Can a Commercial Contract be Perpetual?
by Lise Patry BA | Sc | LLB | ICD.D | NECI Instructor
As part of our NECI courses we teach the importance of planning ahead, as all contracts inevitably come to an end one day. Well, as recently confirmed by the SCC, that may not always be true.
The Supreme Court of Canada Confirms That Contracts Can Be Perpetual
The possibility of being bound to a contract in perpetuity was recently confirmed by the Supreme Court of Canada in Uniprix inc. v. Gestion Gosselin et Bérubé inc.
Uniprix is a member-owned pharmacy business offering its member pharmacies a variety of benefits, including a name brand and collaborative purchasing support. Gestion Gosselin et Bérubé inc. was a member pharmacy that had signed an affiliation contract with Uniprix pursuant to which they would receive the member benefits. The contract renewed automatically unless the member pharmacy opted not to renew. The contract did not give Uniprix the right to terminate for convenience.
After many years, Uniprix decided it wanted to move the member pharmacy to another location in the city. Despite being urged by Uniprix to move to the other location, the pharmacists refused. In response to this refusal, Uniprix provided notice of termination of the contract even though the contract did not give them a right to terminate.
The pharmacy took Uniprix to court to argue that Uniprix had no right to unilaterally terminate the contract. Based on contract interpretation principles, six of the nine Supreme Court judges agreed, leaving Uniprix bound in perpetuity to the affiliation agreement.
Three of the nine judges disagreed with this interpretation, and the dissenting judgement contains the following policy rationale:
[the] 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 words to that effect. In other words, in characterizing the term of a contract, perpetuity should not be inferred.
This division between the judges’ decisions reflects the general discomfort courts, as well as learned scholars and authors, have exhibited when dealing with the notion of perpetual commercial contracts.
Will an Exit Right for Convenience Ever Be Implied?
Despite the findings of the SCC in Uniprix, past court decisions show that courts will usually imply an exit right in an indefinite term contract, particularly when the contract involves a relationship of trust, such as an employment, distributorship, or partnership agreement. Courts are less inclined to imply a termination for convenience right if the party wishing to terminate is both sophisticated and the author of the agreement.
What Does This Teach Us?
This SCC decision reflects and reinforces the stance in both common law and civil law jurisdictions in Canada that some contracts can be perpetual.
This decision teaches us that failing to reserve a right of termination in an indefinite term contract could lead to real problems for the business over time and as circumstances change. Even if today you can’t imagine why you’d ever need to bring an end to the contract, it’s always a good idea to reserve an exit right. This could take the form of either a right not to renew the contract at the end of the term or a right to terminate for convenience upon prior notice.
The “term and termination” clauses are arguably the most important clauses in your contract. Without an explicit exit right allowing you to terminate an indefinite contract for convenience, you may find yourself stuck in an “unhappy marriage” forever.
Lise Patry BA | Sc | LLB | ICD.D
Lise Patry, an instructor with NECI, is a lawyer and former business executive with a strong background in technology and more than 20 years of business and legal experience in the public and private sectors. As principal of Patry Law, in addition to general law, she offers virtual counsel services and specialized expertise in contracts, licensing, government procurement and corporate governance.
Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case. For any particular legal problem, seek advice directly from your lawyer or in-house counsel. All dates, contact information and website addresses were current at the time of original publication.