A recent judgment handed down on May 10 by the Court of Quebec(Small Claims Division)in Khalil v. Nordic Maintenance inc. click here) brings to the forefront a very delicate issue for any franchisor: Is a new franchisee, at the time of contracting with a franchisor, a "consumer" benefiting, as such, from the specific articles of the Civil Code of Quebec dealing with any contract concluded with a consumer, and even more so, from the provisions of the Consumer Protection Act?
In this case, a new franchisee, Mr. Mohamed Khalil, was asking the Quebec Court(Small Claims Division) to cancel a franchise agreement he had signed with Nordic Maintenance Inc. for an industrial and commercial building maintenance service, on the grounds, according to Mr. Khalil, of a defect in consent caused by false representations allegedly made to him by the franchisor.
Khalil also asked the court to order the franchisor to pay him damages in the amount of $14,891.39.
In response, the franchisor, Nordic Maintenance inc., asked the Court of Quebec to dismiss the franchisee's action on the grounds that the franchise agreement stipulated an arbitration clause.
Although, with a few exceptions, Quebec courts now recognize arbitration clauses and refuse to hear actions subject to such a clause, the situation has been different for contracts subject to the Consumer Protection Act since the addition to that Act on January 1, 2016 of its section 11.1, which prohibits a merchant from imposing, in a contract entered into with a consumer, an obligation to submit a potential dispute to arbitration.
The validity of the arbitration clause in the franchise agreement between Nordic Maintenance Inc. and Mr. Khalil depended on whether or not the new franchisee was a " consumer " within the meaning of the Consumer Protection Act at the time the franchise agreement was negotiated and concluded.
Here is the answer to this question in the judgment handed down by the Court of Quebec in this case:
"27] If the Court were to consider the franchisee, an inexperienced person who decides to go into business for himself, as a merchant, article 229 C.P.A. would be rendered meaningless, contrary to the principles of interpretation which dictate that the law should always speak rather than give no effect.
[28] The C.P.A. is a remedial statute that must be given a broad and liberal interpretation aimed at restoring the imbalance of power and knowledge between the consumer and the merchant.
[29] The purpose of this law is to recognize specific consumer rights, impose specific obligations on merchants, promote the exercise of consumer rights, remedy possible abuses by merchants and provide certain benefits to consumers.
[30] An interpretation with the potential to eliminate possible consumer abuse cannot be ignored.
[31] Case law has already recognized that a natural person who contracts for the purpose of going into business is a consumer protected by this Act.
[32] The franchisee was a consumer during the initial investment phase of his first business venture. At the outset, he contracts to become a merchant: when he concludes the franchise agreement and makes lump-sum royalty payments out of his personal account, the act he performs is that of a consumer".
In this case, the Court of Quebec concluded that Mr. Khalil was, at the time he signed his franchise agreement, a " consumer " within the meaning of the Consumer Protection Act; consequently, the judge declared " prohibited, null and void the arbitration clause included in the franchise agreement " and dismissed the motion to dismiss filed by Nordic Maintenance inc.
Obviously, a court's finding that a new franchisee is a " consumer " within the meaning of the Consumer Protection Act has a number of other important consequences for any franchisor, including those arising from the fact that the provisions of this law, many of which are highly restrictive for any merchant, provide important protections for the consumer.
This is an issue to keep an eye on, especially in the context of small or micro franchises where the franchisee is a natural person(since, under the Consumer Protection Act, a "consumer" must be a natural person).
