It is common practice for franchise agreements to contain automatic renewal provisions. However, can a contract be renewed automatically an unlimited number of times, thereby putting the parties in an endless renewal cycle? In other words, are perpetual obligations enforceable pursuant to Québec civil law? These fundamental questions were answered by the Québec Court of Appeal in its Uniprix inc. c. Gestion Gosselin et Bérubé inc., 2015 QCCA 1427 decision where it determined that perpetual obligations are indeed enforceable.
The dispute involved the appellant, Uniprix Inc. (Uniprix), and the respondents, a corporation, Gestion Gosselin et Bérubé inc., and a partnership, Manon Gosselin et Bernard Bérubé, Pharmaciens, S.E.N.C., who together operated a pharmacy under the Uniprix banner (the Gosselin Group).
In 1998, Uniprix and the Gosselin Group entered into a contract of affiliation with a five-year term. The contract contained a renewal provision according to which the agreement was to be renewed automatically for an additional five years, unless the Gosselin Group gave notice of its intention to leave the banner six months before the term. Unlike the Gosselin Group, Uniprix had no ability to end the renewal cycle; it could only terminate the relationship with cause in accordance with specific terms set out in the agreement. Therefore, unless the Gosselin Group 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 renew the agreement a third time.
Quebec Superior Court
The Gosselin Group brought an action contesting the notice in court, and seeking a declaration that Uniprix remained bound by the contract, and was required to renew the agreement. The Gosselin Group succeeded with the Superior Court finding that the renewal provision was clear and enforceable, and that it was stipulated exclusively in favour of the Gosselin Group. Uniprix’s notice was therefore inoperable.
Court of Appeal
The majority of the Court of Appeal upheld the judgment of the Superior Court, with Chief Justice Duval Hesler dissenting. At the core of the dissent was whether the agreement was for a fixed or indeterminate duration. According to Chief Justice Duval Hesler, in spite of the five-year term, the renewal provision rendered the duration of the agreement indeterminate. She opined that the parties could therefore terminate the agreement subject to a reasonable notice period. Alternatively, she would have applied article 1512 of the Civil Code of Québec, which allows the Court to fix a term that the parties omitted or failed to define with sufficient certainty.
According to the majority, however, the contract of affiliation had a fixed term of five years. It acknowledged that this interpretation created perpetual obligations for Uniprix, but stated that perpetual obligations are enforceable in Québec civil law for three reasons:
- The Civil Code of Québec contains no general prohibition of perpetual obligations and nothing indicates that the legislator intended to prohibit perpetuity.
- The need to protect contractual freedom.
- Perpetual obligations do not violate any fundamental values.
The majority further reminded us that article 1512 C.C.Q., raised by the Chief Justice in her dissent, was inapplicable to a contract of a fixed duration.
Although the Court of Appeal attempted to tie its reasoning to the specific facts of this case, the principles it laid out regarding perpetual obligations have broader implications. Caution should be exercised when drafting automatic renewal provisions. Courts will enforce such provisions even when they lead to perpetual obligations, that is to say when only one of the parties has the ability not to renew the agreement, or possibly, when neither of them does.
While enduring commercial relationships are often desirable, perpetual contracts seldom are. An agreement that is mutually profitable for many years may become unprofitable. Long-term contracts such as franchise or affiliation agreements should expressly allow the parties to end their relationship in a commercially reasonable manner, for instance, by limiting the number of automatic renewals or by giving both parties the ability to end the renewal cycle subject to a reasonable notice period.
Uniprix sought leave to appeal to the Supreme Court of Canada and its application is currently under review. Whether or not the highest court decides to hear the appeal, and ultimately, to reverse the Court of Appeal’s decision, the scope of automatic renewal provisions should be expressly limited when drafting a contract, so as to avoid being inadvertently bound by perpetual obligations.