Skip Arbitration, Go Straight to Class Action

December 21, 2015 | smeditor

The Supreme Court of Canada has released a new decision in Seidel v. TELUS Communications, here, that will be followed closely by Canadian class action plaintiff lawyers. If you don’t want to read the whole case,Osler has released a paper, here, by Jennifer Dolman and Matthew Thompson, discussing the decision, some of the SCC precedent cases like Dell v Union des consommateurs, here, and Rogers v Muroff, here, the conflicting precedent, the narrow 5-4 decision and dissenting opinion with the court,  and the impact. The most interesting quote from this article “be prepared for an increased number of claims proceeding to the court system.” Interestingly, this paper makes a specific reference to franchisors and generous interpretation of the Arthur Wishart (Franchise Disclosure) Act, 2000 favouring franchisees.

This Supreme Court decision will put smiles on the faces of plaintiff and defence lawyers, but it will also help identify existing and new risks that must be managed by corporations, their management, directors, shareholders, and their insurers.

If you still don’t want to read the case or paper, here is my short summary:

Plaintiff (P) entered into a consumer contract for cellular service and later alleged false representation in how the defendant (D) calculated air time for billing. The contract included “private and confidential” mediation and arbitration and waiver of right to commence or participate in a class action. P sought certification of a class action; D was denied its application for a stay on proceedings by the trial judge but Court of Appeal stayed P’s action and sent the case to arbitration. P appealed and The Supreme Court of Canada (SCC) lifted the stay of the class action but only in relation to claims regarding Section 172 of the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 (the BPCPA), saying this legislation “should be interpreted generously in favour of consumers”, supporting a “public interest plaintiff” and encouraging “private enforcement in the public interest” through a “well-publicized court action to promote adherence to consumer standards.”

The conflict seems obvious. The SCC suggested they did not negate their decisions in Dell, Rogers and others, which supported arbitration as a means to avoid lawsuits. In par 41 of the decision they explain by suggesting “the outcome turned on the terms of the Quebec legislation” and “contained no provision similar to s. 172 of the BPCPA.”

This court was specifically looking for “public denunciation” and notoriety that could not have been achieved through private and confidential arbitration.

The risk management spin:

If you have used or expect to use arbitration clauses to quash any rebellion by clients, you better hope you are not subject to any legislation where indirect statutory interpretation could suggest that such legislation was “enacted to encourage private enforcement in the public interest” and intended to “shine a spotlight on allegations of shabby corporate conduct.”

Good luck avoiding such legislation, because this case dealt  directly with section 172 of the BPCPA, but cited cases reference the Copyright Act, the Labour Code, the Insurance Act, and others.

Continue to use the arbitration and mediation provisions (as well as “hold-harmless” and “limitation of liability” clauses) in your customer agreements, but also invest in a corporate communication system (CRM) that will help identify and classify customer claims on a real time basis. Also create policies and procedures to deal with individual consumers before they become sufficiently upset to take their complaints to the social networks. Today, versus even two years ago, consumers have exponentially greater ability to reach similarly-minded individuals, and class-action remedy is far more popular. Data-mining in twitter, facebook, myspace, and the broader blog-world is a reality, so use it to your advantage, because it is impossible to determine which complaints will go viral, and no containment strategy can move as fast as a viral complaint.

As for insurance, don’t rely on anything you currently have, unless you have recently “stress-tested” your program for this exact risk exposure.

If the consumer lawsuit names individual directors and officers, the D&O policy might respond to the defence costs of the individuals, excess of the corporate retention (if the corporation is financially and legally able to indemnify the individuals.) But it won’t likely respond to the costs of the corporate entity because a consumer complaint would not be classified as a “securities claim”, which is where most “entity coverage” under a D&O policy can be found. Some private company management liability policies provide entity coverage that is not limited to a securities claim, but the exclusions (which are also hidden in the definition of Loss) typically exclude “fines or penalties”, costs of remedial relief, or any circumstance or situation existing prior to the inception of the policy, and many others.

If a lawsuit of this nature actually gets through the definitions and exclusions in the policy, most D&O and Management Liability policies require that an individual director or officer be continuously named in the case in order for the policy to respond. And the double edge sword to this case is that if the lawsuit is covered by the policy, there is only one policy limit of liability, and exhaustion of that limit based on loss of the corporation entity, could ultimately be to the detriment of individual directors and officers for their downstream personal liability.

The Commercial General Liability policy would not typically respond to claims brought with regards to consumer protection from a consumer contract or agreement because there is no underlying “bodily injury” or “property damage” to trigger the policy.

A Professional Liability policy (aka Errors and Omissions (E&O)) might respond, but there is no standard or regulated wording in this product, so the policy will have to be examined closely. Also, E&O is more commonly purchased in the commercial products industry (where arbitration provisions are more likely to survive), and less often purchased in the retail consumer products industry.

There comments are not meant as fear-mongering. The reality is that the SCC did not allow all of the P’s allegations to go through to private litigation, and the decision is not a certification of a class proceeding. However, whenever a SCC decision goes in favour of an individual P seeking class action status and remedy that includes disgorging of profits, it presents financial and reputational risk exposures that cannot be ignored by any company of any size.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626,

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