On September 19 2014 the Supreme Court of Canada rendered its long-awaited judgment in Marcotte v Bank of Montreal, and clarified the constitutional principles governing the application of provincial consumer protection laws to federally regulated businesses and activities.(1) Given the proliferation of provincial consumer protection legislation, federally regulated businesses will have to pay close attention to this judgment when organising their contractual relations with Canadian consumers. In addition, the court dealt with a number of other issues relating to standing in class actions and consumer protection that are not addressed in this update.
At issue in Marcotte was whether the requirements of Quebec's Consumer Protection Act regarding the rules on disclosure and calculation of consumer borrowing costs apply to foreign exchange conversion fees on transactions charged to credit cards issued by the defendant banks. The matter arose as a result of a class action brought on behalf of Quebec consumers who had paid such conversion fees.
Specifically, the court was required to determine whether Sections 12 and 272 of the act apply to federally regulated banks. Section 12 requires that all contractual charges be precisely indicated in consumer contracts. Section 272 provides for a number of consumer remedies – including punitive damages – for breach of the merchant's obligations under the act. In unanimous reasons written by Justices Rothstein and Wagner, the court held that both provisions validly apply to banks.
Two constitutional arguments were addressed in the court's reasons for judgment:
- Sections 12 and 272 of the Consumer Protection Act were constitutionally inapplicable to banks pursuant to the doctrine of inter-jurisdictional immunity; and
- These provisions were incompatible with the federal legislative scheme governing banking and constitutionally inoperable under the federal paramountcy doctrine.
With respect to inter-jurisdictional immunity, the court confirmed that this doctrine ought generally to be limited to situations covered by precedent. The court held that the doctrine does not preclude application of Sections 12 and 272 of the act, as these provisions cannot be said to impair any activities that are vital or essential to banking. According to the court, the provisions require that conversion fees be disclosed to consumers, but cannot be said to prevent banks from lending money or converting currency.
The court also rejected the argument based on federal paramountcy. The court held that Sections 12 and 272 of the act articulate norms analogous to the basic substantive rules of contract law found in Quebec's Civil Code. As a result, these provisions cannot be said to frustrate the federal purpose that banking be governed by exclusive national standards. However, the court did leave open the possibility that a difference in substantive rules between the Consumer Protection Act and the federal regulatory regime could give rise to application of the paramountcy doctrine.
In addition to the constitutional issues, the court's reasons address a number of other matters relating to class actions and Quebec's Consumer Protection Act. Of particular significance is the court's interpretation of the notion of 'credit charges' in the act. In this respect, the court held that conversion fees constitute net capital – effectively forming part of the loan extended to the consumer – rather than a credit charge.
The court noted that treating conversion fees as credit charges would give rise to numerous practical and conceptual problems. Under the Consumer Protection Act, credit charges must be disclosed separately, included in the disclosed credit rate and subject to a 21-day grace period. The court found that including conversion fees within the notion of credit charges would not benefit consumers, as it would result either in confusing credit rate disclosure or increased costs for all cardholders, including those not using currency conversion services. In short, the court eschewed a purely literal reading of the Consumer Protection Act in favour of a purposive construction that looked to the consequences of its interpretation on Quebec consumers generally.
The court's conclusion that conversion fees do not constitute credit charges resulted in the class action being dismissed against those banks that had included disclosure of such fees in their credit card agreements. With respect to those banks that had failed to disclose the fees, the court held that they had breached Section 12 of the Consumer Protection Act and, as a result, were liable for reimbursement and punitive damages under Section 272.
In light of the Marcotte decision, federally regulated undertakings – including financial institutions – cannot assume that their activities are exempt from all provincial and territorial consumer protection legislation. That said, the court's reasons on the constitutional issues of inter-jurisdictional immunity and federal paramountcy do not break new ground and are consistent with the recent trend of encouraging cooperative federalism.
Finally, the clarity brought by the court to notion of 'credit charges' under the Consumer Protection Act is welcome, as it endorses an approach that is both consistent with economic reality and actually beneficial to consumers.
For further information on this topic please contact Dominic Dupoy or Andres C Garin at Norton Rose Fulbright Canada LLP by telephone (+1 514 847 4747), fax (+1 514 286 5474) or email (firstname.lastname@example.org or email@example.com).
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