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Mandatory Arbitration and Consumer Contracts

Full Report can be downloaded here. [pdf file: 0.73mb]

Executive Summary

This report examines the use of mandatory arbitration clauses in consumer contracts. A mandatory arbitration clause is a clause in a contract that requires two parties (a service provider and a consumer) to arbitrate any dispute that may arise from the contract instead of taking the dispute to court. Arbitration is a form of dispute resolution, which is viewed as an alternative to traditional court processes. It involves two or more parties agreeing, through an arbitration agreement, to submit their dispute before a neutral decision maker who will make a decision that will be binding upon both parties. Arbitration clauses in consumer contracts usually appear in the form of a mandatory requirement written into a standard form contract, which the consumer is not able to negotiate or change.

In the commercial context, arbitration has been heralded by some as being superior to court processes in terms of reduced cost, speedier and more effective resolution of disputes, fairness to both parties and reduced complexity of proceedings. The authors examine these claims in the context of consumer to business disputes. Research from other jurisdictions where mandatory arbitration clauses are much more predominant, such as the United States suggests that claims about the superiority of arbitration over court processes do not hold up and that may in fact result in increased costs, with no discernable reduction in time taken to resolve the dispute or reduce the complexity of the proceeding. The negative impacts may also include: lack of transparency, lack of protection for class proceedings, limits on damages, risk of inconsistent results, lack of impartiality on the part of the adjudicator, and imbalance between the parties due to businesses being able to take advantage of repeat appearances before arbitrators. The report assesses the U.S. experience with mandatory arbitration and contrasts it with other jurisdictions. The European Union (where consumer protection is now generally addressed) has taken a stronger stand against mandatory arbitration clauses in consumer contracts. It issued a directive on unfair terms in consumer contracts, which includes mandatory arbitration clauses. The United Kingdom and France have generally prohibited pre-dispute arbitration clauses in consumer contracts. New Zealand has extended its statutory protection against mandatory arbitration clauses to all consumer contracts. Australia has no arbitration legislation. The reason would appear to be a function of its widely privatized utility industry characterized by the prevalence of private ADR, mitigating the need for business to employ mandatory arbitration clauses in consumer contracts.

In Canada the use of mandatory arbitration clauses in consumer contracts is a relatively recent phenomenon. Our research suggests that they are not yet extensively used by Canadian businesses. Recent jurisprudence in Ontario has upheld mandatory arbitration clause in a consumer Internet service provider contract. This caused the Ontario government to adopt provisions in its consumer protection legislation to counter this decision. The legislation states that any term in a consumer agreement that requires disputes arising out of the agreement be submitted to arbitration is invalid insofar as it prevents a consumer from exercising a right to commence an action in the court. The legislation also specifically protects a consumer’s right to commence a class proceeding.

Ontario is the only province with legislation that specifically addresses mandatory arbitration clauses. Other provinces have general provisions about unconscionable trade practices but they may not be strong enough to withstand judicial scrutiny in the face of an arbitration provision. Consumer protection acts that have created statutory rights of action but have not supplemented these with a non-derogation clause will not protect consumers from mandatory arbitration clauses.

Quebec’s treatment of mandatory arbitration clauses is examined in the final section of the report. Quebec does not have any legislation that specifically prohibits the use of mandatory arbitration clauses. Arbitration agreements are defined in the Civil Code of Quebec and the courts have upheld their authority. However, the Civil Code also specifically recognizes and defines consumer agreements and contracts of adhesion. Under both contracts, a clause can be declared null or the obligation under it can be limited if a court finds that it is abusive (a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith). Mandatory arbitration clauses may also be limited by the application of the rules of public order. The rules of public order are rooted in the legislative powers of the province and describes two types of laws: 1) moral laws which protect the institutions that form the basis of social order and 2) the social and economic laws that characterize the desire of the state to regulate economic exchanges. The Quebec Consumer Protection Act and the Civil Code rules governing contracts of adhesion and consumer contracts are examples of this second category of public laws. The courts have held that an arbitration award is not contrary to the public order. An arbitrator may dispose of a question relating to rules of public order since they may be the subject matter of an arbitration agreement. However, under the Code of Civil Procedure, a court may assess an arbitration award to determine whether the decision itself violates principles that are matters of public order. The report describes a case in which a class action was upheld in the face of a mandatory arbitration clause on the basis that it would have frustrated the authority of the Quebec government to adjudicate an action founded on a consumer contract. This decision is being appealed.

The report calls on provinces to introduce legislative changes that will prohibit the use of mandatory arbitration clauses and protect consumers’ right to voluntarily choose a range of dispute settlement mechanisms in their dealings with businesses, whether arbitration, small claims court or class actions.

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