St. John's (City) v. Newfoundland Power Inc.

Date: 20130319 Docket: 10/138 Citation: St. John's (City) v. Newfoundland Power Inc., 2013 NLCA 21 IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR COURT OF APPEAL BETWEEN: CITY OF ST. JOHN’S APPELLANT AND: NEWFOUNDLAND POWER INC. RESPONDENT Coram: Welsh, Rowe and Harrington JJ.A. Court Appealed From: Supreme Court of Newfoundland and Labrador Trial Division (G) 200901T1724 Appeal Heard: January 18, 2013 Judgment Rendered: March 19, 2013 Reasons for Judgment by: Harrington J.A. Concurred in by: Welsh and Rowe JJ.A. Counsel for Appellant: Edward Hearn Q.C. and Linda Bishop Counsel for the Respondent: Michael Crosbie Q.C. Corrected Decision: The text of the original judgment was corrected on March 19, 2013. A description of the correction is appended. Page: 2 Harrington J.A.: INTRODUCTION [1] Newfoundland Power Inc. (Newfoundland Power), pursuant to a lease granted by the City of St. John’s (City), constructed and operated an electrical power generating plant in the Mobile River watershed area. Clause 1 of said lease provided that after a forty-seven year term, the lease could be terminated upon three years notice being given and upon payment being made by the City to Newfoundland Power for the “value of all works and erections… in use”. The actual amount of the payment was to be determined by a consensual panel of three arbitrators, appointed pursuant to the terms of the lease. The City gave the requisite notice on February 9, 2006 and the panel of arbitrators was convened. [2] The arbitrators heard two preliminary questions put to them by the parties: (1) what is to be valued under the provision of clause 1 of the lease as amended; and (2) what is the meaning of the word “value” as used in clause 1? [3] The majority of the panel held that what was to be valued was Newfoundland Power’s undertaking as a going concern and that “value” meant the value of the business or enterprise constituting the entire undertaking of Newfoundland Power under the lease, including the lands and water rights which revert to the City upon termination and payment. The City made an application for judicial review of that decision which was dismissed. The matter now before this Court is an appeal from the order dismissing that judicial review application. [4] For the reasons that follow, I would allow the appeal by setting aside the decisions of the majority of the arbitration panel and of the applications judge affirming it. BACKGROUND [5] Newfoundland Power is the successor to the Newfoundland Light and Power Company Limited which in turn was the successor to the St. John’s Street Railway Company as incorporated under the St. John’s Street Railway Act, 1896, S.N. 1896 (60 Vic) c. 20. The St. John’s Street Railway Company was incorporated for the purpose of operating a street railway in Page: 3 St. John’s. The Company was also permitted to sell any of its electricity surpluses to other persons. [6] The City is the successor to the St. John’s Municipal Council as it existed under the St. John’s Municipal Act, S.N. 1921 (12 Geo V) c. 13 Pursuant to s. 195 of the Act, the City was granted the power to provide for the lighting requirements of the City of St. John’s. To this end, the City was granted the right to possess and control the waters and watershed of the Mobile River. [7] As a result of An Act Further to Amend the St. John’s Municipal Act, 1921-1945, S.N. 1946 (10 Geo VI), c. 40, s. 195 was amended to allow the City to enter into a lease with any party for the development of the Mobile River watershed. This authority was found in paragraph 195(2)(f), which provided: 195 (2) The waters and lands covered by water within the watershed of the Mobile River as described in Schedule F to this Act are hereby vested in the Council absolutely; and all other Crown lands within the said watershed, which may be reasonably necessary for use in connection with the development of waterpower from the said waters or the development of the waters as a source of water supply for the City, are hereby reserved from operation of the Crown Lands Act, 1930, and Acts in amendment thereof, and upon delivery to the Commissioner for Natural Resources by the Council or its lessees of plans and specifications showing to his satisfaction that any of such lands are reasonably necessary for such use and issue of his certificate accordingly, such lands shall forthwith vest in the Council under this subsection, the Council shall have the following powers: … (f) To enter into a lease upon such terms and conditions as it may deem advisable with any person, firm or company as lessee under this section, and such terms and conditions may provide for the termination of such lease upon notice and upon payment to the lessee of the aggregate cost of all works and erections constructed by the lessee within the watershed of Mobile River subsequent to the date of the lease less depreciation on such works to the date of such determination. (Emphasis added.) [8] The City entered into such a lease with Newfoundland Power. Clause 1, dated November 23, 1946, provided in relevant part: Page: 4 . . . the Council hereby grants and demises to the Company all the rights of the Council under Section 195 of the St. John’s Municipal Act, 1921, as amended . . . provided the Council shall have the right to terminate the said LEASE upon three (3) years’ notice in writing to the company . . . and upon payment to the Company of the aggregate cost of all works and erections constructed by the Company . . . less depreciation on such works to the date of such termination and provided further that should the Council during the continuance of this LEASE or extension thereof exercise its rights to purchase the Company’s undertaking within the meaning of Section 29 of the St. John’s Street Railway Charter 1896 as amended then and in that event all works constructed or provided by the Company in connection with the said Mobile waters shall be deemed to form part of the Company’s undertaking. [9] As a result of negotiations between the parties the Act and the lease were amended in 1949. Paragraph 195(2)(f) of the Act was amended twice; once in March, 1949 and again on August 13, 1949. The latter amendment replaced paragraph 195(2)(f) with the following: (f) To enter into a lease upon such terms and conditions as it may deem advisable with any person, firm or company as lessee under this section, and such terms and conditions may provide for the termination of such lease upon notice and upon payment to the lessee of the value at the time of such termination of all works and erections constructed by the lessee within or outside the watershed of Mobile River subsequent to the date of the lease for the primary purpose of and used for developing the waters of Mobile River and such value shall be determined by appraisal by three experienced arbitrators, one to be appointed by the Council, one by the lessee and the third by the two arbitrators, appointed by the Council and the lessee, and in the event of the said arbitrators not agreeing upon a third arbitrator, then such third arbitrator shall, upon the application of either party within one month after the notice, be appointed by the Supreme Court of Newfoundland, and the award of any two such arbitrators shall be final and binding between the Council and the lessee. [10] The lease was then amended on October 21, 1949. Clause 1 provides in relevant part: . . . provided the Council shall have the right to terminate the said Lease upon three (3) years’ notice in writing to the Company given at any time after the expiration of forty seven (47) years from the date of this Lease and upon payment to the Company of the value of all works and erections constructed or provided by the Company within and without the Mobile River watershed subsequent to the date of this Lease for the primary purpose of developing the waters of Mobile provided such works and erections are in use by the Company for that primary purpose at the time notice of termination of the Lease is given by the Council and also at the time of termination of the said Lease; and in case the Council shall Page: 5 decide to exercise the right reserved by this Section the value of the said works and erections of the Company shall be appraised by three experienced arbitrators, one to be appointed by the Company, one by the Council and the third by the said two so appointed; and in the event of the said two arbitrators not agreeing upon a third, then such third arbitrator shall, upon application of either party within one month after due notice, be appointed by the Supreme Court of Newfoundland, and the award of any two such arbitrators shall be final and binding between the parties and provided further that should the Council during the continuance of this Lease or extension thereof exercise its right to purchase the Company’s undertaking within the meaning of Section 29 of the St. John’s Street Railway Charter 1896 as amended then and in that event all works and erections constructed or provided by the Company in connection with the said Mobile River Waters shall be deemed to form part of the Company’s undertaking. (Emphasis added.) [11] The most significant change arising from the amendment was the deletion of the words “aggregate cost of works and erections … less depreciation” and their replacement with the words “value of all works and erections … in use” with respect to the criteria for the determination of the payment amount to be made to the Company at the end of the lease. [12] On February 9, 2006, approximately forty-seven years after the lease commenced, the City gave notice of termination to Newfoundland Power with an effective termination date of March 1, 2009. [13] Pursuant to clause 1, a panel of arbitrators was constituted to determine the amount of the payment due to Newfoundland Power upon termination for certain assets. As noted above, the parties determined that it was necessary to ask the panel to rule upon two preliminary questions before proceeding to the arbitration. The questions were: (1) What is to be valued under the provision of clause 1 of the amended lease? (2) What is the meaning of the word “value” as used in clause 1 of the amended lease? Arbitration Decision – Majority [14] With respect to the first question, the majority determined that what was to be valued was all of the undertaking associated with the Mobile River Page: 6 watershed as a going concern, including the water rights and land rights held by Newfoundland Power at the end of the lease. The majority held that this interpretation followed from the requirement in the lease that the works and erections to be valued had to be “in use” at both the date upon which the notice of termination was given and at the date of termination of the lease. Thus, what the City would be taking back and paying compensation for would be a fully operational electrical generating and distribution facility. [15] The majority justified this conclusion by examining the closing words of clause 1, which provide: … that should the Council during the continuance of this Lease or extension thereof exercise its right to purchase the Company’s undertaking within the meaning of Section 29 of the St. John’s Street Railway Charter 1896 as amended then and in that event all works and erections constructed or provided by the Company in connection with the said Mobile River Waters shall be deemed to form part of the Company’s undertaking. [16] Section 29 of the St. John’s Street Railway Act provided in relevant part: The Municipal Council or other municipal body having charge of the municipal affairs of the town of St. John’s may, after the lapse of sixty years from the date of this charter, purchase the undertaking, plant, property, assets and rights of the Company as a going concern, upon giving to the Company three years’ notice of their intention so to do and in case the Council shall decide to exercise the right reserved by this section, the value of the said undertaking, plant, property, assets and rights of the Company shall be appraised by three experienced arbitrators… (Emphasis added.) [17] The majority determined that the reason for the reference to section 29 of the Act within clause 1 was to provide guidance to the appraisers. At page 35 of their decision, they state, “In this case, the wording of Clause 1 of the Lease as amended ties the termination process to the concepts expressed in Section 29 of the St. John’s Street Railway Act”. The majority concluded that the valuation of Newfoundland Power’s undertaking must take into account the “assets” and “rights” of the Company as these are explicitly described in section 29. [18] With respect to the second question, the majority examined the definition of the word “value” in both the Oxford Encyclopedic English Page: 7 Dictionary and Black’s Law Dictionary, 4th ed. With reference to those definitions, they noted, “there is nothing to lead the mind to the concept of depreciated cost as representing a value in the context of the present case”. They went on to highlight the fact that the St. John’s Municipal Act and clause 1 of the lease had been amended to remove the words “aggregate cost of works and erections… less depreciation” which were replaced with the words “value of all works and erections”. From this change, the majority concluded by implication that: … the appraisal process which we are now conducting, would be in error if it appraised what is being taken away by the termination of the Lease, on the basis of “cost less depreciation”. To express it another way, whatever the word “value” means in the present context, it cannot mean “cost less depreciation”… [19] The majority answered the two preliminary questions put by the parties in the following manner: (1) What is to be valued under the provisions of Clause 1 of the amended Lease? Answer: The valuation is to be made on a going concern basis, of the entire generation and distribution system and business being the undertaking as created and operated by Newfoundland Power under the terms of the amended Lease of 1949. It follows that it is open to the parties to present evidence and argument on all aspects of value which may be relevant to the appraisal of value. (2) What is the meaning of the word “value” as used in Clause 1 of the amended Lease? Answer: The word “value” in the context of the Lease as amended means value of the business or enterprise which is the entire undertaking of Newfoundland Power under the Lease, including the lands and water which will revert to the City upon termination and payment, following the arbitration process. Page: 8 Arbitration Decision – Minority [20] The minority arbitrator began by examining the definitions of the words “works” and “erections”, noting, “the phrase ‘works and erections’ normally refers to physical assets, such as buildings, structures, chattels and fixtures”. She added, “It would not normally include intangible rights, such as water rights or goodwill of a business”. [21] The minority arbitrator went on to consider that the water rights were leased to Newfoundland Power on certain terms and conditions, one of which was that the lease could be terminated after 50 years. The rights given to the Company were “not in perpetuity, nor were they absolute”. [22] The minority arbitrator noted that these two parties were also involved in another commercial arrangement under the St. John’s Street Railway Act. Section 29 of that Act granted the City the right to purchase Newfoundland Power’s undertaking as a going concern. She contrasted this broader language with the language adopted in clause 1 of the lease and noted that the parties clearly could have used clearer language if they sought to include anything other than the “works and erections”, which she noted “are clearly physical assets within the normal meaning of the words”. [23] She further held that an interpretation which required the City to pay for the physical assets only was a reasonable commercial result when the return on investment for Newfoundland Power during the term of the lease. [24] On the first question, she concluded, “the words ‘works and erections’ were to be given their ordinary meaning”. In her opinion, this meant a valuation of only the physical assets of Newfoundland Power. [25] With respect to the second question, the minority arbitrator found that the replacement of the words “aggregate cost of works and erections… less depreciation” with the words “value of all works and erections” did not exclude the possibility of the works and erections being valued on a depreciated cost basis. Value, being a broad concept with varying definitions, was broad enough to include such a valuation method. She concluded by stating her view that, “it is open to the parties to present evidence and argument on how the assets are to be valued when considered in the context of the directions given with respect to what is to be valued”. Page: 9 Judicial Review Decision [26] The applications judge applied a standard of reasonableness to the majority decision of the arbitrators and held that the decision met that standard. ISSUES [27] The issues for determination on this appeal, as stated by the appellant, are: (1) What is the appropriate standard of review of the arbitration award? (2) What is to be valued under the provision of clause 1 of the amended lease? (3) What is the meaning of the word “value” as used in clause 1 of the amended lease? STANDARD OF REVIEW OF DECISION OF THE APPLICATIONS JUDGE [28] A reviewing court must be correct in both its determination of the appropriate standard of review and its application of the appropriate standard of review: see Q. v. College of Physicians and Surgeons (British Columbia), [2003] 1 S.C.R. 226, per McLachlin C.J.C. at para. 43; C.J.A., Local 579 v. Northland Contracting Inc., 2006 NLCA 11, 261 Nfld. & P.E.I.R. 256, per Mercer J.A. at para. 28. STANDARD OF REVIEW OF ARBITRATORS’ DECISION [29] The analytical framework through which a Court must determine the standard of review applicable to the decision of an inferior tribunal was set out in Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190. The first step in the analysis is to determine whether the appropriate standard of review to be applied to this particular decision maker with regard to a Page: 10 particular category of question has been established in the jurisprudence. If the appropriate standard has not yet been determined, the court must then move on to perform a contextual analysis, taking into account: (1) the presence or absence of a privative clause; (2) the purposes of the tribunal; (3) the nature of the question at issue; and (4) the expertise of the tribunal (Dunsmuir, at para. 64) to determine whether a reasonableness or correctness standard should apply. [30] Neither the applications judge nor this Court was provided with any decisions, decided prior to or after Dunsmuir¸ which conclusively set out the applicable standard to be applied in this case. In order to determine the appropriate standard, therefore, the applications judge carried out a contextual analysis. Privative Clause [31] As the applications judge correctly identified, there were two privative clauses applicable to this decision. One was contained in clause 1 of the lease itself and the other in section 36 of the Arbitration Act, RSNL 1990, c. A-14. Clause 1 of the lease provided: “the award of any two such arbitrators shall be final and binding between the parties”. Section 36 of the Arbitration Act, which is applicable to this arbitration, provides: 36. The award made by arbitrators or an umpire is final and binding on the parties and persons claiming under them. [32] While the existence of a privative clause is not conclusive on the issue of the applicable standard of review, in Dunsmuir the majority noted that “[t]he existence of a privative or preclusive clause gives rise to a strong indication of review pursuant to the reasonableness standard” (para. 52). The applications judge correctly noted this at paragraph 22 of his decision. Purpose of the Tribunal [33] In this case the panel of arbitrators was not a “legislatively endowed administrative [body]”, but a contractually appointed, consensual board. As noted by Lambert J.A. of the British Columbia Court of Appeal in British Columbia Telephone Company v. T.W.U. (1985), 65 B.C.L.R. 145, different considerations apply to consensual arbitrators: Page: 11 [26] The fact that this was a consensual arbitration also raises two points of particular significance. [27] The first is that we must look to the terms of the submission and not to the provisions of a statute in deciding on the scope of the 'jurisdiction' conferred by the parties on the arbitrator. [28] The second is that the award only affects the parties. There is no obligation on any other arbitrator, dealing with a similar issue between other parties, to follow the award. That is in contrast to the position of a statutory tribunal. A statutory tribunal should follow its own previous decisions and, for that reason, ought to be required to be right in its interpretation of general public enactments and general legal principles, and ought to arrive at its decisions, even on matters particularly within its special expertise and function, on the basis of a demonstrably rational process. Those requirements do not have quite the same force in the case of a consensual arbitrator. The significant fact about a consensual arbitrator is that the parties have picked the arbitration process, and they have picked the arbitrator, because they want that process and that arbitrator in preference to any other process or any other decision maker. And they want the arbitrator to do what they ask him to do in the way they ask him to do it and not to do something else in some other way. [34] Justice Lambert’s dissent in that case was adopted by the Supreme Court of Canada in Telecommunication Workers Union v. British Columbia Telephone Company, [1988] 2 S.C.R. 564 and relied upon by the Saskatchewan Court of Appeal in CSP Foods Ltd. v. Grain Services Union (1992), 97 Sask. R. 190, 89 D.L.R. (4th) 542. [35] The fact that this was a consensual arbitration panel therefore suggests that a more deferential stance should be taken by this Court for two reasons. First, the decision only affects the parties to the lease. This is relevant because, in such situations, the necessity of this Court exercising its error correcting function is diminished, absent unreasonableness. [36] Secondly, the parties have specifically chosen this form of adjudication. The rationale for referring this matter to arbitration was, likely, to ensure an expeditious and inexpensive resolution of the exact dispute now being reviewed by this Court. This goal would be defeated where a court delves too easily into the merits of the arbitrators’ decision. As noted by the applications judge at paragraph 25 of his decision, this suggests that deference is owed to the determination of the majority and that a reasonableness standard should be applied. Page: 12 Nature of the Questions [37] The questions determined by the arbitration panel (and now being reviewed by this court) were: (1) What is to be valued under the provision of clause 1 of the amended lease? (2) What is the meaning of the word “value” as used in clause 1 of the amended lease? [38] Both questions involve the interpretation of the lease. The City contends that the interpretation of a legal agreement is a question of law, reviewable on the standard of correctness. As noted by the applications judge, however, “the essence of this task was to apply the factual circumstances of this contract to the legal principles associated with value and valuation of assets”. Similarly, this Court has held, that “[t]he construction and interpretation of a written instrument, leading to a determination of its legal effect” is a question of mixed fact and law. See Seadane International Inc. v. Morgan International Marketing Co. (1999) 180 Nfld. & P.E.I.R. 97 (Nfld. C.A.), per Green J.A., as he was then, at para. 26. Oppenheim v. Midnight Marine Ltd., 2010 NLCA 64, 302 Nfld. & P.E.I.R. 85, per Justice Barry at para. 44; Air-Tite Sheet Metal Ltd. v. N.D. Dobbin Ltd., 2011 NLCA 340, 312 Nfld. & P.E.I.R. 238, at para. 44; and Donovan Homes Ltd. v. Modern Paving Ltd., 2011 NLCA 39, 308 Nfld. & P.E.I.R. 180 at paras. 24-27 also confirm that questions of contractual interpretation are generally questions of mixed fact and law, unless there is some extricable legal question. Questions of mixed fact and law will generally be reviewed on the standard of reasonableness: see Dunsmuir, para. 53. As correctly noted by the applications judge, this factor also points toward a reasonableness standard. Expertise of the Tribunal [39] The wording of the lease required the parties to appoint “experienced arbitrators” to conduct the appraisal. When one looks at the qualifications of the arbitrators actually appointed, it is obvious that the parties abided by this term of the Lease. All three arbitrators were senior and respected members of the legal community. Page: 13 [40] The applications judge, however, correctly pointed out that the arbitrators here were not appointed under a statutory regime under which they would have developed a particular expertise in the subject matter before them. The panel could not be said to have greater relative expertise in contractual interpretation than the court. The applications judge noted that “[a]s such, it would not have the degree of attachment to the subject matter which would demand a high level of deference”. I agree with this characterization. Conclusion [41] With the exception of the relative expertise of the tribunal, all of the other factors point in favor of a reasonableness standard. The applications judge was therefore correct in determining that the applicable standard of review was reasonableness. ANALYSIS Reasonableness [42] The Supreme Court, in Dunsmuir explained that the reasonableness standard has two aspects. Reasonableness is concerned with both: (1) “justification, transparency and intelligibility in the decision making process”; and (2) “whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law” (para. 47). Abella J. in Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62, [2011] 3 S.C.R. 708, clarified that the adequacy of reasons is not a “stand-alone basis for quashing a decision”, however, and Courts are not required to “undertake two discrete analyses – one for the reasons and a separate one for the result” (para. 14). As Justice Abella notes at paragraph 12 of that decision: It is important to emphasize the Court’s endorsement of Professor Dyzenhaus’s observation that the notion of deference to administrative tribunal decision- making requires “a respectful attention to the reasons offered or which could be offered in support of a decision”. In his cited article, Professor Dyzenhaus explains how reasonableness applies to reasons as follows: “Reasonable” means here that the reasons do in fact or in principle support the conclusion reached. That is, even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to Page: 14 supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal’s proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective. [Emphasis added.] (David Dyzenhaus, “The Politics of Deference: Judicial Review and Democracy”, in Michael Taggart, ed., The Province of Administrative Law (1997), 279, at p. 304) [43] This Court must therefore determine whether the reasons meet the standard of “justification, transparency and intelligibility”. Even if the reasoning is in some respects flawed, this Court must determine whether the outcome is acceptable as being defensible in respect of the facts and the law by examining any alternative arguments which could have been made. [44] In this case, however, I am satisfied that the majority made a number of errors in its reasoning process which led to a result that is not reasonable and supportable given the wording of the lease and the context in which it was negotiated. The outcome is not defensible as a possible, acceptable outcome, given the commercial context in which the lease was to be interpreted and applied. I will turn now to an analysis of the majority’s reasoning and its conclusion on the two preliminary questions. QUESTION 1 – What is to be valued? [45] The majority made two main errors in its analysis of this question: (1) determining that the reference to section 29 of the St. John’s Street Railway Act bolstered the conclusion that all assets and rights of Newfoundland Power under the Mobile River watershed system were to be valued as opposed to only its physical assets in use at the date of notice and of the actual termination of the lease; and (2) not giving sufficient weight to the words “works and erections” in the lease. The Reference to Section 29 of the St. John’s Street Railway Act [46] As mentioned above, Newfoundland Power was originally incorporated for the purpose of operating a street railway in St. John’s. Section 29 of the St. John’s Street Railway Act, however, provided that the Page: 15 City could purchase the railway and other rights of the Company after 50 years (that period was later amended to 60 years). The relevant portions of that section provided: The Municipal Council or other municipal body having charge of the municipal affairs of the town of St. John’s may, after the lapse of sixty years from the date of this charter, purchase the undertaking, plant, property, assets and rights of the Company as a going concern, upon giving to the Company three years’ notice of their intention so to do and in case the Council shall decide to exercise the right reserved by this section, the value of the said undertaking, plant, property, assets and rights of the Company shall be appraised by three experienced arbitrators… (Emphasis added.) [47] It is clear on the language of section 29 that if the right to purchase was exercised, the City had to pay the value of the undertaking, plant, property, assets and rights of Newfoundland Power. The right to purchase, maturing as early as 1959, was not exercised. The closing words of clause 1 of the lease, describing what would happen to the electrical power generating facility in the Mobile River watershed had the City exercised the right to purchase under section 29, were thus irrelevant. For ease of reference, the end of clause 1 provides: … provided further that should the Council during the continuance of this Lease or extension thereof exercise its right to purchase the Company’s undertaking within the meaning of Section 29 of the St. John’s Street Railway Charter 1896 as amended then and in that event all works and erections constructed or provided by the Company in connection with the said Mobile River Waters shall be deemed to form part of the Company’s undertaking. [48] The significance of this portion of clause 1, recognized by the minority arbitrator, is that it sets out what is to be valued upon a purchase pursuant to section 29. This can be contrasted with what is to be valued upon termination of the lease after the minimum forty-seven year term and three year notice period set out in the lease. [49] What was to be valued varied significantly depending on whether the City acquired the electrical generating plant by purchase pursuant to section 29 or by termination of the lease. If the City terminated the lease after forty- seven years it had to pay the value of the “works and erections … in use”. If the City exercised its right to purchase the Company as a going concern under section 29 of the St. John’s Street Railway Act, which it could do Page: 16 during the forty-seven year term of the Lease, it had to pay the value of the “undertaking, plant, property, assets and rights”. [50] Intuitively, the different bases of valuation make sense. If the City terminated the lease, Newfoundland Power would no longer have the right to use the water or the land on which the works and erections sat. In other words, its franchise would be terminated. What it would be losing in that case would be the physical structures themselves and not the right to operate them. A similar conclusion was reached in Toronto Street Railway Company v. Toronto, [1893] A.C. 511 (P.C.). There, the City of Toronto had granted a company the right to construct and maintain street railways in the City. The agreement was terminable after thirty years at which point the City could “assume the ownership of the railway and all real and personal property in connection with the working thereof, in payment of their value, to be determined by arbitration”. The company argued that the agreement in that case conferred a perpetual franchise or statutory right to use the streets for the purpose of the railway and that that right should be valued. The Privy Council disagreed and held that the franchise and the right to use the streets came to an end once the City gave notice after the expiration of the original thirty year term. [51] The Toronto Street Railway Company case was one of the so-called “Tramway cases”. Generally speaking, these cases involved the placement of limits on the entitlement of owners of utilities arising from the expiration or termination of commercial arrangements and/or statutory enactments. Wilson J., in Re West Canada Hydro Elec. Corp., [1950] 3 D.L.R. 321 (BCSC), reviewed a long line of such cases and noted at page 438 that the basic nature of the commercial arrangement between owners of utilities and municipalities in those cases was that: …The utility companies were granted certain franchises or rights upon certain conditions, one of which was that a municipal corporation should at its option, have the right to buy their physical assets. When they accepted the franchise and rights they knew of and accepted these conditions. Therefore the sales which ensued were more in the nature of sales by agreement than of compulsory purchases, and an allowance for compulsory taking would have been improper. [52] Wilson J. at page 344, also makes reference to the reasons of Lord Macmillan for the Privy Council in International Railway Co. v. Niagara Parks Commission [1937] 3 ALL E.R. 81 (P.C.). That case dealt with the Page: 17 issue of compensation owed upon the termination of a franchise for a street railway operation at the end of a forty-year term. Lord Macmillan described the bargain at p. 189 in the following terms: It is a familiar feature, common to all cases in which a franchise for a public utility is granted to private undertakers for a limited period, coupled with an obligation to transfer the undertaking to a public authority at the conclusion of the period, that the undertaker must look to reap the reward of their enterprise in the profit which they may make during the currency of their franchise, and on its expiry shall receive only the value of the structure which they have created, without any compensation either for the profits or the losses which they may have made or sustained while in the enjoyment of their franchise. This is plainly just for, with the termination of the franchise, the power to make profits or the liability to incur losses simultaneously terminates. The promoters have had their chance to make what they can out of their undertaking in the knowledge that it was of limited duration and that they must part with it at a fixed date. To compensate them on the basis of the profits which they have made and are surrendering would be to assume that they had a right to go on making profits although ex hypothesi the franchise which gave them that right had come to an end. [53] The comments from those two cases equally describe the situation in this case. Here, Newfoundland Power and the City entered into a lease from the City with an express right of termination after forty-seven years upon three years notice with a compensation formula in favor of Newfoundland Power limited to the value of works and erections in use at the end of the lease to be valued by three arbitrators. There would be no other compensation based on a going concern or otherwise because of the express language set out in the amended clause 1 of the lease dated, October 21, 1949. [54] By improperly relying upon section 29 of the St. John’s Street Railway Act, the majority failed to focus on the true nature of the bargain between the parties formulated in the October 1949 amendment to the lease. On the one hand, the lease gave Newfoundland Power and its predecessors a franchise to operate an electrical power generating plant as a going concern for a continuous period of fifty years with substantial financial returns to its shareholders in exchange for relatively minor payments of rent. Under the lease, the lands and water courses reverted to the City upon termination. The residual entitlement to compensation was limited to the value of works and erections in use at the dates of notice and actual termination. This is the nature of the bargain between the parties that applies here. Page: 18 [55] If the City purchased the undertaking of Newfoundland Power, including the electrical generating plant, which it had the right to do during the term of the lease, it would have been taking back not only the physical structures constructed by Newfoundland Power, but also the contractual rights of Newfoundland Power to use the land and water courses in the Mobile River watershed. [56] If the parties intended that Newfoundland Power would be paid for all its undertaking, plant, property, assets and rights whether tangible or intangible upon termination of the lease, it could have done so with language similar to what is stated to apply in the case of a purchase. Instead, they chose very different words, limiting Newfoundland Power’s entitlement on termination of the Lease by the City to payment for the value of works and erections in use. [57] The majority’s holding that the closing portion of clause 1 supported the contention that the valuation which occurs on the termination of the lease must be consistent with the valuation that occurs upon the City exercising its rights under section 29 was unsupportable and unreasonable and ignores the specific nature of the franchise rights granted by the City to Newfoundland Power. Works and Erections [58] It is clear from the wording of clause 1 that the arbitrators are to value the “works and erections… in use”. The answer to the question “what is to be valued” might, therefore, be better phrased as “what is the meaning of ‘works and erections… in use’ ”. Notably, at no point does the majority consider the definition of the words “works and erections”. Instead, the majority focus on the words “in use”. The latter words, the majority held, indicated that what the City would be taking back would be an operating and functioning electrical generating and distribution facility. This, it held, indicated an intention to value the undertaking as a going concern. [59] This conclusion ignores the meaning of the words chosen by the parties. The words “works and erections” generally refer to physical assets, a fact noted by the minority arbitrator. While the addition of the words “in use” could connote an intention that the City would be taking over an operating facility, read in the context of the discussion above, it is clear that the words “in use” did not intend to transform the valuation from one Page: 19 including only physical assets into one including all associated rights and intangible property. Their inclusion was meant only to identify which physical assets are to be valued, i.e. only those which are in use. [60] This interpretation is commercially sensible. Presumably, the words “in use” were added so that structures which were no longer necessary or functioning for the purpose of electrical power generation, would not be included in the assessment of value. Newfoundland Power is to be paid for the value of only those physical assets which it was using to generate electrical power at the time of notice and termination. These are the only structures of value that it is losing upon termination of the lease. Conclusion on Question 1 [61] For this reason, the decision of the majority of the arbitrators is set aside. This Court would answer the question in the manner requested by the City: The assets to be appraised under the Lease are the physical works and erections constructed or provided by NF Power within or without the Mobile River Watershed after November 23, 1946, for the primary purpose of developing the waters of Mobile River, limited to such works and erections as were in use for that primary purpose on February 9, 2006 [the Notice of Termination date] and as of March 1, 2009 [the termination date] not to include any intangible assets, not to include water rights, and not to be valued as a going concern. QUESTION 2 – What is the meaning of the word “value”? [62] Because of this Court’s conclusion with respect to question 1, the decision of the majority on question 2, that the word “value” in the context of the amended lease is the value of the business or enterprise being the entire undertaking of Newfoundland Power under the lease, including the lands and water, must also be set aside. What is to be valued includes only the physical assets and therefore “value” cannot be interpreted to mean value of the undertaking, including land and water rights. [63] What then, is the meaning of the word “value”? Page: 20 The Change in the Language of the Lease [64] The majority determined that the replacement of the words “aggregate cost of works and erections… less depreciation” with the words “value of all works and erections” in clause 1 of the lease excluded the possibility of conducting a valuation based upon the aggregate cost, less depreciation. As noted by the minority arbitrator, however, the term “value” is capable of a number of interpretations. One of these is aggregate cost, less depreciation. I would agree with the City’s argument that the effect of the amendment was, therefore, to replace one method of valuation with the broader concept of “value”, which included as a possible interpretation the original method of valuation. [65] While the fact that the words “aggregate cost of works and erections… less depreciation” were removed from clause 1, might suggest that this method of valuation may no longer be applied by the panel of arbitrators, this fails to give effect to the fact that the words chosen by the parties to replace them could be interpreted to mean aggregate cost, less depreciation. The effect of the amendment, from a stand point of reasonableness, would appear to be intended to give greater flexibility to the arbitrators in determining which method of valuation is appropriate upon termination of the lease of those works and erections that are in use and are to be valued. Conclusion on Question 2 [66] The decision of the majority of the arbitrators was not a possible defensible outcome. I would, therefore, set aside that decision and remit the matter to the panel of arbitrators so that this question may be determined in a manner consistent with this Court’s decision on question 1. For greater clarity, it is open to the panel to consider whether the appropriate basis for valuation is the aggregate cost of all works and erections in use less depreciation. DISPOSITION [67] The errors identified in the reasoning process of the majority of the arbitrators led to a decision which is unreasonable and unsupportable based Page: 21 upon the wording of the lease and the context in which the agreement was made. Therefore, the applications judge erred by finding that the decision of the majority was reasonable and within the range of possible outcomes. Having found that the majority erred, I would allow the appeal. I would therefore set aside the decision of the majority of the arbitrators and answer question 1 in the manner set out above. I would refer question 2 back to the arbitrators so that they may complete the valuation process in accordance with the analysis in this decision. The City shall be entitled to party and party costs here and in the Trial Division at Column 3 of the Scale of Costs for one counsel. ______________________ M. F. Harrington J.A. I Concur: ______________________ B. G. Welsh J.A. ______________________ M. H. Rowe J.A. Correction Notice This decision was modified on March 19, 2013 by a corrigendum, St. John's (City) v. Newfoundland Power Inc., 2013 NLCA 21 err : [1] In paragraph 12, the number “forty-seven” is deleted and replaced with the number “sixty”, and the words “an effective termination date” are deleted and replaced with the words “a potential effective termination date”. Page: 22 [2] In paragraph 61, the words “as of march 1, 2009 [the termination date]” are deleted and replaced with the words “as of the termination date”. On October 16, 2014, the text of the decision was modified to incorporate these changes, in keeping with the Court’s new policy on correcting decisions.