Friday, September 29, 2017

Contract Interpretation in Quebec

The Supreme Court of Canada recently affirmed the validity of contracts in Quebec that contain perpetual terms. In so doing, the Supreme Court of Canada also reaffirmed general principles of interpretation and freedom of contract in Quebec.

Uniprix Inc. v. Gestion Gosselin et Bérubé Inc. 2017 SCC 43 concerned a number of pharmacists who decided to affiliate their pharmacy with the Uniprix Inc. (“Uniprix”) banner. The parties had 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 six months prior to the automatic renewal date.

The contract was renewed automatically in 2003 and 2008 (two terms). On July 26, 2012, Uniprix notified the member pharmacists that their contractual relationship would terminate as of January 28, 2013, thus providing notice six months prior to the automatic renewal period. Of note is the fact that the contract had a provision for termination for the member pharmacists but no equivalent clause for Uniprix. Uniprix could only terminate the contract for cause. 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. It added that the interpretation proposed by the pharmacists had the effect of binding it in perpetuity, which would be contrary to public order.

In a 6 to 3 decision, the Supreme Court of Canada held that unilateral renewal clauses are valid in Quebec law even though they may give a contract perpetual effect. The dissent opinion held that 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 terminated on reasonable notice, six months in this case. For indeterminate contracts the Civil Code allows a court to fix the term of the contract or to allow termination on reasonable notice.

The Supreme Court of Canada held that autonomy of the will (freedom of contract) is a fundamental principle of Quebec civil law. This contractual freedom allows the parties to a contract to structure their relationship as they see fit within the limits imposed by legislation and the requirements of public order. The contract did not fit within the limits imposed by legislation or the requirements of public order. At paragraph 26 the Court described this type of contract:

The parties signed a contract entitled contract of affiliation. This type of contract is not a nominate contract within the meaning of the Code. Rather, it is an onerous, bilateral contract of successive performance in which the parties obligate themselves reciprocally, each to the other (arts. 1380, 1381 and 1383 C.C.Q.). Because the contract was freely negotiated, it can hardly be characterized as a contract of adhesion (art. 1379 C.C.Q.).

The Supreme Court of Canada provided a pathway of analysis of a contract in Quebec.

a)         The first step in interpreting a contract is to determine whether its words are clear or ambiguous. If the words are clear, the court’s role is limited to applying them to the facts before it. If the court identifies an ambiguity, it must resolve the ambiguity by proceeding to the second step of contractual interpretation.

b)         The cardinal principle that guides the second step of the interpretation is that “the common intention of the parties rather than adherence to the literal meaning of the words shall be sought.” In this exercise, it is necessary to consider intrinsic aspects of the contract, such as the words of the clause at issue and the other clauses, in order to ensure that each of them is given a meaningful effect and that each is interpreted in light of the others. The interpretation of a contract also requires consideration of the nature of the contract and of the context extrinsic to it, including the factual circumstances in which it was formed, how the parties have interpreted it, and usage.

The Court went on to find that the termination clause was not ambiguous and that nothing in the Quebec Civil Code prohibits such a contract of affiliation from having effects that could be perpetual. Nor was there any basis for concluding that such contracts are contrary to public order. The Court noted that Uniprix was unable to identify the fundamental values that would be undermined by a perpetual contract, and more specifically, by its contract of affiliation with the member pharmacists.

At paragraph 91 the Court commented on when perpetual contacts may offend public order:

We agree that there are circumstances in which the imposition of perpetual obligations could offend public order. For example, the protection of individual freedom and fundamental rights is one of our fundamental societal values. It is why the legislature has limited the term of contracts of employment: to preserve the freedom of employees (Baudouin and Jobin, at No. 441; Asphalte Desjardins inc. v. Québec (Commission des normes du travail)2013 QCCA 484, at para. 50 (CanLII); reversed on appeal, but not on this point: 2014 SCC 51 (CanLII), [2014] 2 S.C.R. 514). For contracts whose attributes have not been regulated by the legislature, it is also necessary to [translation] “reconcile two principles, autonomy of the will and freedom of the person — especially that of natural persons” (Lluelles and Moore, at No. 2154). It follows that it would likely be contrary to public order to impose in perpetuity obligations whose nature is such as to affect an individual’s person and freedom (ibid., at No. 2156).

The Court also rejected the argument that an express stipulation is required in order to give effect to the term of the contract whose effects could be perpetual. The Court added at paragraph 72:

 In Quebec civil law, the fundamental principle of consensualism prevails unless a “particular or solemn form is required as a necessary condition for the formation of a contract” (art. 1414 C.C.Q.). As Professors Baudouin and Jobin point out, [translation] “a contractual obligation arises from the meeting of two minds and does not have to be expressed in a particular form prescribed by law in order for the contract to be valid” (No. 90). The problem raised by the possibility of the contract having perpetual effect must be resolved not by taking a formalistic approach, but by analyzing the common intention of the parties having regard to the provisions of the Code and to public order. Once this common intention has been identified, it does not matter whether the possibly perpetual effects of the contract result from an express stipulation. In our opinion, the metaphor our colleague employs in this regard (at para. 167) seems inappropriate. While it is true that the Code requires the observance of formalities, on pain of nullity, for the exchange of marriage vows (arts. 365 to 377 and 380 C.C.Q.Rules respecting the solemnization of civil marriages and civil unions, CQLR, c. CCQ, r. 3), it does not do so for an innominate commercial contract of affiliation entered into by sophisticated parties.

The majority of the Supreme Court of Canada dismissed Uniprix’s appeal. The minority found that the contract was indeterminate. As such, the parties would be able to terminate the contract on reasonable notice.

Lesson learned: Clarity is required in drafting contracts to ensure that a party has an avenue for exit unless that is the intention of the parties and it should be clearly set out.

The last paragraph of the dissent decision of the Supreme Court of Canada, delivered by Justice Cote is 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. 


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