The Power of Perspectives

The Canadian Bar Association

CBA/ABC National

Mandatory arbitration clauses: How do the consumers fare?

November 2 2015 2 November 2015

The New York Times ran a series this weekend on the use of mandatory arbitration clauses by businesses and how they are immunizing them against lawsuits by forcing plaintiffs take their disputes to arbitration instead of regular court:

Over the last 10 years, thousands of businesses across the country — from big corporations to storefront shops — have used arbitration to create an alternate system of justice. There, rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients, The Times found.

The change has been swift and virtually unnoticed, even though it has meant that tens of millions of Americans have lost a fundamental right: their day in court.

“This amounts to the whole-scale privatization of the justice system,” said Myriam Gilles, a law professor at the Benjamin N. Cardozo School of Law. “Americans are actively being deprived of their rights.”

All it took was adding simple arbitration clauses to contracts that most employees and consumers do not even read. Yet at stake are claims of medical malpractice, sexual harassment, hate crimes, discrimination, theft, fraud, elder abuse and wrongful death, records and interviews show.

From the first article of the series, which focused on consumer arbitration clauses:

The Times investigation was based on thousands of court records and interviews with hundreds of lawyers, corporate executives, judges, arbitrators and plaintiffs in 35 states.

Since no government agency tracks class actions, The Times examined federal cases filed between 2010 and 2014. Of 1,179 class actions that companies sought to push into arbitration, judges ruled in their favor in four out of every five cases.

In 2014 alone, judges upheld class-action bans in 134 out of 162 cases.

Some of the lawsuits involved small banking fees, including one brought by Citibank customers who said they were duped into buying insurance they were never eligible to use. Fees like this, multiplied over millions of customers, amount to billions of dollars in profits for companies.

The Consumer Financial Protection Bureau, the U.S.’ consumer protection agency, is hinting at new regulations that would rein in mandatory arbitration.

In Canada, consumer protection legislation prohibits mandatory arbitration clauses in some provinces -- Ontario, Alberta and Québec among them.  Saskatchewan allows them. In 2011, the Supreme Court of Canada ruled in a BC matter that companies can use them in consumer contracts provided they are properly worded and not prohibited under provincial statute, though in that particular case, a divided court found that the province’s consumer protection law wasn’t explicit enough to enforce the mandatory arbitration clause in a class action involving a cell-phone provider, Telus. The minority took the opposite view, that the law wasn’t explicit in foreclosing the use of arbitration.  

In a 2013 paper, Michael Schafler and Amer Pasalic invite policymakers to consider whether access to justice could in fact be achieved to some extent by making class arbitration available to consumers:

Most Canadian common law provinces have statutes that address class proceedings as well as arbitrations. Although there are some variations among the different jurisdictions, usually the arbitration statutes contain mandatory language that a court “shall” stay a court action and refer it to arbitration, if the dispute falls under the arbitration agreement, with certain exceptions stipulated in the arbitration statute. These exceptions include where an arbitration agreement is invalid or void, or if the subject matter of the dispute is not capable of being the subject of arbitration. This mandatory language reflects a legislative choice to limit judicial intervention in the face of an arbitration agreement. However, class arbitrations do not appear to fall under one of the exceptions for judicial intervention, since they are a matter of procedure, arising only after the arbitrability of the dispute has been established. Therefore, one would surmise that the arbitration of class claims is possible. The problem arises because class proceeding statutes also prescribe mandatory criteria for certification of a class action if certain certification requirements are met. Canadian courts have struggled in these provinces to reconcile the apparent tension between the public policy objectives envisioned in each statute. As one commentator notes, “it would be paradoxical if, on the one hand, courts adopt a systematically deferential approach in favour of arbitration to recognize it as a separate system of justice…and on the other hand categorically refuse to recognize an arbitrator’s procedural power to arbitrate representative proceedings in the absence of any express legislation.”

Thus, amendments to existing arbitration or class proceedings legislation are required, not only to resolve this apparent tension between the two statutes, but to harmonize the legislation across the country to enable national certifications of class arbitrations. For instance, the arbitration statutes in each Canadian jurisdiction could be amended to expressly provide for class arbitration to the extent that the claim advanced satisfied the traditional certification requirements of the provincial class proceeding legislation for a class action, with some modifications to account for the differences in how a class is conceived in a class arbitration versus a class proceeding. Similarly, amendments would have to be made to other statutes, such as the consumer protection statutes discussed earlier, that preclude the arbitration of claims in certain contexts in favour of prosecuting claims in court. Because legislation such as consumer protection statutes currently conceive arbitration as generally only involving two parties, a common policy justification for consumer class actions is that individual claims would not otherwise be pursued, given the high costs of litigation compared to the relative low values of the claims. If class arbitration was an option, the legislative policies favouring access to justice, judicial economy, and deterrence would still be met in a class proceeding outside of the courts. This would require legislators to revisit these statutes, and determine whether the same policy objectives would be met in arbitrations. This would necessarily require significant consultation with Canadian lawmakers to determine a straightforward, efficient, and practical method to harmonize the laws, but one which also allows courts to maintain their core supervisory roles (perhaps in the form of judicial review) in relation to arbitration and representative proceedings in their respective jurisdictions.


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