The Tyranny of Arbitration Clauses in Consumer Contracts

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Arbitration clauses affect most everyday people in their daily purchases/subscriptions. This lecture argues that arbitration clauses in consumer contracts are fundamentally unfair and problematic.

This lecture is taught by Amer Mushtaq, LL.B., M. Engineering , B.Sc. (Hons.), who is the Principal and Founder of Formative LLP.   Through his YouTube channel, YouCounsel, Amer shares practical advice from his years of legal experience to help anyone access justice and achieve their goals.  Subscribe today to learn more.


Show Notes:


Lecture Slides:

Welcome to YouCounsel.

In our last lecture we talked about arbitrations in general and we explained arbitration clauses in various contracts. We also discussed arbitration clauses and consumer contracts and we stated that, we find that there is a big problem with arbitration clauses in consumer contracts.  These are fundamentally unfair to consumers. In today’s lecture we will explain why these arbitration clauses are unfair in consumer contracts.

Please note that this lecture is not legal advice.  If you have any specific questions, regarding your issues, you should contact a lawyer or a paralegal or the Law Society of Ontario for a referral.

In today’s lecture will talk about 3 things. 1st of all I will explain what are consumer contracts.  Then we’ll talk about the normal dispute resolution process that is available in Canada (in Ontario) and in most of the democratic world.  Finally we will talk about what are some of the issues with respect to arbitration clauses in consumer contracts.

  • Consumer Contracts are essentially contracts between one entity, one big supplier, one big developer, one big service provider, on one side and many, many, many consumers on the other side. For example, if you are a subscriber to Amazon then you are this one subscriber let’s say ‘A’ and you have an individual contract with Amazon which will be a consumer contract.  Like you many, many hundreds of thousands of people (millions of people) will have a similar contract with Amazon. Essentially it’s the same contract which is prepared by Amazon and when you agree to the terms of the uses of Amazon’s product or delivery process, then you are essentially agreeing to that contract. Each one of us has an individual contract with Amazon or any other party that we are engaging in business with and that contract is considered binding.  That contract has in it an arbitration clause or is going to have an arbitration clause in it and which is what we believe is problematic.
  • In a normal dispute resolution process in Canada, if you as an individual have a case, a dispute with another party, then you can simply go to courts or tribunals and have your case argued there and get the decision from the court. If you have a case that is common with multiple users, for example, hundreds or thousands of users have a common issue with one party on the other side, then you can bring a class-action lawsuit and have all of these cases combined in one case and let the court decide the fairness of that case (of the dispute in question). Class actions are hugely, hugely important in a democratic society. We will have a separate lecture on class actions, but briefly speaking you can understand class actions in this way.

Let’s say that if you have a dispute with your telephone provider or service provider, which is worth $20.00 dollars.  The nature of the dispute is such that it’s not only you who has the same issue but 2,000,000 other people or 3,000,000 other people have the same problem because of the way that telephone provider is dealing with that specific service. As an individual if the dispute is worth $20.00 it may not make sense for you to go to court and have that case argued on an individual basis—it will cost you more, it will take a lot of your time, it will take a lot of courts time and so it wouldn’t make sense. But if 3,000,000 people have the same issue which is worth $20.00 each, then it makes sense to have all those issues combined together in one case and let the court decide. That is what a class action is.  Class action is a very important tool in a democratic society because a lot of people who have smaller issues with one entity, they can have those issues litigated in a cost-effective manner and in a manner that can apply to a large number of people. The results can apply to a large number of people. That is sort of the normal process, in our Canadian system which is how disputes are resolved.  Some of the key features, of our dispute resolution process is that it is a public process. You can walk into any court sit down, see the process unfold and so the idea of justice not only to be done, but to be seen is important and that is why it is a public process. Arbitral process is not at all a public process.  It is a confidential process.

Now again the 2nd item that you want to remember about our judicial system is that it’s subsidized by the state. We pay taxes which fund our judicial system. We have courts that are available to us for free, we have judges who are available to us for free, court staff who are available to us for free. With respect to the judicial system, we pay a minimal cost for the resolution. Yes, we have to pay significant amount of monies to our lawyers, but that you will have to pay in an arbitral process as well. But the judicial process itself is subsidized by the state in a democratic society and in Canada as well.

Another item of the judicial system is that it plays a significant role in the development of law. Many people who understand how judges make decisions, they understand that judges are not just applying the law, by interpreting different legislation, by applying it to different circumstances, they’re actually developing the law. In some cases there are new causes of actions that are created by judges because of the unfairness of a case that they may be dealing with. This is not something that may be available in an arbitral process. Also judicial system deals with public policy matters. That is one of the important functions of our appellate courts and Supreme Court of Canada that they deal with public policy issues all the time.  Then finally access to justice is part of the mandate of the judicial system. We can argue that our judicial system has a lot of problems and it is not performing all of these functions to the satisfaction of the general public, but that’s a separate debate. The question here is that, whether the arbitral system that you may end up subscribing to unknowingly, is that a better system than the court system and I submit, that it’s not.  It’s actually for the consumers, for the ordinary people, largely problematic.

  • Okay, so what are some of the issues with the arbitration clauses in consumer contracts? Number one as I had mentioned in a previous lecture you have no right to go to court. The only place that you can go is before an arbitrator.  You cannot appeal that decision.  There is no oversight to that arbitral decision or very, very minimal oversight. The courts will try to be hands-off with respect to arbitral decision. Secondly, you have no right to have a class action. I will be very surprised if an arbitral agreement will allow for class actions, because the whole idea is to make it difficult for people, for ordinary consumers, to bring these cases against the providers.  There is no class action lawsuit that you can bring together.  Then most importantly, arbitral agreements in consumer contracts are not negotiated.

If there is a dispute between Microsoft and Amazon or Microsoft and Apple and they come to an agreement that they should resolve the dispute by arbitration, that’s fine.  But in consumer contracts you cannot. When you are subscribing to Amazon or when you’re subscribing to a Fortnight or any other service provider or buying any product you cannot say to the other side, say to Amazon that I’m okay to subscribe I’m willing to pay the money but, I’m not agreeing to the arbitration agreement in this contract.  That option is not open to you. You will simply not be able to subscribe.  It’s simply a one-sided contract which is enforced simply because you accept the terms and conditions and you don’t have a choice, you don’t have a say in this matter.

I’ve also mentioned that arbitration agreements end up costing more to the consumers because you will have to pay for the arbitration. Whereas in the court system you’re not paying for the judges and so some people argue that arbitration will be—considering the overall cost—cheaper, I completely disagree.  I believe that arbitration costs will be significantly higher. In arbitration each consumer if they have a dispute even though the dispute may be common to 20,000,000 people, each consumer will have to prepare his own case separately, bring it before the arbitrator and argue it. It is sort of divide and conquer policy. Each defendant on the other hand will have a similar defense to each case. If you have an issue of $20.00 worth based upon a policy of the telephone service provider or any other party and the other person will have a similar case—but these 2 people will not be working together in a class action lawsuit.  They’re working separately. Whereas the defendant has the same defense or similar defense for each of the cases.  It is much easier for the defendant to defend it. There’s also a problem that all of these cases, 20,000,000 of these will be going to the same arbitrators or a few arbitrators.  There is a concern that the process of decision making may not be fair.

I previously mentioned there’s lack of transparency in arbitration process. First of all it’s confidential so other people, who are not party to the arbitral process they may not know what the dispute is, they may not know what the decisions are.  Within the arbitration process the arbitrators, generally, do not provide detailed reasons for every single decision that they make in that arbitral process. There is relatively more lack of transparency in arbitration system, than in courts.

Public policy is not the main concern of arbitration process.  It is a dispute between 2 specific parties and that’s what they’re going to focus on.  In the interest of justice it is important that the arbitral process for the consumer contract is something that should not be in the arbitral system.

What you want to understand is that in most of the Western world (in most of the 1st world), especially in Europe, the arbitration agreement in consumer contracts are unlawful.  The main problem of arbitration agreement in consumer contracts exists in the United States and to some extent and increasingly so in Canada. In the United States, most of the arbitration agreements whether they are with consumers or whether they’re with commercial entities—they’re all enforceable. Now there are few cases (mostly in California) where the courts have held that those arbitration agreements were unconscionable but then those are the cases on the fringes.  The majority of the cases in the United States—the arbitration agreements are enforced.

Now, Canada has a similar issue. In Canadian courts, in Canadian law there is an Arbitration Act, as I mentioned in Ontario, which allows the parties to have the arbitration agreements and take away their ability to go to court.  The arbitration agreement does not distinguish between consumers or any other person.  Although there is a Consumer Protection Act that does provide some protection from the arbitration agreements in consumer context, but very, very limited.

In the next lecture we will talk about how the Canadian courts have been dealing with arbitration agreements.  I will talk about some of the latest cases and then we’ll discuss this matter further.

Hopefully this gives you some understanding of the arguments against arbitration agreements in consumer contracts, which will help you in making decisions with respect to your own cases.

Thank you for watching.

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