to its operation.

In order to finance the project CFLCo was required under the provisions of the Power Contract to raise $700 million out of an estimated total cost in excess of $900 million. In addition to bank loans of between $100 and $150 million, CFLCo borrowed $100 million by the issue of General Mortgage Bonds, pursuant to a Deed of Trust of which General Trust of Canada was Trustee, known as the General Mortgage Trust Deed, which was executed on September 1, 1968. It was amended by a supplemental Trust Deed dated May 15, 1969. Pursuant to the Trust Deeds CFLCo assigned and charged all its assets and rights under the Statutory Lease and the Crown leases to the Trustee. The Lieutenant Governor in Council for the Province of Newfoundland consented to this assignment on August 1, 1968.

The bulk of the financing came from the sale of First Mortgage Bonds. CFLCo borrowed $540 million on the security of Series A bonds and a further $50 million on the security of Series B bonds. These funds came from lenders outside the Province of Newfoundland and largely from the United States. The Royal Trust was constituted Trustee for the bondholders under a First Mortgage Trust Deed entered into by Royal Trust and CFLCo on May 15, 1969. As security, CFLCo assigned all its assets and rights under the Statutory Lease and Crown leases and all its rights under the Power Contract. General Trust intervened in the Trust Deed as Trustee under the General Mortgage Trust Deed, granting priority to

[Page 305] the First Mortgage Bonds. Newfoundland also intervened in the Trust Deed confirming its consent to the assignment by CFLCo of its assets to the Royal Trust, which consent had been given on May 12, 1969 by an agreement, known as the Financial Agreement, between the Royal Trust, CFLCo, and the Province of Newfoundland. This agreement was made pursuant to and given the force and effect of law by The Churchill Falls (Labrador) Corporation Limited (Financing) Act, 1969 (Nfld.), c. 76, (the Financing Act).

At the time of the hearing of this appeal, according to the statement of facts which forms part of the record, there remained owing by CFLCo in respect of the above-described borrowings $98 million in General Mortgage Bonds, $458,620,000 U.S. in Series A First Mortgage Bonds, and $45,804,000 Cdn. in Series B Bonds.

It is against this background that the Power Contract between CFLCo and Hydro-Quebec was signed on May 15, 1969. 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 at the option of Hydro-Quebec 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.

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.

The project was a success. CFLCo built the hydro-electric generating plant upon the leased lands in Newfoundland. It has a generating capacity of approximately 5,225MW of power and is capable of producing 34.5 billion kilowatt hours of energy per annum. The delivery of power to Quebec began in 1971 and the whole development was completed on schedule by 1976. As early as 1974, however, problems had arisen. Newfoundland wanted more power for its own use. In January of 1976 the President of Newfoundland and

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Labrador Hydro requested from Hydro-Quebec the recall of 600MW of power. This request was not met and in May of 1976 another request, this time to the Premier of Quebec, for 800MW was made. No diversion of power to Newfoundland resulted from these requests. On August 6, 1976 the Government of Newfoundland adopted an Order in Council calling upon CFLCo to supply 800MW to Newfoundland commencing on October 1, 1983. CFLCo declined to comply with the Order in Council because of its commitment to Hydro-Quebec under the Power Contract.

In September 1976, the Government of Newfoundland commenced an action in the Newfoundland Supreme Court for a declaration of entitlement to power under the Statutory Lease. This action is still pending in the courts of Newfoundland. In June of 1977 Hydro‑Quebec brought an action in the Quebec courts seeking a declaration of its rights under the Power Contract. That action too is still pending. On December 17, 1980 the Reversion Act received Royal Assent after passage in the Legislature of Newfoundland and on February 10, 1981 the present Reference was presented to the Newfoundland Court of Appeal.

II

The purpose of the Reversion Act is expressed in s. 3 which reads as follows:

The purpose of this Act is to provide for the reversion to the province of unencumbered ownership and control in relation to certain water within the province.

The sections which follow make it clear that the water which is affected is that of the Churchill River covered by the Statutory Lease. Section 4, which is the very heart of the Act, provides that the Lease Act, including the Statutory Lease, is repealed and that all rights and interests arising under the repealed statute and lease revest in Her Majesty in Right of the Province of Newfoundland free and clear of all encumbrances or claims. Subsection 3 of s. 4 makes an exception in the case of Twin Falls Power Corporation which is permitted to retain any interests, rights, and privileges

[Page 308] acquired under the Statutory Lease or any other lease or licence, save only that Her Majesty in Right of Newfoundland will be substituted for CFLCo as lessor or licensor. Section 4 is reproduced hereunder:

4. (1) The Churchill Falls (Labrador) Corporation Limited (Lease) Act, 1961, including the Statutory Lease, is repealed.

(2) For greater certainty and the avoidance of doubt, all rights, privileges, liberties and interests that cease to be vested in, conferred on or accrued to any person by virtue of subsection (1) shall revest in and be held by Her Majesty free and clear of any claim, encumbrance or other right of any person as if that Act and Statutory Lease had had no effect in law.

(3) Notwithstanding subsections (1) and (2) or any other section of this Act, all rights, privileges, liberties and interests vested in, conferred on or accruing to Twinco under the Statutory Lease and any sublease or licence, as amended, executed pursuant thereto do not cease to vest, confer or accrue and do not revest in Her Majesty but continue on and after the commencement of this Act in all respects as though this Act had not been passed, except that in all respects and for all purposes CFLCo is replaced as lessor or licensor to Twinco by Her Majesty.

(4) For the purpose of subsection (3) “Twinco” means Twinco as defined in paragraph (b) of subsection (1) of clause 7 of Part IV of the Statutory Lease.

Sections 5, 6 and 7 merely make it clear that all rights and interests directly or indirectly stemming from the Statutory Lease or any of the Crown leases revest in the Crown free and clear of all claims and encumbrances. For greater certainty, s. 8 provides specifically that the hydro-electric works of CFLCo vest in the Crown.

Section 9 deals with payment to secured creditors for all indebtedness which has arisen under the Statutory Lease for the works done and created pursuant to its terms. Such payment is to be “both in discharge of the indebtedness and as full and final compensation to persons holding those interests for the revesting of rights, privileges, liberties and interests referred to in sections 4 to 8 in Her Majesty”. The section provides as well for

[Page 309] the settlement of any dispute between a claimant and the Lieutenant Governor in Council by way of an appeal to the Trial Division of the Supreme Court of Newfoundland. Compensation is to include principal, interest accrued to the date of payment, and any premiums due as if the debt instruments were redeemed on the date of payment under subs. (1). Section 9 is reproduced hereunder:

9. (1) Her Majesty shall pay, as set out in subsection (2), the amount of all indebtedness secured by way of mortgage, lien, debenture or other encumbrance against the rights, privileges, liberties or interests referred to in the Statutory Lease and other instruments set forth in subsection (1) of section 5 and section 6 or hydroelectric works held under a Crown lease issued under clause 7 of Part III of the Statutory Lease both in discharge of the indebtedness and as full and final compensation to persons holding those interests for the revesting of rights, privileges, liberties and interests referred to in sections 4 to 8 in Her Majesty.

(2) Her Majesty may pay the indebtedness in cash or in such manner as the Lieutenant‑Governor in Council may prescribe by regulation, but where payment is permitted by a method other than cash the secured creditor may choose between cash or that other method of payment.

(3) Payment provided for in subsection (1) shall be made after a claim has been established to the satisfaction of the Lieutenant-Governor in Council and the claimant has executed a release in the form prescribed by regulation.

(4) Where a claimant is not satisfied with the decision of the Lieutenant-Governor in Council pursuant to subsection (3), the claimant may appeal to the Trial Division of the Supreme Court of Newfoundland within ninety days of the making of the decision.

(5) The payment provided for in this section is substituted for the security referred to in subsection (1) and, as against Her Majesty or any agent thereof, any claim to, or in respect of, an encumbrance referred to in subsection (1) becomes a claim for such payment and shall no longer affect or be a charge upon the encumbered property.

(6) For the purpose of this section “indebtedness” includes

(a) the principal as of the date of payment,

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(b) all interest as provided for in the debt instruments as may accrue to the date when payment under subsection (1) is made, and

(c) premiums, if any, due as if the debt instruments were redeemed on the date when payment under subsection (1) is made.

Section 10 provides for compensation to shareholders of CFLCo for any loss in value of their shares resulting from the coming into force of the Reversion Act. In case of any dispute as to valuation, the shareholder may appeal to the Trial Division of the Newfoundland Supreme Court. Section 11 provides for payments under the Act from the provincial Consolidated Revenue Fund. Section 10 bars any action arising from the coming into force of the Act other than for compensation as provided in the Act. Sections 10, 11 and 12 are reproduced hereunder:

(1) A shareholder of CFLCo has the right to elect to receive compensation from Her Majesty for any reduction in the value of the common shares of CFLCo owned by that shareholder that results from the coming into force of this Act.

(2) A shareholder who elects to receive compensation shall apply to and satisfy the Lieutenant-Governor in Council of the amount by which his shares have been reduced in value.

(3) Compensation for the purposes of subsection (1) shall be calculated in accordance with subsections (4) and (5).

(4) Subject to subsection (5), for the purpose of calculating the amount of the reduction in the value of the CFLCo common shares the value of those shares immediately prior to the coming into force of this Act shall be determined by the Lieutenant-Governor in Council, as if this Act had not come into force, on a fair and equitable basis having regard to

(a) the projected income or losses of CFLCo over the remaining period of its contractual commitments for the sale of its output of electrical energy;

(b) the net book value of such shares immediately prior to the coming into force of this Act; and

(c) such other factors as he may, in his discretion, consider appropriate.

(5) For the avoidance of doubt and only for the purpose of this section, the value of the common shares

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of CFLCo immediately prior to the coming into force of this Act shall not, other than as set out in subsection (4), be affected by any right or interest consequential to or contingent on the holding of those common shares.

(6) A shareholder may appeal any decision of the Lieutenant-Governor in Council under this section to the Trial Division of the Supreme Court of Newfoundland within ninety days of the making of the decision.

Payment by Her Majesty under this Act and expenses incurred in the administration of this Act shall be paid by the Minister of Finance out of the Consolidated Revenue Fund of the province.

No action or proceeding lies against any person including Her Majesty, and Minister, agent or servant of Her Majesty or any company in which Her Majesty or an agent thereof has an interest, for or in respect of