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The most important clause in your contract – the exit right

Some say that, like most things in life, a contract will inevitably come to an end. As recently confirmed by the SCC, that may not always be true. So, it’s essential to build in your exit right.

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.[1]

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 operated an Uniprix pharmacy and had signed an affiliation contract with Uniprix, pursuant to which they would receive the member benefits. The Uniprix-Gestion Gosselin arrangement renewed automatically unless the member opted not to renew. The contract did not contain an exit clause for Uniprix; Uniprix did not have the right to terminate the contract for convenience.

After many years, Uniprix decided it wanted to move the Gestion Gosselin pharmacy to another location in the city. Uniprix urged Gosselin et Bérubé to move their pharmacy to the other location but the pharmacists refused. In response to this refusal, Uniprix provided notice of termination of the affiliation agreement even though there wasn’t a clause that gave Uniprix a right to terminate.

Gestion Gosselin 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 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 it 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 about building a contract?

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.

[1] 2017 SCC 43

A version of this article originally appeared on NECI Legal Edge.

To learn more, contact Lise Patry, partner at LXM LAW at lise.patry@lxmlaw.ca or at 613-601-6333. To learn more about Lise’s background, click here.

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