The Supreme Court of Canada (the "SCC") has released today its judgment in the case of Dell Computer Corporation v. Union des Consommateurs et al. ("Dell Computer") and dismissed a class action against the computer company based on the clause in its consumer contracts providing for the exclusive resolution of disputes by arbitration.

In recent years, retailers in Québec and across Canada, in an effort to avoid the costs and publicity associated with court proceedings and to avoid being the target of class actions, have included mandatory and exclusive arbitration clauses in their consumer contracts pursuant to which disputes must be resolved privately to the exclusion of the courts. The issues before the SCC in Dell Computer centered on the validity and applicability of these clauses in light of the statutory right of consumers to institute and form part of class action proceedings and whether the arbitrator or a court of law should first rule on these issues.

Over a weekend in April 2003, Dell's website contained a pricing error for certain handheld computers. Despite Dell's efforts to rectify this situation, the petitioner and other consumers were able to order several handheld computers at the erroneous prices. Dell advised the petitioner that it would not process his order but offered him a significant price discount. The petitioner declined Dell's offer and insisted Dell honor its initially advertised price. When Dell refused, the petitioner along with consumer advocacy group Union des Consommateurs sought permission of the Québec Superior Court (the "QSC") to institute a class action in the name of all consumers who had purchased the computers during the relevant period. Dell responded with a motion to dismiss the proposed case on the basis that the QSC was without jurisdiction and had to refer the case to arbitration in light of the clause to this effect in its contracts. The clause in question provided that disputes were to be exclusively resolved before the National Arbitration Forum (the “NAF”) located in the U.S.

The QSC dismissed Dell's motion and authorized the class action. The basis for the QSC’s decision was that pursuant to the Civil Code of Québec (the "CCQ"), a Québec authority has jurisdiction over an action involving a consumer contract or a contract of employment where the consumer or worker resides, or is domiciled in Québec, and that the waiver of the right to proceed before Québec courts could not be set up against a worker or consumer in such a case. Dell's appeal of the QSC's decision was dismissed by the Québec Court of Appeal (the "QCA") but on different grounds. The QCA held that the arbitration clause in question was an "external clause" (i.e. a clause that refers to and incorporates a provision not directly included in the contract itself) that had not expressly been brought to the consumer's attention as required under the CCQ, and, therefore, was not binding. In this case, the clause could be accessed by clicking on a highlighted hyperlink that appeared on every page viewed by the consumer.

By a 6:3 majority decision, the SCC maintained Dell’s appeal, dismissed the motion seeking authorization to institute a class action and referred the claim to arbitration.

Justice Marie Deschamps, writing on behalf of the majority, noted that the prohibition relied on by the QSC against the waiver of the jurisdiction of Québec authorities and which warranted resorting to Québec’s rules of private international law, was applicable only in a situation “with a relevant foreign element” which suggests a possible connection with a foreign state (a point of contact that is legally relevant to a foreign country, such as a case where a defendant in a personal claim is domiciled in another country). Justice Deschamps noted that while parties are free to attribute foreign connections to an arbitration process, arbitration “was in essence a neutral element” which does not, in itself, have any foreign element. Justice Deschamps further indicated that alternative dispute resolution mechanisms, including arbitration, are among the means that have been adopted by the international community to increase the efficiency in economic relationships, that arbitration “is an institution without a forum and without a geographical basis”, that “it is a creature that owes its existence to the will of the parties alone” and that its “independence and territorial neutrality are characteristics that must be promoted and preserved in order to foster the development of this institution”. In addition, the majority of the SCC held that the choice of procedure for the arbitration does not alter the institution of arbitration. 

In short, the majority of the SCC found no “foreign element” that warranted the application of the prohibition against the waiver of the jurisdiction of Québec courts and that the arbitration clause in question was not prohibited by a provision of any Québec legislation at the time it was invoked and The majority of the SCC went on to set out the test for determining when judicial intervention is appropriate in a case involving a challenge to the arbitrator’s jurisdiction. It reaffirmed that deference must to given to arbitral jurisdiction and held that, as a general rule, a challenge to the arbitrator’s jurisdiction, unless based purely on a question of law, should be resolved first by the arbitrator. In addition, if the challenge to the arbitrator’s jurisdiction requires the production and review of factual evidence, the court should normally refer the case to arbitration. In a case involving mixed questions of fact and law, the court hearing the application must refer the case to arbitration unless the factual elements only require a superficial consideration of the documentary evidence in the record. Based on the foregoing test, the majority of the SCC held that this case should have been referred to arbitration.

The majority of the SCC also rejected the argument that the arbitration clause in question was an “external clause”. It held that while it cannot be argued that every link from a webpage constitutes a single document, it was difficult to accept that the need for a single command by a user (i.e. clicking on a hyperlink) would be sufficient for the purpose of finding that this was an “external clause” as this would be “inconsistent with the reality of the Internet environment, where no real distinction is made between scrolling through a document and using a hyperlink”. The majority of the SCC noted that in this case, the consumer could access the page containing the arbitration clause by clicking on a highlighted hyperlink entitled “Terms and Conditions”, that this link reappeared on every page accessed by the consumer and that this clause was no more difficult to access than would have been the case had the consumer been given a paper copy of the contract on which the terms and conditions appeared on the back of the first page.

Lastly, the majority of the SCC firmly rejected the argument that the arbitration clause could not be set up against the petitioner because this was a class action and the dispute was, therefore, of public order under the CCQ and could not be submitted to arbitration. The majority reiterated the oft-cited principle that a class action is a “procedure and its purpose is not to create a new right”.

The SCC also released today its judgment in the case of Rogers Wireless Inc. v. Muroff ("Rogers"). Rogers also involved a class action and the validity of an arbitration clause in a consumer agreement that was alleged to be abusive and null (though it did not involve any private international law element). The clause in question not only referred all disputes to arbitration, but expressly prohibited consumers from commencing or participating in a class action. Applying the standard endorsed by the majority in Dell Computer, a unanimous SCC allowed Roger’s appeal and held that the trial judge was correct to renounce jurisdiction and refer this matter to arbitration.

The issues raised by Dell Computer and Rogers and the ability of Québec retailers to circumvent class actions through the use of mandatory and exclusive arbitration clauses have since been addressed by the December 2006 amendments to Québec's Consumer Protection Act, which came into force the day after the hearing of Dell Computer. These amendments prohibit mandatory arbitration clauses in consumer contracts as well as clauses which prohibit the rights of consumers to bring a class action or to be a member of a group on behalf of which a class action is launched.  These amendments did not have a retroactive effect and were not applicable to the facts in Dell Computer or Rogers. Québec’s amendments followed the July 2005 amendments to Ontario's Consumer Protection Act, 2002, which invalidated mandatory arbitration clauses in consumer contracts. The SCC's holding in Dell Computer should, however, have implications on the use of arbitration clauses by retailers in consumer contracts in other Canadian provinces.

Davies is involved in some of the largest and most complex class action litigation matters in the country.  Please do not hesitate to call David Stolow (514-841-6567) if you would like further information on these cases or to obtain a complete copy of the decisions.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.