Dangerous Assumptions: Estoppel by Convention in Construction Projects

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[co-author: Mikayla Hill - Articling Student]

A recent case on estoppel by convention in the context of an owner's termination of a construction contract provides a valuable reminder to both legal practitioners and project personnel on the dangers associated with ignoring the contract, even when it may seem safe to do so.

In the recent case from the Ontario Court of Appeal of Grasshopper Solar Corporation v Independent Electricity System Operator, 2020 ONCA 499 [Grasshopper], the court rejected the contractor's argument that a fairly express past communication from the owner that the contract would not be terminated for delay "estopped" the owner from later terminating the agreement for delay.

The contractor had argued that "estoppel by convention" applied, which is briefly defined as a shared assumption of fact or law between two contracting parties that may operate to prevent one of the parties from asserting contractual rights in a manner contrary to the shared assumption. The court held that there was no such shared assumption in the circumstances of the Grasshopper case.

Background

In August 2016, the appellant contractor, Grasshopper Solar Corporation entered into a Feed-in-Tariff Contract (FIT Contract) with Ontario's Independent Electricity System Operator (IESO), as owner, for the construction of solar facilities. These facilities were to provide energy to the Ontario electricity grid. The agreement included a time of the essence clause that required Grasshopper Corp. to achieve commercial operation of these facilities by a milestone date of September 8, 2019.

On June 17, 2013, (notably prior to entering into the FIT Contract with Grasshopper Corp.), the IESO's predecessor, the Ontario Power Authority (OPA), issued a bulletin on its website outlining the OPA's approach to project delays in response to several questions from its contractors, or suppliers, at that time. The bulletin provided that if a supplier could not achieve commercial operations by the contractually mandated milestone date, the OPA would not act upon its termination rights. It further provided, however, that "the information provided here is meant for informational purposes only and shall not be relied on by Suppliers" as well as, "this information does not constitute a waiver of any actual or potential default, nor does it amend the FIT Contract."

On March 29, 2019, almost three years into the FIT Contract, the IESO sent a letter to Grasshopper Corp. (and other suppliers) reminding Grasshopper Corp. of the need to complete operation by the milestone date in its contract. The IESO further advised that it specifically revoked the bulletin and any past waiver of its right to terminate the contract for delay. The IESO also provided notice in the letter that a failure to achieve operation by this date would constitute a default that would allow IESO to exercise its termination rights.

Grasshopper Corp. applied to the Ontario Superior Court of Justice for a determination of its contractual rights under the FIT Contract, namely, that the IESO was precluded from terminating the contract. In related proceedings, other contractors in like circumstances also applied for similar relief.

The Decision

Before the Ontario Superior Court, Grasshopper Corp. relied on several arguments, including, estoppel by convention, and took the position that the bulletin amounted to a shared assumption between the IESO and Grasshopper Corp. that the IESO would not terminate the contract for failure to achieve operation by the contractually-mandated date. The court, however, found that the bulletin was for informational purposes and acted as an announcement for how the OPA intended, at that time, to approach failures of achieving commercial operation by the required date. The court held that the March 2019 letter provided reasonable notice of IESO's intention to change its approach.

The court acknowledged that Grasshopper Corp. may have relied on the bulletin when it entered into the FIT Contract, and that the IESO may have been aware of Grasshopper Corp.'s reliance. However, without the IESO expressly confirming Grasshopper Corp.'s belief, the two parties did not share a "like mind". Without a "like mind", the court ruled that the parties did not have a shared assumption that would invoke the doctrine of estoppel by convention.

On appeal, the Ontario Court of Appeal agreed with the application judge's analysis and upheld the lower court's decision, noting that, as the doctrine of estoppel may operate to prevent a party from relying on the terms of the contract, "the doctrine has the potential to undermine the certainty of contract and must be applied with care".

Takeaway

Grasshopper highlights the danger associated with assuming that the other party is not going to assert a contractual right, even in circumstances where the other party may have expressly advised as such. In these circumstances, it may be prudent for the party receiving the statement to confirm the advice from the other party in writing in a timely manner, or perhaps memorialize it in an amendment to the contract, particularly if that assumption was integral to the decision to contract with the counter-party.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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