Supreme Court Decides Businesses Cannot Be Part Of Class Action Where Arbitration Clause Exists

In a close, 5-4 decision, the Supreme Court of Canada recently reinforced the primacy of arbitration agreements. The Court held that if businesses are parties to a standard form contract containing an arbitration provision, they cannot join a class action relating to that contract, even with consumers against whom the same arbitration provision cannot be enforced. In TELUS Communications Inc. v Wellman, the Court held that business members of a proposed class action were required to arbitrate their disputes. They could not litigate their cases in court as part of a class action brought on behalf of consumers.

Our previous article detailing the lower court decisions can be viewed here.

Factual Background

The appeal related to a class action filed in Ontario on behalf of approximately two million Ontario residents who entered into cell phone contracts with TELUS. The main allegation was that TELUS had been rounding up voice calls to the next minute without disclosing this practice, leading to customers being charged for time that had not actually been used.

The proposed class included both consumers and “non-consumers”, including TELUS’ business customers.

The written form of the contracts between TELUS and its customers were not negotiated. They all included an arbitration clause, which required virtually all claims arising out of or in relation to the contract to be determined through mediation, and failing that, arbitration. Group arbitration is not permitted in the TELUS contracts.

As it relates to consumers, the arbitration clause in the TELUS contracts is of no force because the Ontario Consumer Protection Act, 2002 (“Consumer Protection Act“) explicitly gives consumers the right to commence or join a class action of the kind in issue here, and the right cannot be contracted out of. TELUS’ business customers, who make up about 30% of the proposed class, do not have the same express right under the Consumer Protection Act.

Relevant Legislation

The Supreme Court had to decide whether, under s. 7(5) of the Arbitration Act, 1991 (“Arbitration Act“), a court has discretion to permit business customers’ claims to proceed in court along with consumer claims.

Because the decision is largely based on the wording of s. 7 of the Arbitration Act, the relevant parts of that section are reproduced here:

Stay

7 (1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.

[…]

Agreement covering part of dispute

(5) The court may stay the proceeding with respect to the matters dealt with in the arbitration agreement and allow it to continue with respect to other matters if it finds that,

(a) the agreement deals with only some of the matters in respect of which the proceeding was commenced; and

(b) it is reasonable to separate the matters dealt with in the agreement from the other matters.

The Majority Decided that TELUS’ Business Customers Must Arbitrate

Justice Moldaver, writing for a majority of the Court, held that TELUS’ business customers could not prevent a stay of the court proceeding by relying on the Consumer Protection Act.

Justice Moldaver explained the structure of s. 7 of the Arbitration Act. In particular, he explained how a class action can be stayed in favour of an arbitration under s. 7(5) of the Arbitration Act where some issues are covered by the arbitration agreement and some are not:

1. First, two preconditions need to be met:
   1. s. 7(5)(a) is met if the court proceeding involves both (1) at least one matter that is dealt with in the arbitration agreement, and (2) at least one matter that is not dealt with in the arbitration agreement; and
   2. s. 7(5)(b) is met if it is reasonable to separate the matters that are not dealt with in the arbitration agreement.
2. There is then a discretionary exception: if both the preconditions are met, then instead of ordering a full stay, the court may allow the matters that are not dealt with in the arbitration agreement to proceed in court, although it must still stay the court proceeding for the matters that are dealt with in the agreement.

If the two preconditions are not met, a partial stay of proceedings cannot be granted. Also, if it is not reasonable to separate the matters that are and are not covered by the arbitration agreement, courts cannot hear the proceeding – in such cases, courts must stay the proceeding in accordance with s. 7(1) to await the arbitration decision.

In this case, the first precondition of s. 7(5) was not met. There was no matter in the court proceeding that was not covered by the arbitration agreement. The court did not, as a result, conduct an analysis under the second stage of s. 7(5).

Justice Moldaver also considered the policy reasons for his decision. He noted that the intent of the Arbitration Act was to make parties abide by valid arbitration agreements. He recognized that in “take it or leave it” contracts, there may not be a meaningful “choice” being made by the parties as to a dispute resolution mechanism. According to him, legislatures across Canada have put into place various statutes shielding consumers, the weakest and most vulnerable contracting parties, from the potentially harsh results of enforcing arbitration agreements. Parties can also attack arbitration agreements if they are unconscionable.

Justice Moldaver was concerned that any other interpretation would decrease the certainty and predictability associated with arbitration agreements, and permit parties to arbitration agreements to “piggyback” onto the claims of others to avoid arbitrating.

The Dissent Would have Allowed Judges Discretion to Decide Whether to Stay a Court Action

In a strong dissent written jointly by Justices Abella and Karakatsanis, four judges were of the view that Justice Moldaver’s approach was a return to textualism. In the dissent’s view, s. 7(5) of the Arbitration Act should permit arbitrable matters to be joined with class actions in the public interest.

Per the dissent, the purpose of the Arbitration Act is to promote access to justice by giving parties the choice of resolving disputes outside of the court system, recognizing that courts can be slow and costly. The dissent noted that nothing in the text of s. 7 directs a court to read s. 7(5) on a party-by-party basis. TELUS had argued that a court can never stay arbitrable matters under s. 7(5). Though Justice Moldaver accepted this argument, the dissent rejected it, as it would render the opening phrase “may stay the proceeding with respect to the matters dealt with in the arbitration agreement” superfluous. Courts already have the ability to hear a non-arbitrable matter that is properly before them. “Logically, a discretionary ability to grant a partial stay also includes the power to refuse a partial stay. In other words, ‘may’ means ‘may’.”

According to the dissenting judges, TELUS’ interpretation would result in costly and time-consuming factual inquiries on how to divide the class, and would lead to unnecessary duplication. Though it is important for freely-entered bargains to be enforceable, the reality is that mandatory arbitration clauses deny access to justice in the context of low-value claims, especially in cases such as this one, where group arbitration is also prohibited by the contract.

The Road Forward

Eight years ago, TELUS obtained the same result in British Columbia. The proposed class action in Ontario will now be required to remove business customers’ claims from the class definition. Whether business customers will want to incur the time and expense of individual claims in arbitrations remains to be seen.

This decision reinforces the primacy and enforceability of arbitration agreements. Businesses that use standard form contracts for non-consumer clients can now be more assured that their arbitration clauses are enforceable, as long as the contracts are otherwise valid and not unconscionable.