Pearce v Pillars: What’s the deal with ‘class action waiver’ clauses in contracts of adhesion?

By: Emma Walsh

Introduction

Class actions can, and often do, serve as a procedural vehicle to aid comparably weaker parties in holding larger organizations accountable. Yet, at the outset of their relationship, larger organizations may require individuals to contractually waive their rights to participate in a class action. The British Columbia Court of Appeal recently rejected the validity of one of these clauses in Pearce v. 4 Pillars Consulting Group Inc., 2021 BCCA 198. The decision confirms that class action waiver clauses are not only unconscionable, but also contrary to public policy.

Class Action Waiver Clauses

Class action waiver clauses often emerge in contracts of adhesion, meaning the signing party has no say in the contractual terms. Most consumer contracts are considered contracts of adhesion. In this situation, the weaker party tends to sign the contract without familiarizing themselves with the terms. Large actors take advantage of this fact by including terms that unfairly disadvantage the individual.

Class action waiver clauses are an example of these types of terms. In essence, they state that an individual forfeits their right to be part of a class action for matters arising from the contract. Individual suits or mandatory arbitration become the only avenues for recourse, and very few individuals pursue either route.

The unequal bargaining power inherent in these clauses is a catalyst for consumer protection laws across Canada; these statutes in Quebec, Ontario, and Saskatchewan include provisions that prohibit the use of class action waiver clauses in consumer contracts. Unlike these provinces, however, British Columbia’s Consumer Protection Act is silent on the use of class action waiver clauses. 

What Happened in Pearce?

One of these clauses is at the heart of Pearce. The case emerged out of the business dealings of 4 Pillars Consulting, debt advisors who provided debt restructuring services to individuals on the brink of insolvency. Their customers brought a class action against them seeking damages for allegedly operating illegally and looking to recover the fees they had paid.

In response to the class action, however, 4 Pillars attempted to invoke the class action waiver clause that was standard in their business contracts. The clause read:

To the extent permitted under applicable law, you may only resolve disputes with us on an individual basis, and may not bring a claim as a plaintiff or class member in a class, consolidated, or representative action. Class arbitrations, class actions, general actions, and consolidation with other arbitrations are not allowed.

The lower court found the clause was invalid because it was unconscionable and because it violated public policy. 4 Pillars appealed to the BCCA, who ruled against them and affirmed the invalidity of the class action waiver clause.

Unconscionability

The BC Courts held that the class action waiver clause was unconscionable because there existed unequal bargaining power between the parties, and because the clause conferred an undue advantage on the stronger party such that it was an improvident bargain.

First, the Courts found there to be unequal bargaining power between 4 Pillars and the class members. The class members were all on the brink of bankruptcy when engaging its services, invoking the notion of necessity. Further, the class action waiver clause did not adequately explain its consequences so that a layperson would understand them.

The clause also represented an improvident bargain. The chambers judge had performed a cost-benefit analysis and determined a class action was the only economically viable route for class members to exercise their rights; the claims at issue were complex, and individual claimants would only be able to recover a mere $5,000. Thus, the clause was a direct barrier to access to justice.

Public policy

Though already invalid on the grounds of unconscionability, the Courts further stated that class action waiver clauses violate public policy. These clauses offend three of the major goals of class action proceedings, as identified by the Supreme Court of Canada in a landmark 2001 decision.

First, these waivers prevent class actions from preserving judicial resources. Forcing litigants to pursue individual actions, which could instead be consolidated, means multiple courts would be occupied with considering the same issues. Class actions “protect the rights of all Canadians by freeing up judicial resources to resolve other conflicts.”

Second, these waivers prevent individuals from cost-sharing, posing a barrier to access to justice. One of the main purposes of class actions is to make economically viable a lawsuit that would otherwise not be worth pursuing for an individual. Again, the chambers judge had opined that it would be economically irrational to pursue this claim as an individual.

Third, these waivers absolve large actors of responsibility for wrongdoing, contrary to the behavior modification goal of class actions. Large actors are, at least in theory, constrained from committing wrongdoing so long as the threat of a large class action lawsuit looms over their heads. Curbing one’s customers’ rights from participating in a class action defeats this purpose.

Just before the BC Court of Appeal rendered its decision, the Supreme Court of Canada rejected a mandatory arbitration clause in Uber Technologies. The BC Court of Appeal affirmed that Uber further solidified the correctness of their ruling.

Looking Forward

The decision in Pearce confirms what many have previously argued: class action waiver clauses run contrary to our conceptions of access to justice. In particular, the Court of Appeal’s public policy analysis demonstrates that these clauses frustrate the very functioning of class actions. In jurisdictions lacking the legislative protections of Quebec, Ontario, and Saskatchewan, this decision will serve as a strong signal.

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