Unconscionability

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"...[1] This appeal addresses the question of whether a trade union may invoke the jurisdiction of the court to enforce fines that it has imposed against its members for crossing a picket line.

[2] The respondents, Jeffrey Birch and April Luberti, were fined by the appellant union for crossing the picket line to attend work during a legal strike. In an application to the Superior Court of Justice, Justice Robert Smith held that a provision in the appellant’s constitution authorizing the fines was an unenforceable penalty clause. The appellant appeals that finding.

[3] For the reasons that follow, I would dismiss the appeal.

Are Mr. Birch and Ms. Luberti entitled to defend in the Small Claims Court?

[12] The union’s position before the application judge and in this court was that by failing to appeal their fines to a three member panel and then to file a complaint (if necessary) to the Public Service Labour Relations Board, Mr. Birch and Ms. Luberti lost their right to defend against the actions commenced in the Small Claims Court for the enforcement of the fines.

[13] The application judge held that once the union had sued its members in the Small Claims Court the members were entitled to raise any defence open to them. The application judge made reference to rule 25.07(4) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 relating to the pleading of defences and to rule 25.06(2) concerning the pleading of points of law. The application judge observed that the union had not provided him with any authority in support of its position that he should deprive a defendant in the Superior Court from pleading all possible defences available.

Are the fines imposed on Mr. Birch and Ms. Luberti penalties imposed under the union constitution, and, if so, are they unenforceable by the court?

14] The application judge concluded that the relationship between a trade union and its members is governed by the union constitution which is a contractual relationship. See Berry v. Pulley, 2002 SCC 40 (CanLII), [2002] 2 S.C.R. 493 at para. 48:

[T]he time has come to recognize formally that when a member joins a union, a relationship in the nature of a contract arises between the member and the trade union as a legal entity. By the act of membership, both the union and the member agree to be bound by the terms of the union constitution, and an action may be brought by a member against the union for its breach[.]
The application judge held that the contract between the union and its members is a contract of adhesion as the members had no real bargaining power with the union: see Berry at para. 49.

[15] The application judge further held that, at common law, the courts will not enforce a penalty clause in a contract that does not provide a genuine pre-estimate of damages: see Canadian General Electric Co. v. Canadian Rubber Co. of Montreal (1915), 27 D.L.R. 294 (S.C.C.); Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79 (H.L.); J.G. Collins Insurance Agencies Ltd. v. Elsley Estate, 1978 CanLII 7 (S.C.C.), [1978] 2 S.C.R. 916.

Is the penalty imposed by the union enforceable because it is not unconscionable in the circumstances?

[19] In respect of the enforcement of the penalty clause, the application judge concluded that notwithstanding the language used by Sharpe J.A. in Peachtree II “the [common] law rule remains in effect that the courts will not require a party to pay a genuine or true penalty on grounds of public policy.” However, as a result of the views expressed by Sharpe J.A. in Peachtree II, the application judge considered the application of the doctrine of unconscionability to the facts of this case.

[20] The application judge adopted the test for unconscionability expressed in Ekstein v. Jones, 2005 CanLII 30309 (ON S.C.), 2005 CanLII 30309 (Ont. S.C.) at para. 57 as follows:

(a) that the terms are very unfair or that the consideration is grossly inadequate [and]

(b) that there was an inequality of bargaining power between the parties and that one of the parties has taken undue advantage of this.

[33] On appeal to this court Sharpe J.A. said at para. 30:

Should the impugned clause in the present case be assessed from the perspective of the common law rule against penalty clauses or does the appellant’s case amount to a request for relief from forfeiture? For the following reasons, I consider that the appellant’s case amounts to a request for relief from forfeiture.

[34] While the court in Peachtree II declined to decide the issue of whether a penalty clause in a contract remains per se unenforceable Sharpe J.A. did not leave much doubt concerning where the courts should head when squarely faced with this issue. He said at para. 32 of his reasons:

Second, I agree with Professor Waddams’ observation in The Law of Damages, looseleaf (Aurora: Canada Law Book Inc., 1991) at para. 8.310 that as there is often little to distinguish between the two types of clauses and that there is much to be said for assimilating both under unconscionability. The effect of assimilation would be “to provide a more rational framework for the decisions of both forfeitures and penalties”.

Unconscionability is also the direction suggested by the dictum of Dickson J. in Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (S.C.C.), [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, at p. 937 S.C.R.: “It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum.” As pointed out by the appeal judge, this would also appear to be the direction of s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C43: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise, as are considered just.” All of this suggests to me that courts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses.

[45] However one articulates the test for unconscionability, I am satisfied that it involves more than a finding of inequality of bargaining power between the parties to a contract. Both the test adopted by the application judge in Eckstein and the test in Harry of the British Columbia Court of Appeal recognize that a determination of unconscionability involves a two-part analysis – a finding of inequality of bargaining power and a finding that the terms of an agreement have a high degree of unfairness. I see little, if any, difference between a description of terms of a contract as “very unfair” or “substantially unfair”. I am also of the view that “abuse of the bargaining power” identified by Robins J.A. in Fraser Jewellers is another way of describing substantial unfairness.

Standard of Review

In the much cited case of the Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33 (CanLII), [2002] 2 S.C.R. 235 at para. 36, the majority said:

Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error of law, subject to a standard of correctness. Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal questions from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”. Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact” and is subject to a more stringent standard. The general rule, as stated in Jaegli Enterprises, supra, is that, where the issue on appeal involves the trial judge’s interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.

The penalty clause is unconscionable

[50] The application judge relied upon Iacobucci J.’s reasoning in Berry that in a contract of adhesion, a union member has no bargaining power with the union. Iacobucci J. also concluded that it is when the contract is formed that determines whether there was inequality of bargaining power. When Mr. Birch and Ms. Luberti joined the union, they took the union constitution as they found it with no ability to negotiate or change its terms until they became members. The fact that they could recommend and lobby for change after becoming members does not alter the analysis.

Were Mr. Birch and Ms. Luberti required to proceed in alternative forums to challenge the validity of the penalty clause in the constitution?

[66] It is a settled principle of administrative law that a party who seeks to challenge a decision of a domestic body must first exhaust his or her internal remedies before seeking judicial review in the courts. I do not see that the principle applies here. In this case, it is the union, not Mr. Birch and Ms. Luberti, who is seeking the court’s assistance. In the case at bar, it is conceded that there is no provision in the union constitution or in the Public Service Labour Relations Act which provides for the enforcement of fines levied by the union. In my view, it would be a surprising result to permit the union recourse to the courts to enforce a fine or penalty and deny the union member the right to advance a defence that the penalty was not enforceable because it was unconscionable. I see no merit in this ground of appeal. I perhaps should add that, unlike the application judge, I find it unnecessary to resort to rules 25.07(4) and 25.06(2) of the Rules of Civil Procedure to come to this conclusion...."

Justice Jurianz dissents.