Timothy’s 2022 Hot Topic – At the crossroads of class actions and arbitration – #702

For this year’s “hot topics” post, I have chosen to spotlight an enduring subject: the policy conflict that can arise between arbitration and consumer class actions. The heat comes from developments in 2022 which suggest a fresh look (or two!) at how to reconcile pro-arbitration international legal commitments and policy objectives with consumer protection and class action laws.

A clash of policy objectives

Let’s start with some trite observations. Commercial arbitration promotes party autonomy, speed, and finality, usually between sophisticated commercial parties with relatively equal bargaining power. On the other hand, class action mechanisms were created – with low-value claims of consumers in mind – to advance judicial economy, economic access to justice, and deterrence of otherwise irremediable unlawful conduct. These policy foundations are often incompatible; the conflict is particularly acute where the enforcement of an arbitration agreement would have the practical effect of immunizing a party from the consequences of large numbers of low-value unlawful acts.

In the Canadian domestic sphere, some provinces have intervened to expressly protect a consumer’s right to access court procedures in the face of an arbitration agreement. For example, under the Alberta Consumer Protection Act, RSA 2000, c C-26.3, arbitration agreements are unenforceable with respect to “consumer transactions” and “consumers”, except at the election of the consumer after a dispute has arisen. Similar legislation strictly regulates arbitration agreements in consumer transactions in the Ontario Consumer Protection Act, 2002, SO 2002, c 30, Sch A, Québec Consumer Protection Act, CQLR c P-40.1, s 11.2, and Saskatchewan Consumer Protection and Business Practices Act, SS 2013, c C-30.2. Precise definitions of who counts as a consumer are elusive, although some themes are common, namely, individuals acting for personal, family, or household – not business or resale – purposes. Canadian courts have recognized the difficulty of determining whether a person is a consumer for a particular purpose. See for example, TELUS Communications, Inc v Wellman, 2019 SCC 19 (“Wellman”), at para. 87.

Internationally, Canada has obligations to enforce arbitration agreements under the New York Convention. The federal United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16 (2nd sup) (“UNFAACA”) and provincial international arbitration laws based on (or tracking, as in Québec) the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) apply only to commercial legal relationships. The breadth of that concept under the law of Canada is therefore a key question for cross-border consumer transactions.

Fresh possibilities for cross-border consumer protection?

The consumer/commercial distinction was at the heart of Difederico v Amazon.com, 2022 FC 1256 (“Difederico”), which I covered in a previous Case Note: Amazon purchasers’ class-action competition claims referred to arbitration – #683. There, the Federal Court stayed class action price-fixing claims brought by Amazon purchasers in favor of separate, individual arbitrations. 

The Difederico claimant sought to resist a stay on the basis that, as a consumer, her claims against Amazon were excluded from the scope of the UNFAACA because the relationship between the parties was not commercial. Section 4(1) of that Act implements into federal law Canada’s reservation to limit the application of the New York Convention to “legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration.”

To resolve the question of whether a stay should be granted, the Court followed the Supreme Court of Canada’s direction in Uber Technologies Inc. v Heller, 2020 SCC 16, to examine the claims as expressed in pleadings, rather than the nature of the parties’ relationship. The claimant alleged that the Amazon defendants had engaged in illegal price-fixing in contracts with third-party sellers to list products on Amazon’s platform. The judge, at para. 65, likened the alleged anti-competitive contracts to “‘trade transaction[s] for the supply or exchange of goods or services’ or ‘distribution agreement[s]’ like the examples of commercial relationships listed in […] the Model Law”, providing the “commercial foundation” necessary to conclude that the UNFAACA applied. The upshot was that the arbitration agreement was enforceable, and the class claims were stayed.

Does it make sense for a claimant’s procedural rights to rise or fall on the contractual relationship between the respondent and third parties? The Court in Difederico acknowledged, at para. 63, that the harms the claimant alleged were “those of an ordinary consumer – overpaying for goods purchased in consumer transactions”. The “commercial foundation” required for the UNFAACA to apply came not from the claimant’s relationship with Amazon, but from Amazon’s arrangements with third parties. The scope of consumer claims that could be commercial under this analysis is virtually limitless, considering the complexity of modern supply chains.

However, the express limitation of the New York Convention and Model Law to apply to “commercial legal relationships” must mean that there is scope for relationships that those instruments do not cover. Commentary to the Model Law supports this view, indicating that it does not apply to “labour or employment disputes and ordinary consumer claims, despite their relation to business.” In the Uber case, the Supreme Court definitively carved-out employment disputes from the scope of Ontario’s implementation of the Model Law. Sooner or later the Supreme Court will likely need to consider whether current interpretations of the scope of cross-border consumer claims that are “commercial legal relationships” under the law of Canada, including under Difederico, hit the mark. A more assertive view of what kinds of cross-border consumer transactions are non-commercial might be needed to give effect to the express reservations of the New York Convention and Model Law, while striking a better balance with consumer protection.

Inoperative arbitration agreements, oh my!

A second fresh look at how to reconcile pro-arbitration international legal commitments and policy objectives with consumer protection and class action laws comes, by way of analogy, from a case at the equally turbulent confluence of arbitration and insolvency law: Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 (“Petrowest”) (covered in Case Notes: Supreme Court – Peace River v Petrowest Part 1: Separability Clarified? – #682 and Supreme Court – Peace River v Petrowest Part 2: no conflict between arbitration, bankruptcy law – #687).

The facts of Petrowest, pit the public policy objectives underlying the [Bankruptcy and Insolvency Act] against freedom of contract and party autonomy”, and one had to win. Justice Côté (for the majority) explained, at para. 9, that “the chaotic nature of the arbitral proceedings bargained for by the parties would compromise the integrity of the receivership, to the detriment of affected creditors and contrary to the purposes of the [Bankruptcy and Insolvency Act].” The arbitration agreements, therefore, were “inoperative” and had to yield to the receivership.

Where courts have refused to enforce arbitration agreements in favor of consumer class actions, it has typically been in the domestic context and on the basis of express consumer protection statutes (as in, for example, Wellman). The reasoning of Petrowest, though, could provide an independent and novel basis for refusing to enforce an arbitration agreement even in the absence of an applicable consumer protection law. Consider a paraphrasing of Justice Côté’s statement, above, in the context of a class action: “the chaotic nature of the arbitral proceedings bargained for by the parties would compromise the integrity of the [consumer class action], to the detriment of [injured consumers] and contrary to the purposes of the [legislation permitting class actions].” If the Petrowest reasoning has equal force where arbitration agreements conflict with class actions, arbitration agreements in consumer contracts might be at risk of being found to be inoperative. 

This logic may be particularly compelling in the public policy “competition” between class actions and arbitration because enforcing arbitration will often impair two key purposes of class actions: publicity to other injured parties, and economic access to justice. It is hard, though, to discern guiding principles about how to resolve the myriad permutations in which arbitration statutes come into contact with other areas of law – insolvency, consumer/commercial, international or domestic, class actions, etc. While judicial interpretations help to clarify areas of uncertainty, courts do not have the full panoply of policy making tools that legislatures have. As Justice Binnie observed at paras. 2-3 of Seidel v TELUS Communications Inc., 2011 SCC 15, “the Court’s job is neither to promote nor detract from private and confidential arbitration. The Court’s job is to give effect to the intent of the legislature as manifested in the provisions of its statutes.

Looking forward to the new year and beyond, the tension between consumer class actions and arbitration is as taut as ever. This may signal an opportunity to reassess, and potentially to reinvigorate, the scope of “consumer” and “commercial” in Canada. In the coming year, watch out for an appeal in the Difederico case, which may further develop the intersection between consumer claims and the UNFAACA. In an increasingly international marketplace, a more muscular definition of protected consumer transactions may be needed to strike a different balance with Canada’s pro-arbitration policy commitments.