APPEAL DISMISSED

Uniprix inc. v. Gestion Gosselin et Bérubé inc., 2017 SCC 43 – Contracts – Interpretation – Intention of parties

On appeal from a judgment of the Quebec Court of Appeal (2015 QCCA 1427) affirming a decision of Dugré J. (2013 QCCS 6251).

In 1998, the respondent companies (“member pharmacists”) decided to affiliate their pharmacy with the Uniprix banner. The parties entered into a contract of affiliation for a fixed term of five years. The contract contained a clause to the effect that it would be renewed automatically unless the member pharmacists gave notice to the contrary. By virtue of that clause, the contract was renewed automatically in 2003 and 2008. On July 26, 2012, Uniprix notified the member pharmacists that their contractual relationship would terminate as of January 28, 2013. The member pharmacists objected, arguing that the contract of affiliation was to be renewed automatically unless they gave notice to the contrary. In their view, nothing in the renewal clause entitled Uniprix to oppose this renewal. Uniprix argued that it could oppose the renewal and terminate the contract upon the expiry of the term. Uniprix added that the interpretation proposed by the member pharmacists could have the effect of binding the parties in perpetuity, which would be contrary to public order. According to its position, the contract would therefore be considered to be one for an indeterminate term and could be resiliated at any time on reasonable notice.

The Superior Court declared that the contract was renewed and that Uniprix could resiliate the contract only for cause, not without cause as it had tried to do. The court concluded that unilateral renewal clauses are valid in Quebec law even though they might give a contract perpetual effect. The majority of the Court of Appeal affirmed that judgment. In their opinion, the Civil Code of Québec does not prohibit contracts that could be perpetual, and such contracts violate no fundamental value of our society. The Chief Justice, in dissent, would have allowed the appeal. In her view, the renewal clause made it impossible for Uniprix to know the contract’s termination date, which turned the contract into one for an indeterminate term. The contract could therefore be resiliated on reasonable notice, six months in this case.

Held (6-3):The appeal should be dismissed.

Per Abella, Moldaver, Karakatsanis, Wagner, Gascon and Brown JJ.:

The trial judge made no palpable and overriding error in interpreting the contract. 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.

To resolve the disagreement between the parties, the words of the contract, and more specifically those of the clause that fixes its term and the procedure for renewing it, must be interpreted. The first step in interpreting a contract is to determine whether its words are clear or ambiguous. If the words of the contract are clear, the court’s role is limited to applying them to the facts before it. If, on the other hand, the court identifies an ambiguity, it must resolve the ambiguity by proceeding to the second step of contractual interpretation. The cardinal principle that guides the second step is that “[t]he common intention of the parties rather than adherence to the literal meaning of the words shall be sought” (art. 1425 C.C.Q.). This interpretation exercise makes it possible to establish the term of the contract at issue and the procedure for renewing it.

Characterizing and interpreting a contract are two distinct actions. In Quebec 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. In other words, a contract is characterized on the basis of its nature, by associating it with a category of nominate contracts or with a specific class of contracts, but the term of the contract is not characterized, as it instead depends on the interpretation of the contract’s words.

Contractual interpretation involves the consideration of a multitude of facts. It is a question of mixed fact and law, and the Court’s role is limited to deciding whether the trial judge committed a palpable and overriding error in this regard. In this case, the trial judge’s interpretation to the effect that the renewal clause gave the member pharmacists the right to renew the contract of affiliation as they saw fit every five years is not tainted by a palpable and overriding error. On the contrary, it is perfectly consistent with the other undertakings stipulated in the contract and with the circumstances in which it was formed.

First of all, the renewal clause itself is in no way ambiguous. It specifically provides that the member pharmacists can notify Uniprix of their intention to renew or not to renew the contract. But it does not stipulate that Uniprix can give a similar notice to the member pharmacists. Furthermore, the second paragraph clearly provides that should the member pharmacists fail to send the prescribed notice to Uniprix, the agreement will be deemed to have been renewed. By virtue of art. 2847 C.C.Q., the word “deemed” in the contract creates a presumption that is absolute and irrebuttable. As a result, if the member pharmacists send no notice to Uniprix, renewal is automatic and Uniprix cannot oppose it. The other clauses dealing with the termination of the contract relate solely to the option to resiliate the contract for cause that is conferred on Uniprix. All of these provisions form an integral part of the agreement between the parties, and they must be read and interpreted as a whole.

Moreover, it is not inappropriate to interpret an otherwise clear contract on a subsidiary basis in order to conclude that that interpretation confirms the clear meaning of its words. In this case, an analysis of the circumstances in which the contract was concluded confirms that the parties intended to leave the renewal of the contract to the discretion of the member pharmacists. First, Uniprix was created for the benefit of member pharmacists who had joined together for the purpose of developing their respective commercial and professional practices. Uniprix exists to serve its members. It thus makes sense that Uniprix will serve its members until they themselves decide to withdraw from the group, and that Uniprix therefore cannot terminate the contract without cause. Second, the very conduct of the parties supports this interpretation: twice, Uniprix recognized that the silence of the member pharmacists bound the parties for an additional five‑year term. 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 the renewal clause, 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 fact that the term of Uniprix’s obligations pursuant to the contract of affiliation depends on the will of the member pharmacists to renew it does not transform the contract into one for an indeterminate term. 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. 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. In the same way, art. 1512 C.C.Q. cannot be applied to fix a term for the contract of affiliation. It applies where there is no term or where the term is uncertain, but does not apply to thwart the automatic renewal of a contract whose term is, as in this case, clearly defined. In any event, neither party has applied for this independent remedy. The Superior Court and the majority of the Court of Appeal were right in holding that the parties intended to be bound by a renewal mechanism whose effects could be perpetual.

Nothing in the Code prohibits contracts such as the contract of affiliation from having effects that could be perpetual. Nor is there any basis for concluding that such contracts are contrary to public order. When it enacted the Code, the legislature decided to place limits on only certain specific types of contracts, declining to enact a general provision prohibiting all perpetual contracts. Nothing in the Code, the academic literature or the case law supports the position that a contract of affiliation whose effects could be perpetual is contrary to Quebec civil law. It is true that the courts may raise to the rank of a principle of public order any unwritten rule that is consistent with the fundamental values of society. Nevertheless, it must in every case be possible to tie the concept of public order to specific values or principles that might be violated by the contractual provisions at issue. Perpetual obligations do not in themselves offend any of our fundamental societal values and are not generally contrary to public order. There are circumstances in which the imposition of perpetual obligations whose nature is such as to affect an individual’s person and freedom could offend public order. But in the context of a corporate and commercial partnership such as the one between Uniprix and the member pharmacists, the individual freedom of the contracting parties is not at stake, and public order cannot override the parties’ intention.

There is no basis for reversing the trial judge’s conclusion that the contract of affiliation is for a fixed term and that the option to renew it upon the expiry of each term is limited to the member pharmacists. The notice of non‑renewal sent by Uniprix accordingly violates the terms of the contract of affiliation and may not be set up against the member pharmacists. Because the contract is not for an indeterminate term, Uniprix could not resiliate it without cause on reasonable notice as it tried to do.

Per McLachlin C.J. and Côté and Rowe JJ. (dissenting):

A contract without ambiguity is to be applied, not interpreted. But the trial judge’s conclusion that the contract of affiliation is clear and need not be interpreted is a palpable and overriding error. A reading of the entire contract reveals ambiguities which should have led the trial judge to go on to interpret the parties’ common intention under art. 1425 of the Civil Code of Québec.

First, it is not clear from the renewal clause’s wording that it is stipulated uniquely in favour of the member pharmacists. The clause clearly makes Uniprix the beneficiary of a notice obligation. But nothing about the wording of the clause clarifies that the presumption of renewal in paragraph two of the clause is stipulated in favour of one party or the other. Second, reference to other portions of the contract does nothing to resolve the ambiguity. Third, the ambiguity is magnified by the interaction between the express term of 60 months and the renewal clause. The presence of an express 60‑month contractual term typically denotes the termination of obligations for both parties on expiry of the term. But when read in light of the renewal clause, the term apparently functions asymmetrically to bind Uniprix, though not the member pharmacists, in potential perpetuity. Fourth, when the member pharmacists’ tendered interpretation — that Uniprix is bound forever solely at the member pharmacists’ discretion — is considered in the context of the agreement’s other clauses, the unreasonable result produced suggests an inquiry into whether the parties intended to be so bound. The potential for the interests of a particular member to conflict with those of the collective raises a question as to whether the parties intended that Uniprix be forever beholden to any individual member. Finally, the extent to which the renewal is automatic is itself an open question. The clause’s wording suggests the renewal is contingent, not automatic. The renewal clause kicks in only if the member pharmacists fail to provide notice of whether they will leave or stay.

However, even if it is assumed that the trial judge’s reading of the renewal clause was correct, the contract of affiliation should be characterized as an indeterminate one and the appeal should be allowed on this basis. The characterization of a contract determines the juridical category into which it falls and the legal consequences attaching to it as a result. Characterization and interpretation of a contract are discrete tasks that should not be confused. Unlike the interpretive exercise, where the trial judge seeks out the parties’ common intention, the trial judge is not bound by the parties’ ostensible, or even preferred, characterization. Instead, characterization is a question of law that is left to the determination of the court. The determination of the contract’s term is a matter of legal characterization, since it is concerned with the intended legal effects of the agreement and the presence or absence of an extinctive term is essential to the nature of contracts of successive performance with a fixed term.

In this case, the juridical effect of the renewal clause is to extend the same contract for a further period of time. Since only the member pharmacists may oppose renewal, only they have the benefit of a certain term that will extinguish their obligations. The result is that the contract of affiliation would effectively have a hybrid term: one of five years as applied to the member pharmacists; but one of potential perpetuity, or indeterminacy, as applied to Uniprix. However, a contract’s term must function symmetrically for both parties and the possibility of a hybrid term should not be endorsed. Therefore, there are two possible characterizations of this agreement. The contract either has a perpetual term — that is, a fixed term of forever with an option to exit arising periodically for the member pharmacists, in which case the public order analysis becomes relevant — or is for an indeterminate term, because there is no clear extinctive term. The correct characterization is the latter one. This conclusion is consistent with the well‑established principle that contracts with a purportedly certain extinctive term are to be characterized as indeterminate where the realization of the term is dependent on the decision of only one of the parties. It is also consistent with the law’s reluctance to infer perpetuity in the absence of the parties’ express stipulation to that effect.

A contract for an indeterminate term may be resiliated on reasonable notice. The reasonableness of the notice of resiliation in any given case is a fact‑driven, contextual inquiry. Considering the fact that Uniprix sent a notice of resiliation on July 26, 2012, the member pharmacists will have benefitted from a reasonable notice by the date of this decision. Therefore, the contract of affiliation should be declared to be terminated as of this date.

Reasons for judgment: Wagner and Gascon JJ. (Abella, Moldaver, Karakatsanis and Brown JJ. concurring)

Dissenting Reasons: Côté J. (McLachlin C.J. and Rowe J. concurring)

Neutral Citation: 2017 SCC 43

Docket Number: 36718

https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/16746/index.do