Canada: "Smith Estate V. National Money Mart Co": What You Need To Know About The Conflict Between Arbitration And Class Proceedings Statutes In Ontario

The following recent Ontario Court of Appeal decision will be of interest to financial services industry participants who have been tracking class action trends in the financial services sector. The decision addresses the trend in the context of arbitration clauses.

Smith Estate v. National Money Mart is a class action where the plaintiff class asserts that Money Mart was charging illegal rates of interest on payday loans.1 The contracts contained an arbitration clause, which, if upheld, would have denied the plaintiffs an opportunity to bring a class action against the company. Prior to the class certification motion, the defendants brought a motion for a stay of proceedings and to have the claims referred to arbitration. This motion was denied. On appeal, Justice Weiler held that the question whether or not an arbitration clause is to be enforced should be considered as part of the preferable procedure analysis on a motion for class certification. Ultimately, the action against Money Mart was certified as a class proceeding.

After the Supreme Court of Canada's decisions in Union des consommateurs v. Dell Computer Corp. ("Dell") and Muroff v. Rogers Wireless Inc. ("Rogers"), the defendants moved a second time for a stay of proceedings. It was argued that the law in Ontario had been overturned and that class proceedings must be set aside when there is a binding arbitration agreement.2

In the second stay of proceedings motion, the court addressed three questions pertaining to consumer protection, arbitration and class proceedings legislation in Ontario.

  1. What is the relationship between the Class Proceedings Act, 1992, which compels a court to certify an action as a class proceeding when the criteria for certification have been satisfied, and the Arbitration Act, 1991, which compels a court to stay proceedings when the parties have agreed to submit their dispute to arbitration?
  2. Do sections 7 and 8 of the Consumer Protection Act, 2002, which preclude contracting out of class proceedings, apply retroactively?
  3. What is the significance to the law of Ontario and other common law provinces of the Supreme Court of Canada's decisions in Dell and Rogers?

Retroactive Application of Sections 7 and 8 of the Consumer Protection Act, 2002

Sections 7 and 8 of the Consumer Protection Act, 2002 permit consumers to participate in a class action, even if the contract at issue contains an arbitration clause. Money Mart argued that these provisions did not apply retroactively. And, as a result, its clients who had signed contracts prior to the provisions coming into force were bound by the arbitration agreement and could not join the class action.

Justice Perell approached the problem as a matter of statutory interpretation. He found that these provisions were enacted in reaction to the decision in Kanitz v. Rogers Cable Inc. ("Kanitz"), where the court stayed a class proceeding because the consumer contract contained an arbitration agreement.3

In my opinion, these sections were passed to address the mischief that some ...suppliers of goods and services were using the device of an arbitration agreement not because they genuinely wished to have an alternative to court proceedings to resolve disputes but rather to immunize themselves from the seat of justice altogether... The obvious purpose of s. 7 and s. 8 of the Consumer Protection Act, 2002 was to stop this mischief, but this mischief is not stopped if the legislation is not applied retroactively.4

From a practical point of view, applying the provisions retroactively avoided the potentially unfair and difficult task of partitioning the claims. Sections 7 and 8 were held to apply retroactively, "even if this would take away the substantive contractual right to arbitrate and even if an arbitration was actually underway".5

Resolving the Conflict Between Class Proceedings and Arbitration Legislation

The courts of Ontario and British Columbia have recognized that there is a conflict between class proceedings and arbitration legislation.6 The conflict arises where class proceedings legislation dictates that the court shall certify a class when the applicable criteria are satisfied, and simultaneously the arbitration legislation instructs courts to stay the action because there is an arbitration agreement between the parties. It is worth noting that the legislature has expressly excluded arbitration as a means of dispute resolution in nineteen Ontario statutes. The Class Proceedings Act does not contain such an express exclusion.

In rejecting the defendants' first motion to stay, the Ontario Court of Appeal adopted the approach used by the British Columbia Court of Appeal in MacKinnon. Under this approach, the validity of an arbitration agreement is to be determined at the preferable procedure stage of the certification motion and no stay should be granted prior to that. Justice Perell wrote of the earlier decisions: arbitration agreement that had the effect of absolutely blocking an action that satisfied the criteria for a class proceedings and thus the social purposes of access to justice, judicial economy, and behaviour modification was "inoperative" in British Columbia or "invalid" in Ontario and thus within an exemption to the stay mandated by the arbitration statute.7

This means that, as a matter of statutory interpretation, an arbitration clause is considered "invalid" under section 7(2) of Ontario's Arbitration Act, 1991, if an action pertaining to the same dispute has been certified as a class proceeding.

Although Justice Perell adopted this interpretation, it should not be taken as a rule that arbitration agreements are to be automatically struck down. A court may decide that arbitration is preferable to class proceeding or may refuse to certify the class proceeding for other reasons.8

The Effect of Supreme Court of Canada's Decisions in Dell and Rogers on the Law of Ontario

In Dell, the Supreme Court upheld an arbitration clause in a consumer contract and dismissed the authorization for a class action. Money Mart submitted that Dell and its companion case Rogers had overturned the law in Ontario as applied by Justice Weiler. Specifically, it was argued that if there is a binding arbitration agreement, then the court's subject matter jurisdiction is ousted.

In reaching his decision, Justice Perell found that statutory or court intervention is required to remove a court's jurisdiction, not merely an arbitration agreement.

Private citizens can neither confer or take away the court's jurisdiction, and under the Canadian Constitution, there is a "core jurisdiction" that cannot even be removed by Parliament or the legislatures without amending the Constitution... When a court stays an action to permit arbitration, it is not because it has no power to speak the law, but rather, the action is stayed because a statute or the court's own power directs it to defer to another means of dispute resolution selected by the parties.9

The court also rejected the proposition that the Dell and Rogers decisions changed the law in Ontario that a court can determine whether or not to stay an action at the preferable procedure analysis. The interpretation of the Civil Code of Quebec - which uses much different language than its Ontario counterparts - was the main focus of Dell and Rogers. As such, Justice Perell concluded that these decisions cannot be used to interpret s. 7 of the Arbitration Act, 1991 or to reconcile the tension between arbitration and class proceedings legislation in Ontario.

Appeal of Justice Perell's Decision Dismissed by the Ontario Court of Appeal

On appeal, Money Mart unsuccessfully sought to have Justice Perell's decision set aside and have the class action stayed and decertified. The Ontario Court of Appeal declined to rule on whether Dell or Rogers had changed the law in Ontario, or on whether s. 7 and s. 8 Consumer Protection Act, 2002 have retroactive effect. Instead, the court based its decision on the doctrine of issue estoppel.

All three preconditions for issue estoppel were found to be present. First, in its 2005 decision, the Ontario Court of Appeal had already ruled that Money Mart was not entitled to stay. Second, the 2005 decision was final and leave for appeal to the Supreme Court of Canada had been denied. Third, the parties were same as those in the 2005 decision.

Finally, with the three preconditions having been met, the court also determined that it ought to exercise its discretion and apply the doctrine of issue estoppel. In reaching this decision, it was noted that the matter had advanced to the point of trial after years of motions and several appeals including two applications for leave to appeal to the Supreme Court of Canada. Moreover, Money Mart would not agree to waive its right to object to a joinder or consolidated arbitration. Given the small size of each individual claim, the court commented: "a stay would defeat the claims subject to arbitration clauses, not on the merits but for reasons of practicality."10


1 See Smith v. National Money Mart Co., [2005] O.J. No. 2660 (Ont. S.C.J.), appeal quashed (Ont. C.A.), leave to appeal to S.C.C. refused, (2006) (S.C.C.); 2008 CanLII 27479 (Ont. S.C.J.), appeal quashed [2008] O.J. No. 4327 (Ont. C.A.) ["Smith Estate"]. For a similar decision in British Columbia, see MacKinnon v. National Money Mart Co. (2004), 50 B.L.R. (3d) 291 (B.C.C.A.) ["MacKinnon"].

2 See Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801 ["Dell"] and Rogers Wireless Inc. v. Muroff, [2007] 2 S.C.R. 921 ["Rogers"].

3 Kanitz v. Rogers Cable Inc .(2002), 58 O.R. (3d) 299 (Ont. S.C.J.) ["Kanitz"].

4 Smith Estate, supra note 1 at para. 118.

5 Ibid. at para. 101.


7 Smith Estate, supra note 1 at para. 208.

8 Smith Estate, supra note 1 at para. 209.

9 Smith Estate, supra note 1 at para. 213 and 215.

10 Smith Estate, supra note 1 at para. 50 (Ont. C.A., 2008).

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