The enforceability of class action waivers: Are they fair game or unconscionable and contrary to public policy?

Introduction

As class actions become more prevalent, many businesses are actively taking steps to avoid such potential claims.  One such step may include the use of a “class action waiver” in a standard form contract.  Businesses who take these steps may be viewed as more favourable “risks” by underwriters as they take proactive steps to manage their potential exposure to class actions.  However, underwriters should be aware of a recent decision from the British Columbia Court of Appeal with respect to the enforceability of class action waivers.  This decision casts doubt on the utility and enforceability of class action waivers, at least in the consumer protection context.

What is a Class Action Waiver?

A class action waver is a contractual term, usually contained in a standard form contract, that restricts an individual’s right to file a class action lawsuit.  These waivers often stipulate that the individual will resolve any dispute with the company on an individual basis.  The intent behind this clause is to allow the company to avoid or manage the risks associated with costly class action proceedings.

The enforceability of a class action waiver has been an unsettled issue in the Canadian courts for some time.  Although the Supreme Court of Canada in Seidel v. Telus, 2011 SCC 15 considered the enforceability of a standard form contract with a class action waiver, the court did not rule directly on the enforceability of that waiver, rather finding that the arbitration clause in issue was void due to the application of consumer protection legislation.

Recent Developments in British Columbia

In Pearce v. 4 Pillars Consulting Group Inc., 2021 BCCA 198, the defendant, 4 Pillars Consulting Group Inc. (“4 Pillars”), provided services to individuals with respect to debt restructuring in relation to consumer proposals under the Bankruptcy and Insolvency Act (Canada) and informal debt repayment proposals with individual creditors.  Within 4 Pillars’ contract for debt restructuring services, there was a class action waiver clause precluding customers from participating in a class action against 4 Pillars.

The plaintiff, Paul Pearce, commenced a class action against 4 Pillars alleging the services provided were illegal.  The British Columbia Supreme Court certified the action: Pearce v. 4 Pillars Consulting Group Inc., 2019 BCSC 1851.  4 Pillars appealed the certification decision to the British Columbia Court of Appeal.  One of the grounds of appeal was that the trial judge erred in failing to dismiss the class action on the basis of the class action waiver clause.

On appeal, the British Columbia Court of Appeal considered whether the class action waiver clause was unenforceable as being either (i) unconscionable, or (ii) contrary to public policy.  In conducting this analysis, the Court of Appeal utilized the framework set out in Uber Technologies Inc. v. Heller, 2020 SCC 16 which sets out the following test for unconscionability: (1) was there an inequality of bargaining power; and (2) was there a resulting improvident bargain?  If so, the contract is void for unconscionability.  Further, a clause may also be held to be invalid on the basis that it is contrary to public policy.  Applying this analysis, the Court of Appeal unanimously held that the class action waiver clause contained within the 4 Pillars’ service agreement was unconscionable and, therefore, invalid.

With respect to the first aspect of the legal test, the court found there was unequal bargaining power between 4 Pillars and the proposed class members due to the proposed class members’ lack of sophistication.  The very fact that the proposed class members were individuals who had difficulty managing their debts and required the help of 4 Pillars, highlighted their lack of sophistication.  Further, the Court of Appeal noted that the service agreement was in standard form, the individual consumers did not have the opportunity to negotiate the contract and the clause could effectively bar them from recovery for damages.

With respect to the second aspect of the legal test, the Court of Appeal found there was an improvident bargain between 4 Pillars and the proposed class members.  The class action waiver clause modified the substantive rights of the proposed class members and denied them critical tools to access justice.  The waiver removed the proposed class action members’ only practical way of seeking a remedy for 4 Pillars’ wrongs.

Although not necessary to dispose of the issue, the Court of Appeal also found that the class action waiver clause was unenforceable due to public policy considerations as the clause denied independent dispute resolution, which interfered with access to the courts.

Take Away

The decision in Pearce suggests that where a standard form contract contains a contractual term preventing a party from participating in a class action, that clause may be considered unconscionable or contrary to public policy and therefore unenforceable.

Class actions can be viewed as serving a valid purpose in the context of consumer protection as they ensure that “individually small breaches that cause widespread harm are not encouraged by the absence of an effective remedy.” [1]  As such, the courts may ascribe a valid public policy purpose to class actions, which could, in the future, also be a ground upon which to refuse to enforce a class action waiver clause.

If a party intends to rely upon a class action waiver clause, they will need to take proactive steps to ensure its enforceability, including drafting the waiver in such a way to bring the other side’s attention to the consequences of that clause.  One-sided or onerous clauses must be expressly understood and agreed to.  However, it is possible that the class action waiver clause will still be considered unconscionable or contrary to public policy, particularly if a class action is the most preferable and cost effective manner for a plaintiff to resolve a matter.  This is often the case in the context of consumer protection claims.

Companies who rely solely upon a class action waiver to manage potential class action risk may find themselves with an unenforceable contractual provision which provides no real protection.  To the extent that underwriters rely upon the existence of such provisions in the standard form contracts of their insureds as a potential risk-mitigation strategy, they should be aware of the potential limitations of these clauses.

[1]      Horton W. & Campbell. D. (2019), Arbitration as an Alternative to Dispute Resolution: Class Proceedings and the Mirage of Mandatory Arbitration.