Can mandatory arbitration clauses in consumer agreements prevent class actions?

August 20, 2005

Canada's two largest provinces have recently taken distinct approaches to the effectiveness of mandatory arbitration clauses in consumer agreements. Ontario has passed legislation that gives the consumer the right to proceed by class action even where he or she has agreed to a mandatory arbitration clause-unless the agreement came after the dispute arose. In contrast, a Quebec court has ruled that where the consumer demonstrably had knowledge of a mandatory arbitration clause, it is possible that in some situations the existence of that clause would create an enforceable obligation to proceed by arbitration rather than class action.
The following articles by members of our National Litigation Group discuss the new developments.

Dell Computer Decision Holds That Mandatory Arbitration Clauses Can Sometimes Be Effective

Under Quebec law, can class actions over consumer contracts be avoided by means of a contractual provision that any dispute must be resolved exclusively by arbitration? While no Quebec court has yet granted a motion allowing parties to a consumer contract to proceed to arbitration on the basis of such a clause, a May 30, 2005 decision of the Court of Appeal, Dell Computer Corp. v. Union des consommateurs, J.E. 2005-1136, seems to have opened the door to such a possibility.

Dell Computer, the applicant, is of course the well-known retailer of computer systems, operating over the Internet. The sales offer on the Dell website professed to incorporate an external document entitled "Terms and Conditions of Sale", according to which disputes between Dell and its customers are to be resolved exclusively and finally by binding arbitration administered by the National Arbitration Forum (NAF). Thus, when the Union des consommateurs (Consumers' Union) filed for certification of a class action against Dell in Quebec Superior Court, Dell countered that the arbitration clause prohibited any such proceeding.

At trial, the Superior Court judge agreed with the Union des consommateurs, interpreting the arbitration clause as requiring that disputes be taken before the NAF in the United States. He based his ruling on Article 3149 of the Civil Code of Quebec (CCQ), according to which Quebec tribunals have jurisdiction to hear actions concerning consumer contracts, a right on which consumers can insist in spite of any waiver they might have signed. On July 22, 2005, the Supreme Court of Canada, in its decision in GreCon Dimter Inc. v. J.R. Normand Inc., 2005 SCC 46 (CanLII), recognized this exception to the fundamental substantive rule of the autonomy of parties in a private international law context. On appeal, Dell argued that the trial judge had erred in concluding that the arbitration was to take place in the United States. The NAF,  is simply an arbitration management service, and there was therefore no reason that the arbitration could not proceed in Quebec under Quebec law. The Court of Appeal agreed. Dell's customers had not waived the jurisdiction of Quebec tribunals, it held, and there was accordingly nothing in the contract that prevented the arbitration from taking place in the province.

In spite of this, the Court of Appeal dismissed Dell's motion for what in Quebec civil law is called a "declinatory exception", which would have allowed the parties to proceed with the arbitration. The problem wasn't the jurisdictional issue, but the fact that the arbitration clause was to be found in an external document. The Court found that Dell could not demonstrate that its customers had knowledge of this clause, as is required of external addenda to consumer contracts by Article 1435 of the CCQ. Prospective Dell customers were not obliged to read the "Terms and Conditions of Sale" before purchasing the product online. It is important to remember that any clause conferring jurisdiction on an arbitrator should be set out in the consumer contract as such and that the merchant must prove that the consumer knew of the clause.

A second argument of the Union des consommateurs was rejected. The Union argued that Quebec's Consumer Protection Act (CPA) entitles the consumer to submit a dispute with a merchant to a "tribunal" and that because this is (in Quebec civil law terms) a "public order" provision it cannot be nullified by a contractual arbitration clause. Indeed, Article 2639 of the CCQ specifically states that a matter of public order may not be submitted to arbitration. The Court of Appeal considered this argument even though it had already dismissed Dell's appeal. While it agreed that consumers cannot waive a right granted by the CPA through recourse to arbitration, the Court held that the use of the undefined term "tribunal" in section 271.3 of the CPA does not constitute a mandatory attribution of jurisdiction to the courts that would exclude arbitration.

Finally, with respect to the question whether an arbitration clause can nullify the right to pursue a class action, the Court of Appeal responded by noting, first, that the legislature has recognized both arbitration and class actions as legitimate mechanisms for the resolution of disputes without any suggestion that one takes precedence over the other. However, while recognizing that the existence of class actions does not create new substantive rights, the Court of Appeal noted that it offers undeniable benefits as far as access to justice is concerned. It also observed that the right to proceed by way of arbitration is not absolute, some disputes being ineligible for arbitration under Article 2639 of the CCQ. The Court concluded that disputes about the effect of arbitration clauses on the ability to proceed by way of class action must be considered on a case-by-case basis.

In principle, therefore, there is no reason under Quebec law that a consumer contract cannot stipulate that all disputes must be arbitrated, as long as the merchant can prove that the consumer accepted this condition. Where these conditions are met, such a clause might be found, in certain fact situations, to preclude a class action.

Ontario's Consumer Protection Act, 2002
Invalidates Mandatory Arbitration Clauses

New consumer protection legislation, which came into effect in Ontario on July 30, 2005, will give preference to class proceedings over mandatory arbitration for resolving disputes that arise from consumer transactions. The Consumer Protection Act, 2002 permits a consumer to commence or join a class proceeding arising out of a consumer agreement, even if there is a mandatory arbitration clause in that agreement.

The new legislation effectively overturns the Ontario Superior Court's 2002 decision in Kanitz v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299 (S.C.J.). Kanitz involved a proposed class action by former subscribers of Rogers Cable Inc.'s high-speed Internet service. The user agreement between the plaintiffs and Rogers provided that any claim or dispute would be referred to and determined by arbitration, and also required the subscriber to waive any right to commence or participate in a class action against Rogers. The plaintiffs in Kanitz argued that the mandatory arbitration clause was invalid because it was unconscionable to prevent a customer from commencing or participating in a class action.

The Kanitz case came before Mr. Justice Nordheimer, who sided with Rogers and stayed the action under the Arbitration Act, 1991. Justice Nordheimer determined that the inclusion of a clause expressly precluding class actions in the user agreement was not unconscionable on two grounds. First, Justice Nordheimer held the Class Proceedings Act, 1992 was merely procedural and did not affect the substantive rights of the plaintiffs. Hence, the clause did not have the effect of removing Rogers' liability, but merely required the plaintiffs to seek relief in a different forum. Second, Justice Nordheimer ruled that although there was a clash of public policies between the Class Proceedings Act, 1992 and the Arbitration Act, 1991, there was no reason to believe the Ontario Legislature had intended the former to take precedence over the latter. He noted that the Legislature could have expressly exempted class proceedings from the Arbitration Act, 1991, but had chosen not to do so.

With the Consumer Protection Act, 2002, the Legislature has now clearly indicated that in disputes arising from consumer agreements the policy concerns underlying the Class Proceedings Act, 1992 are to take precedence over an arbitration clause. In a direct response to the Kanitz decision, the new legislation provides that any term or acknowledgement in a consumer agreement that requires disputes be submitted to arbitration is invalid. Only in cases where the consumer agrees to resolve the matter by arbitration after the dispute arises will the resulting settlement or decision bind the parties. The new Act also permits a consumer to commence or participate in a class action of a dispute arising out of a consumer agreement despite any provision in the agreement that purports to prevent consumers from commencing or becoming a member of a class proceeding.

Consequently, mandatory arbitration provisions included in consumer agreements, such as the one at issue in Kanitz, will no longer bind the consumer with the new legislation. While the issue has yet to be tested before a court, it appears that the new restriction on mandatory arbitration clauses is intended to apply to agreements concluded both before and after the new Act comes into force.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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