Financial institutions ordered to pay $200 million

Quebec’s business and legal community and consumer protection advocates are concerned over the impact of three related class action rulings by the Quebec Court of Appeal, with some fearing that motions seeking class action authorization will now be more easily granted while others are worried that consumers will pay the price following the court’s interpretation of what is included in the cost of credit.

In a series of complex and controversial rulings the Quebec Court of Appeal in part overturned a lower court’s ruling that ordered nine different financial institutions to pay damages amounting to almost $200 million for improperly disclosing (or not at all) and charging fees for currency conversions in credit card transactions under the Quebec Consumers Protection Act (Act).

In dismissing class actions against four financial institutions and reducing damages against five others, the appeal court notably revised its stance over a petitioner’s required standing to sue in multi-defendant proceedings, adopted a “novel interpretation” over credit charges under the province’s consumer protection legislation, and provided guidance on punitive damages.

“The rulings raise a very important constitutional issue for the banks which was not clearly resolved by the decision, raises a very significant consumer protection issue in Quebec dealing with currency conversion fees, and deals with the issue of standing in a multi-defendant context and whether in the name of judicial efficacy the banks were entitled to question representative plaintiffs they actually had dealings with,” remarked Laurent Nahmiash, a class action expert with Fraser Milner Casgrain LLP in Montreal.

The class action suits were filed in Quebec in 2004, a couple of years after a series of similar class actions across North America challenged the imposition and disclosure of conversion fees in credit card agreements. Credit cardholders who make purchases or who make cash withdrawals in foreign currency are charged a fee by issuers. The fee consists of a percentage (ranging between 1.5 per cent and 2.5 per cent) of the amount of the purchase price, and is rolled into the currency conversion rate reported in the monthly statements issued to the cardholder. Up until the early 2000s, the existence of the fee and the fact that it was rolled into the reported conversion rate was not disclosed. The plaintiff classes contended that the conversion fees billed by the banks were credit charges. Under Quebec consumer’s protection legislation, if these fees are deemed to be credit charges, they must be disclosed as a fixed annual rate in the credit agreement and in periodic statements of the account. In 2009 Quebec Superior Court determined that the non-disclosure of the conversion fees on the credit card agreements, and even the subsequent disclosure of the fees, failed to comply with Act.

The financial institutions appealed, arguing that the class actions should not have been authorized since the representative plaintiffs did not have a cause of action against each defendant. The institutions also argued that the Act, a provincial statute, was not applicable given that under Canada’s Constitution Act, 1867, banking falls within the exclusive jurisdiction of Parliament rather than provincial legislatures.

The Quebec Court of Appeal granted in part the appeal, reducing damages against five financial institutions to approximately $13 million in total. More significantly, the appeal court sought to reconcile in Montréal v. Marcotte 2012 QCCA 1396 two seemingly contradictory rulings it issued more than five years ago that provided guidance over the standing of representative plaintiffs in class actions suits. In a landmark judgment in 2006 the appeal court held in Bouchard v. Agropur Coopérative 2006 QCCA 1342 that proposed representative plaintiffs in class action suits must have a contractual relationship with defendants in order to be able to have standing to sue. In 2007 the Court of Appeal cast doubt on the bright light test it spelled out the year before, and held that a direct cause of action against each defendant was not necessary where the same fault was alleged against each of the other defendants.

The appeal court, acknowledging the inconsistencies between the two judgments, held in Marcotte that it is not necessary for a representative plaintiff in a multi-defendant class action to have a direct cause of action with each of the defendants. However the appeal court held that representative plaintiffs must nevertheless show that a class of individuals exists that do have a direct cause of action against the defendants and that they are capable of adequately representing the members of the proposed class with respect to their claims against the defendants.

“This is a conundrum that has occupied a lot of courts in the country,” noted Nick Rodrigo, a class action litigator with Davies Ward Phillips & Vineberg LLP in Montreal. “Some provinces have resolved it either through legislation or they have really clear jurisprudence that has undercut the ambiguity.” In Ontario, following Ragoonanan Estate v. Imperial Tobacco Ltd. 2000, 51 O.R. (3D) 603 ruling by the Ontario Court of Appeal, representative plaintiffs must have a cause of action against each defendant. In British Columbia, the cause of action must be held by class members, not necessarily the representative plaintiff.

“I think the Marcotte ruling is largely driven to render class action procedure as judicially efficient as possible,” added Rodrigo. “There is no point in the judgment where the appeal court points to some logical flaw in the Agropur decision because the Agropur decision is frankly well-grounded. Because of this desire for judicial efficiency the court is essentially saying we should not apply the Agropur judgment as strictly as it has been applied. The court is really making a plea for a more flexible application of interest.”

Nahmiash concurs. The Montreal lawyer believes that representative plaintiffs should have a direct cause of action with each of the defendants because “you are entitled to face off with somebody who you had dealings with.” Nahmiash asserts that the efficacy argument is “overplayed,” and that having representative plaintiffs with a cause of action against each defendant would not have led to lengthy delays in court proceedings. “It would not have changed a thing but it would have ensured that substantive law is protected and given those banks the right to question the representative plaintiffs,” said Nahmiash.

The Quebec Court of Appeal sidestepped the constitutional question raised by the banks by adopting a “novel interpretation” of the notion of credit charges under the Act, said Nahmiash. The appeal court found that the conversion fees were not charged to allow the extension or reimbursement of credit, and therefore was not required to be calculated in the credit rate. The appeal court found however that conversion fees are subject to disclosure under the Act, a requirement that is similar under the federal Bank Act. Since this is the case, judicial harmonization exists between the federal and provincial legal frameworks, wrote Justice Pierre Dalphond, who penned the related class action rulings.

“It’s a welcome and practical interpretation but many consumer protection advocates will find that it does not dovetail with previous rulings which have consistently said that there are two basic types of charges under the Act for the purpose of disclosing credit – there is capital and everything else is a credit charge,” noted Nahmiash.

Indeed, according to Marc Migneault, a lawyer who argued the case for the l’Office de la protection du Consommateur, the appeal court has with these rulings created a third kind of charge for “accessory services” such as conversion fees. “We’re still evaluating the impact of the ruling but it’s clear that it has changed the long-standing interpretation of the law,” said Migneault. “It says there are now three types of charges – net capital, credit charges and charges for accessory services. If we have to live with this position, we are going to have to determine what accessory services are.”

Raynold Langlois, widely recognized as one of the country’s top litigators, has a completely different take over the importance of Fédération des caisses Desjardins du Québec c. Marcotte 2012 QCCA 1395, the ruling that dealt with credit charges. The ruling is “significant” in terms consumer protection law in the province because it applied the fundamental principle behind the interpretation of statutes – and that is “you must construe statutes that are ambiguous in favour the objective pursued by the legislation,” said Langlois of Langlois Kronström Desjardins, L.L.P. in Montreal.

The rulings also provided guidance regarding punitive damages in class actions. In Amex Bank of Canada c. Adams 2012 QCCA 1394, the third related class action ruling, Justice Dalphond points out that class actions “often comprises an important punitive aspect as compared to individual recovery.” He does add though that this does not imply that punitive damages cannot be awarded in a class action when collective recovery is ordered.

But the message is clear, and likely to attract attention by plaintiff’s bar as Justice Dalphond appears to be suggesting that class actions by their nature are punitive, says Rodrigo. “He’s telling the lower courts, and the plaintiff’s and defense bar, that punitive damages are not something that is an automatic even in cases of breaches in the Consumer Protection Act which it had pretty much looked like it was starting to become. Other things need to be considered and the award of punitive damages will also turn on the gravity of the fault.”

Lawyers representing other financial institutions involved in the suits declined to comment.

This story was originally published in The Lawyers Weekly.

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