The Validity of Perpetual Contracts Upheld by the Supreme Court of Canada

Written by on December 20, 2017 in Blog, Focus on Canadian Cases
Signing a contract agreement

 

The Supreme Court recently affirmed the validity of perpetual contracts under Quebec law. In Uniprix inc. v. Gestion Gosselin et Bérubé inc., the Court ruled that a unilateral contract renewal clause is valid, despite its potential to bind one party in perpetuity.

In 1998, the appellant, Quebec pharmacy chain Uniprix Inc. (“Uniprix”), entered into a contract with the respondents, a corporation and a partnership which operated a pharmacy (“the Gosselin Group”), which allowed the Gosselin Group to operate under the Uniprix banner for a five-year term. The contract contained a renewal provision that automatically renewed the contract for an additional five years, unless the Gosselin Group gave notice of its intention to terminate it.

Significantly, 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 in perpetuity.

The contract was automatically renewed in 2003 and 2005. When, in 2012, Uniprix notified the Gosselin Group of its intention not to pursue a third term, the Gosselin Group successfully brought an action contesting the purported termination of the agreement. The decision was affirmed on appeal.

In a July 28th decision, a majority of the Supreme Court dismissed Uniprix’s appeal, upholding the judgments of the Court of Appeal and Superior Court of Quebec.

The Court concluded that the unilateral renewal option granted to the Gosselin Group was consistent with the other provisions of the contract, with the circumstances surrounding its execution, and with the parties’ conduct. The Court emphasized that nothing in Quebec law precludes parties from agreeing on such a mechanism even though its effects could be perpetual.

Writing for the six-judge majority, Justices Wagner and Gascon confirmed the lower courts’ interpretation of the automatic renewal clause. The clause granted the Gosselin Group the exclusive option to terminate the renewal by sending Uniprix notice to that effect six months before the expiry of the five-year term. If the Gosselin Group did not exercise such option, the contract would automatically be renewed for an equivalent period, without Uniprix being able to oppose it. In the majority’s view, this clause was clear and unambiguous.

While they acknowledged that the Gosselin Group’s unilateral renewal option creates uncertainty as to the total duration of the parties’ contractual relationship, Wagner and Gascon JJ. held that this uncertainty does not transform the contract into an indefinite one. Characterizing the agreement as perpetual would be contrary to the intention of the parties. Even when left to the discretion of one party, a contract subject to an automatic renewal clause remains a fixed-term contract, though its effect may be perpetual.

The dissenting judges differed on this point, characterizing the agreement not as being of fixed duration, but rather as an indeterminate contract that either party can terminate with reasonable notice.

Justices Wagner and Gascon went on to hold that nothing in Quebec law prohibits potentially perpetual obligations, noting that the Quebec legislature chose not to prohibit perpetual contractual obligations except for certain contracts, such as leases. Wagner and Gascon JJ. also emphasized that perpetual obligations, in general, do not offend any fundamental value so as to make them contrary to public order. While certain perpetual contracts, such as contracts of adhesion, might be contrary to public order, that is not the case in a commercial agreement such as the one at issue, where the parties freely chose to bind themselves in perpetuity.

The significance of the Supreme Court’s willingness to enforce a perpetual contractual obligation cannot be overstated. Any agreement that contemplates an automatic renewal, from franchise agreements to employment contracts, may be affected by the decision. Moreover, the judgment will have impact beyond Quebec. While this particular case involved Quebec parties, the Supreme Court drew extensively on common law jurisprudence in its analysis.

Uniprix may change the way in which parties negotiate contracts, particularly with respect to termination and renewal provisions. Parties seeking to avoid the effects of this decision may, for example, provide that after a certain number of renewals, each of the parties would have the unilateral option to terminate without cause. Or they may consider a specific “drop-dead” date for renegotiation, include a finite number of renewal cycles, or require bilateral signoffs in order to proceed.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. Whether you are an employer or an employee, we can help. Contact us to see how.

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