The Supreme Court of Canada recently decided that businesses can’t get out of arbitration agreements by joining class action lawsuits with consumers.

What Happened?

The respondent-consumer filed a proposed class action for damages against the telephone company TELUS on behalf of about two million Ontario residents who entered into mobile phone service contracts with TELUS during a specified timeframe.

The class consisted of both consumers (about 1.4 million people) and non‑consumers (business customers). The respondent-consumer alleged that TELUS had engaged in an undisclosed practice of rounding up calls to the next minute and that customers were overcharged and were not provided the number of minutes to which they were entitled. He asked for over $500 million in damages on behalf of the group.

Under the service contracts signed by all customers, the standard terms and conditions included an arbitration clause stipulating that all claims arising out of or in relation to the contract, apart from the collection of accounts, must be determined through mediation and, failing that, arbitration.

However, this clause did not prevent the consumers from joining a class action and seeking compensation in court under the Ontario Consumer Protection Act (“CPA”). The CPA states that consumers can join a class action even if they had agreed to arbitration. However, the business customers were not covered by the CPA. As a result, TELUS asked the court to stay the claims of business customers, as they should be held to their agreement to go to arbitration under the service contracts.

Lower Court Decisions

The motions judge dismissed TELUS’s motion for a stay and certified the action, holding that s. 7(5) of the Ontario Arbitration Act grants courts discretion to refuse a stay where it would not be reasonable to separate the matters dealt with in the arbitration agreement from the other matters.

The motions judge held that, in this case, it was reasonable to exercise this discretion and allow the business customer claims that were otherwise subject to an arbitration clause to participate in a class action.

The Court of Appeal dismissed TELUS’s appeal.

Supreme Court of Canada Decision

The Supreme Court of Canada allowed the appeal, finding that s. 7(5) of the Arbitration Actdid not grant the court discretion to refuse to stay the claims. Section 7(5) reads:

“7(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 court stated that s. 7(5) provides an exception to the general rule established under s. 7(1) that where a party to an arbitration agreement commences a proceeding in respect of a matter dealt with in the agreement, the court must, on the motion of another party to the agreement, stay the court proceeding in favour of arbitration. This exception consists of two main components, which include the two preconditions set out in ss. 7(5)(a) and (b).

The court explained that the first precondition is met if the agreement deals with only some of the matters in respect of which the proceeding was commenced. The second precondition is met if it is reasonable to separate the matters dealt with in the agreement from the other matters.

However, it is only if both preconditions are satisfied that the court may allow the matters that are not dealt with in the arbitration agreement to proceed in court. Therefore, if the preconditions are not met, then the discretionary exception is not triggered and the proceeding must be stayed.

As a result, the court found that because the sole matter at issue in the proceeding was dealt with in the arbitration agreements into which the consumers and business customers entered, the first precondition set out in s. 7(5)(a) had not been met. Consequently, the general rule under s. 7(1) of the Arbitration Act applied to the business customers and the proceeding had to be stayed. However, the stay was restricted to the parties who were legally bound by the arbitration agreement; namely, TELUS and the business customers. The consumers were protected from a stay because of the exception in the CPA.

The court concluded that the motions judge and the Court of Appeal erred in law by interpreting s. 7(5) of the Arbitration Act incorrectly and refusing to order a stay that was mandatory under s. 7(1). It found that s. 7(5) did not permit the court to ignore a valid and binding arbitration agreement.

The court allowed the appeal and stayed the business customer claims.

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