The limited Canadian case law dealing with the enforceability of mandatory arbitration clauses in consumer contracts has been inconsistent, with courts in Ontario, British Columbia and Québec reaching somewhat different conclusions. For potential litigants, these decisions created a state of uncertainty regarding what recourses could be available if a dispute arises from a consumer contract that contains an arbitration clause. One of the chief recourses is a class proceeding.

This uncertainty was addressed by the Supreme Court of Canada on Friday, July 13, 2007 which was an unlucky day for the plaintiffs in two Québec class actions: Dell Computer Corp. v. Union des consommateurs, and Rogers Wireless Inc. v. Muroff. It may also turn out to have been a red letter day for some class action defendants in Canada.

On that day, the Supreme Court of Canada held that Québec courts must stay a class action if the plaintiff’s claim is subject to an arbitration clause that is included in an agreement. The court affirmed that, in general, arbitration clauses cannot be circumvented by bringing an action in the form of a class action.

While the judgment was based on Québec law, the principles adopted by the Supreme Court of Canada should be equally applicable to class actions in all provinces with class action legislation as well as to class actions in the Federal Court. In each of these jurisdictions, there is legislation that, with very limited exceptions, requires a court to grant a stay of an action if the claim is subject to an arbitration clause and the defendant promptly requests that the action be stayed in favour of arbitration.

There are a number of non-Québec decisions that were rendered before the Supreme Court of Canada’s decisions in Dell and Rogers in which courts held in effect that a class action trumped an arbitration clause. On the basis of Dell and Rogers, these cases now appear to have been wrongly decided.

However, it is important to note that before Dell and Rogers were decided, two provinces — Ontario and Québec — opted to settle the arbitration clause — class action issue through legislation. Both prohibit or invalidate predispute arbitration clauses that prevent consumers from seeking recourse before the ordinary courts.

In Québec, the legislature adopted Bill 48, which effectively reverses both the Court of Appeal and the Supreme Court of Canada in Dell on the issue of pre-dispute arbitration clauses. The bill, which amended Québec’s Consumer Protection Act, came into force on December 14, 2006. As a result of the amendments, no pre-dispute arbitration clause agreed to after that date will be upheld if it prohibits a class action or otherwise waives or restricts the consumer’s right to go to court. Since these provisions were adopted after the commencement of the class action claims in Dell and Rogers, the court held that the legislative provisions did not apply in those cases.

Similarly, the Ontario legislature amended that province’s Consumer Protection Act to invalidate pre-dispute arbitration clauses that preclude consumers from pursuing remedies before the courts. The new provisions also specifically overrule contractual provisions, entered into after the amendments were passed, if they prevent consumers from starting or participating in a class action. These rules came into force in July 2005.

In other jurisdictions, an arbitration clause, even in a consumer contract, should enable a class action defendant to have a class action stayed if it is brought in violation of an arbitration clause.

McCarthy Tétrault Notes:

For merchants, knowing that contractual disputes will follow a uniform arbitration process has many advantages, such as reduced jurisdictional uncertainties, reduced litigation costs, and resolution of disagreements through an impartial adjudicator instead of in the media. The Dell and Rogers cases have brought significant certainty to this area.

The result of the Ontario and Québec legislation is to deny those advantages, in most circumstances, to sellers who enter into contracts with consumers in those two jurisdictions. In Québec, some industries are exempted from these rules — notably those in the insurance, gas and electricity, funeral, tradable securities and real estate sectors. These industries are instead regulated by sector-specific rules. In addition, the legislation in both jurisdictions expressly permits the parties to pursue arbitration if the agreement to do so is concluded after the dispute arises.

Businesses that sell or otherwise make goods or services available to customers in Ontario and Québec should review their standard customer agreements to ensure they are not relying on the ability to oust courts in favour of arbitration when a customer dispute arises.