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Canadian Sanctity of Contract case offers hope for Guyana: Part 4

Introduction

Having established in the previous parts the considerable assistance that Guyana can draw from the Churchill Falls case in pursuing renegotiation of the 2016 Agreement, this part examines the specific mechanisms available under the 2016 Agreement that allow Guyana to achieve that end. Additionally, I argue that ExxonMobil’s recent categorical refusal to consider any modifications to the Agreement provides the very leverage needed to compel meaningful negotiations.

Article 31.2 of the 2016 Agreement is not a mere aspirational provision – it creates binding obligations on Guyana and the oil companies. The provision requires them to consult on modifications and amendments proposed by either. This is a positive obligation: neither party can refuse to engage in good-faith discussions on proposals by the other party. While Exxon may ultimately reject any change proposed by the Government or make its counterproposal, an outright refusal to enter negotiations represents a distinct breach. It is the same principle when Exxon seeks a force majeure or any other proposal. Guyana does not have to agree, or it may suggest an amendment to the proposal. However, it is required to consider the request in good faith since failure will trigger arbitration.

ExxonMobil’s categorical public declaration through its local President opposing any renegotiation potentially constitutes a breach of this contractual obligation. Such an unconditional refusal contradicts the fundamental purpose of Article 31.2, which contemplates periodic review and potential modification as circumstances warrant. This breach would provide grounds for Guyana to initiate arbitration proceedings.

Good Faith Obligations

The obligation for good faith engagement in contract modifications extends beyond Guyana’s Agreement. It represents a cornerstone principle of contract law, firmly established across both common law and civil law jurisdictions. This universal principle gains particular force in Guyana’s case, as amendments are explicitly enshrined within the Agreement, creating an even more compelling position than that established in the Churchill Falls case.

ExxonMobil’s unequivocal public opposition to renegotiation elevates this beyond a mere negotiation impasse to a potential contractual breach. Their blanket refusal to consider modifications, irrespective of merit or changing circumstances, contravenes the letter and intent of Article 31.2 and fundamentally undermines its core purpose as a mechanism for contractual adaptation.

This breach assumes critical significance when viewed against the Agreement’s fundamental defects previously analysed. The glaring absence of ring-fencing provisions, the unprecedented requirement for government payment of ExxonMobil’s taxes, and the extraordinary subordination of parliamentary sovereignty to an agreement secured under demonstrable and well-documented duress collectively constitute compelling grounds for pursuing modifications under Article 31.2.

These structural flaws and ExxonMobil’s categorical refusal to engage strengthen Guyana’s position in subsequent arbitration proceedings.

Legal Mechanisms Available

The Agreement’s dispute resolution provisions provide multiple avenues for addressing ExxonMobil’s refusal to engage in good faith discussions—from formal dispute notification to arbitration proceedings. However, before pursuing such measures, the government must adequately document both the grounds for seeking modifications and ExxonMobil’s refusal to engage in meaningful discussions.

The key is transforming ExxonMobil’s blanket refusal from a negotiating position into evidence of a breach. This requires careful documentation of attempts to initiate discussions and the company’s responses, creating a record demonstrating their violation of Article 31.2’s obligations.

Strategic Considerations

Enforcing Article 31.2 aims to secure meaningful improvements in the Agreement’s terms beyond winning a legal argument. The threat of legal action should serve as leverage to compel ExxonMobil to negotiate. Guyana’s position is strengthened because many proposed modifications reflect standard industry practices, such as ring-fencing provisions common in global petroleum agreements. ExxonMobil’s refusal to discuss such standard terms undermines its good faith claim.

The timing for action is optimal. With high oil prices and Guyana’s growing importance as a significant oil producer, ExxonMobil’s leverage is not absolute. While substantial, the company’s investments in Guyana make it vulnerable to reputational risks from appearing to exploit a developing nation. Commercially, Exxon cannot risk undermining the jewel in its crown as the Stabroek Block has proven to be and which now forms part of its core investment strategy.

Precedent and Practice

The international petroleum industry has numerous examples of successful contract renegotiations, often triggered by circumstances far less compelling than those facing Guyana. Indonesia’s renegotiation of its production-sharing contracts, when initial terms proved inadequate for national interests, set a defining precedent. Similar renegotiations globally – from China and Kazakhstan to Libya, Tanzania, Uganda, and Vietnam – demonstrate this is an established industry practice.

While Article 31.2 provides the legal framework, successful renegotiation requires leveraging the broader context. ExxonMobil’s mounting concerns over environmental and governance issues create pressure points that strengthen Guyana’s position. The company’s rigid stance towards Guyana contradicts its public commitments to corporate responsibility and fair dealing with developing nations.

This, however, is not a problem for Exxon alone. At home, the Ali Administration’s reluctance to invoke Article 31.2 is particularly troubling since this provision creates a permanent mechanism for seeking improvements in the national interest. The contrast between available legal tools and their non-utilisation becomes stark when viewed against the agreement’s fundamental flaws. This gulf between legal potential and government inaction demands more than just public scrutiny.

Conclusion

ExxonMobil’s categorical refusal to consider modifications could ultimately backfire. Article 31.2 creates legal obligations that cannot be dismissed by mere refusal. An adequately documented case would transform the obstacle from their intransigence to our opportunity.

Yet, despite the compelling grounds for renegotiation and precise legal mechanisms to pursue them, our government shows no interest in action. The question is stark: WHY?

Column #150, appearing on Old Year’s Day, will confront this troubling question

Canadian Sanctity of Contract case offers hope for Guyana: Part 3

Introduction

The two previous parts set out the parallels between the Canadian Churchill Falls case and Guyana’s 2016 PSA. Both deal with agreements governing natural resources and involve the legal principle of sanctity of contract, which is common to both jurisdictions. But any comparison without contextual references or relevant contrasts is simplistic and insufficient. The 2016 PSA is not merely about private commercial law but constitutes the unprecedented subordination of constitutional authority to such lesser law.

Beyond Commercial Terms – Invalidating the Constitution

The extraordinary scope of the implicit sovereignty surrender sets Guyana’s situation apart from Churchill Falls. Through the stability clause highlighted in Part 2, Guyana has effectively suspended its Parliament’s constitutional authority until 2057, barring any further force majeure extension or another bridging deed. I can find no precedent in the history of resource contracts globally for such nullification of a country’s sovereignty. This usurpation goes far beyond Churchill Falls’ commercial imbalances and into the realm of constitutional law.

The Constitution of Guyana vests Parliament with the authority and duty to legislate for the country’s peace, order and good government. Any agreement preventing Parliament from exercising this fundamental power for four decades raises questions about its constitutional validity. I repeat: the stability clause essentially places ExxonMobil beyond the reach of Guyana’s democratic institutions until 2057.

Churchill Judgment Supports Guyana

The Canadian Supreme Court’s emphasis on the equality of the contracting parties in Churchill Falls strengthens Guyana’s position. The Court specifically noted that “both parties to the contract were experienced, and they negotiated its clauses at length.” Contrast this with the 2016 PSA’s negotiation: two technical officers from the Guyana Geology and Mines Commission facing ExxonMobil’s battalion of experts at the company’s headquarters. This stark imbalance is documented in GGMC’s Commissioner’s widely available report following their return.

Churchill Falls became contentious because fixed electricity prices grew increasingly unfavourable to Newfoundland and Labrador over decades. While perhaps not optimal, the initial agreement was considered fair by both parties. Guyana’s situation is fundamentally different. The PSA’s terms were problematic from inception:

• A 2% royalty rate among the world’s lowest
• Up to 75% cost recovery before profit sharing
• Government payment of Exxon’s taxes
• Absence of standard ring-fencing provisions
• The bridging deed’s circumvention of statutory relinquishment requirements
• Most egregiously, the subordination of parliamentary authority to corporate interests

Article 31.2 – Guyana’s Stronger Hand

Perhaps the most significant distinction lies in the agreements’ provisions for modification. Churchill Falls contained no mechanism for adjustment. In contrast, Article 31.2 of Guyana’s PSA explicitly anticipates and provides for renegotiation. This crucial difference means Guyana need not rely solely on broader principles of contract law, equity or even constitutional law – the right to seek modifications is built into the agreement itself. This makes the excuse of the sanctity of contract a farcical and nonsensical red herring.

Constitutional Dimensions

While Churchill Falls raised questions of commercial fairness, Guyana’s PSA presents fundamental constitutional issues that go to the heart of the country’s democratic framework. The stability clause is not about sanctity – it suspends Parliament’s legislative authority over a strategic national resource for four decades. This extraordinary provision raises fundamental questions about whether any minister possesses the authority to fetter Parliament’s constitutional obligations to this degree.

Here is what makes it so farcical. The President appoints a minister giving him the portfolio over natural resources. The Minister then signs an agreement with a private party that suspends the authority of the National Assembly and that of the President who appointed him, and all the presidents and National Assemblies for the next forty years!

The Constitution’s grant of authority to Parliament to legislate for peace, order and good government is not a mere technical provision – it represents the foundational principle of democratic sovereignty. By attempting to place ExxonMobil beyond parliamentary reach until 2057, the stability clause creates a form of corporate sovereignty unprecedented in resource contracts. Even more extraordinary is the extension of this constraint to the Executive President, effectively creating a state within a state, immune from the normal operations of democratic governance.

The Scale of Control

Churchill Falls involved a single significant hydroelectric project. The 2016 PSA governs an area exceeding 6.6 million acres—more than 12% of Guyana’s territory – with multiple discoveries and prospects. This vast scale of resource control granted to ExxonMobil, combined with the constitutional implications, creates a situation unique in the annals of resource agreements.

The implications of this scale are profound. Through the bridging deed, ExxonMobil has secured control over an area larger than many countries, with the right to exploit any discoveries made over this vast expanse. The absence of ring-fencing provisions means each new discovery can be used to extend the period during which Guyana receives minimal returns from existing production. This creates a perpetual cycle of deferred benefits that could extend well beyond the formal agreement period.

Conclusion

The Churchill Falls judgment, far from being an obstacle to Guyana’s aspirations for a fairer deal, strengthens our case for renegotiation in several crucial ways. The court’s emphasis on equal bargaining power and extensive negotiations highlights precisely what was missing in the PSA’s formation. When combined with Article 31.2’s explicit provision for renegotiation and the serious constitutional questions raised by the stability clause, Guyana stands on firmer ground than Newfoundland ever did.

Moreover, while Churchill Falls became unfair through changing circumstances, Guyana’s PSA contained fundamental flaws from inception that strike at the heart of constitutional governance and democratic sovereignty. The scale of control ceded to ExxonMobil, both in terms of territory and governance, goes far beyond anything contemplated in Churchill Falls or, indeed, in most resource contracts globally.

The question is not whether Guyana has the legal basis to seek renegotiation – it incontrovertibly does – but whether there is the political will to pursue it.

Friday’s column will address the approach to renegotiation.

Canadian Sanctity of Contract case offers hope for Guyana: Part 2

Introduction

Last week’s part 1 of this mini-series dealt mainly with the court case and subsequent renegotiation of the Churchill Falls Hydro project in the Canadian province of Newfoundland and Labrador. In that case, the Canadian Supreme Court rejected an application for an increase in the fixed charge for electricity supplied to Quebec Hydro in exchange for the provision of loan guarantees and the undertaking to purchase all the power produced from a hydro project. For continuity, I repeat two passages from the judgment that support a case for renegotiation of the Exxon 2016 PSA.

1. “The Court cannot change the content of the contract or require renegotiation,” emphasising that renegotiation must arise from the contract itself, as with the 2016 PSA.
2. “There is neither inequality nor vulnerability in their (Churchill/Quebec Hydro) relationship. Both parties to the contract were experienced, and they negotiated its clauses at length.” As we shall see, that was not the case with the 2016 PSA.

The failure in the court was not the end of the matter. The parties thereafter successfully renegotiated the Agreement – a case of losing the battle but winning the war!

The ExxonMobil PSA

The Exxon PSA and Churchill Falls agreement differ significantly in how their imbalances arose. In Churchill Falls, what became a significant advantage for Hydro-Québec emerged gradually through market changes under a 65-year fixed price contract that was initially considered fair. In contrast, the PSA’s key provisions reflected fundamental disadvantages from the outset.

Exxon’s discovery of oil in 2015 coincided with heightened vulnerability arising from Venezuela’s claim over two-thirds of Guyana. The oil giant exploited this vulnerability by insisting on terms and concessions unknown in any historical post-discovery petroleum contract. The need and the urgency, coupled with Guyana’s lack of technical expertise, left the government at a disadvantage in what passed for negotiations, conducted mainly at Exxon’s headquarters on a visit by two technical officers from the Guyana Geology and Mines Commission against an army of Exxon’s experts. The GGMC’s report on those negotiations is on public record.

The PSA’s final terms reflect this imbalance. The royalty rate, set at just 2%, is among the lowest globally. Exxon can recover up to 75% of annual revenues as production costs, including a portion of capital and decommissioning costs, before profit-sharing begins, leaving Guyana with minimal immediate financial benefits.

The PSA also defies accounting principles and logic with no provision for ring-fencing, a standard feature in resource contracts. Without such provisions, Exxon has been claiming costs from future projects against existing operations, delaying Guyana’s share of profits and their true economic value. This creates a sustained cycle of deferred earnings, locking the government into a position of dependence on ExxonMobil’s accounting practices.

Perhaps most egregious of all is a provision requiring the government to pay ExxonMobil’s income taxes and to provide it with a certificate that it (the oil companies) has paid such taxes in Guyana.

The Bridging Deed and Procedural Failures

Beyond the financial terms, the PSA’s renewal process raises even more serious concerns about governance and compliance with the law. Under Guyana’s Petroleum (Exploration and Production) Act, companies must relinquish unexplored areas at the end of their license period, retaining only those blocks where discoveries have been made. This provision ensures that unexplored resources revert to state control, allowing the government to attract new investors and maintain competition. However, through a bridging deed, ExxonMobil could bypass this requirement, retaining control over the entire Stabroek Block for forty years and fifty-seven years in total.

The Clyde & Co. report, commissioned to review the PSA, revealed troubling details about the renewal process. According to the report, ExxonMobil was directly involved in drafting the Cabinet paper that justified the bridging deed. This extraordinary corporate influence raises fundamental questions about whether the government acted independently or ceded control to ExxonMobil in exchange for perceived short-term security.

Governance and Sovereignty

Beyond these economic and procedural flaws are deeper issues of governance and sovereignty. Article 32.1—Stability of Agreement freezes the terms of the Agreement effectively for forty-one years (2016 – 2057), nullifying Parliament’s authority over the oil sector. That clause prohibits any changes to fiscal terms or other conditions without ExxonMobil’s consent, thereby placing Exxon outside the reach of Guyana’s democratic institutions.

Guyana’s Constitution vests in Parliament the authority and the duty to legislate for the country’s peace, order and good government, without qualification or reservation. Yet, a minister appointed by the President consented to the Stability Clause, preventing Parliament from exercising its authority – undermining the country’s constitutional framework and raising fundamental questions about the constitutionality of such agreements. What is particularly unprecedented and outlandish is that the full extent of this ouster and incapacitation lasts fifty-seven years, including the seventeen years under the Janet Jagan approved 1999 Agreement. And second, the incapacitation includes the all-powerful Executive President!

Addressing the flaws in the PSA requires more than renegotiating financial terms. It demands a broader effort to restore the integrity of Guyana’s resource governance framework. This includes revisiting the legality of the bridging deed, holding those involved in its approval accountable, and reaffirming the government’s commitment to transparency and compliance with the law.

Comparing Contexts and Outcomes

While both agreements highlight the risks of imbalanced resource contracts, their differences are stark. Churchill Falls became contentious due to inequities that grew over decades as Hydro-Québec’s fixed pricing arrangements became increasingly favourable to one party. In contrast, Guyana’s PSA reflected significant disadvantages from the outset, with terms heavily favouring ExxonMobil and constraining Guyana’s ability to adapt or renegotiate.

Another critical difference lies in the governance frameworks. Newfoundland and Labrador lacked the legal tools to challenge Hydro-Québec effectively during the original term of the Churchill Falls agreement, relying instead on eventual expiration to renegotiate. In Guyana’s case, the Agreement in Article 31.2 anticipates and permits renegotiation.

Finally, the scale of resource control differs. The Churchill Falls contract involved a single, albeit massive, hydropower project. Exxon’s PSA governs an extensive offshore oil block with multiple discoveries and prospects over an area of more than 12% of Guyana’s territory. This gives ExxonMobil an enduring and enormous control far greater than Hydro-Québec’s over Churchill Falls’ electricity.

Next Tuesday’s column 148 will examine the lessons from Churchill and conclude with why that case offers much more than hope for the renegotiation of Exxon PSA 2016.

Part 1: Canadian Sanctity of Contract case offers hope for Guyana

Introduction

Contrary to the clear wishes of the Ali Administration and its sidekick ExxonMobil, the call for the renegotiation of the 2016 Production Sharing Agreement (Exxon PSA) will not likely end soon. I would not be surprised if a cohort of youths in the year 2040 would be asking why Raphael Trotman signed such a diabolical Agreement and why Attorney General of the stature and ability possessed by the incumbent Anil Nandlall S.C. often takes Exxon’s side in any litigation involving the company. We will answer both questions later in this mini-series in which I am again making the case for renegotiation of the Agreement. I do so prompted by a letter written by Terence M. Yhip, a member of the Guyana Diaspora appearing in the 15th. December 2024 Sunday Stabroek, highlighting a compelling parallel between two agreements: Canada’s Churchill Falls hydropower contract (Churchill Falls) and the Exxon PSA.

Ironically, the only error in Mr. Yhip’s letter is his assertion that the Exxon PSA’s life cycle is twenty years and, therefore, ends in 2036. In fact, as of today, it ends in 2057 after including a ten-year exploration period, a one-year COVID-19 force majeure, and a thirty-year production period.

The two agreements, each with its own facts but subject to similar legal systems, demonstrate the long-term implications of resource contracts negotiated under imbalanced conditions. While Churchill Falls is a tale of financial inequity that emerged over decades, Guyana’s PSA presents a broader set of challenges – economic, procedural and constitutional – that were evident from the outset.

Background

The Churchill Falls agreement, signed in 1969, was transformative for the Canadian province of Newfoundland and Labrador. The province wanted to monetise its vast hydroelectric potential but lacked the financial resources and technical expertise to develop the Churchill Falls hydropower plant. Hydro-Québec offered to finance the necessary infrastructure in exchange for the right to purchase most of the electricity generated at fixed prices for 65 years. For the province, the deal brought immediate development benefits. For the company, it guaranteed a stable and affordable energy source to support Quebec’s industrial expansion.

Initially, the agreement appeared equitable. Both parties assumed risks, and Newfoundland lacked other options to unlock its hydroelectric potential. However, as global energy prices rose sharply in subsequent decades, the fixed pricing terms became increasingly unfavourable for Newfoundland. Hydro-Québec profited immensely, earning billions by reselling Churchill Falls electricity at market rates, while Newfoundland’s revenues remained tied to terms negotiated decades earlier.

By the 2010s, this disparity had become untenable for Newfoundland. The province sought renegotiation of the agreement under the principle of good faith, which requires contracting parties to act honestly and fairly toward one another. Newfoundland argued unsuccessfully that the economic inequities undermined the agreement’s spirit and intent.

The judgment

However, in 2018, the Supreme Court of Canada upheld the agreement under the doctrine of sanctity of contract, which prioritises stability over fairness.

Interestingly, while the judgment shows Chief Justice McLachlin as present, it also states -without offering any reason – that he took no part in the judgment. As we shall soon see, the ruling was not unanimous.

The court’s majority opinion emphasised:

“Good faith does not compel a party to forego advantages freely negotiated in the contract. Courts cannot rewrite contracts to address inequities that arise over time.”

Despite affirming the enforceability of contracts, the decision was not unanimous, failing to address the ethical concerns surrounding resource inequities. Justice Malcolm Rowe, a native of Newfoundland, dissenting, warned against the rigidity of this approach, arguing that

“Equity cannot be divorced from justice. A rigid application of contractual terms may serve the letter of the law, but it can erode public confidence in the fairness of resource agreements.”

The judicial loss did not deter Newfoundland, which persisted. It brought the parties together to successfully renegotiate the contract in 2024, resulting in improved revenue-sharing terms while preserving Quebec’s energy stability. This outcome demonstrated that even the most rigid agreements can be revisited through persistence and negotiation.

The Churchill Falls case also offers valuable lessons in the power dynamics of resource contracts. The court also considered the extensive negotiation between the parties, the absence of any provision for adjusting the rate for the electricity supplied, and any renegotiation clause.

Conclusion

The Churchill Falls case illustrates that a court loss is not the end of the road. Public pressure, combined with strategic persistence, can compel change even in the face of rigid legal doctrines like the sanctity of contract. Newfoundland’s eventual success in renegotiating its agreement in 2024 underscores the power of public sentiment, sustained advocacy, and strong leadership to overcome inequities.

The next column will address the Exxon 2016 Agreement drawing comparisons and differences with the Churchill Falls Agreement.