Estoppel by Convention: The Ontario Court of Appeal’s Latest Take on a Relatively Rare Form of Estoppel and the Implications for Contracting Parties

The question often arises in contractual disputes as to whether a party is entitled to rely on the strict terms of the contract in circumstances where the counter-party believes the strict terms will not be enforced. The Ontario Court of Appeal’s August 7, 2020 decision in Grasshopper Solar Corporation v. Independent Electricity System Operator¹ [“Grasshopper”] serves as a cautionary reminder that the certainty of contractual terms will not be lightly undermined by the courts in Ontario, and affirms that the doctrine of estoppel will be narrowly applied in the context of commercial relationships between sophisticated players.

Generally speaking, estoppel is an equitable doctrine that allows the court to prevent or “estop” a contracting party from relying on the terms of a contract where, by its words or conduct, it evidenced an intention not to rely on the strict terms of the contract and has led the counter-party to believe that certain provisions in the contract will not be relied on. As noted by the Court of Appeal in Grasshopper, the doctrine of estoppel cannot vary the terms of a contract, but may operate to prevent a party from relying on the terms of the contract to the extent necessary to protect the reasonable reliance of the other party. As the doctrine has the potential to undermine the certainty of contract, “estoppels are to be received with caution and applied with care,” especially in the context of commercial relationships between sophisticated parties.

The Court of Appeal in Grasshopper specifically revisited the doctrine of “estoppel by convention” - a relatively rare form of estoppel. Estoppel by convention contemplates:

1. A “manifest representation” of a shared assumption (by statement, conduct or arising from silence) between parties to a contract that a provision of the contract will not be relied upon;
2. One of the parties conducts itself in reliance on that shared assumption, thereby resulting in a change of its legal position; and
3. The party seeking to rely on strict performance of the contractual term will be estopped from doing so where the counter-party can show that it reasonably relied on the shared assumption and can establish that it will suffer a detriment if the strict terms of the contract are enforced.²

Grasshopper reminds contracting parties that the absence of a “shared assumption” is fatal to the argument for estoppel by convention. Contracting parties should accordingly expect that the express terms of the contract will govern, unless there is clear and unequivocal evidence demonstrating both parties’ understanding that a term of the contract will not be relied upon.

Background:

Grasshopper concerned the respondent Independent Electricity System Operator’s (“IESO”) decision to terminate contracts with the appellants, renewable energy suppliers. The contracts were for the construction of solar facilities which would provide energy to Ontario’s electrical grid. Notably, the contracts contained a milestone clause requiring the facilities to be commercially operational by a specific “milestone date”. The contracts also contained a “time is of the essence” provision, which required the appellants to strictly abide by the milestone date.

The appellants failed to meet the milestone date and the contracts were terminated by the IESO.

The appellants contended that the IESO’s conduct induced them into assuming that their failure to meet the prescribed milestone date would not result in the immediate termination of the contract, and therefore, that the IESO was estopped from relying on certain termination rights in the contract. In support of this argument, the appellants relied upon the following conduct:

1. a 2013 bulletin report from the IESO’s predecessor agency, the Ontario Power Authority, which purportedly suggested that the OPA would not act upon its termination rights arising from a breach of the milestone date; and
2. the IESO’s alleged past practice of not terminating Feed-In Tariff (FIT) Contracts for failure to achieve commercial operation by the milestone date.

Neither argument survived judicial scrutiny, as the “shared assumption” which is necessary to establish estoppel by convention was not found to exist. The bulletin report expressly provided that its information “shall not be relied on by Suppliers” and that it did not constitute a waiver of any actual or potential default, nor does it amend the FIT Contract. Moreover, the appellants were not yet suppliers for the IESO at the time the bulletin report was published. Accordingly, the entire agreement clause operated to prevent the appellants from relying on the IESO’s past practices.

The Court of Appeal similarly found that there was no promise by the IESO capable of supporting the appellants’ reliance on the doctrine of promissory estoppel.³ In particular, the bulletin report could not be objectively interpreted as a promise to the appellants. Even if the bulletin report could be construed as a promise, it was not a promise directed to the appellants, as they were not the intended audience for the bulletin at the time it was published.

In the result, the appeal was dismissed, with the Court of Appeal concluding that “…the appellants may well have assumed that time limits they contracted to meet did not really matter. But the [IESO] did not share that assumption, nor did it promise that it would not enforce those time limits.”

Bottom line:

The Court of Appeal’s decision in Grasshopper serves as a cautionary reminder that commercial parties should operate on the assumption that all provisions in a contract will be strictly enforced, absent clear and unequivocal evidence demonstrating both parties’ mutual understanding that a term of the contract will not be relied upon. Detrimental reliance by a contracting party which results from its belief that the terms will not be strictly enforced is not sufficient to assert estoppel by convention, absent the necessary shared assumption.