Government contracts can be changed or cancelled through legislation

Media Contacts:Bruce Pardy

Release Date:October 22, 2014

10625141_10152424880641463_8263706323511626936_nTORONTO—Provincial governments have the power to change or cancel legally binding agreements, notes a new essay released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

“Government contracts are not the ironclad agreements they appear to be because governments may change or cancel them by enacting legislation,” says Bruce Pardy, Professor of Law at Queen’s University and author of Cancelling Contracts: The Power of Governments to Unilaterally Alter Agreements.

Pardy’s conclusion is particularly relevant for Ontario where the province has locked itself into a number of long-term contracts with wind and solar power companies, resulting in escalating electricity prices.

A Fraser Institute study to be released Thursday, Oct. 23 spotlights Ontario’s skyrocketing electricity prices and the extent to which provincial government contracts with renewable energy producers are responsible for the increases.

But if the Ontario government cancels electricity contracts, wouldn’t it be required to pay compensation?

Not if the Ontario legislature passes a statute explicitly denying the right to compensation, which would nullify the robust compensation clauses contained in Feed-In-Tariff contracts. (Only foreign firms could then seek compensation under NAFTA or other foreign investment protection regimes.)

“No negotiations between governments and companies can eliminate the risk of future legislated changes, so when the state controls the market, as the Ontario government does with electricity production, the only real options are to accept the risk or pursue a different venture altogether,” Pardy said.

“If democratically elected governments are to establish their own policies, they require the ability to make unilateral changes to agreements made by previous governments. If they cannot legitimately do so, then their predecessors can control policy decisions beyond their democratic mandates.”

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