The Québec Superior Court recently upheld a million-dollar penalty clause in favour of Uniprix, following a breach of a right of first refusal clause by affiliated pharmacists, in a decision that recognizes the intended deterrent effect of the penalty clause without having to prove actual damages.
In a recent judgment rendered on July 22, 2025, (500-17-111096-205) by the Honourable Justice Simon Chamberland, J.S.C., the Superior Court of Québec endorsed the reasonable nature, legality, and merits of a clause imposing a CA$1 million penalty in favour of the network leader, Uniprix, after finding that three owner-pharmacists had breached its contractual right of first refusal.
In this case, Uniprix and the affiliated pharmacists entered into an affiliation agreement on October 19, 2009. This contract required pharmacists wishing to sell the assets of their pharmacy to first submit any offer to purchase received from a third party to Uniprix, in order to give Uniprix a 120-day period to exercise its “right of first refusal.”
In November 2018, the pharmacists accepted an offer to purchase assets from pharmacists Myriam Hamoui and Chadi Hamoui, and forwarded a copy of the offer to Uniprix. In March 2019, Uniprix informed the pharmacists that it would not exercise its right of first refusal regarding the offer received from the Hamouis, and authorized the affiliated pharmacists to proceed with the sale.
On May 16, 2019, the offer to purchase was assigned to a third party, Mr. Jean-François Lafrance, without Uniprix’s knowledge. On the same day, after being informed of this assignment, Uniprix formally notified the affiliated pharmacists not to proceed with the sale of assets to Lafrance, as it considered that, under the affiliation agreement terms, the proposed change in the buyer required the affiliated pharmacists to submit a new request to Uniprix to enable it to exercise its right of first refusal.
The affiliated pharmacists ignored Uniprix’s formal notice and, on May 17, 2019, completed the sale of assets to the buyer, Jean-François Lafrance. On January 13, 2020, Uniprix instituted proceedings against the affiliated pharmacists, claiming the sum of CA$1 million as a contractual penalty for the alleged breach of the right of first refusal benefitting Uniprix.
The three main issues in this case are as follows:
- Did the affiliated pharmacists breach the contract by selling their pharmacy to Lafrance without allowing Uniprix to exercise its right of first refusal?
- Is the penalty clause in the contract applicable in this case if, as the defendants claim, Uniprix suffered no damages?
- Is the amount of the penalty clause oppressive?
First, the court found that the defendants were at fault. The proper contractual process was followed in the initial purchase offer to pharmacists Myriam and Chadi Hamoui. At the end of this process, Uniprix elected not to exercise its right of first refusal. However, without Uniprix’s authorization, the pharmacists assigned the offer to purchase to a third party, which had never been pre-approved by Uniprix. The defendants nevertheless argued that there had been no breach since the initial offer to purchase had simply been assigned to a third party, without changing any of the conditions. The Court rejected this argument and found that the affiliated pharmacists had breached section 9.7 of the Affiliation Agreement. This section clearly stipulates that, if the sale is not completed with the “proposed buyer,” in this case Myriam and Chadi Hamoui, the affiliated pharmacists must submit a new request to Uniprix before proceeding with any other sale of their rights under the Affiliation Agreement.
The Court further stated that this breach was all the more apparent since, for Uniprix, the identity of the proposed buyer was an essential element of any offer to purchase, as provided for in article 9.2.1 of the Affiliation Agreement. Justice Chamberland also rejected the defendants’ argument that Uniprix had waived its right of first refusal for any new offer, knowing that the initial offer to purchase, in favour of the Hamouis, contemplated its possible assignment to another purchaser. Given the principle of relativity of contract (art. 1440 of the Civil Code of Québec), the argument was rejected, since such a clause did not bind Uniprix, which was not a party to the offer to purchase. The mere transmission to Uniprix of an offer to purchase containing an option to sell did not bind Uniprix.
As regards the penalty clause, the Court found that, despite the lack of clear wording to that effect, the intention of the parties was clear. The penalty clause, which was initially set at $400,000, was amended in 2011 to increase the penalty to $1,000,000. However, the new version of the penalty clause no longer specifically referred to article 9.4 of the Affiliation Agreement, which addressed the right of first refusal. The removal of this specific reference to article 9.4, prima facie, resulted in an ambiguity. The defendants attempted, albeit at a late stage, to highlight this ambiguity to support their argument that the new penalty clause did not apply in the event of a breach of the right of first refusal clause. This was contradicted by the evidence, which revealed that the parties’ true common intention regarding the penalty increase was solely to deter network-affiliated pharmacists from breaching the right of first refusal clause.
The sole purpose of this clause was to impose a penalty, which was increased from $400,000 to $1,000,000, in the event of a breach of Uniprix’s right of first refusal, regardless of whether Uniprix suffered any damage.
Moreover, the evidence revealed that when the penalty clause was amended in 2011, several pharmaceutical retail chains were trying to capture some of Uniprix’s market share. It was in this context that its affiliated pharmacists, including the defendants, voted in favour of increasing the penalty. The purpose of this amendment was to deter Uniprix affiliates from selling their assets to competing banners without first respecting Uniprix’s right of first refusal, thereby protecting the entire network. If the amount of the penalty clause were not sufficiently high, its deterrent effect would not be achieved, as Uniprix affiliates could simply ignore the right of first refusal by setting a sale price high enough to cover the penalty, if it were imposed. The Court noted in passing that the defendants seemed to be of the same opinion with regard to the parties’ intention, since they were slow to raise the fact that the penalty clause did not apply to them. This ground did not appear in their initial statement of defence, but was instead raised two years after legal proceedings commenced.
Moreover, one of the most notable aspects of the Chamberland decision is the recognition of the penalty clause solely for its deterrent effect. In fact, the defendants argued at trial that the penalty clause could not apply, since, in their view, Uniprix had not suffered any damage due to the breach of its right of first refusal. This argument was rejected by the Court.
The Court pointed out that it was not established that the enforceability of the penalty clause was contingent on Uniprix suffering damage. As a result, the Court recognized the concept of a penalty clause intended solely as a deterrent, a notion that had previously been confined to only a certain line of thinking found primarily in the legal doctrine.
The Court found that in this case, given the commercial context at the time the clause was amended, the parties' intention in providing for a penalty clause was not to compensate Uniprix for a breach of its right of first refusal, but rather to deter Uniprix affiliates from ignoring that right.
Notwithstanding the foregoing, the Tribunal found that the evidence established that Uniprix had suffered damage as a result of the defendants’ breach of Uniprix’s right of first refusal. First, any breach of the right of first refusal constitutes a serious risk to Uniprix—if one affiliate can ignore this clause with impunity, so can all other affiliates in the network. This could have a destabilizing effect on the entire network, which would be detrimental to Uniprix.
The Court therefore allowed Uniprix’s claim in its entirety and ordered the defendants to pay Uniprix, solidarily, the amount of one million dollars, plus interest, an additional indemnity and legal costs.
This decision is of great interest to franchise network managers. It also follows the reasoning of the Court of Appeal in Dunkin Brands, which reiterated that it is up to network managers to enforce existing agreements in order to protect their network. Moreover, the recognition of a penalty clause intended solely as a deterrent supports the possibility of providing for a penalty for contractual default, without having to prove, even prima facie, the existence of any damage.
