Canada: Recent Developments in Class Proceedings: the (Un)Enforceability of Mandatory Arbitration Clauses

Last Updated: August 31 2005

Article by David Neave & Jennifer Spencer, ©2005 Blake, Cassels & Graydon LLP

Introduction

In response to the proliferation of consumer class actions, many companies in the service industry incorporate mandatory arbitration clauses into consumer contracts so to preclude any court action, including class proceedings. However, a trend appears to be emerging in the law which favours class proceedings over arbitration. Recent authority from the British Columbia Court of Appeal allowed a class proceedings certification hearing to proceed in the face of a mandatory arbitration clause, noting that an application to stay proceedings in favour of arbitration was premature until there is a finding that a class proceeding was not the preferable procedure. Further, pending legislation in Ontario renders "inoperative" and unenforceable a mandatory arbitration clause in a consumer contract-which itself is not unconscionable or otherwise void-simply by a consumer commencing a proposed class action with respect to any dispute arising under the contract.

The British Columbia and Ontario approaches run counter to American jurisprudence which supports the enforcement of mandatory arbitration provisions in consumer agreements notwithstanding that they may effectively bar determination by way of class action or class arbitration. With consumer contracts on both sides of the border increasingly including mandatory arbitration clauses, this divergence in the jurisprudence is somewhat troubling, particularly for clients whose business straddles multiple jurisdictions

Mandatory Arbitration vs. class proceedings: the Trend

Ontario: Mandatory Arbitration Clauses and Unconscionability

In Ontario, the courts considered the enforceability of mandatory arbitration clauses in the context of proposed class proceedings in the two cases: Huras v. Primerica Financial Services Inc. and in Kanitz v. Rogers Cable Inc.

In Huras, the issue of whether an arbitration clause in a standard form employment contract was unconscionable and ought to give way in favour of a proposed class proceeding was considered. Mr. Justice Cumming held that the temporal operation of the arbitration clause did not extend to the relationship between the parties during the pre-employment training period. As a result, the defendant employer was not entitled to a stay of the proposed class proceeding in accordance with the Ontario Arbitration Act.

In Kanitz, a proposed class action advanced in response to service disruptions with Rogers Cable Inc. high-speed internet service, the Court concluded that the mandatory arbitration clause was not invalid under the Ontario Arbitration Act, and the Court stayed the action under s.7(1) of the Ontario Arbitration Act. The Court held that the arbitration clause was not void for unconscionability on the basis it was not "sufficiently divergent from community standards of commercial morality." Further, the Court observed that class proceeding legislation confers procedural and not substantive rights. The parties still have recourse to a dispute resolution mechanism albeit in the form (and forum) set out in their contractual relationship. Further, the contract provisions for dispute resolution may allow the consolidation of like disputes into a class arbitration.

In 2002, the Ontario Legislature enacted certain amendments to the Consumer Protection Act which, if proclaimed, will favour class proceedings over arbitration and will render the Kanitz decision of no precedential value in Ontario. The amendments authorize a consumer to commence a class proceeding arising out of a consumer transaction notwithstanding a term in an agreement precluding such proceedings.

The American Experience

In the recent (June 2003) U.S. Supreme Court decision in Green Tree Financial Corp. v. Bazzle, the Court confirmed its strong support for enforceability of arbitration clauses. In this case, at issue were the mandatory arbitration agreements that two groups of plaintiffs executed with respect to certain home loans with Green Tree Financial Corp. The arbitration clause was silent with respect to whether the dispute could be resolved by class arbitration. Both groups of plaintiffs sought class certification; Green Tree Financial sought an order to stay court proceedings and compel arbitration instead. In both cases, the South Carolina Court certified a class and sent both disputes to arbitration. Multi-million dollar awards were rendered.

Significantly, the U.S. Supreme Court did not comment upon the enforceability of no-class action arbitration provisions in the consumer context per se. Rather, the majority of the Court held that the question of whether an arbitration clause (which is silent with respect to class arbitration) is operative in the face of class claims is a question of contract interpretation and arbitration procedure. It is a matter, the majority determined, for the arbitrator to determine.

British Columbia: Arbitration Clauses may be "Inoperative" in the face of Class Proceedings

In British Columbia, the enforcement of a mandatory arbitration clause in a class proceeding was recently considered by the Court of Appeal in MacKinnon v. Instaloans Financial Solution Centres (Kelowna) Ltd.

The MacKinnon case places in sharp relief the operational conflict between the Commercial Arbitration Act and the Class Proceedings Act in British Columbia. On the one hand, the Commercial Arbitration Act requires the Court, on application by a party to an arbitration agreement, to stay related legal proceedings unless the Court determines that the arbitration agreement is "void, inoperative, or incapable of being performed." In contrast, the Class Proceedings Act requires the Court to certify a proceeding as a class proceeding where the requirements for certification are met.

In the MacKinnon case, the plaintiff seeks to certify, on behalf of British Columbia residents, a class proceeding against 28 corporate defendants each of which the plaintiff asserts was engaged in the pay day loans business. The statement of claim asserts that the defendants unlawfully breached the usury (criminal interest rate) provisions in the Criminal Code, that each of the defendants was unjustly enriched, and that the making of such loans constitutes an "unconscionable practice" under the BC Trade Practices Act.

At the commencement of the MacKinnon action certain defendants who had mandatory arbitration clauses in their respective loan contracts brought an application for a stay of proceedings under the BC Commercial Arbitration Act. The Chambers Judge Brown J. dismissed the defendants’ stay applications concluding "in the face of a class proceeding, the arbitration agreement is inoperative."

At the subsequent appeal, Madam Justice Levine (writing for a panel of five) was in "general agreement" with the reasoning of the Court below. Her Ladyship concluded, however, that any order to stay the proceedings was premature: it is only after the Court determines whether a class proceeding will be certified that the arbitration clause becomes inoperative.

Following the analysis in MacKinnon, it is only when the Court has completed its analysis of the certification application and determines it must certify the proceedings as a class proceeding that the Court can conclude the arbitration clause is inoperative. Accordingly, the applications for a stay and for certification of the class proceedings are interdependent and must be considered at the same time. In this way, the MacKinnon decision contrasts with those in both Ontario decisions-Huras and Kanitz.

The holding in MacKinnon is significant in a number of respects. The decision may be applicable to a broad range of consumer and commercial agreements that contain mandatory arbitration agreements. Further, while the BC arbitration legislation contemplates a stay of legal proceedings unless the arbitration agreement is void, inoperative or incapable of being performed, the Court appears to prioritize a statutory procedural preference couched in public policy considerations over substantive contractual analysis.

Implicit in the MacKinnon and Huras cases is the view from the Bench that arbitration cannot be used to efficiently and cost-effectively resolve consumer disputes. However, arbitration is widely regarded to offer a number of advantages to litigation, including both time and costs savings. Further, provincial arbitration acts provide arbitrators with substantial authority for the efficient and effective resolution of disputes. Arbitrators also have the discretion to award a successful party its actual costs for legal fees and disbursements, including expert fees, thereby providing full indemnity for a meritorious claim. As Mr. Justice Nordheimer held in Kanitz, there is an advantage to the plaintiff bringing a meritorious claim in arbitration proceedings and there is no reason—despite the Court’s concern in MacKinnon and other cases-to shield consumers from cost consequences if it is found they have advanced unmeritorious claims. Further, the economies of scale that result from consolidating claims may well be available in arbitration.

Conclusion

It is troubling that a trend appears to be developing in Canada which sees otherwise valid contract terms setting out alternative dispute resolution methods set aside for policy reasons favouring class proceedings. The result is not a development which favours a just, inexpensive, and speedy resolution to consumer disputes, particularly disputes that typically involve modest sums of money. A consequence of this trend may very well see British Columbia as the forum of choice for plaintiffs who seek both the sword of class proceedings and a shield of the no costs recovery rule under BC Class Proceedings Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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