Canada: Non-Renewal Of Fixed-Term Contracts: The Court Of Appeal Sets The Record Straight

Last Updated: October 5 2012
Article by Martin Sheehan, Sylvie Bourdeau and Noah Boudreau

On September 19, 2012, the Court of Appeal of Quebec ruled on the case pitting Bombardier Produits Récréatifs inc. ("BRP") against its former dealer, Christian Moto Sport inc. ("CMS").1 In a unanimous decision, the Court set aside the trial judgment and concluded that BRP had not acted abusively by not renewing its dealership agreement with CMS when the agreement expired.

This decision is important for any company that manages dealer, franchise or other networks.

Background

The respondent, CMS, is a snowmobile and all-terrain vehicle (ATV) dealer. In 1995, a first dealership agreement was entered into between the parties for snowmobiles. ATVs were added in 1998. These agreements were for a period of one year and were renewed annually until 2005.

In 2003, the principal shareholder of CMS considered opening a Yamaha dealership to sell snowmobiles. He discussed the matter with BRP, which reminded him that his contract  did not allow him to directly or indirectly promote a competitor's snowmobiles. BRP notified him, verbally and in writing, that if he pursued this initiative, it would result in the termination of their business relationship.

Despite everything, and without notifying BRP, the CMS shareholder incorporated a new company and began operating a new Yamaha dealership. BRP learned of this in April 2004 and, in June 2004, BRP notified CMS in writing that upon the expiration of its dealership agreement in spring 2005, the agreement would not be renewed.

Discussions took place between the parties, and shortly before the expiration of its contract, CMS said it would consider selling one of the dealerships, first to the principal shareholder's father and then to its employees. However, CMS requested an additional period of time to do this. Unfortunately, no concrete proposal was made, so BRP maintained its position.

The contract therefore terminated upon expiration. BRP made an offer to buy the inventory which was more generous than what was provided in the contract, but CMS refused the offer because BRP asked for a release in return.

Action taken by CMS and judgment of the Superior Court

Believing it had been wronged, CMS sued BRP for damages totalling $2,184,308.20, claiming that BRP's decision not to renew its dealership contract was illegal and abusive.

The Superior Court allowed the action in part and awarded CMS damages of $526,054.68 as well $75,164.89 in expert fees.

The trial judge found that BRP's decision to send a notice of non-renewal was not abusive because BRP had reasonable business reasons for doing so and because it had given sufficient notice. Nevertheless, the judge concluded that BRP had an obligation to give CMS a second chance when CMS offered to "get back in line" and sell its interests in the Yamaha dealership. The court criticized BRP for not having withdrawn its notice of non-renewal in the circumstances. In addition, although the contract between the parties stated otherwise, the court held, based on the law in some U.S. states, that the manufacturer had an implicit obligation to buy back the dealer's inventory at the end of the contract. While conceding that its offer to CMS in this regard was more generous than what was provided in the contract, the trial judge concluded that BRP's insistence on obtaining a release in exchange for its offer was an abuse of rights.

Decision of the Court of Appeal

The Court of Appeal allowed the appeal and dismissed CMS's action with costs.

According to the Court, since a fixed-term contract ends upon expiration of the term, it is not abusive for a manufacturer like BRP to exercise its right not to renew the agreement. Citing its decision in BMW Canada inc. v. Automobiles Jalbert inc.2, it stated that the obligation to act fairly and in good faith did not change the terms of the contract between the parties and could not be interpreted as giving the dealer a perpetual right of renewal of its contract.3

Like the Superior Court, the Court of Appeal held that CMS knew very well that its Yamaha dealership project was in breach of the agreement between the parties and that BRP had good reasons to send a notice of non-renewal.4 Furthermore, the CMS project was incompatible with BRP's business plan, and BRP made this clear to CMS. In short, the Court of Appeal concluded that the dealership agreement between the parties was a fixed-term contract and that,  consequently, BRP had the right to let the contract expire at the end of the term, after giving CMS reasonable notice. In addition, and this is the essence of the decision, since no justification is required to send a notice of non-renewal, there is no obligation to withdraw it if the business reasons for which it was given no longer exist.5

The Court of Appeal also set aside the trial judge's finding that inventory buybacks are a widespread practice. This finding was not supported by the evidence, and since BRP offered to buy back the inventory for a higher amount than what was provided in the contract, it was entitled to demand a release.6 As for American law, since it was neither alleged nor proven, the trial judge should not have referred to it.

Conclusion

BRP v. CMS is an important decision on contractual interpretation in cases of non-renewal of a dealership contract. It distinguishes between termination for cause in the course of a contract, which requires a ground of default, and termination upon expiration of a fixed-term contract, which requires only reasonable notice. It confirms that when a manufacturer acts in good faith, it has no legal obligation to justify its decision not to renew a fixed-term contract. Moreover, when the manufacturer gives a reason, a dealer has no right to perpetuity of its contractual relationship  simply because it rectifies the situation and is no longer in default.

Footnotes

1.Bombardier Produits récréatifs inc. v. Christian Moto Sport inc.,Christian Moto Sport inc., 2012 QCCA  (200-09-007312-116) (available in French only).

2. 2006 QCCA 1068 (CanLII), 2006 QCCA 1068

3. Id., paras 43-44.

4. Id., para 47.

5. Id., paras 60-63.

6. Id., paras 69-76.

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