September 21, 2008

The News on Class Action Waivers

Class Actions are often perceived by corporations as one of the biggest threats to their operations. They are costly, time consuming and can draw substantial media and public attention to unproven claims for huge sums of money.

Not surprisingly, corporations often seek to limit their exposure to class actions. One conceptual way to achieve this is for a corporation to insert into its contracts with parties which could conceivably have claims against it in common with others, a clause which purports by agreement to prevent the other party from commencing class action litigation against it.

This is but one example of many clauses commonly found in contracts which are inserted with the intention to potentially limit one party’s liability for contractual breaches, negligence or other wrongful conduct on its part.

The validity of clauses ousting a party’s right to commence a class action was considered for the first time by a Canadian court in the case involving the Quizno’s franchise system known as 2038724 Ontario Ltd. et al v. Quizno’s Canada Restaurant Corporation et al.

Our firm successfully argued that clauses which purport to prevent one party from commencing a class action are not strictly enforceable under Canadian law.

The Judge who decided the issue made the following statement:

…a contract that precludes class proceedings interferes with the administration of justice….such an agreement denies the administration of justice the opportunity of economies of judicial resources and it denies the public the access to justice and behavioral modification provided by class proceedings.

Neverthless, the Judge went on to state that “[a]n agreement to preclude class proceedings is not an obvious evil, and its enforcement should be determined by the balancing of public interests”.

In the class action context, the plaintiffs must successfully bring a motion to have the action certified before it may continue as a class action. There are five criteria which the plaintiffs must satisfy in order for the court to certify the action as a class action. One of the criteria is that it is “preferable” for the action to continue as a class action rather than as an individual action.

There is a substantial body of case law that has developed over this “preferable procedure” criterion.

In Quizno’s, the Judge decided that whether a class action waiver clause should be upheld should be considered as part of the preferable procedure analysis. In that case, the Judge held that where the defendants offer no reason to uphold the class action waiver other than their contractual right, this would be insufficient to uphold the clause.

The Judge in Quizno’s, however, was very clear that he was not categorically striking down all agreements that contract out of class proceedings legislation. The Judge left open the possibility that “[t]here may be instances where contracting parties may be able by contract to shape the contours of a class proceeding in whole or in part”.

Given this decision and the limited guidance offered by this court, it is important for all businesses which may be susceptible to class action litigation to revisit any provisions they commonly use or may consider consider using for the purposes of preventing class actions being brought against them.

What can be taken from the Quizno’s decision is that a clause which does not address with justification what the public’s interest may be in ousting the availability of a class action over the issue in dispute will likely be unenforceable.

At Sotos LLP, our substantial experience in litigating franchising class actions assists us to shape and meet the contractual goals of Canadian franchisors.