Judicial Limits on Freedom of Contract?

Arbitration Clauses and Consumer Class Actions

Introduction
In recent years, there has been a growing acceptance by Canadian courts of the viability
and legitimacy of alternative dispute resolution regimes. Previously jealous of their
exclusive adjudicatory authority, courts now acknowledge that private dispute resolution
such as mediation and arbitration provides an “efficient and effective access to justice
mechanism.”1
Yet despite the courts’ growing comfort with alternative dispute resolution, and
arbitration in particular, there are areas of the law in which the trend toward private
dispute resolution has been curtailed, and courts and legislatures have been holding that
access to justice does in fact require, access to the courts. The trend toward insisting on
preserving public dispute resolution through the courts is most apparent in the growing
prohibition on the use of arbitration clauses in consumer contracts, particularly
mandatory arbitration clauses in consumer contracts that would have consumers waive
their right to participate in class action litigation in favour of a private dispute resolution
process.
This paper will argue that the courts’ shift away from upholding arbitration agreements
trenches upon parties’ contractual freedom to enter into private dispute resolution
agreements. In the Supreme Court of Canada’s recent decision in Seidel v. Telus
1 Seidel v. Telus Communications Inc. [2011] 1 S.C.R. 531 at para.52 (“Telus”)
2
Communications Inc., the Court set aside an arbitration clause, despite the lack of specific
legislative language excluding arbitral jurisdiction over the dispute. The Telus decision
demonstrates a throwback to an earlier era of scepticism regarding alternative dispute
resolution, and introduces unnecessary uncertainty into consumer contracts.
This paper will begin by discussing the emergence of arbitration as an accepted method
of alternative dispute resolution to that offered by the courts. It will discuss the
emergence of class action litigation in Canada during the same period. The paper will
then consider some criticisms of arbitration as a method of dispute resolution in the
consumer and class action context. The responses of legislatures and courts to those
criticisms will be discussed. Finally, the paper will argue that the recent Supreme Court
of Canada decision in Telus indicates that the limits placed on arbitration in the consumer
context may have gone too far in curtailing the freedom of contract that is at the heart of
private dispute resolution.
Arbitration
Arbitration is a “private process of adjudication in which parties in a dispute with each
other choose decision makers…and the rules and procedure, evidence, and decision by
which their dispute will be decided.”2 Agreements to arbitrate can come about after a
dispute has arisen, or can include pre-dispute arbitration clauses in contractual
agreements between the parties.
2 Carrie Menkel-Meadow, “Ethics Issues in Arbitration and Related Dispute Resolution Processes: What’s
Happening and What’s Not” (2002) 56 U. Miami L. Rev. at p. 949
3
Arbitration agreements confer on an arbitrator or arbitrators the authority to decide a
dispute, and bind the parties to follow the arbitrator’s decision, which can be enforced as
if it were an order of the court. In both pre and post-dispute arbitration, arbitration is said
to provide for a more efficient dispute resolution process than that offered by the courts.
In addition to the efficiency of a private adjudicative process, arbitration is said to allow
parties the freedom to choose procedural and substantive rules governing dispute
resolution, and generally to provide greater flexibility in crafting a dispute resolution
process best suited to the parties’ needs.
Despite the potential advantages of arbitration and the freedom of contract that underlies
the right of parties to choose methods of alternative dispute resolution, Canadian courts
were reluctant historically to forego their jurisdiction in favour of the parties’ agreement
to submit their disputes to arbitration. In fact, many early court decisions approached
arbitration clauses with suspicion and held such clauses, which purported to limit or oust
the jurisdiction of the court, as being against public policy and therefore void.
Perhaps the most notable of these early court decisions was the Supreme Court of
Canada’s 1964 decision in National Gypsum Co. v. Northern Sales Ltd,3 a decision
involving enforcement in Quebec of an arbitration agreement providing for New York as
the forum for the arbitration. Speaking for the majority, Justice Fauteux said of the
arbitration clause in the parties’ contract: “the clause, being vitiated by absolute nullity,
3 National Gypsum Co. v. Northern Sales Ltd., [1964] S.C.R. 144 (“National Gypsum”)
4
cannot obtain or be acted upon in the Court below either to oust or in any way interfere
with its jurisdiction to be seized with and try the action on its merits4
Similarly, in Vinette Construction Lteé. v. Dobrinsky., 5 the Quebec Court of Appeal was
critical of the arbitration process and held an arbitration clause in that case void as being
against public policy in the Province of Quebec. With a few exceptions, the decisions of
Canadian courts prior to the 1980s reflected a general hostility to private contracting of
dispute resolution that had the effect of ousting the jurisdiction of the courts.6
Legislative Change and Judicial Acceptance
By the mid-1980s, growth in the use of commercial arbitration internationally spurred
Canadian legislatures to modernize arbitration legislation in the country to provide for
greater recognition of the role of commercial arbitration.7 Prior to 1986, Canadian
arbitration legislation was modelled on the U.K. Arbitration Act, 18898. The U.K.
Arbitration Act did not provide for automatic stays of court proceedings in the face of an
arbitration agreement, and courts would often refuse to grant stays or enforce arbitration
agreements under the legislation.9
4 National Gypsum at p.151
5 Vinette Construction Ltee. v. Dobrinsky. [1962] B.R. 62
6 Note that if an arbitration agreement required arbitration before resort to the Courts, but did not purport to
oust the Courts’ jurisdiction, such clauses were generally upheld in accordance with the reasoning in Scott
v. Avery (1856), 5 H.L.C. 811, 10 E.R. 1121
7 J. Alexandrowicz, “A Comparative Analysis of the Law Regulating Employment Arbitration Agreements
in the United States and Canada” (2002), 23 Comparative Labor Law and Policy Journal 1007
8 (U.K.), 52 & 53 Vict., c.49 [U.K. Arbitration Act]
9 Jonette Watson Hamilton, “Pre-Dispute Arbitration Clauses: Denying Access to Justice” (2006), 51
McGill L.J. 693
5
In 1986, the federal parliament and provincial legislatures approved legislation adopting
the Convention on the Enforcement of Foreign Arbitral Awards and the United Nations
Commission on International Trade Model Law on International Commercial
Arbitration.10 Following the adoption of these international instruments, the Provinces
began updating domestic legislation to reflect the principles of the Convention and U.N.
Model Law, which recognized arbitral authority and independence.11
In 1986, British Columbia passed legislation reflecting the new attitude of deference to
arbitration. Quebec amended the Code of Civil Procedure that same year.12 Ontario and
Alberta incorporated the changes of the U.N. Model Law in 199113, followed by
Saskatchewan14, New Brunswick15, Manitoba16 and Nova Scotia17. Section 6 of the
Ontario Arbitration Act was typical of the new deferential approach.
6. No court shall intervene in matters governed by this Act, except for the
following purposes, in accordance with this Act:
1. To assist the conducting of arbitrations.
2. To ensure that arbitrations are conducted in accordance with arbitration
agreements.
3. To prevent unequal or unfair treatment of parties to arbitration agreements.
4. To enforce awards
10 Convention on the Enforcement of Foreign Arbitral Awards 10 June 1958, 330 U.N.T.S. 38 (the
“Convention”) and United Nations Commission on International Trade Model Law on International
Commercial Arbitration, 21 June 1985, 24 I.L.M. 1302 (“U.N. Model Law”)
11 See for example Article 5 of the U.N. Model Law, which provides: “In matters governed by this Law, no
court shall intervene except where so provided in this Law.”
12 Arts. 940-52 C.C.P.
13 Arbitration Act, 1991, S.O. 1991, c.17 (“Ontario Arbitration Act”) and Arbitration Act, R.S.A. 2000,
c.A-43
14 The Arbitration Act, 1992, S.S. 1992, c. A-24
15 Arbitration Act, S.N.B. 1992, c. A-24
16 The Arbitration Act, S.M. 1997, c. 4, C.C.S.M. c. A120
17 Commercial Arbitration Act, S.N.S. 1999, c. 5
6
In addition, the various arbitration acts included clauses requiring a court to grant a stay
of proceedings on application by either party to an arbitration agreement. Such stays
were mandatory and the court was precluded from taking any actions in the face of an
arbitration agreement except in the limited circumstances provided for in the legislation.
Again, Ontario’s Arbitration Act contained a stay clause that was typical of the new
arbitration legislation:
7(1) If a party to an arbitration agreement commences a proceeding in
respect of a matter to be submitted to arbitration under an agreement, the
court in which the proceeding is commenced shall, on the motion of
another party to the arbitration agreement, stay the proceeding.
The shift toward acceptance of parties’ right to submit their disputes to arbitration to the
exclusion of the courts was evident in court decisions in the lead-up to the adoption of the
Convention and the U.N. Model Law. In Zodiak International Products Inc. v. Polish
People’s Republic18, the Supreme Court of Canada upheld an arbitration agreement
between a Polish business and its Canadian distributor that required disputes to be
submitted to arbitration in Warsaw, Poland. In dismissing the appellant’s appeal of the
Quebec Court of Appeal’s decision upholding the arbitration agreement, the Court held
that:
The mere presence of an undertaking to arbitrate suffices to bar appellant’s
action…The effect of such a clause is to remove the Court’s jurisdiction… In
the case at bar, the clause stipulated in the contract is a conclusive undertaking
to arbitrate. The language used cannot be interpreted in any other way. The
Superior Court’s lack of jurisdiction can be raised at any time.19
18 Zodiak International Products Inc. v. Polish People’s Republic, [1983] 1 S.C.R. 529
19 Ibid at p. 503
7
In Sport Maska Inc. v. Zittrer20 the Supreme Court of Canada considered whether the
parties had entered into an agreement to arbitrate their dispute. The ostensible arbitration
agreement was entered into prior to the 1986 amendments to the Quebec Code of Civil
Procedure and Civil Code of Quebec. Although the Court found on the facts that no
arbitration agreement had been concluded – in fact, the parties had struck out language
from their contract requiring arbitration, Justice L’Heureux-Dubé, speaking for the Court,
stated: “As I have already mentioned, there is no longer any question since Zodiak, supra,
concerning the validity of the undertaking to arbitrate in Quebec law.”21
Similarly, in GreCon Dimter Inc. v. J.R. Normand Inc.22 the Supreme Court of Canada
considered the validity of the parties’ agreement precluding a Quebec court from
exercising jurisdiction and requiring disputes to be adjudicated by a German court. In its
reasons the Court held:
The multitude of situations in which the intention of the parties provides a basis
for determining the jurisdiction of Quebec or foreign authorities, or for resolving
conflicts of laws, attests to the legislature’s intention to allow room for the
autonomy of contracting parties in private international law, and confirms the
primacy of that principle. Recognition of the principle also goes hand in hand
with the legislature’s tendency toward recognizing the existence and legitimacy of
the private justice system, which is often consensual and is parallel to the state’s
judicial system.23
According to some commentators, the new legislative and judicial deference to
arbitration was grounded on an ascendant theory of freedom of contract and the respect
20 Sport Maska Inc. v. Zittrer Inc., [1988] 1 S.C.R. 564
21 Ibid at para. 135
22 GreCon Dimter Inc. v. J.R. Normand Inc., [2005] 2 S.C.R. 401
23 Ibid at para.38
8
for party autonomy in commercial relations.24 Judicial deference to the intention of the
parties was perhaps most evident in Dell Computer Corp. v. Union des consommateurs25
and Rogers Wireless Inc. v. Muroff,26 cases involving arbitration clauses in the consumer
class action context. These cases will be explored in more detail following a discussion
of class action legislation in Canada.
Consumer Class Actions
The cases discussed above involved arbitration agreements entered into between
sophisticated commercial parties. Dell and Rogers, however, raised the issue of whether
consumers were barred from participating in class action litigation in the face of an
arbitration clause inserted into contracts they had entered in the consumer context.
Introduction to Class Actions
At about the same time as Canadian legislatures were revising their arbitration
legislation, they were also in the process of promulgating legislation providing for class
action litigation.
A class action is an action in which a representative plaintiff is authorized to act on behalf
of a defined class of plaintiffs who share a claim comprising common issues against a
specified defendant. In a modern economy, where products, services and securities are
often available to consumers across a province, across the country or around the world,
aggregating the claims of a large number of plaintiffs who may have suffered common
24 Jonette Watson Hamilton supra note 9 at 703.
25 Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801 (“Dell”)
26 Rogers Wireless Inc. v. Muroff [2007] 2 S.C.R. 921 (“Rogers”)
9
damages or losses provides benefits in terms of cost and efficiency. Class actions allow
plaintiffs to aggregate what may be small claims that are not cost effective to litigate
individually, thus reducing costs and maximizing recovery. In addition, class actions can
prevent a proliferation of inconsistent judgments and preserve judicial resources by
obviating the need for plaintiffs to commence multiple litigation arising out of the same
circumstances.
Although class action proceedings are authorized under the common law27, nine of ten
Canadian provinces have adopted class action legislation to regulate class action
proceedings before their courts. The various provincial class action statutes are
substantially similar, and reference will be made primarily to the Ontario Class
Proceedings Act 1992, S.O. 1992 c.6 (the “CPA”), for the purposes of this paper.
The CPA provides that a class action is commenced by way of a motion for certification
under section 2. Only if the motion for certification is granted, may the claim move to the
trial stage. At the certification stage, the court will certify an action to proceed as a class
proceeding where the conditions in section 5 of the CPA are met. These conditions
require that: i) the pleadings discloses a cause of action; ii) there is an identifiable class of
two or more persons that would be represented by the representative plaintiff or
defendant; iii) the claims or defences of the class members raise common issues; iv) a
class proceeding would be the preferable procedure for the resolution of the common
27 Western Canadian Shopping Centres Inc. v. Dutton, [2001] 2 S.C.R. 534
10
issues; and, v) there is a representative plaintiff or defendant who would fairly and
adequately represent the interests of the class.
At the certification stage, the court acts as a gatekeeper to ensure that class actions
proceed only where the court is satisfied that the criteria in section 5 are met. Generally,
the courts have held that class proceeding legislation is procedural and does not affect
substantive rights; it simply ensures that pre-existing substantive rights are given their
day in court by allowing the aggregation of litigation costs.28
Dell and Rogers: The high-water mark of arbitration clauses?
There has been controversy whether clauses in consumer contract that would have the
effect of barring consumers from participating in class actions should be upheld by the
courts. In Dell and Rogers, the Supreme Court of Canada decided strongly in favour of
upholding mandatory arbitration clauses in the consumer class action context.
In Dell, the Supreme Court of Canada considered the validity of an arbitration clause
which provided that any potential action against Dell had to be submitted to binding
arbitration. The proposed action against Dell arose as a result of two mispriced items that
appeared for sale briefly on Dell’s website. A number of consumers purchased the items
at the incorrectly posted, lower price advertised on the website. Dell subsequently
refused to honour those sales due to the pricing error. The plaintiff sought certification of
28 Haylock, Jeffrey, “The National Class as Extraterritorial Legislation”, 32 Dalhousie Law Journal 253
(Fall 2009) at p. 8 (“Haylock”)
11
a class comprising several hundred consumers who were said to have purchased the items
at the reduced price.
Dell eventually came before the Supreme Court of Canada, which confronted two
principal questions in the case: who decides whether an arbitration clause is valid, the
courts or the arbitrator?; and, if the arbitration clause is valid, does it oust the jurisdiction
of the court? The Court held that where the issue of the validity of an arbitration clause
arises, it is the arbitrator who is to rule on the validity of the arbitration clause (the socalled
compétence-compétence principle). If the arbitrator finds the clause to be valid
and enforceable, the court will not have jurisdiction over the dispute. In the
circumstances, the Court stayed the proposed class action and sent the matter back to
arbitration. On the issue of the right to pursue a class action, Deschamps J., speaking for
the majority, held that:
Although the class action is of public interest, it is a procedure, and its
purpose is not to create a new right. The mere fact that D decided to bring
the matter before the courts by means of a class action rather than an
individual action does not affect the admissibility of his action. An
argument based on the class action being of public order cannot therefore
be advanced to prevent the court hearing the action from referring the
parties to arbitration.29 [emphasis added]
Rogers was another Quebec action heard by the Supreme Court of Canada at the same
time as Dell. In Rogers, a customer of the telephone service provider sought certification
of a class action as a result of allegedly undisclosed special roaming charges the company
billed to its customers when they used their mobile devices outside the Rogers service
29 Dell supra note 25 at para.105
12
area. The plaintiff complained that he had been charged roaming fees of $4.00 per minute
while using his mobile phone in Rhode Island. The plaintiff’s contract with Rogers
contained an arbitration clause that required any dispute to proceed by way of binding
arbitration and barred the consumer from participating in a class action against the
company. The Court again considered whether the arbitration clause could be invoked to
stay the proposed class action.
Writing for the majority, Chief Justice McLachlin applied the reasoning from Dell and
held that:
In Dell, the Court was unanimous in finding that under art. 940.1 C.C.P.,
arbitrators have jurisdiction to rule on their own jurisdiction (the
“compétence-compétence principle”). The majority of the Court held that,
when an arbitration clause exists, any challenges to the jurisdiction of the
arbitrator must first be referred to the arbitrator.
Arbitration Clauses in the Consumer Context
The use of arbitration clauses in consumer contracts to prevent participation in class
action litigation is a relatively recent phenomenon in Canada.30 Businesses in the United
States have been inserting mandatory arbitration clauses into consumer contracts for
many years, and these clauses have generally been given effect by U.S. courts.
Canadian businesses, as with their U.S counterparts, have incorporated mandatory
arbitration clauses in their consumer contracts as a way to reduce the potential costs of
class action litigation, avoid being the targets of class actions that may be motivated less
by a meritorious claim than by a desire to extract a quick settlement, as well as to control
30 Susan Lott, Marie Helene Beaulieu and Jannick Desforges, “Mandatory Arbitration and Consumer
Contracts”, Public Interest Advocacy Centre, November 2004 at p. 6 [Public Interest Advocacy Centre]
13
the dispute resolution process and maintain confidentiality regarding potential claims,
thus protecting their reputation and stock price.31 Some commentators have argued that
the adoption of mandatory arbitration clauses in consumer contracts in Canada was a
direct response to the adoption of class action legislation across the country.32
Criticisms of mandatory arbitration clauses in consumer contracts
Critics of the use of mandatory arbitration clauses in the consumer context cite a number
of common practices in the use of such clauses as sources of concern. For example,
many mandatory arbitration clauses are said to be “buried in the fine print” or on
backsides of agreements.33 In addition, critics argue that many consumers never read the
agreements pertaining to their services, or if they do read them, cannot understand
them.34
A number of other aspects of mandatory arbitration clauses in consumer contracts have
been noted as a cause for concern. The consumer contracts containing these clauses often
do not allow the consumer to challenge the clause. The clauses often state that if the
consumer disagrees with the clause, they should not subscribe for the service or purchase
the particular product.35 As well, many of the consumer contracts containing the
mandatory arbitration clauses do not require express agreement to the terms of the
31 Ibid at pp.9-10
32 Jonette Watson Hamilton supra note 9 at p.697.
33 Public Interest Advocacy Centre supra note 30 at p.14
34 Ibid at p. 14
35 A clause in Telus Internet Services agreement is typical:
BY OPENING A TELUS INTERNET SERVICES ACCOUNT UNDER YOUR NAME OR BY USING
THE TELUS INTERNET SERVICES YOU ARE AGREEING TO BE LEGALLY BOUND BY AND
ABIDE BY THE TERMS OF THIS AGREEMENT. IF YOU DO NOT AGREE TO BE BOUND BY THIS
AGREEMENT, YOU MAY NOT SUBSCRIBE FOR, ACCESS OR USE THE TELUS INTERNET
SERVICES AND YOU MUST IMMEDIATELY TERMINATE YOUR TELUS INTERNET SERVICES
ACCOUNT, IF YOU HAVE ONE.
14
contract – use of the service in itself is sad to constitute acceptance. Finally, many
consumer contracts contain a change of terms provision, which allows the business to
make changes to its contracts without prior notice and deems consumers to be bound by
such changes. These and other business practices in the use of mandatory arbitration
clauses have rightfully been the subject of criticism. As a result, legislatures in Quebec,
Ontario and Alberta have amended their consumer protection legislation in an attempt to
protect consumers from the effects of mandatory arbitration clauses that would negate
their rights to participate in class action litigation and restore some balance to the
bargaining power as between business and consumers.36
Legislative Responses to Mandatory Arbitration Clauses
On December 14, 2007, the same day that the Supreme Court of Canada was hearing
arguments in Dell and Rogers, the Quebec government passed Bill 48, to amend
Quebec’s Consumer Protection Act37 to prohibit mandatory arbitration clauses in
consumer contacts that would have the effect of barring participation in class action
litigation. Section 11.1 of the Quebec Consumer Protection Act provides:
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.
36 Public Interest Advocacy Centre supra note 30 at p.15
37 Consumer Protection Act, R.S.Q., c P-40.1
15
Similarly, Ontario amended its Consumer Protection Act38 to nullify mandatory
arbitration clauses in all consumer contracts and allow consumers to participate in class
actions: Sections 7 and 8 provide:
No waiver of substantive and procedural rights
7. (1) The substantive and procedural rights given under this Act apply despite
any agreement or waiver to the contrary.
Limitation on effect of term requiring arbitration
(2) Without limiting the generality of subsection (1), any term or acknowledgment
in a consumer agreement or a related agreement that requires or has the effect of
requiring that disputes arising out of the consumer agreement be submitted to
arbitration is invalid insofar as it prevents a consumer from exercising a right to
commence an action in the Superior Court of Justice given under this Act
Class proceedings
8. (1) A consumer may commence a proceeding on behalf of members of a class
under the Class Proceedings Act, 1992 or may become a member of a class in such
a proceeding in respect of a dispute arising out of a consumer agreement despite
any term or acknowledgment in the consumer agreement or a related agreement
that purports to prevent or has the effect of preventing the consumer from
commencing or becoming a member of a class proceeding.
Finally, Alberta also made amendments to its consumer protection legislation, the Alberta
Fair Trading Act39. The Alberta amendments are less comprehensive than those in
Quebec and Ontario, and only apply to claims based on unfair practices and
misrepresentation. In addition, businesses can seek pre-approval of arbitration clauses in
consumer contracts from the Minister responsible for the act, in which case an approved
38 Consumer Protection Act 2002, Chapter 30 Schedule A (the amendments came into effect on July 31,
2005)
39 Alberta Fair Trading Act, R.S.A. 2000, c. F-2
16
mandatory arbitration clause will operate as a bar to any litigation, including class action
litigation.40
Had the amendments to Quebec’s Consumer Protection Act been in force at the time Dell
and Rogers were commenced, there is no doubt that the mandatory arbitration clauses in
those cases would have been prohibited under the legislation. However, the trend against
mandatory arbitration clauses in the consumer context, particularly those preventing
consumers from participating in class actions, was already apparent after the legislation
was passed, but prior to its coming into force. In addition, the tide was turning against
mandatory arbitration clauses even in provinces without explicit statutory prohibitions on
such clauses.
Court responses to arbitration and consumer class actions
There has been a discernable trend in the caselaw over the past twenty years to uphold the
validity of mandatory arbitration clauses, even in the consumer class action context. The
legislatures of Ontario and Quebec made an explicit choice to amend their consumer
protection legislation, stepping in to protect consumers and prohibit the use of such
clauses. The choices made by elected representatives in Canada’s largest provinces were
an understandable response to an area of concern for consumers and consumer
advocates.41 However, the restrictive approach to mandatory arbitration clauses in the
consumer class action context is evident in provinces that have not adopted specific
statutory language excluding such clauses. Most problematically, it is evident in the
40 Ibid at s.16
41 See Susan Lott, Marie Helene Beaulieu and Jannick Desforges, “Mandatory Arbitration and Consumer
Contracts”, Public Interest Advocacy Centre, November 2004 supra note 30
17
Supreme Court of Canada’s recent decision in Telus, which lifted a stay of a class action
and overrode a mandatory arbitration clause in a consumer contract despite the lack of
“explicit legislative language to the contrary”.42
Mandatory arbitration clauses and class actions
In MacKinnon v. National Money Mart43 the British Columbia Court of Appeal refused to
grant a stay of a class action despite an arbitration clause. Although B.C. does not have
consumer protection legislation barring such clauses, the Court invoked the British
Columbia Class Proceedings Act to sidestep the arbitration clause. The Court noted that
its:
jurisdiction to refuse a stay of an action in favour of arbitration is limited. The
approach of the courts has been deferential to arbitration agreements in the
interests of freedom of contract, international comity and expected efficiency
and cost-savings.44
In addition, the Court emphasized “the need for certainty and predictability in the
interpretation of arbitration statutes because of their international implications”.45
Nevertheless, the Court went on to find that in the context of a class proceeding, the
conflict between the arbitration legislation and class proceeding legislation stood to be
resolved by weighing the competing policy issues of contractual freedom and commercial
certainty on the one hand, and the right of consumers to aggregate claims they could not
pursue individually on the other. The Court upheld the reasoning of the trail judge,
refusing the stay of the class proceeding, holding that the trial judge had correctly:
42 Telus supra note 1 at para.42
43 MacKinnon v. National Money Mart (2004), 203 B.C.C.A. 103 at para. 37 (“MacKinnon”)
44 Ibid at para. 38
45 Ibid at para.37
18
considered the cost-saving objectives of both arbitration and class proceedings,
and concluded that individual actions or arbitrations would likely create an
economic bar to the resolution of the individual claims, while a class proceeding
would allow the claimants economic access to justice. This is a proper approach
to a preliminary or prima facie analysis of whether a class proceeding is the
preferable procedure.46
In short, the Court found that the “preferable procedure” aspect of the test for class action
certification trumped the mandatory arbitration clause found in the parties’ contract,
despite there being no legislation specifically excluding such clauses in British Columbia.
The Court’s reasoning stands in stark contrast to the Supreme Court of Canada’s
reasoning in Dell, where the Court had held that “An argument based on the class action
being of public order cannot therefore be advanced to prevent the court hearing the action
from referring the parties to arbitration.47
MacKinnon was followed in Ontario in Smith v. National Money Mart48, a decision
released prior to the coming into force of Ontario’s amended Consumer Protection Act in
July 2005. In Smith, Macdonald J. considered whether a mandatory arbitration clause
prohibited customers of the short-term loan provider from participating in a class action.
Her Honour held that arbitrators do not have jurisdiction over class proceedings, and on
that basis, the arbitration clauses at issue “cannot be construed to exclude class action
claims.” According to the Court, the ‘preferable procedure’ analysis in the CPA takes
precedence over the Ontario Arbitration Act, whose stay provisions could be disregarded:
I agree that the question of whether or not there is an enforceable
arbitration clause is a matter that is not relevant to the Arbitration Act 1991
but is relevant to the preferable procedure determinations that will be
46 Ibid at para. 47
47 Dell supra note 25 at para.105
48 Smith v. National Money Mart, [2005] O.J. No. 2660 (“Smith”)
19
eventually made in this action under s. 5 of the Class Proceedings Act,
1992.49
Once the amendments to Ontario’s consumer protection legislation came into force, the
courts no longer had to struggle with the tension between the CPA and Arbitration Act
and could invoke the provisions in the Ontario Consumer Protection Act to strike down
mandatory arbitration clauses. However, the courts did not restrict the use of the Ontario
Consumer Protection Act to invalidating consumer arbitration clauses. In Griffin v. Dell
Canada50, the Court extended the protection offered by the legislation to refuse a stay
under a mandatory arbitration clause in a non-consumer context. The Court considered
whether section 7 of the Ontario Consumer Protection Act also aplied to prevent the
defendant from invoking the mandatory arbitartion clause to stay an action by small
busineses that were also participating in the class acion and did not fall under the
definition of “consumers” under the Act. Sharpe J. held:
In my view, it would not be reasonable to separate the consumer from the
non-consumer claims. We should, therefore, refuse a partial stay and allow all
the claims to proceed under the umbrella of the class proceeding.51
Thus, in Griffin, the Court appeared prepared to allow a class action to proceed on behalf
of parties who were not covered by the consumer protection legislation, suggesting an
increased vulnerability of mandatory arbitation clauses.
49 Ibid at para.26
50 Griffin v. Dell Canada (2010) ONCA 219 (“Griffin”)
51 Ibid at para.46
20
Seidel v. Telus Communications Inc.
The critical approach to mandatory arbitration clauses in the consumer context was
apparent in the decision the Supreme Court of Canada in Telus, released earlier this year.
Telus involved the enforceability of a mandatory arbitration clause in a consumer contract
in British Columbia, a province that has not amended its consumer protection legislation
to bar such clauses. Telus was a 5-4 decision, with a strong dissent to Justice Binnie’s
majority decision by Justices LeBel and Deschamps, who characterized the majority
decision as expressing an “undercurrent of hostility towards arbitration” and the “same
reluctance to fully accept arbitration as a legitimate form of dispute resolution that
permeated the old jurisprudence.”52
The plaintiff in Telus had sought certification of a class action as a result of allegedly
deceptive ‘air time’ charges billed by the service provider. The issue before the Supreme
Court of Canada involved the enforceability of an arbitration clause inserted Telus’s
standard form cellular telephone service contract. The answer to that question turned on
whether section 172 of British Columbia’s Business Practices and Consumer Protection
Act53 prevented the defendant from enforcing the arbitration clause in its standard form
contract. Section 172 provides:
172 (1) The director or a person other than a supplier, whether or not the person
bringing the action has a special interest or any interest under this Act or is
affected by a consumer transaction that gives rise to the action, may bring an
action in Supreme Court for one or both of the following:
(a) a declaration that an act or practice engaged in or about to be
engaged in by a supplier in respect of a consumer
transaction contravenes this Act or the regulations;
52 Telus supra note 1 at para.101
53 Business Practices and Consumer Protection Act, S.B.C. 2004, c.2
21
(b) an interim or permanent injunction restraining a supplier from
contravening this Act or the regulations. [emphasis added]
Section 3 of the BPCPA, provides:
3 Any waiver or release by a person of the person’s rights, benefits or protections
under this Act is void except to the extent that the waiver or release is expressly
permitted by this Act.
In addition to the interpretation of section 172 of the BCBPA, Telus raised the question of
the applicability of Dell outside Quebec. Recall that the holding in Dell, which upheld a
mandatory arbitration clause in the consumer context, had been rendered moot in Quebec
as a result of amendments to the Province’s consumer protection legislation. However,
British Columbia had not chosen to adopt legislation specifically excluding mandatory
arbitration clauses in the consumer context. In fact, only Ontario, and to a more limited
extent Alberta, had chosen to make similar amendments. The dissent argued that Dell
applied outside of Quebec and that the holding in the case upheld a stay of the proposed
class action in Telus in the face of a mandatory arbitration clause.
However, the majority largely sidestepped the question of the applicability of its decision
in Dell and focused on the interpretation of section 172 of the BCBPA. The majority
held that section 172 of the BCBPA contained sufficiently clear “legislative language to
the contrary” to prohibit the use of mandatory arbitration clauses in consumer contracts in
British Columbia. The Court agreed that the BCBPA “manifests a legislative intent to
intervene in the marketplace to relieve customers of their contractual commitment”54 to
54 Ibid at para. 2
22
mediation and arbitration. Justice Binnie concluded that the clear purpose of the BCBPA
was consumer protection. Therefore, its terms should be interpreted generously in favour
of consumers. According to the Court:
The policy objectives of s. 172 would not be well served by low-profile,
private and confidential arbitrations where consumers of a particular
product may have little opportunity to connect with other consumers who
may share their experience and complaints and seek vindication through a
well-publicized court action. 55
The minority stated that nothing short of explicit language by the legislature to exclude
arbitration as a method of resolving legal disputes should permit parties to avoid previous
contractual agreements to arbitrate. The minority disagreed that the policy choice to
allow a class proceeding in the face of a mandatory arbitration clause was an appropriate
role for the Court. According to the dissenting Justices:
Unless this Court were to hold that a standard form contract cannot establish
a substantive right to arbitration or that arbitration clauses are inherently
unfair to consumers, an agreement to arbitrate cannot be supplanted by the
procedural right to commence a class action.
The dissent went on to state:
Taking any necessary action and assessing Ms. Seidel’s policy concerns
with respect to the use of arbitration clauses in consumer agreements are
matters best left to the legislature, which is in a better position to balance
competing policies and objectives.
In Telus, the Supreme Court of Canada sidestepped the holding in Dell, which
held that class actions were procedural, and could not be invoked to avoid the
obligation to arbitarte. The Court did this not by overruling Dell, which the
55 Ibid at para.37
23
majority agreed stood for the “enforcement of arbitartion clauses absent
legislative language to the contrary.”56 The Court simply found that section 172
of the BCBPA constituted sufficiently expicit legislative language to the contrary.
Thus in Telus, the Court, much like the Courts in MacKinnon and Smith above,
was prepared to find legislative language to justify denial of stays of class actions
based on class proceedings legislation, or other legislation that was not
specifically drafted to negate mandatory arbitration clauses.
Conclusion
The history of judicial treatment of arbitration clauses demonstrates a shift from
scepticism, even hostility, to acceptance and support. Since the growth of class action
litigation and consumer protection legislation, there has been a shift back to scepticism,
particularly in the consumer context.
Provincial legislatures have a responsibility to make policy decisions that are believed to
be in the best interests of their citizens. Arguably, consumer protection legislation that
prohibits the use of mandatory arbitration clauses in consumer contracts is one such
choice. The criticism of this paper is not focused on the policy choices made by
legislatures, but on the uncertainty that shifting and expansive judicial decisions
introduce into business planning and litigation risk management. As a result of decisions
such as MacKinnon, Smith, Griffin and now Telus, parties who previously may have
believed they were bound to proceed to arbitration, can be expected to commence court
actions, attempting to circumvent arbitration clauses. Based on the caselaw discussed
56 Ibid at para. 42
24
above, in many cases they may succeed in doing so, even in provinces where no
legislation specifically prohibits mandatory arbitration clauses.
After Telus, the certainty and predictability that legislatures sought to provide
commercial parties with the introduction of arbitration legislation in the 1990s, as well as
consumer protection amendments, has been eroded. The tide has turned perhaps too
strongly in favour of class action litigation, and courts have facilitated the trend by
weakening mandatory arbitration clauses in the absence of explicit legislative language
prohibiting such provisions. There may be a deeper underlying cause to the trend
emerging from the caselaw, including a judicial preference for offloading regulatory and
enforcement functions onto private actors, who are often motivated to act more
expeditiously to right the perceived wrongs of commercial defendants. Whatever the
cause, the critical treatment of mandatory arbitration clauses has introduced uncertainty
into commercial contracts, which can be expected to lead to higher costs and increased
litigation, placing an additional burden on both the consuming public and the courts.
25
Cases Cited
Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801 (“Dell”)
GreCon Dimter Inc. v. J.R. Normand Inc., [2005] 2 S.C.R. 401
Griffin v. Dell Canada (2010) ONCA 219 (“Griffin”)
MacKinnon v. National Money Mart (2004), 203 B.C.C.A. 103
National Gypsum Co. v. Northern Sales Ltd., [1964] S.C.R. 144
Rogers Wireless Inc. v. Muroff [2007] 2 S.C.R. 921
Scott v. Avery (1856), 5 H.L.C. 811, 10 E.R. 1121
Seidel v. Telus Communications Inc. [2011] 1 S.C.R. 531
Smith v. National Money Mart, [2005] O.J. No. 2660
Sport Maska Inc. v. Zittrer Inc., [1988] 1 S.C.R. 564
Vinette Construction Ltee. v. Dobrinsky. [1962] B.R. 62
Western Canadian Shopping Centres Inc. v. Dutton, [2001] 2 S.C.R. 534
Zodiak International Products Inc. v. Polish People’s Republic, [1983] 1 S.C.R. 529
Statutes and Regulations
Alberta Fair Trading Act, R.S.A. 2000, c. F-2
Arbitration Act, 1991, S.O. 1991, c.17
Arbitration Act, R.S.A. 2000, c.A-43
The Arbitration Act, 1992, S.S. 1992, c. A-24
Arbitration Act, S.N.B. 1992, c. A-24
The Arbitration Act, S.M. 1997, c. 4, C.C.S.M. c. A120
Business Practices and Consumer Protection Act, S.B.C. 2004, c.2
26
Commercial Arbitration Act, S.N.S. 1999, c. 5
Consumer Protection Act, R.S.Q., c P-40.1
Consumer Protection Act 2002, Chapter 30 Schedule A
Treaties and Other International Instruments
Arbitration Act (U.K.), 52 & 53 Vict., c.49
Convention on the Enforcement of Foreign Arbitral Awards 10 June 1958, 330 U.N.T.S.
38
United Nations Commission on International Trade Model Law on International
Commercial Arbitration, 21 June 1985, 24 I.L.M. 1302
Authors Cited
J. Alexandrowicz, “A Comparative Analysis of the Law Regulating Employment
Arbitration Agreements in the United States and Canada” (2002), 23 Comparative Labor
Law and Policy Journal 1007
Haylock, Jeffrey, “The National Class as Extraterritorial Legislation”, 32 Dalhousie Law
Journal 253 (Fall 2009)
Jonette Watson Hamilton, “Pre-Dispute Arbitration Clauses: Denying Access to Justice”
(2006), 51 McGill L.J. 693
Susan Lott, Marie Helene Beaulieu and Jannick Desforges, “Mandatory Arbitration and
Consumer Contracts”, Public Interest Advocacy Centre, November 2004