Pre-dispute consumer arbitration clauses: denying access to justice?

• Date: 22 December 2006
• Author: Hamilton, Jonnette Watson
• Published date: 22 December 2006
• Author: Hamilton, Jonnette Watson

More and more businesses are inserting arbitration clauses into their standard form contracts with Canadian consumers. In so doing, they are denying consumers access to the courts and, in particular, access to class actions. Some businesses are strategically deploying arbitration clauses to give themselves additional advantages. As a result of these business practices, Canadian consumer arbitration law is in a state of flux. If the American experience with pre-dispute consumer arbitration clauses over the past two decades is any indication, this uncertainty in the law may continue for some time to the detriment of individual consumers.

Recent legislation in Ontario and Alberta has prohibited some types of pre-dispute consumer arbitration clauses, but the types each province has banned are different and not all problems with these clauses have been dealt with. The Courts of Appeal in British Columbia and Ontario have taken one approach to the apparent conflict between arbitration legislation and class proceedings legislation, and the Quebec Court of Appeal has taken another. Canadian arbitral organizations have yet to take advantage of the experience of their American counterparts and take action to prevent the abuse of arbitration in the consumer context.

While the courts and arbitral organizations have roles to play, the author argues that a Canada-wide, uniform amendment to provincial arbitration legislation is the best response to the problems posed by pre-dispute consumer arbitration clauses. In her opinion, such clauses should not be effective to deny consumers access to small claims courts or class proceedings or to deny consumers the mandatory legal rights granted to them in the province of their residence.

Un nombre croissant d'entreprises inserent aujourd'hui une clause d'arbitrage dans leurs contrats d'adhesion avec les consommateurs canadiens. Ce faisant, elles privent ces derniers de leur acces aux tribunaux et, en particulier, de leur acces au recours collectif. De plus, certaines entreprises font un usage strategique des clauses d'arbitrage afin de s'accorder des avantages supplementaires. Par consequent, le droit canadien de l'arbitrage des conflits relatifs a la consommation est instable. Par ailleurs, si l'on se fie a l'exemple americain des vingt dernieres annees, cette incertitude juridique pourrait se maintenir pendant quelque temps encore, au detriment des consommateurs.

En effet, meme si des lois recentes en Ontario et en Alberta ont interdit certains types de clauses compromissoires dans les contrats de consommation, les types de clauses que chaque province a bannis ne sont pas les memes, et il demeure toujours des problemes non resolus relatifs a ces clauses. De leur cote, les Cours d'appel de l'Ontario et de la Colombie-Britannique ont prefere une approche autre que celle qui a ete adoptee par la Cour d'appel du Quebec sur le conflit apparent entre la legislation sur l'arbitrage et la legislation sur le recours collectif. Quant aux organisations arbitrales canadiennes, elles n'ont pas encore profite de l'exemple des Etats-Unis pour prevenir le recours excessif a l'arbitrage dans le contexte de la consommation.

Toutefois, alors que les tribunaux et les organisations arbitrales ont un role a jouer dans la prevention des abus, l'auteure soutient que la meilleure solution aux difficultes posees par les clauses compromissoires est d'adopter un amendement, uniforme a travers le Canada, a toute la legislation provinciale sur l'arbitrage. Selon l'auteure, les clauses compromissoires ne devraient pas avoir pour effet de bloquer l'acces des consommateurs ni a la Cour des petites creances ni au recours collectif. Ces clauses ne devraient pas non plus leur enlever les droits legaux et obligatoires qui leur sont accordes dans leur province de residence.

Introduction I. Arbitration Legislation and Stay Applications II. Consumer Arbitration Cases A. Cases Applying the Stay Provisions of the Arbitration Legislation 1. Huras v. Primerica Financial Services Ltd. 2. Kanitz v. Rogers Cable Inc. B. Cases Sidestepping the Stay Provisions of Arbitration Legislation 1. MacKinnon v. National Money Mart 2. Smith v. National Money Mart 3. Dell Computer Corp. c. Union des consommateurs 4. Ayrton v. PRL Financial (Alta.) Ltd. 5. Stop n Cash 1450 v. Box C. Issues Not Addressed 1. Invalidity, Separability, and Competence-Competence 2. Costs of Arbitration 3. Privatization of Law III. Possible Responses A. Legislative Reform B. Self-Regulation by Arbitration Associations C. Judicial Responses Conclusion Introduction

Consumer arbitration has arrived in Canada. Businesses are increasingly inserting arbitration clauses into standard form contracts. In the event of a dispute, these clauses deny consumers access to the courts, including small claims courts and class proceedings. The costs of arbitrating may effectively deny consumers access to any forum at all. Some businesses abuse arbitration clauses to give themselves other unfair advantages, exacerbating the power imbalance between themselves and consumers. (1) To date, only Ontario (2) and Alberta (3) have addressed arbitration in the consumer context through legislation. Even in those provinces, the legislation renders only some consumer arbitration clauses ineffective.

Arbitration is a "private process of adjudication in which parties in dispute with each other choose decision-makers ... and the rules of procedure, evidence, and decision by which their dispute will be decided." (4) Arbitration is advertised as an inexpensive, speedy, informal, and private alternative to the judicial system. Some parties find certain aspects of the typical arbitration process disadvantageous, however, including its lack of transparency, lack of reliance on precedent, lack of a right of appeal on the merits, limits on discovery, and the cost of private judges.

Pre-dispute arbitration clauses in standard form consumer agreements have been controversial in the United States for the past two decades. (5) By the mid-1990s, they had become ubiquitous; (6) businesses providing goods and services, lending institutions, credit card companies, and health care providers had inserted them into their standard form contracts. (7) Consumer associations rallied, alleging that arbitration clauses were being used to undermine consumer protection legislation, to defeat class actions, to evade small claims, and to take advantage of a pro-business bias built into the arbitration system. (8) The secondary literature is voluminous and almost all of it is critical. (9) American courts have heard hundreds of cases in which parties have contested the enforceability of pre-dispute arbitration clauses in consumer contracts, including several cases heard by the Supreme Court. (10) Elections have even been fought on the issue. (11)

The current proliferation of pre-dispute consumer arbitration clauses in Canada is not an unexpected development. Many Canadian companies are subsidiaries of U.S.-based transnational corporations, whose usual arbitration clauses now appear in their standard form agreements with Canadian consumers. (12) However, there is probably a more specific reason for the recent appearance of consumer arbitration clauses in Canada. American commentators speculate that the growth in consumer arbitration in the 1990s was a response to the availability of civil jury trials, punitive damages, and class actions in that country. (13) Similarly, the recent growth in the number of class actions in Canada appears to have spurred the use of consumer arbitration clauses here. (14) After the Ontario Superior Court of Justice held in 2002 that an arbitration clause prevented dissatisfied subscribers from bringing a class action against Rogers Cable Inc., (15) Canadian corporate and commercial lawyers began recommending consumer arbitration clauses to their corporate clients as part of a "class action risk management strategy", (16) a type of do-it-yourself law reform. (17)

As yet, there have been only a half-dozen Canadian cases in which courts have considered whether arbitration clauses are effective to deny consumers access to the courts and the usual rights and remedies available to them in that forum. Although the number of cases is small, their profile is high. Three of the cases were heard by provincial courts of appeal, and when the corporate defendants lost at that level, all requested leave to appeal to the Supreme Court of Canada. (18) The American experience, the Supreme Court of Canada's deference to arbitration in Desputeaux v. Editions Chouette (1987) Inc., (19) and the use of arbitration clauses as corporate class action risk management strategies suggest that we will see more arbitration clauses inserted into standard form agreements with consumers in the future. The pending Supreme Court of Canada appeals may either encourage or curtail this trend.

In this article, I focus on pre-dispute agreements to arbitrate between consumers and businesses providing them with goods and services. Arbitration clauses are also rampant in the American employment, (20) franchise, (21) and securities (22) contexts. While many issues in these contexts are similar to those in the consumer area, the statutory law governing them is different and they therefore deserve their own examination. Moreover, I do not discuss arbitration agreements entered into after a dispute has arisen; they do not raise the same troubling issues raised by pre-dispute agreements. (23)

In Part I, I discuss how agreements to arbitrate are enforced. All but one of the Canadian cases involved corporations' applications to stay consumer class actions based on arbitration clauses in the corporations' standard form contracts. The legislation governing these stay applications is therefore reviewed. In Part II, I look at the Canadian cases. Two different judicial approaches to the use of pre-dispute consumer arbitration clauses to...