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Change in provincial government impacts clients

Focus on Environmental Law
|Written By Dale Smith
Change in provincial government impacts clients
Laura Zizzo says lawyers should be factoring in considerations around climate-related risk as part of the due diligence process.

With the Ontario government having repealed the province’s Green Energy Act, cancelling the provincial cap-and-trade regime and legislating that proponents cannot sue for certain cancelled projects, lawyers say they need to help their clients manage the political risk of doing business in the current political climate in Ontario.

Laura Zizzo, a lawyer and the founder and CEO of Zizzo Strategy in Toronto, says there is always political risk when there is a reliance on policy incentives for projects that governments deem to be important, such as green energy. She says these incentives are intended to be phased out over time, as they are intended to stimulate the market.

“A lot of these policies may have already worked to help jump-start the market, so this might just be a premature end to some of them, but the idea that incentives should be relied on is something we should always warn against,” says Zizzo. “They’re meant to be time limited.”

She says many Ontario companies were expecting investments to come from revenues related to cap and trade. Ontario’s Financial Accountability Office recently reported that the loss of cap and trade would cost Ontario $3 billion in lost revenue over the next four years.

“There is a risk to the private sector in general with the policy uncertainty, both from a regulatory side and from the opportunity side,” says Zizzo.

She says a contract with the government should provide proponents with recourse in the event of cancellation, but that may not be the case in instances where the government legislates immunity from domestic litigation for itself, as it did in the case of cancelling the White Pines wind turbine project.

In July, the Ontario government cancelled White Pines, which had been in development for more than a decade, as well as revoked its permits. The Ontario government may yet face action under an international trade agreement as White Pines’ parent company is German owned.

Patrick Duffy, partner with Stikeman Elliott LLP in Toronto, says that, in the past, he would tell clients that there was a risk of projects being cancelled because there was no protection of property rights in the constitution, but he would preface it that such a cancellation likely wouldn’t happen because it would hurt the reputation of Canadian governments.

Duffy says the recent developments are a reminder to lawyers that property rights don’t enjoy constitutional protection, which they sometimes take for granted.

Duffy adds that, for those who have clients that are affected by these kinds of cancellations, they should see if there is an international trade remedy, such as with White Pines; although he adds that the elimination of investor-state protection in the recent United States-Mexico-Canada Agreement does limit those opportunities going forward.

“If you’re working for a client, one of the things you’d want to keep in mind is that if you’re on a file that is politically sensitive, is there a way that you could structure it to ensure that you have available some sort of international remedy?” says Duffy. “Whether or not that would work at the end of the day, at least it would give you an option.”

Duffy says that, when he is negotiating contracts with governments, he will often try to include change-of-law or discriminatory action provisions.

“The feed-in tariff contracts in Ontario had this feature, including the one terminated for White Pines,” says Duffy, referring to the pricing structure for clean energy projects. “What it provides effectively is that if a government changes legislation or programs in a way that has a detrimental impact on the economics of the contract, the counter-party is entitled to have the contract amended so that it can be made whole.”

Duffy says this remedy can only go so far, such as when the government legislates the contract away as it did in White Pines, but he says it still remains important to have those clauses.

He adds that the bigger­picture consideration is that when a government takes these kinds of actions, it creates uncertainty in the market, it can have an effect on future investment and proponents may start pricing in the political risk.

Paul Manning, principal at Manning Environmental Law in Toronto, echoes that legislated immunity from litigation creates a broader business risk for Ontario.

“Business people look at risks, and they’ll see what’s happened here, and they will have to conclude that there is a risk that, if they do business with the Ontario government, the contract won’t be honoured and they may be unable to get compensation for the investment that they have put in,” says Manning.

He points to Tesla Motors Canada ULC v. Ontario (Ministry of Transportation), 2018 ONSC 5062, where the provincial government was found to have acted unlawfully because it singled out the company in the manner in which it went about cancelling electric car subsidies.

“There is an exercise in discretion in tearing up the contracts and deciding to debar litigation for compensation, so I daresay that the jurisprudence in [Tesla] will inform whatever claims are made going forward,” says Manning.


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