Automatic Renewal Clauses: Perpetual Effect and Validity; the Supreme Court of Canada Decides

August 2, 2017

The Supreme Court of Canada has put an end to the judicial saga in Uniprix and confirmed the legality of a clause providing for the automatic renewal of a fixed term contract at the sole discretion of the member pharmacist for whose benefit the clause exists. In the given circumstances, the effect is to give the contract a "perpetual" scope, at the sole discretion of the pharmacist, as long as the pharmacist is not in default. As a result, despite dissenting opinions (six to three), the Supreme Court upheld the decisions of the Court of Appeal and Superior Court of Quebec.

Four key principles to note

  1. An automatic renewal mechanism whose effects could be perpetual is neither contrary to the law or the public order in commercial matters.
  2. The clear language of a clause does not require an interpretive exercise in order to be applicable. It must first be determined whether the text is clear and only if it is ambiguous should it be interpreted. "The distinction between these two steps can be difficult to see, but it is fundamental."[1] This decision serves as something of a counterweight to the trend in recent case-law which has placed a greater emphasis on finding the true intention of the parties, often at the expense of the language used in contracts.
  3. A distinction must be made between the characterization of a contract and the interpretation of its terms. Characterization serves to determine what object the parties intended to give to their agreement as a whole, that is, the overriding purpose of the agreement or essential prestation that is central to the agreement. Interpretation seeks, rather, to determine the meaning that the parties intended to give to a specific part of the agreement.[2] In this case, the question of the duration of the contract is a question of interpretation and not of characterization of the contract. It must be analyzed in light of the facts and not in the abstract.
  4. The interpretation of contracts entails consideration of a multitude of facts. It is a question of mixed fact and law in respect of which courts of appeal may not intervene in the absence of a palpable and overriding error.[3]

The facts

In this case, Uniprix inc. ("Uniprix") appealed the judgment of the Hon. Gérard Dugré dated December 13, 2013, in which he held that the contract of affiliation between the parties had been renewed until January 28, 2018.

The respondent (the "Affiliate" or the "Pharmacist") operated a pharmacy under the "Uniprix" banner. The contractual relationship arose under a contract of affiliation signed on January 28, 1998.

The central issue was the interpretation and characterization of a renewal clause that read as follows:

[translation]

10. TERM:

Regardless of any written or verbal provisions to the contrary, this agreement shall commence on the day of its signing and shall remain in effect for a period of sixty (60) months, or for a period equal to the term of the lease for the premises where the pharmacy is located. THE MEMBER shall, six (6) months before the expiration of the agreement, notify [Uniprix] of its intention to leave THE COMPANY or to renew the agreement;

Should THE MEMBER fail to send the prescribed notice by registered mail, the agreement shall be deemed to have been renewed in accordance with the terms and conditions then in effect, .... [4]

Uniprix appealed the decision of the Court of Appeal of Quebec dated September 11, 2015, affirming the trial decision, although there was also a dissenting opinion at the appellate level.

To summarize, the contract of affiliation signed by the parties in 1998 (the "Agreement") was entered into for a fixed term of five years. However, the Agreement contained an automatic renewal clause that had been triggered twice: in 2003 and in 2008. In 2012, Uniprix sent the Pharmacist a notice of non-renewal, hoping to thereby terminate the contract as of January 2013. The Pharmacist argued that it could renew the Agreement, at its discretion, while Uniprix contended that it could terminate the contract upon the expiry of the term.[5]

The facts showed that in 2010, to counteract the installation of a competing banner in premises located less than 200 metres from the Affiliate's pharmacy, Uniprix submitted an offer to lease the premises sought by a competitor, unknown to the Pharmacist. A year later, in 2011, it tried unsuccessfully to persuade the Pharmacist to move to the new premises, which it refused to do, since those premises were less advantageous for it. In any event, on March 1, 2012, Uniprix nonetheless leased the premises in question for a 15-year term. On July 26, 2012, Uniprix informed the Pharmacist that the contractual relationship would terminate on January 28, 2013.

Decision of the Supreme Court

The Supreme Court upheld the decision of the trial judge and the majority decision of the Court of Appeal, concluding that "the unilateral renewal option granted to the member pharmacists in the contract of affiliation is consistent with the other provisions of the contract, with the circumstances surrounding its signature and its object, and with the parties' conduct in applying it. Nothing in Quebec law precludes the parties from agreeing on such a mechanism even though its effects could be perpetual."[6]

The reasoning of the majority of the Supreme Court can be divided into two main questions:

  1. Is clause 10 of the Agreement clear and does it 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?

The Court answered both questions in the affirmative. First, it held that the clause in question was in no way ambiguous[7] and specifically provided that the Pharmacist could notify Uniprix of its intention to renew or not renew. Its second paragraph also clearly provided that, should the notice not be sent, the Agreement would be "deemed" to have been renewed. The term "deemed" implied an absolute presumption that the Agreement would be renewed. The Court noted, in passing, that there was nothing to prevent Uniprix from terminating the Agreement for cause, as the Agreement and the Civil Code of Québec provide, but that still did not constitute an option for Uniprix to oppose the renewal of the Agreement, even implicitly.[8]

The Court emphasized the particular context surrounding the "Agreement". It noted that the Agreement is a contract of affiliation that may be distinguished from a franchise agreement, although it has similarities[9] with that kind of agreement. Evidence was introduced that Uniprix had been created [translation] "for the benefit of owner pharmacists who have joined together for the purpose of developing their respective commercial and professional practices". It was submitted that Uniprix had been created in 1977 by its pharmacists, who wanted to be served "forever", Uniprix being their "creation".[10] It therefore made sense to the Court that Uniprix would serve its members until they themselves decided to withdraw from the group. In the circumstances, it would be understandable that Uniprix would not be able to terminate the Agreement except with cause.[11]

The conduct of the parties also supported the Pharmacist's position: twice, in 2003 and 2008, Uniprix recognized that the Pharmacist's silence bound the parties for an additional five-year term.[12]

The Court noted that in the case of a contract of employment, a fixed term contract can be renewed "in perpetuity". Accordingly, and a fortiori, that right must be recognized in a commercial context.[13]

In addition, the Court noted that at each stage of the case, the parties had acknowledged that the Agreement was for a fixed term.[14]

Lastly, the Court rejected the reasoning based on Article 1512 C.C.Q., noting in passing that that argument had not been raised by the parties in the courts below and that only the Hon. Justice Duval Hesler had referred to it in her dissenting reasons in the Court of Appeal decision.[15]

The Court pointed out that Article 1512 applies where there is no term or where the term is uncertain:[16] It was not intended to prevent the automatic renewal of a contract whose term has been clearly stated.[17]

On the question of the potentially perpetual effect of the Agreement, the Court concluded that nothing prohibited such effects and there was no basis for concluding that such contracts are contrary to the public order.[18]

The Court further noted that in her dissent, the Hon. Justice Côté did not address that question.[19]

Justice Côté wrote the dissenting reasons for the Supreme Court, with the agreement of Chief Justice McLachlin and Justice Rowe. Justice Côté's dissent is based on two points. First, she was of the opinion that the trial judge had erred in concluding that clause 10 was clear and needed no interpretation, since a reading of the entire Agreement revealed ambiguities that should have led to the application of the rules of interpretation set out in the Civil Code of Québec.[20] Second, in her opinion, the Agreement should have been characterized as a "contract for an indeterminate term".

In the opinion of the Hon. Justice Côté, the Agreement could be characterized as a "fixed term" contract in perpetuity with a unilateral possibility of exit arising every five years for one party. In her opinion, this would amount to a "fixed term" lasting forever, that is, an indeterminate term.[21]

Conclusion

The key takeaway from this decision is that the highest court in the land has recognized the validity of a fixed term contract whose effects, arising from automatic renewal, could be to make the contract perpetual, at the sole discretion of one of the contracting parties. The decision is, nonetheless, based on very particular facts. Firstly, a clause providing for automatic renewal at the sole discretion of one of the parties and the fact that the absence of an expression of intention at the time of renewal creates an implicit and absolute presumption of renewal are somewhat uncommon facts in the context of contracts of affiliation or similar franchise contracts. Moreover, one of the particular facts that was emphasized by the Supreme Court of Canada was the commercial raison d'être of the relationship between the parties in Uniprix.

The best way for a party to avoid the effects of the conclusion in Uniprix is to ensure that a contract is drafted in such a way as to avoid those consequences. For example, a similar contract could provide that after a certain number of renewals, each of the parties would have the unilateral option of terminating without cause, by giving minimum notice of several months.


[1] Uniprix inc. v. Gestion Gosselin et Bérubé inc. et al, 2015 QCCA 1427, para. 36.

[2] Uniprix inc. v. Gestion Gosselin et Bérubé inc. et al, 2015 QCCA 1427, para. 38.

[3] Uniprix inc. v. Gestion Gosselin et Bérubé inc. et al, 2015 QCCA 1427, para. 41.

[4] Uniprix inc. v. Gestion Gosselin et Bérubé inc. et al, 2015 QCCA 1427, para. 8 [based on the Court's translation]

[5] Uniprix inc. v. Gestion Gosselin & Bérubé inc. et al, 2017 CSC 43, para. 2.

[6] Ibid, para. 4.

[7] Ibid, para. 46.

[8] Ibid, para. 49.

[9] Ibid, para. 30.

[10] Ibid, para. 104.

[11] Ibid, para. 53.

[12] Ibid, para. 54.

[13] Ibid, para. 59.

[14] Ibid, paras. 60 and 61.

[15] Ibid, para. 63.

[16] Ibid, para. 66.

[17] Ibid, para. 66.

[18] Ibid, para. 70.

[19] Ibid, para. 71.

[20] Ibid, para. 108.

[21] Ibid, para. 109.

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