Supreme Court of Canada Finds Arbitration Clause to Be “Uber” Unconscionable

On June 26, 2020, the Supreme Court of Canada (SCC) released its decision in Uber Technologies Inc. v. Heller. The SCC ruled in favour of the plaintiff, allowing him to proceed with a class-action lawsuit in Ontario courts, rather than through a foreign arbitration.

At issue was an arbitration clause in a standard form contract that required claimants to pay a US$14,500 commencement fee and specified that the place (or seat) of arbitration was the Netherlands. The plaintiff, David Heller, sought to pursue a proposed class action against Uber Technologies Ltd. (Uber) and related companies seeking rights and benefits under Ontario’s Employment Standards Act, 2000 (ESA). Uber sought to stay that class action on the basis that Mr. Heller’s contract with Uber required disputes to be submitted to the International Chamber of Commerce (ICC) for mediation and, if unsuccessful, to arbitration in the Netherlands.

A majority of the court held that the proposed class action should not be stayed in favour of arbitration. The court’s reasoning provides guidance as to what types of arbitration and standard form clauses will be enforceable.

ENFORCEABILITY OF ARBITRATION CLAUSES

A preliminary issue was whether Ontario’s domestic Arbitration Act, 1991 or the International Commercial Arbitration Act, 2017 governed the parties’ dispute. A majority of the court held that this question should focus on the nature of the parties’ dispute, rather than the parties’ relationship, and found that the dispute at hand was fundamentally about labour and employment and not a commercial dispute, meaning the Arbitration Act, 1991 applied.

The court then turned to the underlying issue of who should decide whether an arbitrator has jurisdiction: the courts or the arbitrator/arbitral tribunal. The SCC reaffirmed prior jurisprudence and the “competence-competence” principle holding that courts should refer questions of arbitral jurisdiction to arbitrators, unless the question is a pure question of law or of mixed fact and law that requires only a superficial review of the record and the court is convinced that the challenge is not a delaying tactic or will not prejudice the recourse to arbitration.

However, the majority added an additional exception. It stated that courts may resolve a challenge to arbitral jurisdiction where, assuming the facts pleaded to be true, there is a genuine challenge to arbitral jurisdiction and a real prospect that, if the stay is granted, the challenge may never be resolved by the arbitrator.

On the facts of this case, the majority found that the question of arbitral jurisdiction could be determined on a superficial review of the record and that accessibility concerns — primarily, the costs of arbitration — indicated that the issue should be decided by the court.

UNCONSCIONABILITY IN STANDARD FORM CONTRACTS

The majority set out two elements that must be proven to establish that an agreement is unconscionable:

  1. An inequality of bargaining power between the parties

  2. An improvident bargain that unduly advantages the stronger party or unduly disadvantages the more vulnerable

The majority noted that a standard form contract does not, by itself, establish an inequality of bargaining power, but it does have the power to do so, particularly through choice of law, forum selection and arbitration clauses.

In this case, the majority of the court found that the arbitration clause was unconscionable. There was a clear inequality of bargaining power between the parties, and the plaintiff could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC rules or Dutch law. These costs also created an improvident bargain when compared with the plaintiff’s annual income and the disproportionately small size of a potential arbitration award.
The SCC’s ultimate finding was that the arbitration clause, in effect, made the substantive rights provided by the contract unenforceable by a driver against Uber.

IMPLICATIONS FOR ARBITRATION CLAUSES

The decision in Uber is unlikely to have a significant impact on arbitration clauses in commercial contracts between sophisticated parties. However, it does represent a significant shift in the law as it relates to arbitration clauses in standard form contracts between parties of unequal bargaining power, such as those commonly used by participants in the gig economy. Canada continues to be an arbitration-friendly jurisdiction, and arbitration agreements freely entered into by commercial parties will be enforced. However, the position of the majority of the court was that respect for arbitration is based on it being a cost-effective and efficient method such that both parties can resort to it for resolving disputes. When arbitration is not realistically accessible for a party, it provides no dispute resolution mechanism at all.

As a result, it can be expected that challenges to the “accessibility” of arbitration will become more common in the context of standard form contracts between stronger and more vulnerable parties. While arbitration clauses continue to be a useful tool in contracts, this decision reinforces that care must be taken in drafting such clauses to ensure they are enforceable. Parties should consider including terms that clearly reflect that arbitration will be accessible for both parties, such as capping arbitration fees, explicitly specifying that hearings may take place in a location other than the place or seat of arbitration, allowing for telephone hearings or creating a tiered process based on the size of claims.

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.

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