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Privity of Contract as a Defense to Consumer Class Actions in Canada

Nina Butz and Ranjan Agarwal

Privity of Contract as a Defense to Consumer Class Actions in Canada
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Privity of contract has a well-established presence in Canadian common law, with Supreme Court cases delineating the doctrine and its “principled” exception rule. But the law of privity as it relates to consumer contracts has varying application across Canadian provinces, largely because of differences in provincial consumer protection legislation. These differences have important implications for national consumer class actions, as the viability of certain claims and the application of privity of contract as a defense will vary across the country.

This article first offers a primer on the class action and consumer protection regimes in Canada before outlining the law of privity and the statutory factors that influence divergence from the common law, which may be of particular importance to class action lawyers in the U.S. when considering how to structure or defend “copycat” consumer claims in Canada.

The Class Action Regime in Canada

In Canada, each province and territory has its own court system for civil claims. Canada also has a parallel federal court system for civil matters identified in specific federal statutes. The Supreme Court of Canada’s decision in Western Canadian Shopping Centres v. Dutton, 2001 SCC 46 (Dutton), provided a procedural blueprint for class actions regardless of whether provinces or territories have class action legislation.

Since Dutton, most provinces have adopted provincial class proceeding statutes (or, in Québec, class action provisions in its Code of Civil Procedure, CQLR c C 25.01), the exceptions being Prince Edward Island and the three Canadian territories, which still rely on Dutton for the structure of their class action regime. The federal court system has class action procedures outlined in its Rules of Court (SQR/98 106).

Precertification motions are uncommon in Canada, but when multiple class actions are filed in the same province based on the same set of facts, there may be a “carriage motion”—the analogue to a motion for appointment of interim class counsel—where competing counsel move for determination by the court of which plaintiffs’ counsel (or consortium of counsel) will have carriage of the class action in that province. If a carriage motion is brought and determined by the court, all other proceedings filed within the jurisdiction will be stayed.

Unlike the U.S., Canada has no process to consolidate overlapping class actions filed in different provinces for pretrial case management purposes. As a result, defendants can face actions relating to the same conduct brought in several provinces simultaneously. That said, national class actions (i.e., those that seek to certify a class of members that spans the country, rather than solely within the province) are increasingly common.

Certification of a class action in Canada depends on a purely procedural analysis of the proposed claims. More cases are certified than not. Class counsel must establish five elements to certify an action in Canada’s common-law provinces: (1) that the statement of claim discloses a cause of action; (2) that there is an identifiable class of two or more persons; (3) that there is a representative plaintiff who will fairly represent the class, does not have a conflict with the class, and has produced a workable litigation plan; (4) that the claim raises common issues; and (5) that a class proceeding is the preferable procedure for the resolution of the common issues. If a case is certified, it proceeds much like a regular litigation matter.

Québec is Canada’s only civil law province (like most of Continental Europe). Canada’s other nine provinces are common-law provinces (like the U.S. and the United Kingdom). Québec’s class action regime differs from both the U.S. regime and the regime in the rest of Canada in that certification (or “authorization” as it is known in Québec) is more streamlined (for example, the parties require leave to file evidence). To date, most complex cases in Canada have been led by class counsel in Ontario.

The Consumer Protection Regime in Canada

Consumer claims in Canada are often brought as putative class actions in the provincial courts. Some of the country’s leading class action case law concerns consumer protection issues.

The federal and provincial governments share responsibility for consumer protection in Canada. In general, federal laws focus on promoting a safe, fair, and competitive marketplace for consumers, while provincial and territorial laws focus on the terms on which businesses transact with consumers. The consumer protection statutes in most Canadian provinces (including Alberta, British Columbia, Ontario, and Québec) set out requirements for specific types of consumer agreements and prohibit a range of “unfair” or “deceptive” practices in any consumer transaction. Unfair business practices include misleading and unconscionable representations. When a business has engaged in an unfair business practice, the consumer has rights of rescission and recovery and, in some cases, monetary damages.

Unlike provincial class action legislation, which is very similar across the country, consumer protection legislation in Canada varies considerably between provinces. Notable areas of difference include (a) the requirement of “reliance” by a consumer on a particular representation to make out an unfair practice, (b) the enforceability of a pre-dispute mandatory arbitration clause, and (c) the enforceability of implied warranties or conditions. Another notable difference is whether privity of contract between the consumer and the entity alleged to have committed an unfair practice is required.

These variances between provincial statutes have important implications for consumer class actions in Canada, as different provinces allow for different types of claims and remedies by consumer classes. The differences between statutes relating to privity of contract in particular can affect which defendants are appropriately named in a consumer class action.

Privity of Contract in Canada

Under Canadian common law, a contract cannot confer rights or impose obligations on any person other than the parties to the contract. That said, the privity doctrine has been met with mixed treatment by the courts in recent years. In the leading cases of London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 SCR 299, 143 NR 1, and Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 SCR 108, 245 NR 88, the Supreme Court of Canada created a “principled” exception for when a third party can obtain the benefit of protections under a contract, thereby permitting third parties to use contractual provisions as a “shield.” Although the Supreme Court was reluctant to allow third parties to use the contract as a “sword” (i.e., to enforce an affirmative breach), the Ontario Court of Appeal ruled otherwise in Brown v. Belleville (City), 2013 ONCA 148, creating inconsistency in the common law. This case did not concern a consumer contract, however, and its application is limited to privity of contract in the realm of trust and real property. The key consideration across Canada remains whether the parties to the contract intended to extend a benefit or obligation to the third party or not.

The application of privity of contract to a particular dispute becomes more complicated when consumer protection legislation is involved. As highlighted above, consumer protection statutes vary across Canada, particularly in relation to the requirement of privity of contract. Some provinces have enacted statutes that depart from the common law and expressly waive the requirement of privity between the parties. For example, in British Columbia, the Business Practices and Consumer Protection Act (BPCPA) prohibits any “supplier” from committing or engaging in a “deceptive act or practice.” The definition of “supplier” in the BPCPA is very broad and negates any need for privity of contract with a consumer to be subject to the BPCPA. Thus, in British Columbia, manufacturers that do not sell directly to consumers can be liable under the BPCPA.

Québec’s Consumer Protection Act is similar in that it expressly waives privity of contract. The statute creates a direct right of action by a consumer against every participant in the distribution chain of a product on the basis that the implied warranty to which every participant is bound follows the product, no matter if there is a direct contractual relationship. Alberta, Manitoba, New Brunswick, and Saskatchewan have enacted consumer protection legislation that similarly waives the requirement of a direct contractual relationship between consumer and “supplier.”

In contrast, Ontario’s Consumer Protection Act, 2002, Newfoundland and Labrador’s Consumer Protection and Business Practices Act, Nova Scotia’s Sale of Goods Act, and Prince Edward Island’s Sale of Goods Act do not expressly depart from the common-law doctrine of contractual privity. Ontario courts have found that, without an express departure in statute, a consumer contract is required between a consumer and “supplier” or “seller” before a consumer can recover damages under the legislation. That said, when the manufacturer’s promotional materials induced the purchaser to buy a product, or where the manufacturer itself offered a warranty on the product, the requirement of an express contract between the parties may not always be necessary.

Implications for Consumer Class Actions in Canada

In Canada, the viability of a consumer class action against an entity that did not sell directly is therefore dependent on which province’s laws govern the case. Which entities in the distribution chain of a product can be named as defendants in consumer claims brought under statute therefore depends on which province the case is brought in.

In Ontario, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island, statutory consumer claims will generally not succeed against manufacturers or any other entity along the distribution chain of a product that does not have a direct contractual relationship with the consumer. In these provinces, the breadth of available defendants to name in a consumer class action is limited.

In Alberta, British Columbia, Manitoba, New Brunswick, Saskatchewan, and Québec, on the other hand, plaintiffs and class counsel are generally free to name any entity involved in the distribution chain that has engaged in supplying, soliciting, offering, advertising, or promoting a product to the consumer, whether or not privity of contract exists between them. In these provinces, plaintiffs have far more options in terms of appropriate defendants to name.

These different regimes create challenges (or opportunities, depending which side of the bar you are on) for national class actions where the representative plaintiff is seeking to represent class members in different provinces, who are subject to different legal regimes. Courts have found it to be procedurally and legally unworkable to adjudicate a common issue where the underlying law is different. That is especially the case when some class members have viable claims against certain defendants, while other class members do not because of their jurisdiction.

National classes have been certified in consumer cases despite the acknowledgment that this would entail applying different consumer protection laws in different provinces. These cases have not been litigated on their merits, and it remains to be seen whether it is workable to manage such trials. The advent of recent amendments to Ontario’s Class Proceedings Act might further complicate whether national class actions in consumer cases are plausible, as the effect of privity on whether and to what extent issues can be certified in common might produce different outcomes in Ontario than it does elsewhere.

A consideration particular to defendants is that, in some provinces, particularly those in which privity of contract is required, the retailer and every other party in the distribution chain can rely on the legislation to sue the party from whom it directly bought the product, ultimately leading back to the manufacturer. This provides opportunities for third-party claims.

Privity of contract is not the only statutory factor to consider when determining how to structure or defend consumer class actions in Canada, but it does highlight some material implications of the country’s provincial consumer protection regime that can have serious implications for both class counsel’s and the defense’s strategies.