‘Sole Discretion’ Contract Renewal

January 07, 2016

Links from this article: 2014 SCC 71 (CanLII)

Businesses today have become increasingly reliant on software as a service (SAAS) provided by other corporations. What happens if the SAAS contract is suddenly terminated or not renewed?

In Data & Scientific Inc. v Oracle Corp., 2015 ONSC 4178 (CanLII) the plaintiff DS had been a partner of Oracle’s partner network (OPN) for 20 years. The contract was renewable annually at Oracle’s ‘sole discretion’, and Oracle had renewed the contract every year in November. In the fall of 2014 Oracle invited DS to renew the contract. When DS attempted to do so online, the renewal was refused. In subsequent correspondence Oracle confirmed that the OPN agreement would not be renewed. DS had become dependent on the OPN for its business, and sued Oracle for damages for failure to give reasonable notice for the non-renewal of the contract. Oracle moved to strike the pleadings as disclosing no cause of action. The Court dismissed the motion to strike, stating that it was not plain and obvious that the plaintiff had no cause of action.

The agreement between the parties was clear on the point of Oracle’s ‘sole discretion’ to renew (or not renew) the contract, and provided that: “Any renewal of this agreement shall be subject to Oracle’s standard terms and fees … and shall be at Oracle’s sole discretion. You may apply for renewal of your membership in OPN by on-line electronic acceptance of the terms of the then current OPN agreement and Oracle will notify you if it accepts your application for renewal.” DS’s argument was that this discretionary contractual power ‘must be exercised reasonably’, and that after 20 years of renewals and reliance upon those renewals, the total absence of notice was an unreasonable exercise of discretion.

The court distinguished this situation from the Supreme Court of Canada’s decision in Bhasin v Hrynew,2014 SCC 71 (CanLII), stating that the court’s focus in Bashin was dishonesty, not the unreasonable exercise of discretion to renew. In Bashin the defendant had complied with the procedure established in the contract, and had given the required 6 month notice, thus “it would be difficult if not impossible to argue that the exercise of the discretion not to renew was unreasonable.” The court concluded that the “Supreme Court’s decision in Bhasin v. Hrynew does not stand for the (extreme) proposition that under no circumstances does a “sole discretion” contract renewal power have to be exercised reasonably.”

The questions to be decided if this case makes its way through the court system include: ‘Does a ‘sole discretion’ contract renewal power have to be exercised reasonably?’, and if so, ‘What notice is required for a reasonable exercise of this discretion?’

The stakes are high for both licensors and licensees of software. This will be a case to watch as the upcoming year unfolds.

Take aways:

  • Exercise of a discretionary renewal power is arguably ‘reasonable’ if the contractual notice requirements have been satisfied
  • ‘Sole discretion’ renewal provisions that do not contain any notice requirements may be subject to a court imposed standard of the ‘reasonable exercise of discretionary contractual powers’ where no notice is given for non-renewal, and where the parties have a long term business relationship
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