Author: Anthony Pugh, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.
In Najah c. Desatrais, a May 10, 2019, decision of the Small Claims Division of Court of Québec, the judge decided that an arbitration clause in a franchise agreement for a cleaning and maintenance franchise offended Québec’s consumer protection legislation. The judge also held that Mr. Najah, the franchisee, was entitled to cancel the franchise agreement because he had not received the monthly revenue that Excellpro promised and because Excellpro was habitually late in remitting payment to him.
The plaintiff, Mouhssine Najah, previously a restaurant dishwasher, entered into a franchise agreement with the defendant, Excellpro, which operated a cleaning and maintenance franchise system. Under the franchise agreement, Mr. Najah was required to pay a franchise fee of $17,795 to Excellpro, which was to include the licence, initial training, and the manuals. Excellpro promised to deliver revenues of $4,000 per month to Mr. Najah, and to remit payment to Mr. Najah every Monday. Mr. Najah paid $8,870.50 to Excellpro and promised to use any amounts received over the promised $4,000 per month to pay the remainder of the franchise fee.
Mr. Najah did not receive training, and never received revenues of $4,000 per month. Excellpro was also habitually late on its payment obligations. The relationship between the parties collapsed because of the late payments. Eventually, Excellpro delivered a notice of termination, purporting to terminate the contract because of Mr. Najah’s conduct.
Mr. Najah started the proceeding in the Small Claims Division, demanding, among other things, the return of his franchise fee and outstanding amounts owed to him for his work under the franchise agreement. Mr. Najah claimed against both Excellpro and its principal, Christian Desatrais.
Excellpro argued that the Small Claims Division did not have jurisdiction because of a clause in the franchise agreement referring all disputes about the performance and termination of the contract to arbitration. It also argued that it did not provide $4,000 per month in revenues to Mr. Najah because of customer complaints about Mr. Najah’s work and because Mr. Najah refused to service certain clients.
The arbitration clause was unenforceable because it offended Québec’s Consumer Protection Act
Section 11.1 of Québec’s Consumer Protection Act prohibits a term in a contract that requires a consumer to refer a dispute to arbitration. Under the legislation, a consumer is defined as a natural person, except a merchant who obtains goods or services for the purposes of his business.
Following previous Québec cases, the court held that a natural person who contracts for the purpose of starting a business is a consumer protected by the Consumer Protection Act. It noted that the Consumer Protection Act was a public order law of social importance. Further, the court stated that Mr. Najah did not act as a merchant seeking a profit because the franchise agreement guaranteed a revenue.
Mr. Najah was entitled to cancel the contract
Mr. Najah was entitled to cancel the contract because of Excellpro’s failure to deliver $4,000 per month in revenues and because of the habitually late payments.
The court rejected Excellpro’s argument that Mr. Najah did not receive $4,000 per month in revenues because of performance issues or because he refused to serve certain clients.
The court reasoned that the franchise agreement provided for Excellpro to give notice to Mr. Najah when there was a default in performance. Excellpro had not done this until it gave notice that it was terminating the contract. Its evidence was exclusively hearsay from purportedly upset clients. On the other hand, Mr. Najah provided documentary evidence from his former clients stating that there were no performance issues with the work that he did.
About refusing to serve some customers, the court held that Mr. Najah’s refusals were reasonable. Mr. Najah did not serve customers who were located too far away from where he resided. The court found that Excellpro must bear the consequences of not providing a territory to Mr. Najah in the franchise agreement.
As a result, the court ordered the cancellation of the franchise agreement and ordered Excellpro to reimburse the franchise fees and pay the outstanding amounts that it never paid to Mr. Najah for the months of April and May 2016. Desatrais did not have any personal obligations towards Mr. Najah and the court refused to pierce the corporate veil.