To arbitrate, or not arbitrate? That is the question.

Mark Kohras is a JD candidate at Osgoode Hall Law School.

Last Friday, the Supreme Court of Canada issued a decision in the case of Seidel v. TELUS Communications Inc. This case highlights a key issue in contract law; the operability of arbitration clauses and class action waivers in the consumer protection context. The case related to a telecom contract and whether British Columbia law rendered the arbitration and class action waiver clauses inoperable.

Arbitration clauses are commonly found in telecom service contracts. Most of these clauses purport to waive the inherent right of the contracting parties to initiate civil proceedings in a court of law, instead requiring them to settle any disputes between them by way of confidential mediation and binding arbitration.

Proponents of arbitration argue that it serves as an important alternative to court proceedings by providing a low cost, expedient and private way to settle disputes. Arbitration also serves two socially beneficial purposes: increasing access to justice by providing a quicker and cheaper dispute resolution alternative and providing relief to an overburdened court system by reducing the amount of caseload.

Opponents of arbitration clauses argue that companies gain additional benefits in relation to consumers. The confidential nature of the arbitration prevents the dispute from entering the public domain, thereby insulating the corporation from bad publicity. It also ensures that any harmful precedents set during the arbitration remain confidential, thereby denying them any precedential value. Private arbitration also derives its authority from the agreement between the parties, which leaves the question of whether any injunctions that may be granted (e.g. to cease an unfair billing practice), would be binding as against 3rd parties. If it is only binding between the parties of the arbitration, the company could continue billing all its customers unfairly, except for the sole customer that is party to the arbitration. Finally, there is the issue of possible arbitrator bias described by Sharpe J.A. of the Ontario Court of Appeal: “When consumer disputes are in fact arbitrated through bodies such as NAF that sell their services to corporate suppliers, consumers are often disadvantaged by arbitrator bias in favour of the dominant and repeat-player corporate client.”

Similarly, class action waivers are seen as an attempt to avoid liability for low-value wrongs. If the damage is of a sufficiently low value, it would not be cost effective to litigate (or arbitrate) the issue for individual consumers, allowing companies to gain substantial profits in the aggregate. Allowing class actions would provide consumers with a cost effective solution to litigate such a claim.

Due to these concerns, many courts in the US (including the 9th circuit) have ruled that pre-dispute arbitration clauses in contracts of adhesion are void due to unconscionability, particularly when coupled with class action waivers. Various states have also passed legislation to that effect (although their validity is currently being challenged in the US Supreme Court). In Canada, the courts have taken a different stance, at least with regards to arbitration clauses. Two previous Supreme Court cases (Dell and Rogers Wireless) upon which Telus bases their argument were clarified in the current case as standing “for the enforcement of arbitration clauses absent legislative language to the contrary.”

Such legislative language is present in Canada. The provinces of Ontario and Quebec have barred arbitration clauses and class action waivers in regards to consumer contracts. In Alberta, consumer arbitration clauses are subject to ministerial approval. British Columbia takes a more limited approach, which has led to the need for clarification from the courts.

The main issue of the case was whether Section 172 and Section 3 of the BC Business Practices and Consumer Protection Act (“BPCPA”) rendered the arbitration clause found in the cell phone services contract inoperative. While there is no specific provision barring arbitration clauses like in the Ontario equivalent, Section 3 of the BPCPA provides that “Any waiver or release by a person of the person’s rights, benefits or protections under this Act is void except to the extent that the waiver or release is expressly permitted by this Act.”

In a split 5/4 decision, the majority of the court ruled that Section 172 of the BPCPA, which allows for anyone affected by a consumer transaction to bring an action for declaratory relief or an injunction (along with a limited list of remedies) in the Supreme Court of British Columbia, granted a “right” under the Act. As the “right” granted allows for an action in the courts (and not in arbitration), the arbitration clause is rendered invalid by Section 3, in so far as the specific claims allowed under Section 172. Any other claims are still bound by the arbitration clause.

Unfortunately, the issue of the unconscionability of class-action waivers was not decided in this case, as the court ruled that the waiver was not severable from the arbitration clause and as such was also rendered void. This is surely an issue that will be revisited in the future.