Supreme Court Addresses Provincial Regulation of Banks and Class Action Standing in Bank of Montreal v. Marcotte Trilogy

Introduction

The Supreme Court of Canada recently released its decision in Bank of Montreal v. Marcotte¹ and its companion cases, Marcotte v. Fédération des caisses Desjardins du Québec² and Amex Bank of Canada v. Adams³. It held that: (1) certain provincial consumer protection legislation imposing fee disclosure requirements on credit card issuers, and remedies for their breach of these requirements, can constitutionally apply to banks; and (2) a representative plaintiff in a multi-defendant class action in Québec does not need to have a direct cause of action against each defendant to have standing to pursue the class action.

Background

Three class actions were brought in Québec based on the disclosure requirements of the Québec Consumer Protection Act (CPA). The plaintiffs alleged that issuers of credit cards had not disclosed the charges levied for foreign currency conversion and, when disclosing them, had failed to treat the fees as “credit charges” under the CPA, which would require increased disclosure and a 21-day grace period.⁴ All but one of the issuers were federally regulated banks. The bank issuers argued that, because of exclusive federal authority under the Constitution to regulate banking, and the federal regulations governing bank-issued credit cards, the constitutional doctrines of interjurisdictional immunity (IJI) and federal paramountcy rendered the CPA disclosure requirements inapplicable or inoperative to the banks’ activities.

The Superior Court found for the plaintiffs. The Québec Court of Appeal reversed in part, holding that the conversion charges were not credit charges; however, the issuers remained liable because for several years they had failed to properly disclose the fees. The constitutional doctrines of IJI and paramountcy did not apply. The Court of Appeal also found that the representative plaintiffs had standing to proceed with the class actions despite lacking direct causes of action against each defendant.

The Supreme Court Decisions

Justices Rothstein and Wagner wrote the trilogy of decisions for a unanimous Court. The heart of the legal analysis is contained in Bank of Montreal. The Court denied the issuers’ appeals, allowed the plaintiffs’ appeal in part, and restored punitive damage awards against certain issuers for the breach of their disclosure obligations.

Conversion Charges under the Québec Consumer Protection Act

The Court determined that conversion charges are not “credit charges” under the CPA. Conversion charges are incurred when a purchase is made in a foreign currency. Under the CPA, credit charges, which include interest and most administrative fees, are subject to additional disclosure requirements and a 21-day grace period. The Court held that conversion charges are not fees that a consumer must pay to access credit, but are instead additional fees charged for an optional service and thus cannot be interpreted as credit charges.

Interjurisdictional Immunity

The Court held that IJI did not render the CPA inapplicable to credit cards issued by federally chartered banks. The doctrine of IJI renders provincial law inapplicable to the extent that it impairs the core of a federal power. The bank issuers argued that bank lending and foreign currency conversion lie at the core of the exclusive federal power over banking and that the CPA’s disclosure and remedial regime substantially impaired that jurisdiction.

The Court assumed, without deciding, that the CPA touched on the core of the federal banking power. But it held that the application to banks of the CPA as the Court had interpreted it did not meet the impairment requirement. A disclosure regime for ancillary charges—and the civil remedies when such a regime is breached—does not impair the exercise of federal jurisdiction over banking because the provisions do not limit the banks’ activities by restricting lending or currency conversion. The Court reiterated the limitations it placed on IJI in Canadian Western Bank v. Alberta: the doctrine must be applied with “restraint” because “[a] broad application of the doctrine is in tension with the modern cooperative approach to federalism.”⁵

Paramountcy

The Court likewise held that the doctrine of paramountcy did not render the relevant sections of the CPA inoperative. Under paramountcy, where a conflict exists between provincial and federal law, the federal law prevails and the provincial law is inoperative to the extent of the conflict. A conflict may arise when the provincial law either directly conflicts with or frustrates the purpose of the federal scheme. However, the Court noted that “care must be taken not to give too broad a scope” to the concept of frustration of purpose, holding that the “mere fact that Parliament has legislated in an area does not preclude provincial legislation from operating in the same area.”⁶

The Court found no direct conflict between the federal regulations governing disclosure and the provincial disclosure requirements as it had interpreted them. It also rejected the argument that the CPA frustrated the purpose of the federal regulatory regime. First, the Court characterized the relevant sections of the CPA as articulating a contractual norm in Québec, analogous to the substantive rules of contract found in the Civil Code of Québec. Even if the purpose of the federal regime was to create exclusive and comprehensive national standards, rules regarding disclosure and accompanying remedies “support rather than frustrate the federal scheme,” similar to the relationship between contract law in a province and the federal regulations⁷. Second, although the federal legislation does not provide for civil remedies for breach of bank disclosure requirements, employing instead review by the Financial Consumer Agency of Canada and monetary sanctions, the legislative silence does not mean that civil remedies are inconsistent with the federal scheme. The Court noted that banks are not immune from provincial laws of general application, pointing to the variety of civil claims that may be brought against banks under provincial law.

Representative Plaintiff Standing

In upholding the decisions below, the Court held that under the Québec Code of Civil Procedure (CCP), a representative plaintiff in a multi-defendant class action does not need to have a direct cause of action against each defendant to have standing to proceed with the action. In this case, the representative plaintiffs in Bank of Montreal held credit cards with only two of the defendant banks.

The Court concluded that the CCP “permits an entity or person without a direct and personal interest against some of the defendants to represent the class in various circumstances.”⁸ Rather than focusing on whether the representative plaintiff has a cause of action against every defendant, in considering whether a class action should be permitted courts should focus on, among other factors, whether the class action presents identical, similar or related questions of law or fact and whether the representative plaintiff can adequately represent the class. In determining the latter question, the Court emphasized a flexible and proportional approach, which includes a consideration of the balance between litigants, questions of good faith and judicial economy. In this case, the Court held that the representative plaintiffs had standing because largely the same legal issues were present in the cause of action against each issuer.

The Court also held that this standing analysis must be the same whether undertaken before or after the class action is authorized. This holding clarifies the former distinction under the CCP between challenges to the standing of representative plaintiffs before or after authorization.⁹

Implications of the Decisions

These cases may prove significant developments in both class action proceedings and the provinces’ jurisdiction to regulate banking and other federally regulated industries. Depending on the nature of the provincial regulation, the Court’s reiteration of its narrow interpretation of IJI and its restrictions on paramountcy based on frustration of federal purpose may expand the ability of provinces to regulate federal undertakings.

Further, the holding on standing in multi-defendant class actions may facilitate industry-wide class actions. While the decisions only discuss Québec civil procedure, they could affect case law in the rest of Canada, which is currently split on this issue. ¹⁰

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¹ 2014 SCC 55 [Bank of Montreal].
² 2014 SCC 57 [Desjardins].
³ 2014 SCC 56 [Amex].
⁴ The grace period required that an issuer waive any credit charges if paid within the 21-day period.
⁵ Bank of Montreal, supra note 1, para. 63 (citing Canadian Western Bank v. Alberta, 2007 SCC 22).
⁶ Id. para. 72.
⁷ Id. para. 79.
⁸ Id. para. 34.
⁹ See Bouchard v. Agropur Coopérative, 2006 QCCA 1342 and Regroupement des CHSLD Christ-Roy (Centre hospitalier, soins longue durée) v. Comité provincial des malades, 2007 QCCA 1068.
¹⁰ See e.g. MacKinnon v. National Money Mart Co., 2004 BCCA 472 ; Ragoonanan Estate v. Imperial Tobacco Canada Ltd. (2000), 51 O.R. (3d) 603.

Republished in National Banking Law Review’s December issue.