Perpetual contracts valid in Québec

Supreme Court of Canada upholds appellate court ruling in disputed contract of affiliation
Perpetual contracts valid in Québec

THE SUPREME COURT of Canada has affirmed the validity of perpetual contracts in Québec law in a six-three decision handed down in July.

In Uniprix inc. v. Gestion Gosselin et Bérubé inc., 2017 SCC 43, the majority of the court found that a unilateral renewal option in a contract of affiliation was consistent with other provisions of the contract, with the circumstances surrounding its signature and its object, and with the parties’ conduct in applying it.

Characterizing and interpreting a contract are two distinct actions, the SCC noted, and “in Québec civil law it is the classification of the contract based on the rules that apply to it, the conditions that apply to its formation, its object and how it is performed — that makes it possible to define the nature of the contract and thereby determine how it should be characterized.”

André Joli-Cœur, a partner in Joli-Cœur Lacasse , s.e.n.c.r.l. in Québec, says there have not been many decisions recently on the characterization of contracts, which “depends on the intention of the parties when they wrote the contract.” When a contract is worded in clear and unambiguous language, the SCC found in the Uniprix decision, “it doesn’t need interpretation,” says Joli-Cœur.

But, the SCC found, where the parties’ positions are incompatible despite clear contractual wording, as in Uniprix, the interpretation exercise is important “in order to identify the parties’ common intention.” In this case, that intention “was that they would be bound for definite, successive five-year periods and that the member pharmacists would have full discretion to decide to renew or not to renew the contract,” Justices Richard Wagner and Clément Gascon wrote for the majority.

“The court in this case clarified the issue,” says Éric Préfontaine, a partner in Osler, Hoskin & Harcourt LLP in Montréal. An agreement that may be perpetuated forever, and therefore creates an obligation forever, does not contravene public order under Québec law, he says of the SCC’s decision.

In 1998, the respondent companies of Gestion Gosselin and Bérubé Inc., or “member pharmacists,” decided to affiliate their pharmacies with the Uniprix banner. Uniprix is a Québec pharmacy chain based in Montréal. The resulting contract of affiliation contained a clause to the effect that it would be renewed automatically unless the member pharmacists gave notice to the contrary. The contract was subsequently twice renewed automatically, until in 2012 Uniprix notified the member pharmacists that their contractual relationship would terminate as of January 2013.

The member pharmacists argued that the contract could only be cancelled by them. Uniprix countered that that interpretation could have the effect of binding the parties in perpetuity, which would be contrary to public order, and that the contract should be considered to be for an indeterminate term, thus allowing it to be resiliated at any time on reasonable notice.

The majority of the Québec Court of Appeal affirmed the Superior Court of Québec's judgment, finding that the Civil Code of Québec does not prohibit contracts that could be perpetual.

Indeed, the SCC noted the validity of perpetual contracts in Québec residential leases.

“Normally a [residential] lease is for a one-year period,” says Préfontaine. “But the tenant under Québec law has a right to remain in his premises. He’s entitled to renew the lease every year provided he’s not in default …  So, even if you have an agreement that’s of fixed duration, the fact that one party has the right to renew … could result in perpetual obligations under civil law.”

In forming its decision, the SCC stressed the importance of the clear wording of the Uniprix contract and the common intention of the parties.

“In this case, the parties agreed on a clear term of five years together with an equally clear renewal mechanism that would enable them to pursue their business relationship for fixed five‑year periods,” the court found.

“A conclusion that the contract is one for an indeterminate term would fly in the face of logic and the clearly expressed intention of the parties.”