The Supreme Court of Canada (“SCC”) recently ruled that a unilateral contract renewal clause was valid, despite its potential to bind one party perpetually: Uniprix inc. v. Gestion Gosselin et Bérubé inc. The clause afforded sole discretion to the respondents to renew or terminate their contract with Uniprix. The wording of the clause, the nature of the contract and the relationship between the parties were determinative in the majority’s ruling, which upheld the decisions of the Court of Appeal and the Superior Court of Quebec. The SCC’s decision and our key takeaways are outlined below.

Background

Uniprix was established by independent pharmacy owners with the objective of joining together under a common “banner”. The respondents decided to affiliate their pharmacy with Uniprix in 1998. The parties entered a “contract of affiliation” to accomplish this. The contract had a five year term with an option to renew by the respondents. The contract also provided that if the respondents failed to give notice of their intention to renew, the contract would automatically be renewed. Such automatic renewal occurred on two occasions. In 2012, Uniprix sought to terminate the contract. The respondents rejected this attempt, arguing that the renewal clause gave them sole discretion to renew and Uniprix could not oppose the decision. Uniprix argued that it could terminate the contract on reasonable notice and that the respondents’ interpretation could have the effect of binding Uniprix indefinitely, which would be contrary to public order.

The Decision

The majority of the SCC dismissed Uniprix’s appeal and upheld the decision of the lower courts on the basis of the following findings:

  • the renewal clause was clearly drafted;
  • the renewal clause accurately reflected the common intention of the parties; and
  • a potentially perpetual contract term of this nature was valid under Quebec law.

On the second point, the majority concluded that since Uniprix was created by and for the member pharmacists, it followed that Uniprix would serve its members until they themselves decided to withdraw from the group. Therefore, Uniprix could not oppose the renewal but could only terminate the contract for cause.

On the third point, the majority distinguished between the parties’ contract, entered in the context of a corporate and commercial partnership, and an employment contract, noting that the Quebec Civil Code makes it possible to terminate an employment contract because the imposition of perpetual obligations would be contrary to public order.[1]

Key Takeaways

While the parties were not in an employment relationship, the SCC’s decision highlights the importance of drafting clear and unambiguous termination clauses in employment agreements that do not require further interpretation and clearly articulate the employer’s right to terminate the contract without cause.

Employers should also consider the Ontario Court of Appeal’s decision in Howard v. Benson Group Inc. (see our previous blog post here) when drafting termination provisions in fixed term employment agreements. The Court of Appeal held that a discharged employee is entitled to payment for the unexpired portion of the contract on early termination, where the contract does not contain an enforceable provision stipulating a specified period of notice (or pay in lieu) for early termination. Further, the Court held that an employee employed pursuant to a fixed term employment contract is not required to mitigate his damages following early termination unless the contract expressly mandates mitigation.

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[1] The dissenting opinion found that the agreement was ambiguous and should have been subject to judicial interpretation. Furthermore, the contract term should have been characterized as indeterminate and thus subject to termination by Uniprix upon reasonable notice.