Heller v Uber: The Supreme Court finds arbitration clause unconscionable and establishes new test for determining when to stay litigation in favour of arbitration

Dentons
Contact

Dentons

On June 26, 2020, the Supreme Court of Canada (SCC) released its highly anticipated decision in Heller v Uber, 2020 SCC 16 [Heller]. Uber had applied for a stay of this proposed class action in favour of arbitration. The court of first instance had granted the stay, which the Ontario Court of Appeal set aside. The SCC upheld the Court of Appeal’s decision, concluding that the arbitration clause was invalid as it was unconscionable: (i) Mr. Heller was powerless to negotiate the terms of the contract; (ii) there was a gulf in sophistication between Mr. Heller, a food deliveryman, and Uber, a large multinational corporation; (iii) the arbitration agreement contained no information about the costs of mediation and arbitration in the Netherlands; (iv) those costs, US$14,500, that Mr. Heller needed to pay up front, constituted a hurdle to relief in that they represented close to Mr. Heller’s annual income; and (v) arbitration here was thus only “illusory.” Justice Côté, in dissent, would have granted the stay on condition that Uber pay the necessary arbitration fee.

Heller develops arbitration and contract law in three important ways:

  1. It provides guidance on whether domestic or international arbitration legislation applies;
  2. It develops the competence-competence principle; and
  3. It restates the doctrine of unconscionability.

Heller, perhaps most significantly, marks a departure from the general rule of arbitral referral established in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 [Dell]. Now, the courts – not the arbitral tribunal – may decide whether an arbitration clause is invalid, provided there is a bona fide challenge and there is a real prospect that, if a stay is granted, the challenge may never be resolved by the arbitrator.

The SCC did reiterate its view that courts ought to respect party autonomy in selecting arbitration as their preferred dispute resolution procedure, being cost-effective and efficient. However, when arbitration is “realistically unattainable” because an arbitration clause, in the circumstances of a particular case, “amounts to no dispute resolution mechanism at all,” a stay in favour of arbitration should not be granted. 

Background

Mr. Heller, an Ontario resident, entered into several agreements with Uber entities in the Netherlands in order to provide food delivery services to restaurant customers through the Uber app (the Services Agreements). In 2017, he commenced a proposed class action against Uber, seeking a declaration that proposed class members are Uber employees and so entitled to benefits under Ontario’s Employment Standards Act, 2000 (the ESA). Uber brought a motion to stay the proposed class action in favour of arbitration based on the arbitration clause in the Service Agreements (the Arbitration Agreement).

The Arbitration Agreement included a dispute resolution clause that stated that any disputes arising under the Services Agreement must be mediated and then arbitrated in Amsterdam under the International Chamber of Commerce’s (ICC) rules. The mediation and arbitration process required up-front administration and filing fees of approximately US$14,500. These fees are set out in the ICC rules, but not in the Service Agreements.

At first instance, the motion judge granted Uber’s stay motion. While he acknowledged the parties’ inequality of bargaining power, he found that the Arbitration Agreement was not unconscionable, because Uber did not take advantage of proposed class members through the Arbitration Agreement.

The Court of Appeal allowed Mr. Heller’s appeal, finding that the Arbitration Agreement was unconscionable, and involved improperly contracting out of the ESA.

SCC Decision

Writing for the majority, Justices Abella and Rowe held that the Arbitration Agreement was invalid. Justice Brown concurred with the majority holding that the Arbitration Agreement was invalid, not because it was unconscionable but because it denied access to justice and was thus contrary to public policy. Justice Côté dissented. In her view, the majority’s opinion offended the rule of systemic referral to arbitration established in Dell.

Applicable Arbitral Legislation: The SCC held that the domestic Arbitration Act applied, not the International Commercial Arbitration Act, 2017 (the ICAA). The majority held that focusing on the nature of the dispute led to this result. Justice Côté, on the other hand, found that the ICAA was applicable because the nature of the relationship was commercial.

Determining Jurisdiction: The majority held that the court had jurisdiction to hear the challenge to the Arbitration Agreement (instead of referring the issue to the arbitrator). Until Heller, motion judges were to apply the general rule of arbitral referral (i.e., referring challenges to an arbitrator’s jurisdiction to the arbitrator) unless doing so raised a pure question of law or a question of mixed fact and law based on a superficial consideration of the evidence on the record.

The SCC held that the court may depart from the general rule if issues of accessibility arise such that the arbitrator might never actually hear the matter. This was the case here and will be the case where: 1) there is a genuine challenge to the arbitrator’s jurisdiction, assuming the facts pleaded are true; and 2) if the stay is granted, the challenge may never be resolved by the arbitrator, having regard to the supporting evidence. For the second prong of the test, the Court held that “[g]enerally, a single affidavit will suffice” and that counsel and judges must ensure that the hearing is narrowly focused such that the assessment does not devolve into a mini-trial. The majority found that while Mr. Heller had a bona fide challenge to present, the ICC fees, in the amount of US$14,500, imposed a “brick wall”. Crucially, the majority held that this “Gordian Knot” could be cut only by deciding the question of unconscionability.

The development of the two-part test above seems to be aimed at providing a further basis for the court to adjudicate the validity of the arbitration clause, even where evidence of the applicable foreign law is tendered. Previously, where a contract was governed by foreign law and evidence was tendered on the foreign law, the challenge to the arbitration agreement became a question of fact for the arbitrator to decide, and not the court. In this case, although the contract was governed by Dutch law, no expert evidence was tendered (and so this specific issue did not arise). Some questions may be raised by the majority’s statement that had evidence of Dutch law been adduced, under Dell, “this Court would have had to grant the stay in favour of an arbitrator determining the unconscionability argument.” Was this simply a reference to the Dell test no longer applying? Or, should the statement be taken at face value?

In her dissenting reasons, Justice Côté raised concerns about this new expanded test. She noted that preliminary motions would take on a life of their own, irrespective of “what we who dwell on Mt. Olympus think about such matters”. It is unclear what evidence the plaintiff must demonstrate and how, if at all, the defendant may challenge that evidence without the resolution of this preliminary issue devolving into a mini-trial. Only time will tell how these issues will play out.

Unconscionability: The majority clarified the test to determine whether an agreement – under Canadian laws – is unconscionable, which permits the court to set aside an agreement. A contract is unconscionable if: 1) there is an inequality of bargaining power, which exists when one party cannot adequately protect their interests in the contracting process, and 2) there is a resulting improvident bargain, which means a transaction that unduly advantages the stronger party or unduly disadvantages the more vulnerable party. Improvidence is assessed at the time the agreement is entered into.

Applying this test to this case, the SCC held that the Arbitration Agreement was part of a standard form agreement and there was a “significant gulf” in sophistication between Mr. Heller, a food deliveryman for Uber, and Uber. The Court also noted that the Arbitration Agreement did not contain information about the costs of mediation or arbitration in the Netherlands; the Arbitration Agreement simply referred to the ICC Rules. The Court clearly tied the unequal bargaining power to the improvident bargain when it noted that even if Mr. Heller had read the Services Agreement in its entirety, he would not have known about the significant costs of commencing this dispute process, that is to say, US$14,500. There appear to have been significant evidentiary issues here as well and it is far from clear that Mr. Heller was powerless and unsophisticated as the majority portrayed. The SCC then held that the bargain was clearly improvident, noting that the US$14,500 initial fee (plus any other costs associated with travelling to the Netherlands as mandated by the Arbitration Agreement) is close to Mr. Heller’s entire annual salary.

Justice Côté stated in dissent that although Amsterdam was the forum or seat of the arbitration, the place of arbitration is not synonymous with the location where arbitral hearings take place and there is no obligation to actually conduct the arbitration at the place of arbitration. Justice Côté further stated that if the court were inclined to grant a stay, it should impose an obligation on Uber to advance the US$14,500 filing fees to initiate the proceedings.

Contracting out of the ESA: The majority declined to consider the contracting out of the ESA issue, namely whether the Arbitration Agreement is invalid because it had the effect of contracting out of the mandatory protections of the ESA. This had been one of the bases for the Court of Appeal granting Mr. Heller’s appeal.

Significance

Although Heller paves the way for this case to proceed to a class certification hearing, this decision should not be interpreted to advantage class actions to the detriment of arbitrations. Instead, it is about taking a hard look at the arbitration agreement in the context of any litigation: Is it lop-sided? What is the forum selection? What is the cost of arbitrating? Is there a streamlined procedure available for disputes of a lesser monetary value?

Parties drafting arbitration agreements should use clear, “plain English” language setting out the terms and any costs associated with the alternative dispute resolution mechanism and should carefully consider not only what the cost of arbitrating should be, but who should bear the cost of arbitrating. They should also consider where any in-person hearings are to be located and whether any can proceed by telephone, in writing, virtually or through a streamlined procedure.

More generally, companies using standard form agreements where there may be an inequality of bargaining power should take care that the terms of the agreement are not unduly harsh to the other party to the agreement, such that they may be considered unconscionable. This is a good time for companies to be reviewing online and other standard form agreements, particularly those with independent contractors and employees.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:

Dentons
Contact
more
less

Dentons on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.