Ruling remits arguments on agreement's nullity, renunciation, repudiation, scope
Quebec’s Superior Court suspended, rather than rejected, a franchising dispute until the completion of the mediation process and/or the rendering of an arbitral ruling, given that the arbitrator governing the matter might decide they lack competence to hear it.
In 16074804 Canada inc. c. 12311321 Canada inc., 2025 QCCS 3464, the parties had a dispute arising from a July 15, 2024 franchise agreement.
Last April, the plaintiffs brought an originating application to rescind the franchise and sub-lease agreement. They sought $193,000 in damages, plus interest and legal fees. In June, they filed an amended originating application to annul the franchise and sub-lease agreement.
The defendants brought an application asking the court to decline jurisdiction and refer the matter to mediation and arbitration under ss. 607.1 and 622 of the Code of Civil Procedure. They alleged that the court lacked jurisdiction because the franchise agreement’s mandatory mediation and arbitration clauses covered the dispute.
The plaintiffs countered that the franchise agreement and its mediation and arbitration provisions were null ab initio because the defendants obtained the agreement through fraudulent conduct, renounced and repudiated it as early as February and March, and thus could not rely on its mediation and arbitration provisions.
Cases suspended
The Superior Court of Quebec granted the defendants’ application with costs, declined jurisdiction, suspended the present case, and referred the parties to mediation and arbitration in line with the franchise agreement.
The court stated that the franchise agreement’s mediation and arbitration provisions, which were enforceable, made the mediation and arbitration process mandatory and binding.
The court added that the provisions’ broad definition of a dispute covered the issues in the initial and amended originating applications, which arose from the parties’ signing of the franchise agreement and its aftermath.
Under the competence/competence principle, the court ruled that it should remit the matter to mediation and arbitration to allow the arbitrator to rule on their own competence, unless the plaintiffs’ arguments solely involved legal or factual questions requiring superficial or prima facie consideration of the documentary evidence in the record.
Again citing the competence/competence rule, the court held that the arbitrator should determine whether the franchise agreement was null ab initio due to a defect of consent, based on a complete examination of the evidentiary record. The court noted that it did not have enough evidence at this point to find a defect of consent.
Next, the court found that the arbitrator should likewise rule on the existence and extent of renunciation, a disputed factual issue, based on a full review of the record.
Lastly, the court held that the arbitration provision clearly bound the franchisee and guarantor, both of whom signed the franchise agreement, in connection with the agreement’s actual parties, listed third parties, or non-signatory third parties connected to any dispute.
Based on a prima facie review of the record, the court concluded that all defendants could benefit from the arbitration provision and request the referral of the matter to arbitration.
