Uniprix inc. v. Gestion Gosselin et Bérubé inc: The Supreme Court Clarifies the Validity of Perpetual Contracts

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When parties sign a contract, they have usually settled on an agreement that they find to be mutually beneficial, and are therefore happy to do business with one another. However, issues can arise when parties jump headfirst into an agreement without consideration for how to terminate it.

For some contracts, such as a one-time sale of goods, this is not an issue. The contract is either performed or a breach of contract claim is brought forth. But what about ongoing agreements? Are perpetual contracts that do not contemplate a termination date enforceable? Can a contract with automatic renewal terms be renewed indefinitely? These questions are at the heart of the Supreme Court of Canada (“SCC”) case Uniprix inc v Gestion Gosselin et Bérubé inc, 2017 SCC 43 [Uniprix, SCC].

Case Background: ’Til Death Do Us Part

This dispute involved the appellant, Quebec pharmacy chain Uniprix Inc. (“Uniprix”), and the respondents, a corporation and a partnership who together operated a pharmacy (“Gosselin Group”).

The parties entered into a contract in 1998 that allowed Gosselin Group to operate under the Uniprix banner for a five-year term. The contract also contained a renewal provision (the “Renewal Clause”) that automatically renewed the contract for an additional five years, unless the Gosselin Group gave notice of its intention to terminate the contract.

Critically, the contract did not contain language that allowed Uniprix to end the renewal cycle. Therefore, unless the Gosselin Group unilaterally decided not to renew the agreement, Uniprix would be bound perpetually.

After two automatic renewals, Uniprix notified the Gosselin Group of its intention not to pursue a third 5-year term. Gosselin Group brought an action contesting the termination of the agreement in court. The Gosselin Group’s action was affirmed at both the Superior Court and the Quebec Court of Appeal before being appealed to the SCC.

The SCC Decision: Clear Terms and Clear Renewal Mechanisms 

The SCC contemplated two main issues:

  1. Does the renewal clause faithfully reflect the parties’ common intention of granting the Pharmacist a unilateral option to renew the contract every five years, which Uniprix would be unable to oppose?
  2. If that is the case, is its consequence, that an Agreement can become perpetual, valid in Quebec Law? (Uniprex, SCC, para 25).

In a 6-to-3 majority decision, the SCC answered affirmatively to both questions. Drawing on both Quebec and common law jurisprudence, the court outlined the first step in its contractual analysis:

The first step in interpreting a contract is to determine whether its words are clear or ambiguous (Droit de la famille — 171197, 2017 QCCA 861, at para. 62 (CanLII); Samen Investments Inc. v. Monit Management Ltd., 2014 QCCA 826, at para. 46 (CanLII)). The purpose of this step, which some authors refer to as the clear act rule (règle de l’acte clair) (Gendron, at p. 27), is to prevent judges from departing, deliberately or unexpectedly, from a clearly expressed intention of the parties. In short, a judge must defer to a clear contract (Uniprex, SCC, para 34).

For instances where the words of a contract were indeed ambiguous, the court turned to the Civil Code of Quebec (the “Code”) in describing the second step of its analysis:

The cardinal principle that guides the second step of the interpretation exercise is that “[t]he common intention of the parties rather than adherence to the literal meaning of the words shall be sought” (art. 1425 C.C.Q.). In this exercise, it is necessary to consider intrinsic aspects of the contract, such as the words of the clause at issue and the other clauses, in order to ensure that each of them is given a meaningful effect and that each is interpreted in light of the others (arts. 1427 and 1428 C.C.Q.; Baudouin and Jobin, at No. 417; Lluelles and Moore, at Nos. 1593‑94). The interpretation of a contract also requires consideration of the nature of the contract and of the context extrinsic to it, including the factual circumstances in which it was formed, how the parties have interpreted it, and usage (art. 1426 C.C.Q.; Baudouin and Jobin, at No. 418; Lluelles and Moore, at Nos. 1600, 1603 and 1607). (Uniprex, SCC, para 37).

Applying the two-step analysis to the case at hand, the SCC found that the Renewal Clause was not ambiguous. The Court held that the clause provided clearly that Gosselin Group could notify Uniprix of their intention not to renew the contract. The contract did not stipulate that Uniprix could give a similar notice to Gosselin Group. In the Court’s judgment, the parties agreed on a clear term of five years together with an equally clear renewal mechanism.

Uniprix’s first contention was that its ability to terminate the agreement was an implied term of contract. As evidence, Uniprix referred to various other sections of the agreement that allowed them to terminate the contract. However, the SCC affirmed the trial judge’s view that these clauses only allowed for termination of Gosselin Group with cause. An option to renew the contract without cause could not be read into the contract implicitly.

Uniprix’s second contention was that a contract binding parties in perpetuity would be contrary to public order. More specifically, Uniprix asserted that the individual freedom of those contracting would be offended by contracts that imposed obligations in perpetuity.

The SCC found this line of argument unpersuasive. Turning to the Code, the court found that the legislature had the opportunity to enact provisions prohibiting perpetual contracts, but declined to do so. Furthermore, the court failed to find academic literature or case law that found perpetual contracts to be contrary to Quebec civil law. The court left open the possibility that obligations that affected an individual person or that person’s freedom could offend public order, but saw no application of this principle to a corporate commercial partnership such as the one at hand.

Significance and Applicability

The SCC has certified the validity of a fixed-term contract that contemplates an indefinite number of renewals at the discretion of one party. Indeed, any commercial agreement that contemplates an automatic renewal (such as franchise agreements, affiliate agreements, purchase agreements, co-branding agreements and employment agreements) may be affected by the decision.

This judgment is expected to have impact beyond Quebec. While Uniprix involves Quebec-domiciled parties and relies on a civil code, the SCC’s judgment nonetheless draws extensively on both Quebec and common law cases in its contractual analysis. Such an analysis is unlikely to be unpersuasive in other Canadian common law jurisdictions.

Uniprix may spark a revision of the terms by which companies engage with their partners and customers. In particular, contracting parties may more readily assert the right to unilaterally terminate agreements without cause. Moreover, such contracts may choose to contemplate a specific “drop-dead” date for renegotiation, include a finite number of renewal cycles, or will require bilateral signoffs from both contracting parties in order to proceed. Uniprix is required reading for companies seeking to avoid unintended consequences when entering an agreement.

 

 

 

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