Governments can cancel contracts without huge penalties

According to a study released by the Fraser Institute on October 23, the Ontario government does not need to be on the hook when it cancels or changes its contracts for energy, transit or other projects.

In “Cancelling Contracts: the Power of Governments to Unilaterally Alter Agreements,” author Bruce Pardy argues: “Government contracts are not the ironclad agreements they appear to be because govern¬ments may change or cancel them by enacting legislation.” Pardy is a law professor at Queen’s University.

The Institute points out that Pardy’s conclusions have ramifications for the Ontario electricity sector where it says the government’s long-term Feed-in-Tariff contracts with wind and solar power producers have led to “skyrocketing” energy prices. Normally, in order to cancel those contracts the province would have to pay huge amounts in compensation, but the Institute’s press release says: “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.” However, the Institute notes that foreign firms could still seek compensation under NAFTA or other foreign investment protection regimes.

Pardy says that his analysis applies to all government contracts, not just energy projects. He argues: “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.”

The position is important given the Ontario government’s history of cancelling gas plant projects and the city of Toronto’s habit of changing its mind over transit projects even though plans and designs are already in hand.

To view the report, click here.