Forever is a long time! But not unattainable in Quebec!

The general validity of contracts with perpetual terms in Quebec has been re-affirmed by the Supreme Court of Canada (S.C.C.) in an interesting must read decision for practitioners who draft contracts under Quebec law.

The SCC's six to three majority decision issued on July 28, 2017 in Uniprix Inc. v. Gestion Gosselin et Bérubé Inc. and Manon Gosselin et Bernard Bérubé, pharmaciens,[1] is welcome as reaffirming general principles of interpretation and freedom of contract in Quebec.

Take Aways

Some of the general takeaways from it are:

  • If the words of a contract are clear, a judge is not required to interpret it.
  • However, a judge can look to the common intention of the parties even in the face of the clear words to ensure that the clear words reflect their intention.
  • Self-serving language in the contract and the actions of the parties will have some influence on the interpretation.
  • If the contract is not clear, then one can have recourse to the rules of interpretation in the Civil Code of Québec (C.C.Q.).
  • If the words purporting to make a contract have a perpetual effect are clear then, unless the contract fits into one of the few categories of contracts which are limited by the C.C.Q. as to the term, or offend fundamental principles of public order such as individual freedoms and fundamental rights, a perpetual term, even one at the discretion of only one of the parties, has a good chance of being enforceable.

Facts

The plaintiffs were pharmacists practicing in the province of Quebec and "members" of the Uniprix banner of pharmacies. Uniprix regroups pharmacists under one banner to give a common brand, pool their purchases and provide incidental support for their professional activities. Members subscribe for shares in Uniprix and must sign a "contract of affiliation" which governs their ownership in Uniprix and commitments to the banner.

At issue was whether Uniprix had the right to terminate the plaintiffs' contract of affiliation without cause. It is worth repeating the section of the contract that set out the term.: [Translation]

  1. 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,. [The member pharmacist] shall, six (6) months before the expiration of the agreement, notify [Uniprix] of its intention to leave [Uniprix] or to renew the agreement;

Should [the member pharmacist] 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, as prescribed by the board of directors, except with regard to the fee. [Our emphasis]

In other words, while the contract is stated to be for a term of five years, it automatically renews for successive periods of five years unless the pharmacist sends a notice of non-renewal. Uniprix had no corresponding right to send a notice of non-renewal. It could remain bound by the contract in perpetuity if the pharmacist does not send a notice of non-renewal.

In the case reviewed by the S.C.C., there had been two five-year renewal terms as the pharmacists did not give a notice of non-renewal: once in 2003 and once in 2008.

Subsequent to a dispute related to the location of premises, Uniprix sent on July 26, 2012, just over six months before the expiration of the third term of the contract, a notice that the contract would terminate as of the end of the then current term (January 28, 2013).

Needless to say, the pharmacists did not accept that notice and asked the Superior Court of Quebec to declare that the contract had been renewed for an additional five years until January 28, 2018.

Judicial History

The pharmacists won at the Superior Court level. The Court of Appeal dismissed the subsequent appeal of Uniprix.

The S.C.C. upheld the decision of the Court of Appeal in a six to three decision, with two of the three Quebec judges writing the decision for the majority, and the other writing for the dissent.

Analysis

The decision is important for its thorough and organized review of the rules relating to the interpretation of contracts in Quebec as well as circumstances in which contracts with successive performance may have a perpetual term, either explicitly or, in the case at bar, implicitly.

Interpretation

The majority decision, co-written by Gascon and Wagner JJ, stated that initially one must determine whether the contract is clear or ambiguous.[2] This is known as the clear act rule (règle de l’acte clair), the purpose of which is to prevent judges from departing from the clearly expressed intention of the parties. However there may be circumstances in which the language does not reflect the parties' common intention, even if the language is clear. The apparent clear words of a provision may prove to be ambiguous and inconsistent with both the contract as a whole and the intention of the parties.

If the words are not clear, then you proceed to the second step of contractual interpretation[3] namely, to seek to find the parties' common intention. In this second step, the cardinal rule is set forth in article 1425 of the C.C.Q.: "The common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract."

The characterization of the contract (such as whether it is a "nominate" or named contract, or an "innominate" contract, thereby helping to determine the object the parties intended to give to their agreement as a whole) is different than the interpretation of the contract. The term of a contract is not characterized but interpreted.

Contractual interpretation 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.

In the case at bar, the court determined that section 10 of the contract of affiliation was not at all ambiguous: member pharmacists can notify Uniprix of their intention to renew or not. Uniprix did not reserve to itself a similar option. Indeed, the clause refers to the contract being "deemed" to be renewed if the pharmacist does not send a notice of non-renewal. Article 2847 C.C.Q. states that the word "deemed" creates a presumption that is absolute and irrebuttable.[4]

The court also used self-serving words in the contract to help interpret the contract. Section 21.2 of the contract read: [Translation] "No provision of this agreement is abusive or is excessively or unreasonably detrimental to [Uniprix] or [the member pharmacists]."

While the court concluded that the words are clear, it nevertheless held that it would be appropriate "to interpret an otherwise clear contract on a subsidiary basis in order to conclude that the interpretation confirms the clear meaning of the words."[5] On this basis, the court noted that Uniprix was created for its owner pharmacists. It exists to serve its members and it makes sense that it continues to serve its members until they themselves decide to withdraw. Accordingly, Uniprix should not be able to terminate the contract without cause. The very conduct of the parties also helped: the contract was twice automatically renewed, each time accepted by Uniprix. In other words:

To interpret the contract of affiliation in such a way as to give Uniprix the power to oppose the renewal desired by the member pharmacists would therefore be contrary to the words of clause 10, to the general scheme of the contract of affiliation, to the circumstances in which it was concluded, and to how it has been applied by the parties. The trial judge committed no palpable and overriding error in this regard, and the Court of Appeal was right not to intervene.[6]

The majority concluded this part of their decision by reaffirming the trial judge's decision in concluding that the contract of affiliation is for a fixed term (five years with successive five-year renewals) and not for an indeterminate term (as otherwise Uniprix might be able to resiliate it on reasonable notice).

Validity of contracts whose effects are perpetual

The court then examined the validity of contracts with a perpetual term. Uniprix's second argument was that, if the contract itself did not give it a power to oppose the renewal or to terminate it at law, then the effects of the contract would be perpetual and that such perpetual effects are unlawful in Quebec civil law as contrary to both the C.C.Q. and to 'public order'.

The majority quickly dismissed this argument as being without merit. Nothing in the C.C.Q. prohibits contracts such as a contract of affiliation from having effects that could be perpetual. And there is no basis to conclude that contracts with such a term are contrary to public order.

Indeed, no express clause is required in order for contract to have a perpetual term. It can be inferred from the contract itself, such as a situation where a contract is for fixed term, but subject to automatic renewal and it is impossible for either party to oppose the renewal.

The fundamental principle of consensualism applies in Quebec law on contracts. Unless a particular form is stipulated as a condition to the validity or formation of a contract, the mere meeting of the minds is sufficient to form a contractual obligation. There is no particular formality required in order to give effect to contract with a perpetual term. Rather one examines the words and analyzes the common intention of the parties, having regard to both the C.C.Q. and matters of public order.

The court then reviewed case law, including under the previous Civil Code of Lower Canada, with respect to contracts with perpetual terms. In Consumers Cordage Co. v. St. Gabriel Land & Hydraulic Co.[7] the S.C.Q. concluded that "under Quebec law the covenant for perpetual renewal is not contrary to public policy, nor prohibited by law." This position was supported by subsequent decisions.

When the C.C.Q. was enacted in the early 1990s, the legislature did not change the law in this regard. The new code does specifically list certain types of contracts for which the term must be limited for very clear reasons: the duration of payment of an annuity is limited to 100 years after the annuity is constituted;[8] a commercial lease may continue for up to 100 years from its effective date;[9] and a surety may terminate an indeterminate suretyship after three years.[10]

One should not read into these specific examples a general prohibition against perpetual terms in Quebec.

However, the court left open the door to a more nuanced approach such as that taken by the French courts where validity has been upheld in commercial matters, but limits might be imposed if a perpetual term would have a real effect on individual freedom.

The court then considered and then dismissed Uniprix's argument that the clause should be held unlawful because of the application of the general concept of public order. It reiterated the public order is one of the few limits on contractual freedom in Quebec. Matters of public order can be stipulated in the C.C.Q. or created by the courts when judges believe that a principle of public order is required as consistent with fundamental values of society at a particular point in its development. But Uniprix was unable to identify what fundamental values would be undermined by a perpetual contract:

Perpetual obligations do not in themselves offend any of our fundamental societal values and are not generally contrary to public order.[11]

There could be circumstances where a perpetual obligation could offend public order such as where issues of individual freedoms or fundamental rights are at stake. But in the context of the corporate and commercial relationship, an asymmetrical option to renew in favour of one party only does not offend the concept of public order.

Dissent

Côté J. wrote the dissent. The minority would have held that a reading of the contract as a whole revealed ambiguities which therefore should have required the interpretative exercise. The termination clause should not be interpreted as solely in favour of the respondents: while they must give a notice of non-renewal to terminate the contract, that can suggest that Uniprix was granted settled expectations of the members' commitment, not to bind it in perpetuity.

The dissent then stated that the determination of contract's term is a matter of legal characterization, and thus a proper matter for appeal. On this point, the dissent was reticent to accept a hybrid term (fixed for one party, indeterminate for the other) "without conducting a careful enquiry into the lawfulness of such a mechanism."[12] The contract should be characterized as one with an indeterminate term as, when applied to Uniprix, the contract's five year term is not an extinctive term. Contracts with an apparent extinctive term are in fact indeterminate terms "where the realization of the term is dependent on the decision of only one of the parties."[13] Once characterized as an indeterminate term, Uniprix may resiliate it on reasonable notice.

While the dissent would have held differently, it is important to note that it did not disagree with most of the initial stages of contract interpretation: determine if the contract is clear. If yes, no further analysis is required. If not, then proceed with the interpretive rules of the C.C.Q.

Moreover, while the minority did not need to pronounce on the legality of contracts with perpetual terms, it did imply that they would be generally upheld if the parties expressly stipulated such a term.

Conclusion

My immediate reaction in reading the clause, without the benefit of doctrinal analysis on contract interpretation, was that Uniprix would be bound in perpetuity. If I had been asked by a client to draft a contract of successive performance wherein one party could elect not to renew every five years, and the other party could elect to terminate at any time on reasonable notice, then those are pretty much the words I would have used.

However, the term of the contract could have equally stated the opposite in clear terms: in the absence of a notice of non-renewal or breach, Uniprix is bound in perpetuity.

In other words, there is no substitute for clarity. In this respect, the closing words of the minority are apt:

I acknowledge that the civil law’s workings in this case are somewhat complex. But, as always, its underlying rationale is simple. A court should not forever wed two parties in an unhappy marriage where only one of them has an avenue for exit, in the absence of express vows to that effect. In other words, in characterizing the term of a contract, perpetuity should not be inferred.[14]

The author would like to thank Tania Djerrahian for her review and helpful comments on earlier drafts of this blog. The views (and any errors) belong to the author only.