Introduction
Recent authority in both Ontario and British Columbia has considered the enforceability of arbitration agreements to forestall intended class proceedings. In each of Huras v. Primerica Financial Services Ltd. (2000), 13 C.P.C. (5th) 114 (Ont. S.C.J.), aff'd (2001), 148 O.A.C. 396, Kanitz v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299 (S.C.J.) and MacKinnon v. National Money Mart Co., 2004 BCSC 136, appeal allowed 2004 BCCA 473, 203 B.C.A.C. 103, a party to an arbitration agreement commenced a proposed class action in provincial superior court. In each case a defendant to the action sought a stay of the proceeding in reliance on the provisions of the applicable provincial domestic arbitration statute. Despite these similarities, the cases differ in their approach to the policy issues engaged. This article will outline the underlying policy context, and then summarize the approach of the three decisions. Finally, it will make some general observations in relation to this issue and the implications raised for parties who seek to have their disputes resolved by arbitration, rather than through the courts.
Policy Context
The issue described above involves the interplay between two legislative regimes (respecting arbitration and class proceedings), which both involve the resolution of disputes through alternative mechanisms to the traditional trial model. As such, it should not be surprising that to some extent the legislation reflects similar public policy goals. These goals include the expeditious resolution of disputes and the saving of cost to the parties. Arbitral proceedings allow the parties to shape the process in respect of such important matters as the extent of discovery (both documentary and oral) and the time within which the issue will be resolved. Class proceedings legislation provides for the aggregation of individual actions in one proceeding to resolve "common issues". Class proceedings are thereby intended to promote access to justice for small claims which otherwise could not be economically advanced through the judicial system. As shall be seen below, a comparison of the anticipated efficacy of the two processes in accomplishing the objectives expressed above plays a significant part in the reasoning of the judgment of the courts in Huras and MacKinnon.
In addition to the above, arbitration and class proceedings are supported by other, though differing, policies. Arbitration is said to promote certainty and predictability in commercial relations. Class proceedings are also intended to serve the purpose of deterring wrongful conduct (including wrongful commercial conduct) by facilitating access to justice.
There are also other substantive differences between arbitration and class proceedings. Fundamentally, arbitration is consensual. While historically, the common law showed some hostility to arbitral agreements, modern legislation and common law strongly encourage the resolution of disputes through arbitration. In this regard, Campbell J. stated in Boart Sweden AB v. NYA Stromnes AB (1988), 41 B.L.R. 295 (Ont. H.C.) that "the very strong public policy of this jurisdiction [is] that where parties have agreed by contract that they will have the arbitrators decide their claims, instead of resorting to the Courts, the parties should be held to their contract…." Boart was subsequently referred to with approval in this regard in Sandbar Construction Limited v. Pacific Parkland Properties Inc. (1992), 50 C.L.R. 74 (B.C.S.C.) and by the Ontario Court of Appeal in Automatic Systems Inc. v. Bracknell Corporation (1994), 18 O.R. (3d) 257. Enforcement of arbitration agreements is enforcement of the substantive contractual rights of the parties.
Class actions are not based on the agreement of the parties. Instead, class actions are the creature of legislation of relatively recent vintage (the Ontario statute was passed in 1992 and the British Columbia statute in 1995). In contrast to arbitral proceedings, class proceedings are not an alternative to the court system, but rather are an alternative procedure within the system. It has been repeatedly stated by the Courts that class proceeding statutes are procedural. While a consideration of the treatment that the class proceeding statutes have received by the Courts is beyond the scope of this article, it is fair to state that many decisions have reflected a keen sense of the policy issues underlying the legislation when considering whether a particular proceeding meets the necessary criteria to certify a proceeding as a class action.
In broad terms, then, while arbitration and class proceedings, as alternatives to the traditional trial process, can be said to respond to some of the same policy issues, they have important substantive and procedural differences. One is a substantive contractual agreement providing an alternative dispute resolution procedure. The other is a procedural statute that is said not to affect substantive rights. When they present as alternatives to each other, as opposed to each being alternative to the trial process, how is a choice to be made between them?
Case law
Huras v. Primerica Financial Services Ltd.
Huras (like Kanitz and MacKinnon) involves an application by a defendant to stay a proposed class proceeding on the basis that there was a valid arbitration clause in effect between the parties. In Huras, the application was made pursuant to s. 7(1) of the Arbitration Act, 1991, S.O. 1991, c. 17, which reads as follows:
If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.
In Huras, the plaintiff had entered into the defendant's program for the training of sales representatives for its life insurance and related financial products. The plaintiff was not compensated during the mandatory training period. Subsequent to the training period, the parties entered into an agreement which contained an arbitration clause. The proposed class action was brought on behalf of all trainees for a defined period and sought damages for failure to pay a minimum wage as allegedly required by s. 23 of the Employment Standards Act, R.S.O. 1990, c. E.14.
The Court found that there were two distinct relationships between the parties, one related to the training period and the second to the later role as sales representative. The contract, including the arbitration clause, governed only the second relationship. As a matter of construction the Court found that the arbitration agreement had no application to the relationship during the training period. Therefore, there was no basis for a stay.
The Court went on to consider two additional issues argued by the parties: whether the arbitration clause was inconsistent with the Employment Standards Act and thereby contrary to public policy and whether the arbitration agreement was unconscionable. While the reasoning of Cumming J. concerning these issues is obiter dicta, it is summarized below in relation to the issues presently under consideration.
The Court found that the Employment Standards Act provides both for a minimum wage and that an attempt to contract out of the standards mandated by the legislation is null and void. The Act further provides two procedures for an employee to pursue a claim to wages pursuant to its provisions. The first is the filing of a complaint for investigation by an employment standards officer, who may issue an order against the employer for the claimed wages that, subject to review by an independent referee, is binding. The second is by action for the claimed wages.
The Court held that the right to make a complaint to an investigating officer was "predicated upon the policy of protecting workers with limited means and bargaining power from being taken advantage of unfairly" and that "the arbitration clause in question, if it were to be enforced as against a complaint brought under the ESA, would defeat the public policy underlying the ESA." Accordingly (and while the Court recognized that its reasoning on the point was not only obiter dicta, but also that the issue was moot as time-barred), Cumming J. opined that the arbitration clause would be contrary to public policy and unenforceable to prevent an Employment Standards Act complaint from proceeding. The provision of the statute prohibiting contracting out of its employment standards implicitly included the remedy provisions that enable enforcement of its terms.
In reaching its conclusion that the clause was unconscionable, the Court again referenced policy considerations. It stated that it was required to balance the principle of freedom of contract, fundamental to market relations, with the competing value to protect the weak from the imposition of an unfair contract of adhesion. The Court noted that the claims at issue were for small sums of money in relation to the cost and risks inherent in the proceeding such that very few would consider going to arbitration. The Court opined that the purposes of an arbitration clause to expedite resolution and save cost were not advanced but frustrated by the clause in question.
Finally, Cumming J. went on to conclude that the policy objectives of the Class Proceedings Act, 1992, S.O. 1992, c. 6 would also be defeated if the arbitration agreement were enforceable. While the Court declined to decide whether the frustration of the purposes of the Class Proceedings Act would itself be a sufficient basis to find the clause unconscionable, it was considered to be one relevant factor.
On appeal, the decision of Cumming J. was upheld on the basis that as a matter of interpretation the arbitration clause did not apply to the claim. Given the balance of the reasons of the Court below were obiter dicta, the Court of Appeal declined to review them.
Kanitz v. Rogers Cable Inc.
In Kanitz, the plaintiffs were former subscribers to the defendant's high-speed internet access service. The user agreement between the defendant and subscribers provided that the defendant could amend the agreement by posting notice of such changes on its website, and that continued use of the service by the subscriber following notice constituted agreement to the amendments. The defendant amended the user agreement to add an arbitration clause, which provides not only for arbitration but also that the subscriber waived any right to commence or participate in any class action against the defendant. In reliance on the arbitration clause, the defendant sought to stay the proposed class action pursuant to s. 7(1) of the Arbitration Act, 1991.
Nordheimer J. first rejected the plaintiffs' various arguments to the effect that in the circumstances there was no agreement to arbitrate between the parties. The Court held that the consequence of that finding is that there is a mandatory stay of any action by virtue of s. 7(1) of the Arbitration Act, 1991 subject to the exceptions set out in s. 7(2). Section 7(2) provides that the Court may refuse to stay the proceedings in a number of circumstances including if the arbitration agreement is invalid (s. 7(2)(2)).
The plaintiffs argued that the arbitration agreement was unconscionable and therefore invalid within the meaning of s. 7(2)(2). At the outset, Nordheimer J. adopted the observation of Hart J. in G. v. G., [2000] 7 W.W.R. 363 (Alta. Q.B.) to the effect that if intervention were warranted upon the mere suggestion that an arbitration contact is invalid, it would effectively negate the legislative intent to promote arbitral autonomy.
In considering whether the arbitration agreement was unconscionable, the Court distinguished exemption clauses that serve to limit the liability of one contracting party from arbitration clauses that simply require that the parties seek their relief in a different forum. Exemption clauses are substantive in nature whereas arbitration clauses are merely procedural. Huras was distinguished on the basis that the defendant was attempting to rely on a term in an employment agreement to deny the plaintiff the rights accorded to him by the Employment Standards Act. In a footnote, the Court noted that the discussion of unconscionability in Huras was obiter dictum that the Court of Appeal expressly declined to review. Nordheimer J. rejected the argument that the defendant had adopted the arbitration clause in order to preclude customers from pursuing relief for service disruptions and stated that there was no evidence to support the contention that no customer would arbitrate such claims because of the costs involved. Speculation that the cost would be prohibitive did not justify the invalidation of the arbitration agreement, particularly given the arbitrator's discretion under the Arbitration Act, 1991 to award costs.
In response to the argument that it would be unfair for class members to be deprived of the protection against costs consequences provided by the Class Proceedings Act, the Court noted that costs consequences were otherwise an ordinary feature of the legal system such that unconscionability could not be said to arise from exposure to the risks of an adverse award. The Court also found the inclusion of a "no class action clause" to be of no assistance to the plaintiffs as it was largely superfluous given the inclusion of an arbitration clause which by itself would have the effect of precluding a class action.
Finally, the plaintiffs argued that frustration of the public policy underlying in the Class Proceedings Act, 1992 was sufficient to make the clause unconscionable. Nordheimer J. rejected this submission firstly on the basis that the Class Proceedings Act, 1992 is procedural and cannot be given effect in a manner that derogates from the substantive rights of the parties. Secondly, the Court noted that in any event there is no basis to prefer the policy expressed in the Class Proceedings Act over that in the Arbitration Act. The Court noted that given the Class Proceedings Act was passed after the Arbitration Act, had the Court intended it to be given precedence, it easily could have so provided.
MacKinnon v. National Money Mart
In MacKinnon, the plaintiff commenced a proposed class action alleging that a number of defendant corporations made short-term loans to people in distressed circumstances at exorbitant rates of interest. The defendants with arbitration clauses in their contracts sought to have the action stayed with respect to those contracts pursuant to s. 15 of the Commercial Arbitration Act, R.S.B.C. 1996, c. 55, which states:
15 (1) If a party to an arbitration agreement commences legal proceedings…
(2)…the court must make an order staying the legal proceedings unless it
determines that the arbitration agreement is void, inoperative or incapable of being performed.
The Class Proceedings Act, R.S.B.C. 1996, c. 50 provides as follows:
4(1) The court must certify a proceeding as a class proceeding…if all of the
following requirements are met…
Brown J. considered the above provisions to be in conflict. A proceeding that meets the requirements of s. 4 of the Class Proceedings Act must be certified (Brown J. appears to have assumed those requirements would be met, although the issue was not before her). The Commercial Arbitration Act, however, requires that a proceeding be stayed if the contract contains an arbitration clause. After reviewing certain principles of interpretation and setting out policies underlying the two statutes, the Court concluded that the claims advanced (which were otherwise uneconomic to litigate) were of the precise nature contemplated by the Class Proceedings Act. Brown J. reiterated that the purposes of an arbitration provision are to expedite dispute resolution and save costs. She held that those purposes and the policy underlying the Class Proceedings Act would be frustrated if effect were given to the clause.
The Court went on to interpret the qualification within s. 15(2) that an action is to be stayed unless the arbitration agreement is "void, inoperative or incapable of being performed." Brown J. concluded that the arbitration clause was "inoperative", reasoning that as a proceeding that meets the requirements of s. 4 of the Class Proceedings Act must be certified as a class proceeding, an arbitration clause is thereby rendered inoperative. The reasoning of Nordheimer J. in Kanitz was distinguished on the basis that the language of the Ontario Arbitration Act, 1991 was said to be more restrictive than the British Columbia statute in this respect.
In the British Columbia Court of Appeal, Levine J.A., writing for the five-member panel, agreed with Brown J.'s approach to the apparent conflict between the arbitration clause and the Class Proceedings Act. She expressly agreed with the conclusion that individual arbitrations would effectively bar the resolution of the individual claims, while a class proceeding would likely allow the claimants economic access to justice. She also approved of Brown J.'s finding that s. 4 of the Class Proceedings Act would render the arbitration clause inoperative had the action been certified. As the action had not yet been certified, however, Levine J.A. allowed the appeal on the basis that the refusal to grant a stay was premature. She held that it is only when a proposed class proceeding has been certified that it can be said to be the preferable procedure, and for this reason the applications for a stay and for certification must be dealt with together.1
Discussion
As noted above, historical hostility to arbitration agreements has given way to strong public policy favouring the enforcement of such clauses. This policy holds particular sway in the international context where Courts must be mindful of the need for consistency between jurisdictions (Rio Algom Ltd. v. Sammi Steel Co. Ltd. (1991), 47 C.P.C. (2d) 251 (Ont. Gen. Div.)). In this context, parties often face competing, or conflicting, domestic laws. The imperatives of international commerce are said to support a strong deference to the arbitral arena. A uniform approach between jurisdictions is also said to foster commercial activity within each jurisdiction.
While obvious distinctions can be made between the international commercial context and domestic consumer contracts or contracts of adhesion, notably, the legislative regime applicable in British Columbia does not draw such distinctions. Indeed, the conclusion in MacKinnon that the arbitration agreement would be "inoperative" if the class proceeding is ultimately certified is difficult to reconcile with the source of that language and the broader context in which it has been used. As set out above, the Commercial Arbitration Act provides for a stay of proceedings subject only to cases of invalidity, inoperability or inapplicability. British Columbia is the only province the domestic legislation of which has adopted this formulation (though Canada has also done so). This language is found as well in the UNCITRAL Model Law on International Commercial Arbitration, which provides:
Article 8(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
The Model Law was intended as model legislation for enactment by countries seeking to establish a modern legal framework to encourage arbitration. This provision of the Model Law has been adopted in substance by the international commercial arbitration legislation of every province (other than Quebec ) and territory. In British Columbia, it is found in s. 8 of the International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 and in Ontario, the Model Law is a schedule to the International Commercial Arbitration Act, R.S.O. 1990, c. I.9. The expansive interpretation of "inoperative" so as to give effect to a procedural statute of the forum, would on its face have equal application to the commercial and international forum as the consumer and the domestic. It is not an approach that accords with the policies that underlie the legislative scheme.
Further, and in relation to the reasoning in MacKinnon, the issue is not truly one of resolving a conflict between the two statutory regimes. The issue is whether an agreement to arbitrate has been reached and, if so, whether there is a basis to set aside or disregard that agreement consistent with the applicable arbitral statute. In essence, the issue is one of jurisdiction. If the agreement is enforceable, the dispute is withdrawn from the judicial forum and its procedures, including class action procedures, are of no application except to the extent provided by the arbitration legislation.
The issue, then, is the enforceability of the arbitration agreement in light of the class action legislation and its underlying policy. An agreement can be found to be in violation of public policy either at common law or, more directly, because it is contrary to a statute through which the policy speaks. In the former case, the court may, of course, have reference to statutes that are themselves expressions of societal policy. However, the agreement is held unenforceable based on the Court's balancing of the policy issues at stake with the values underlying freedom of contract.
In this regard, while in MacKinnon it was agreed by both courts that s. 4 of the Class Proceedings Act would render the arbitration agreement inoperative (the only difference was to timing), the arbitration agreement cannot be said to have been in violation of the Class Proceedings Act. Further, use of s. 4 to render an arbitration agreement inoperative is to apply a procedural statute to alter substantive contractual rights (albeit ones which may have an essentially procedural character). In contrast, Huras, to the extent that it was concerned with denial of the substantive right and remedy under the Employment Standards Act, is an example of violation of public policy through breach of statute.
As there is no statutory violation, the issue becomes a balancing of the public policy interests at stake, including the interests underlying the Class Proceedings Act. These include, of course, access to justice, a policy discussed in all three judgments.
The context of the issue in these instances is a valid arbitral agreement, supported by the applicable arbitral legislation, being considered in light of public policy underlying a competing procedural regime that could have but did not expressly limit arbitral autonomy. In such circumstances, it is submitted that the Court should be most hesitant to interfere in the parties' bargain simply on the basis of public policy said to underlie that regime. This is not to say that, as was done in the cases under consideration, public policy arguments cannot be marshalled in aid of a finding of unconscionability. However, the basis for such a finding is carefully circumscribed based on the application of well-developed case law. For example, and while the difference in approach of Cumming J. and Nordheimer J. cannot be reconciled simply on this basis, it is notable that in Huras, in finding that the clause was unconscionable, the Court concluded that the arbitration clause prevented the resolution of the dispute on any basis other than one dictated by the defendant. Nordheimer J. in Kanitz noted the absence of evidence upon which such a finding could be made, declined to do so and found no unconscionability.
Finally, the Ontario legislature is addressing the issue by amending the Consumer Protection Act such that it will provide in s. 8(1):2
A consumer may commence a proceeding on behalf of members of a class…despite any term or acknowledgement in the consumer agreement…that purports to prevent…the consumer from commencing…a class proceeding.
This is an appropriate way for the issue to be resolved, if there is to be significant encroachment on the principle of arbitral autonomy. Arbitral legislation applies to a wide variety of contractual situations, raising different policy concerns. Indeed, and as to legislative context, British Columbia also has in place consumer protection legislation. The now-repealed Trade Practice Act3provided for forms of civil proceeding, including class actions, as well as an administrative regime to regulate wrongful conduct. These remedies are carried forward in the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2, now in force. To the extent the legislature considers it necessary, amendments to such consumer protection legislation are the best vehicle to resolve conflicts between the policies outlined above.
1 Interestingly, after Levine J.A. sent the matter back to the case management judge for reconsideration on the
certification application, Brown J. denied certification, partly on the basis that a class proceeding was not the preferable procedure as the individual issues overwhelmed the common issues: 2005 BCSC 271.
2 By proclamation, this amendment will come into force on July 30, 2005.
3 Repealed by Reg. 274/2004, Schedule 1, s. 1(g), effective July 4, 2004.
Kenneth McEwan, Q.C. •Tel: (604) 661-9356 • Fax: (604) 661-9349 •Email: kmcewan@farris.com
Farris Vaughan, Wills & Murphy LLP
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