The Arbitration Review of The Americas 2008

Section 2: Country Overviews

Recent developments in Canadian arbitration law

Canada's thriving arbitration law and practice continued to see exciting developments over the past year, including the longawaited signing of the ICSID Convention in late 2006.1 One decision in particular, however, dominated the arbitration landscape in Canada in 2007: the Supreme Court of Canada's judgment in Dell Computer Corp v Union des consommateurs.2

Dell Computer reflects the large and liberal approach to arbitration which has been adopted by the Supreme Court of Canada and which is consistently recognised and applied by courts across Canada.

The Supreme Court arbitration trilogy

In Dell Computer, Canada's highest court had the opportunity to pronounce on a number of important questions of arbitration law and practice, including the applicability of an arbitration agreement in the face of a consumer class action, the scope of the Kompetenz- Kompetenz principle and the extent of the review to be undertaken by a court which is seized of an application to refer a matter to arbitration, and the nature and 'localisation' of arbitral tribunals. The decision is the third in what may be seen as a trilogy of recent Supreme Court judgments, all from Quebec and all dealing with fundamental issues of domestic and international arbitration.

The first of these decisions, Desputeaux v Éditions Chouette (1987) inc,3 dealt with the issue of the arbitrability of intellectual property disputes, and the nature of arbitration agreements. Specifically, the Supreme Court determined in Desputeaux that a question of copyright ownership was arbitrable and was not precluded by the provisions of the Civil Code of Quebec (CCQ) and Quebec's Code of Civil Procedure (CCP), which provide that matters of the status and capacity of persons and other matters of public order may not be submitted to arbitration. The court underlined in this regard that public order was restricted to the effect of the decision, rather than the subject matter of the dispute.

The court took a clearly pro-arbitration position in Desputeaux and held that the scope of the arbitration agreement and the arbitrators' mission must be interpreted in a broad and liberal manner and that the arbitrator's mandate includes not only what is expressly set out in the arbitration agreement, but everything that is closely connected with that agreement as well.

In the second decision, GreCon Dimter inc v J R Normand inc,4 the Supreme Court overturned a line of case law in Quebec, in which courts refused to recognise choice of forum or arbitration clauses in the context of actions in warranty. Although this was not an arbitration case, but rather one which related to the application of a forum selection clause, the court seized the opportunity to examine certain features of Quebec and Canadian arbitration law, including the importance of deferring to the contracting parties' choice with respect to the forum for resolving their disputes, whether this be a foreign court or arbitral tribunal.

The Supreme Court in Grecon underlined Quebec and Canada's international commitments relating to the recognition and enforcement of foreign judgments and arbitral awards, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and maintaining its pro- arbitration stance, emphasised the importance of recognising arbitration and forum selection clauses given that they provide international commercial relationships with stability and foreseeability. The court also examined the nature of arbitration and choice of law clauses, explaining that the ouster of the jurisdiction of Quebec authorities will depend on the wording of the jurisdiction clause adopted by the parties, the mandatory and exclusive nature of that clause and a meeting of minds between the parties.

Supreme Court of Canada's decision in Dell Computer


Background

The appeal in Dell Computer originated with a class action instituted following a pricing error on handheld computers posted on Dell's website in April 2003. Essentially, Olivier Dumoulin, a Quebec resident, filed a motion to institute a class action against Dell because the company refused to honour the lower prices for the handheld personal digital assistants that had appeared on the website. The company had incorrectly listed the products for C$89 and C$118 for certain models, whereas the actual prices were C$379 and C$549 respectively. Dell filed a motion to dismiss and requested that the matter be referred to arbitration on the basis of an arbitration clause contained in its online terms and conditions.

The Superior Court of Quebec dismissed Dell's motion and allowed the class action to be instituted. The court concluded that the jurisdiction of the courts of Quebec could not be ousted under article 3149 CCQ, contained in that code's private international law rules, which prohibits such exclusion in consumer or employment disputes where the employee or consumer is resident in Quebec.5 In the court's view article 3149 CCQ applied, given the fact that the arbitration clause provided that arbitration would be administered by the National Arbitration Forum (NAF), an institution in Minneapolis.

The Quebec Court of Appeal upheld the lower court's decision agreeing that Dell's motion to refer the dispute to arbitration should be dismissed, although for somewhat different reasons.6 Essentially, the court determined that the arbitration agreement, which had to be accessed through a hyperlink, consisted of an external clause that could not be set up against consumers (absent proof that the clause had expressly been brought to their attention or that they had otherwise gained knowledge of it).

Dell sought to appeal the matter to the Supreme Court and for the third time in recent years, Canada's highest judicial authority granted leave in an arbitration matter, reflecting its view that such matter was of such exceptional public and national importance as to warrant the court's attention. The majority of the Supreme Court held in Dell Computer that the matter should be referred to arbitration; the minority held that it should not.

The majority judgment

In reversing the Court of Appeal's decision, and in referring the dispute to arbitration, the majority first dismissed the argument that article 3149 CCQ precluded the matter to be referred to arbitration, on the basis that the dispute lacked the 'foreign element' needed before that private international law rule could apply. In doing so, the majority determined that an arbitral tribunal was a neutral institution and that the existence of an arbitration clause was not enough to warrant the application of Quebec's private international law rules.

The majority also considered the issue of which authority, between the court and the arbitral tribunal, should be the first to decide on the validity or applicability of an arbitration agreement. This issue arose with respect to articles 940.1 and 943 CCP, based on articles 8 and 16 of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) respectively, which provide:

Where an action is brought regarding a dispute in a matter on which the parties have an arbitration agreement, the court shall refer them to arbitration on the application of either of them unless the case has been inscribed on the roll or it finds the agreement null.
The arbitrators may decide the matter of their own competence.

In what is perhaps the court's most detailed examination of the New York Convention and Model Law to date, the majority looked to international law and commentary, as well as precedent and doctrine in Quebec, in deciding on the proper test to adopt. Among other things, the court considered and compared both the interventionist and deferential approaches to the Kompetenz-Kompetenz question, and concluded that the second, which called for a limited prima facie review and the referral of parties to arbitration unless the arbitration agreement is manifestly tainted by a defect rendering it invalid or inapplicable, was gaining increasing acceptance around the world.

The test

After her review of the relevant international and Quebec authorities, Justice Marie Deschamps, writing for the majority of the court, set out the following test:

First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator's jurisdiction must be resolved first by the arbitrator. A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator's jurisdiction is based solely on a question of law. This exception is justified by the courts' expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator's decision regarding his or her jurisdiction can be reviewed by a court. It allows a legal argument relating to the arbitrator's jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate. In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator's jurisdiction, consider the facts leading to the application of the arbitration clause.
If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record.7

Thus, the majority accepted the deferential principle by which a challenge to an arbitrator's jurisdiction should generally first be referred to the arbitrator. It went on, however, to set out an exception where the challenge is based on an issue of law, in which case the court may first decide the issue. If the challenge is a fact-based one, the court should normally refer the issue to arbitration. If the challenge gives rise to mixed issues of fact and law, the rule set out by the majority provides that the matter be referred to arbitration, unless a merely 'superficial' consideration of documentary proof filed into the court record is required.

The majority concluded that in the case before it, the question of the validity and applicability should have been referred to arbitration, given that a number of the arguments raised required an analysis of the facts in order to apply the law to the case. Rather than refer that question to the arbitrator for determination, however, the majority went ahead and decided the issue for itself, concluding that there was nothing intrinsically abusive or unfair about an arbitration clause in the context of a consumer or class action dispute, and that the arbitration clause could be set up against consumers, given the hyperlink to the terms and conditions from the order page.

The dissent

The dissenting judges disagreed that the dispute lacked the foreign element that would give rise to the application of Quebec's rules on private international law and dismissed the appeal on the basis that the matter could not have been referred to arbitration in light of article 3149 CCQ.8 The minority agreed, however, that there was nothing inherently abusive about arbitration clauses in the consumer or class action context.

With respect to the issue of the degree of scrutiny that should be exercised by a court seized of a motion to refer a matter to arbitration, it appears as though the minority may have implicitly taken a similar approach to the majority, though without expressly using the question of fact or question of law decision. The minority simply stated that when seized with a motion to refer a matter to arbitration, a court should rule on the validity of the arbitration only if it is possible to do so on the basis of documents and pleadings filed by the parties without having to hear evidence or make findings about its relevance and reliability. It held in this regard that a discretionary approach favouring resort to the arbitrator in most instances would best serve the legislator's clear intention to promote the arbitral process and its efficiency, while preserving the core supervisory jurisdiction of the Superior Court.

The minority judgment also underlined that courts could still exercise some discretion when faced with a challenge to the validity of an arbitration agreement regarding the extent of the review they chose to undertake. Given that the issue in Dell Computer was one largely relating to the interpretation of various provisions of the CCQ, they held that the lower courts were correct to fully consider the challenge to the validity of the arbitration agreement.

The Rogers Wireless decision: Application of Dell Computer

The Supreme Court immediately applied the principles set out in Dell Computer to Rogers Wireless Inc v Muroff, 9 a decision heard and issued on the same date as Dell Computer. The Rogers Wireless case also dealt with the applicability of an arbitration clause following the institution of a class action proceeding. In that case, residents in Quebec sought authorisation to institute a class action against Rogers for allegedly abusive C$4 per minute 'roaming charges' billed to customers for the use of their mobile phones in certain areas in the United States. The dispute resolution clause in the relevant agreement not only provided that disputes would be referred to arbitration, but also expressly prohibited a consumer from commencing or participating in a class action. The class representative argued that this clause was abusive.

Applying the test set out in Dell Computer, the court concluded that the issue of whether or not the arbitration clause was abusive should have been referred to arbitration, given that a detailed factual inquiry would have been needed in order to determine whether or not the clause was indeed abusive. In the court's view, to allow a court to decide the issue would run counter to article 940.1 CCP and deprive the arbitrator of the jurisdiction to determine his or her own jurisdiction. As such, the court reinstated the Superior Court's decision to refer the issue to arbitration.

Criticism and comment

The Dell Computer decision has been criticised. Consumer activists, for instance, have argued that the case will jeopardise the future of class actions in Canada, and that the court in fact diverged from other recent Supreme Court jurisprudence which had expressed support for class actions in Canada.

Arbitration specialists have also expressed concern about the test set out by the court, questioning how the court's approach will play out in practice, and whether it in fact respects the deferential approach to arbitration endorsed by the court in this, and previous cases.

The practical effect of the court's decision on class actions will, at least in the short-term, be somewhat limited, particularly in two of Canada's provinces - Quebec and Ontario - which have enacted legislation precluding the waiver of the courts' jurisdiction, particularly in consumer matters. For instance, Quebec Bill 48 An Act to Amend the Consumer Protection Act (Bill 48) was assented to on the day of hearing of the Dell Computer case. That Act added a provision to Quebec's Consumer Protection Act, which prohibits any stipulation requiring a consumer to refer a dispute to arbitration, particularly if it deprives a consumer of access to class proceedings. Although the court in Dell Computer determined that that amendment had no retroactive effect, and therefore did not preclude the claim against Dell from being referred to arbitration, that amendment will now effectively prevent consumer claims in Quebec from being referred to arbitration. The decision will no doubt have considerable impact, however, across the country notwithstanding the above. Even though the matter was decided under Quebec law, it will be a key authority in other Canadian jurisdictions, where arbitration statutes are, like Quebec's rules, based on the Model Law and reflect the New York Convention.

The preclusion of class actions through the application of arbitration clauses will continue to be possible with respect to consumer disputes in those provinces that have not yet enacted legislation similar to that introduced in Quebec and Ontario. Further, such preclusion will also still be possible with respect to arbitration notices sent prior to the introduction of the legislative reforms in those latter provinces. Non-consumer matters and class actions can of course also still be submitted to arbitration.

Overall, the Supreme Court's decision can be seen as a further endorsement of arbitration as an effective and efficient way for resolving disputes in Canada. The court reiterated its confidence in private arbitration as a legitimate alternative to lawsuits, even at the expense of another form of legal proceeding - the class action. The Supreme Court's latest decisions continue to reflect the deferential approach toward arbitration which is accepted, endorsed and applied across Canada.

Notes

  1. Canada signed the Convention on the Settlement of Investment Disputes Between States and Nationals of other States (ICSID Convention) on 15 December 2006. In doing so, Canada became the 156th state to sign the ICSID Convention.
  2. 2007 SCC 34.
  3. [2003] 1 SCR 178, 2003 SCC 17.
  4. [2005] 2 SCR 401, 2005 SCC 46.
  5. JE 2004-457.
  6. [2005] RJQ 1448, 2005 QCCA 570. A member of our firm represented Dell before the Quebec Court of Appeal in this matter.
  7. Supra note 2 at paragraphs 84 and 85.
  8. As mentioned, article 3149 CCQ prohibits the waiver of the jurisdiction of a Quebec authority in private international law consumer and employment matters where the consumer or employee is resident or domiciled in Quebec.
  9. 2007 SCC 35.

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Eric Ouimet

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BCF LLP is a leading Canadian law firm of more than 120 lawyers, patent agents and trademark agents whose business law practice has been keeping pace with the changing needs of the business world. In response to complex needs of clients, BCF offers a unique multidisciplinary team approach as a solution. The firm's main areas of expertise are in buying and selling businesses, corporate finance, taxation, domestic and international dispute resolution, intellectual property, and restructuring and insolvency. BCF has had a growth rate of 1, 600 per cent over the past 12 years - evidence of its emerging status as a leader in the practice of business law in Quebec and Canada.

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