Originally appeared in the Ontario Bar Association Civil Litigation section’s newsletter Keeping Tabs, Vol 18, No. 4 (June 2010)

Arbitration clauses may not be as impenetrable as they once were. Some recent decisions in the context of class actions and joinder actions have refused to stay proceedings despite arbitration provisions. While consumers have seen their right of access to the courts preserved in the passing of the Consumer Protection Act, 2002, S.O. 2002 c. 30, the same concerns which led to the limitation of arbitration provisions in consumer cases have recently started to emerge in the commercial arena. Class actions and multi-party proceedings have been allowed to proceed even where the Consumer Protection Act, 2002 does not strictly apply.

The judicial system has embraced arbitration as a form of alternative dispute resolution, and for good reason: it is relatively inexpensive, expedient and allows parties to choose their own adjudicator all while freeing up scarce judicial resources. When it comes to enforcing arbitration clauses judges have generally not hesitated to give them full effect. After all, if the parties bargain to keep their disputes to themselves (and away from judicial resources), why stop them?

One need look no further than Kanitz v. Rogers Cable Inc.1 to see how far Ontario courts were willing to take arbitration clauses absent any legislative direction. In that case the Superior Court of Justice stayed a proposed class proceeding on the basis that the consumers had accepted an arbitration clause as part of their end-user license agreements. In fact, many of the consumers had not even agreed to the arbitration clauses when they first signed up; Rogers introduced them after the fact and merely posted the updated agreements on its website. Nevertheless, the court found that the customers were bound by the contracts and therefore were required to settle their claims individually through arbitration.

Kanitz inspired section 7(2) of the Consumer Protection Act, 2002 which explicitly renders arbitration clauses invalid in the consumer context. The rationale is simple: few consumers would voluntarily submit to arbitration over a dispute relating to a consumer product or service. Only through class proceedings can such small claims be satisfied in an efficient manner. Retailers know this, which is why they included arbitration clauses in the first place.

While it is now settled that consumers are protected from arbitration clauses that preclude class actions, the burning issue is whether or to what extent non-consumers should also be protected. The Supreme Court provided a partial answer in Dell Computer Corp v. Union des consommateurs,2 where it held that courts should not assume jurisdiction where parties have contractually agreed to arbitration, even when it is to take place in a foreign forum. However, Dell was decided in the context of the Civil Code of Quebec and the facts of the case arose before the Consumer Protection Act, R.S.Q. c. P-40.1 went into effect.

Despite Dell, a number of Ontario cases have continued to test the boundaries of arbitration clauses. The recent case of Griffin v. Dell Canada Inc.3 dealt with the very same arbitration clause but arrived at the opposite conclusion in light of the Consumer Protection Act, 2002. The proposed class included both consumers and non-consumers who had purchased allegedly defective laptop computers from Dell. After finding that the consumers in the class were protected by the Consumer Protection Act, 2002, Sharpe J.A. went on to consider whether the non-consumers should also be protected. Writing for a unanimous five-judge panel, Sharpe J.A. found that it would be tremendously inefficient and contrary to the efficient administration of justice to force some of the proposed class to proceed through arbitration and while allowing others to go to court. Underlying the decision were worries that small business owners, like consumers, would not realistically be able to resolve their claims through arbitration.

Sharpe J.A.’s overriding concern was that the true purpose of the arbitration clause was not merely to select a form of alternative dispute resolution but rather to deprive non-consumers of any reasonable method of dispute resolution. He wrote, at para. 57:

The choice is not between arbitration and class proceeding; the real choice is between clothing Dell with immunity from liability for defective goods sold to non-consumers and giving those purchasers the same day in court afforded to consumers by way of the class proceeding.

Similar reasoning has been applied in business-to-business disputes. In 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corp.,4 the Quiznos franchise agreements included a provision prohibiting franchisees from participating in class actions. The Court dismissed a motion to stay a class proceeding based on the provision. Perell J. framed the issue as one of freedom of contract coming into conflict with the public policy goals advanced by the Class Proceedings Act, 1992, S.O. 1992, c. 6, including “access to justice, judicial economy, and behavior modification of civil wrongdoers.” Much like in Griffin, the Court recognized that the franchisees would be unable to effectively resolve their claims as individuals and that there was ‘strong cause’ to override the contract in the circumstances.

In Stoneleigh Motors Limited et al. v. General Motors of Canada Limited,5 the facts centered on the federal auto bailout and the termination of approximately 240 GM dealers. Of the terminated dealers, most signed a “Wind-Down Agreement” which among other things aimed to release GM from liability. Nineteen of the dealers, however, did not sign and instead sued GM. GM moved for the proceeding to be stayed on the basis of an arbitration agreement contained in the dealer agreement. The Superior Court of Justice allowed the claim to proceed as a multi-party action, once again citing concerns over the dealers’ lack of resources as individuals. The Court grounded its decision in both the arbitration agreement itself (which excluded multi-party lawsuits from arbitrability) and the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3.

As Sharpe J.A. noted in Griffin, the upcoming appeal to the Supreme Court of Canada from Seidel v. Telus Communications Inc., [2009] 5 W.W.R. 466 (B.C.C.A.) may ultimately decide how far this line of judicial reasoning can be taken. It seems clear that certain classes of non-consumers are indeed vulnerable to arbitration clauses in the same way as consumers are. It remains to be seen to what extent these groups will be afforded similar protection on other grounds.

*David Sterns is a litigation partner and Stuart Freen is a summer student with Sotos LLP.

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1 (2002), 58 O.R. (3d) 299 (S.C.J.).
2 [2007] 2 S.C.R. 801
3 (2010), 98 O.R. (3d) 481; leave to appeal denied 2010 CanLII 27725 (S.C.C.).
4 (2008), 89 O.R. (3d) 252.
5 2010 ONSC 1965.