Originally published in Blakes Bulletin on Class Actions, June 2007
Credit card interest and freedom of contract recently came under scrutiny in a proposed class action, which was dismissed following a decision from the B.C. Court of Appeal.
In Dahl v. Royal Bank of Canada et al., Ms. Dahl claimed that interest charges incurred by holders of credit cards issued by the Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Montreal (the Banks) violated the Bank Act and provincial consumer protection legislation.
Each of the Banks has a cardholder agreement by which the cardholder agrees, as a term of the use of the card, that interest may be charged in respect of purchases made by the cardholder through the use of the card. The cardholder agreements provide that, if the cardholder does not pay the full monthly account when due, interest is charged in respect of purchases from the transaction date.
Ms. Dahl claimed that these interest charges are not properly disclosed as "interest" pursuant to the Bank Act (Canada), the Consumer Protection Act (B.C.) and the Trade Practice Act (B.C.), in those instances where the bank pays the merchant after the transaction date. Ms. Dahl contended that charges between the transaction date and the date the bank advances funds to pay the merchant cannot properly be characterized as interest at law.
On a summary trial application by the Banks prior to certification, the British Columbia Supreme Court dismissed Ms. Dahl’s claim, apart from two individual claims under the Trade Practice Act. Ms. Dahl’s appeal to the British Columbia Court of Appeal was also dismissed.
The Court of Appeal reasoned that, pursuant to the Banks’ cardholder agreements, cardholders agree as a term of using the credit card to pay interest from the transaction date. The Court went on to hold that the cardholder agreements provide that a debt from the cardholder to the bank arises immediately upon the cardholder's use of the card on the transaction date. Credit is thus extended by the bank to the cardholder on that date, because the cardholder, by the use of the card as payment, retains her own funds. Interest may be charged on credit advanced.
The Court of Appeal also held that agreements between the Banks and other parties to credit card transactions, such as merchants, have no bearing on the obligation of cardholders to pay interest to the Banks in the circumstances defined in the cardholder agreements. Applying the principle of privity of contract, the Court concluded that only the cardholder agreement determines a cardholder’s obligations to the Bank.
Finally, Ms. Dahl argued that this matter should not have been dealt with by summary trial in advance of a certification hearing. The Court disagreed, holding that the issue in the case was a simple matter of contract interpretation. Where there is a discrete legal issue capable of summary determination, it saves all parties and the court enormous time and expense to determine it before certification.
Following the decision of the Court of Appeal, Ms. Dahl consented to an order dismissing her proposed class proceeding entirely.
The importance of this case is two-fold. First, the decision of the Court of Appeal, in combination with an earlier decision from the same court in these proceedings, presents the most authoritative analysis by a Canadian appellate court of the legal operation of credit card schemes in Canada. Prior to these proceedings, few courts had explored in any detail the nature of the contractual relationship between the cardholder and the bank (along with the related, but independent, relationships between the bank and the merchant, and between the merchant and the cardholder, in respect of each transaction).
Second, the Court of Appeal decision gives appellate support to a growing trend in British Columbia, whereby the legal merits of proposed class proceedings are considered before the certification hearing. A certification hearing requires significant investments of time and resources by the court and all parties, none of which are recoverable under B.C. class proceedings legislation, regardless of the end result. By subjecting the central legal basis of a claim to judicial analysis in advance of certification, unmeritorious claims can be dispensed with at significantly less cost.
The Court’s decision in this regard will be welcome to defendants facing proposed class proceedings of questionable legal merit. It may also help to deter speculative class proceedings commenced with a view to achieving certification and leveraging it to obtain settlement from the defendant.
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