Québec – inexperienced, first-time franchisee remains consumer when contracting, arbitration clause inapplicable

In Najah v. Desatrais, 2019 QCCQ 3143, Mr. Justice François Lebel held that an individual who contracts with the goal of becoming merchant is, at that time, a consumer within the meaning of Québec’s Québec’s Consumer Protection Act, CQLR c P-40.1 (“CPA”). As a result, the arbitration clause in the first-time franchisee’s contract did not apply because it restricted his right to go to court.

In July 2015, Plaintiff saw ads placed by 9307-0753 Québec Inc. (“Excellpro”) encouraging one to become owner of an Excellpro commercial and industrial office maintenance franchise.  Plaintiff had no particular experience in maintenance and had never operated a franchise.  At the time he signed the initial document, entitled “Programme de franchise unitaire” (‘Unit Franchise Program’) (“Programme”), he worked as a restaurant dishwasher.

The Programme provided that Plaintiff, accepted as a franchisee, pay $17,795.00, representing license fees, training, manuals and provision of maintenance contracts worth $4,000.00 monthly.  To pay that amount, Plaintiff borrowed $8,870.00 and paid it to Excellpro.  The balance would be payable out of the maintenance contracts stipulated in the Programme.

Within days of the signature of the Programme, Plaintiff met sign the franchise contract (“Contract”) which contained more than 80 pages.  The meeting lasted ten (10) minutes.  Each page of the Contract, as well as an Annexe C summarizing the Contract’s important elements, contained a spot for the franchisee to initial.  None of the pages bore Plaintiff’s initial.

Plaintiff did not read the Contract during that meeting, notice that it contained an arbitration clause or realise that it allowed Excellpro to keep the initial payment in case of resiliation.

Plaintiff commenced his work as an Excellpro franchisee on July 17, 2015.

Disputes arose between Plaintiff and Excellpro.  Excellpro resiliated the Contract on May 18, 2016 on the basis of alleged conduct by Plaintiff and claimed the balance of the initial payment. In response, Plaintiff obtained a series of letters from clients confirming their satisfaction with his services.  On April 6, 2017 Plaintiff filed a claim in Court of Québec, Small Claims Division.  Initially, Plaintiff named the individual defendant only but later added Excellpro.  Claiming $13,942.95, Plaintiff alleged that Excellpro made false representations, failed to respect an essential condition of the Contract, namely to provide maintenance contracts worth $4,000.00 monthly, and delayed payment to Plaintiff.

Excellpro contested the claim and, first among other grounds, asserted that the Court of Québec had no jurisdiction to decide the claim because of the arbitration clause.

Lebel J. confirmed that the Contrat at article 17.1 did contain an arbitration clause which provided that any dispute regarding the performance or nullity of the Contract was to be referred to an arbitrator.

Lebel J. held that Excellpro could not obtain an order referring the parties to arbitration.  Referring to Sauvé v. Service sanitaire de la Rive-Sud [1986] AZ-8602145 and Zannis v. P.G. du Québec [1986] AZ-8602117, Lebel J. stated that the case law had recognized that an individual who contracts for the purchase of starting a business is a consumer within the meaning of the Consumer Protection Act which Lebel J. reminded is of public order.

This determination attracted the application of the Consumer Protection Act’s section 11.1 which prohibits any contractual stipulation obliging a consumer to undertake arbitration and thereby restrict access to the courts:

11.1. Any stipulation that obliges the consumer to refer a dispute to arbitration, that restricts the consumer’s right to go before a court, in particular by prohibiting the consumer from bringing a class action, or that deprives the consumer of the right to be a member of a group bringing a class action is prohibited.

If a dispute arises after a contract has been entered into, the consumer may then agree to refer the dispute to arbitration.

Lebel J. relied on Khalil v. Nordic Maintenance Inc., 2017 QCCQ 5540 in which the Court of Québec, Small Claims Division, held that an arbitration clause did not apply in a maintenance franchise dispute.

In Khalil v. Nordic Maintenance Inc., Madam Justice Chantal Gosselin concluded that the franchisee was a consumer at the initial phase of investing with a view to get his first start in business.  At the start, the individual contracts to become a merchant.  At the time of entering the contract of franchise, and payment of the initial fees from his own personal bank account, the acts are those of a consumer.

Gosselin J. at para. 34 of Khalil v. Nordic Maintenance Inc. stated, paraphrasing the Court of Appeal in eBay Canada Ltd. v. Mofo Moko, 2013 QCCA 1912, she could not convince herself that the individual acted as a merchant seeking profit by way of a transaction seeking to guarantee the individual a revenue.

Gosselin J. held that, in the case before her, the individual presented all the characteristics of a consumer that the legislator had wanted to protect given the individual’s inexperience and potentially disadvantaged position vis-à-vis the franchisor.  That reasoning, Gosselin J. concluded, was consistent with the legislator’s intention.

As a result, Lebel J. concluded that the arbitration clause in the franchise agreement did not apply to Plaintiff and the Court of Québec had jurisdiction to decide the dispute.

urbitral note – The analysis in both the instant case and Khalil v. Nordic Maintenance Inc. considered first-time, inexperienced franchisees bound by hastily considered, unequal contracts and involved allegations of misrepresentations by the more advantaged contracting party . 

The courts did not use the nature/title of the contract to qualify the contracting party as either consumer or merchant. Rather, the courts examined the status of the party at the date of signing the contract and not the eventual status which results once the party performs the contract. Eschewing status based on ‘fake it till you make it‘, the courts qualified status at signature and status assigned as party to the contract.

In the instant case, the allegations involved evidence provided to and accepted by the court. In Khalil v. Nordic Maintenance Inc. the court did not test those allegations as it only dealt with a declinatory motion and not the merits. On the declinatory motion, the courts’ practice is to hold the allegations as proven for the purpose of the motion only.

For some, the overall circumstances, taken together, might not warrant extending the scope of the decision to the level of broad precedent. Some might urge that all the elements must be present for a court to conclude along the same lines in other instances.

For others, both courts focused on how each individual sought to launch himself in business for the first time and, at that initial moment, was still a consumer.  This finding was reinforced by Gosselin J., paraphrasing the Court of Appeal, when she held that seeking a financial gain did not alter the consumer’s status.  In her case, she looked principally at the status of the individual.