Business Agreements: an Ambiguous Duration Provision?

Article #2009-2, by Me Gilles Thibault on Dimanche, octobre 11th, 2009
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As explained during our seminars on business agreements, when drafting an agreement, it is not enough to merely state the various provisions of the contract. It is also important to ensure that the content is clear so as to avoid an eventual dispute between the parties on how it should be interpreted. A recent decision of the Court of Appeal of Quebec on the duration of a supply agreement, Société de cogénération de St-Félicien c. Industries Piékouagame inc.1, is a good illustration of this statement.

Facts:

Société de Cogénération de St-Félicien (Cogénération) and Les industries Piékouagame inc. (Piékouagame) have entered into a supply agreement pursuant to which Piékouagame supplies wood by-products to Cogénération, for use as fuel in Cogénération’s electrical production system. The duration provision of the contract reads as follows:

« 3- Duration of the Contract.

3.1 The duration of this agreement is five (5) years with renewal every year. The contract starts on the date of the first delivery of wood by-products, which shall take place during 1998.

3.2 The parties shall agree by addendum on the date of the first delivery.

3.3 Each year, unless otherwise agreed or unless a termination notice is sent, this agreement shall be renewed for an additional period of one year, so that it will never have a remaining duration shorter than four (4) years.

(Our translation)« 

On May 13th, 2008, Piékouagame notifies Cogénération that it terminates the contract on May 31st, 2008. Cogénération replies by stating that it considers that the contract will remain valid until May 31st, 2012. Cogénération then seeks an injunction to ensure that Piékouagame continue supplying its facility with wood by-products.

Contention of the Parties:

Cogénération claims that the contract is clear, that it has a FIVE (5) years duration, and that since Piékouagame sent a notice of termination in May 2008, the contract expires FOUR (4) years later, in May 2012.

Piékouagame claims that the contract had an initial duration of FIVE (5) years, namely from May 31st, 2001 to May 31st, 2006, and that it was renewed for additional ONE (1) year periods since then. Consequently, it can terminate it on May 31st, 2008.

Ruling:

The Superior Court judge first rules that Provision 3 of the contract is ambiguous. The Court of Appeal affirms that part of the ruling, going into greater detail on the ambiguity of Provision 3.

Specifically, the Court of Appeal rules that the first segment of Paragraph 3.1 , which states that the contrat has a FIVE (5) years duration, contradicts the second segment providing for yearly renewal. In addition, the segment of Paragraph 3.3 providing that the contract shall never have a remaining duration of less than FOUR (4) years contradicts the segment providing for renewal for an additional ONE (1) year period.

As he considers the contract ambiguous, the Superior Court judge can then use other information sources, in addition to the contract, to properly interpret it, among other referring to the testimony of Mr Charles Paul, owner of Piékouagame. The judge ultimately rules that the contract was intended to have an initial duration of FIVE (5) years, followed by additional ONE (1) year renewed periods. Consequently, Piékouagame could terminate the contract on May 31st, 2008. The Court of Appeal also affirms this ruling.

Comments:

Regardless of which interpretation of Provision 3 the parties agreed on initially, the latter could have avoided the entire conflict by fitting the provision in a clearer structure. Provision 3 discusses the following elements:

  • Duration
  • Effective Date
  • Renewal
  • Non-renewal

By splitting these concepts in separate provisions, the parties could have avoided the misunderstanding.

If Cogénération’s position was what the parties agreed to, the conflictual provision could have been split as follow:

14.00 Effective DateThe Contract shall come into force on the date of the first delivery of wood by-products to Cogénération’s facility by Piékouagame.

15.00 Duration

15.01 Initial Duration

The contract shall have an initial duration of FIVE (5) years.

15.02 Annual Extension

Every year, on the anniversary date of the contract, the duration provided in Section 15.01 shall be extended by an additional year, unless one of the parties send to the other party a written notice stating that it does not wish to extend the duration of the contract any further.

By splitting the provision in its component parts, and by correctly classifying it within a tried-and-tested contract structure, it becomes easy to:

  1. Avoid using the wrong terms (such as substituting a termination notice to a non-renewal notice);
  2. Avoid failing to properly describe a mechanism, as such description will have to be detailed in a specific provision;
  3. Avoid treating the same matter in different provisions or paragraph, thus ensuring that no contradiction occur between related item.

This clearly illustrates the need for a very structured drafting methodology to avoid overlapping or contradictory provisions. For more information on the best drafting practice, register to our Business Agreements training seminars.



  1. 2009 QCCA 1487
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