Monday, 4 February 2019

Ontario Court of Appeal Confirms Court May Render an Arbitration Clause Invalid in Order to Protect the Weaker Contracting Party

By: Marlena McMurtry

Canadian Courts have consistently held that arbitration clauses are to be given a large and liberal interpretation. Underpinning this interpretive approach is the policy of encouraging arbitration and minimizing judicial interference in the arbitration process. This policy is embodied in Alberta’s Arbitration Act,[1] which directs the Court to not intervene in the arbitration process[2] and establishes a presumptive stay of Court proceedings in favour of arbitration.[3]   

Despite the strong policy in favour of arbitration, Courts may still set aside an arbitration clause in the interests of fairness and justice via the doctrine of unconscionability, as illustrated in the recent Ontario Court of Appeal decision of Heller v Uber Technologies Inc.[4] There, the Court held that a universal arbitration clause that imposed significant barriers on the weaker contracting party was unconscionable and therefore invalid.  

The Heller case arose in the context of a proposed class action brought by the appellant UberEATS driver (the “Appellant”) on behalf of individuals who had provided food delivery services and/or personal transportation services through the Uber Apps (the “Drivers”). In his proposed class action, the Appellant sought a declaration that the Drivers were employees of Uber and were therefore entitled to the minimum benefits and protections provided for under the Employment Standards Act (the “ESA”).[5] The Appellant further sought declarations that Uber violated provisions of the ESA and that the arbitration provisions in the service agreements entered into between Uber and the Drivers were void and unenforceable. Finally, the Appellant sought damages of $400 million. 

The Appellant entered into a Driver services agreement and an UberEATS services agreement with Uber (the “Agreements”). The Agreements contained an identical arbitration clause which provided that arbitration must be held in Amsterdam, under the law of the Netherlands and must be conducted in accordance with International Chamber of Commerce rules (the “Arbitration Clause”).

Uber brought an application to stay the Appellant’s action in favour of arbitration. In granting Uber’s stay application, the motion Judge held that Courts must enforce arbitration agreements freely entered into, even in standard form contracts. There were two issues on appeal: (1) whether the Arbitration Clause amounted to an illegal contracting out of the ESA, and (2) whether the Arbitration Clause was unconscionable and thus invalid on that separate basis.

The Court first reviewed section 7(1) of the Arbitration Act,[6] which provides that if a party to an arbitration agreement commences a proceeding in respect of a matter subject to arbitration under an agreement, the Court shall stay the proceeding, unless one of the exceptions in s. 7(2) applies, including where the arbitration agreement is invalid. On the first issue, the Appellant argued that the Arbitration Clause was invalid as it amounted to a contracting out of the ESA, which is prohibited under the ESA.

To determine whether one of the exceptions in s. 7(2) of the Arbitration Act applied, the Court found that, like other preliminary challenges to the Court’s jurisdiction, it had to start with the presumption that the Appellant could prove what he had pleaded, namely that he was an employee of Uber. The Court concluded that the Arbitration Clause was invalid because, based on the presumption that the Drivers are employees, the Arbitration Clause was a contracting out of the provisions of the ESA. One reason was that the Arbitration Clause eliminated the ability to make a complaint to the Ministry of Labour, thereby depriving the Drivers of the right to have an Employment Standards Officer investigate their complaints.

Turning to the second issue, the Court said that regardless of its first conclusion, it found the Arbitration Clause to be invalid on the basis of unconscionability, which also brought the Arbitration Clause within the invalidity exception in s. 7(2) of the Arbitration Act.

The evidence before the Court was that the cost for a Driver to participate in the mediation-arbitration process in the Netherlands pursuant to the Arbitration Clause was $14,5000 US, which did not include the costs of travel, accommodation and counsel to participate in the arbitration. The Court juxtaposed those costs with the Appellant’s approximate earnings of $400-$600 per week based on 40 to 50 hours of work delivering food for UberEATS and his claim for minimum wage, overtime and vacation pay.

The Court took issue with the motion Judge’s finding that disputes between the Drivers and Uber could be dealt with by dispute resolution mechanisms available in Ontario and that only a substantial dispute would require arbitration in the Netherlands. The Court found that there was no dispute resolution mechanism in Ontario. The only other avenues available to the Drivers were in the Philippines or in Chicago, were completely controlled by Uber and could not be characterized as independent grievance procedures. The reason only a substantial dispute would go to arbitration was a direct consequence of the financial barriers that discouraged the Drivers from engaging in arbitration. 

The Court observed that what made the Arbitration Clause clearly unreasonable was that a Driver with a claim of no more than a few hundred dollars would have to undertake arbitration in Amsterdam, a place unconnected to where the Drivers lived and performed their duties. 

The Court addressed the proper test to be applied in determining whether a contractual provision is unconscionable, and said that the Ontario approach is to apply the following four-part test:
  1. a grossly unfair and improvident transaction;
  2. a victim’s lack of independent legal advice or other suitable advice;[7]
  3. an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
  4. the other party’s knowingly taking advantage of this vulnerability. 

The Court then contrasted the Ontario approach with the test for unconscionability recently applied by Justice Abella in her concurring reasons in Douez v Facebook, Inc[8] that requires only 2 elements: inequality of bargaining power and unfairness. In that case, the Supreme Court of Canada found that Facebook’s forum selection clause in a standard form contract was unenforceable due to the gross inequality of bargaining power between Facebook and its users. The majority did not address the proper elements of the test for unconscionability, however.

In Heller, the Court found that it was not necessary to decide the proper elements to be applied in determining unconscionability in Ontario because, under either statement of the test, the Arbitration Clause was unconscionable. In arriving at this conclusion, the Court weighed the following factors:
·         The Arbitration Clause represented a substantially improvident or unfair bargain. It required an individual with a small claim to incur significant up-front costs. Uber was better positioned to incur the costs associated with the arbitration procedure that it unilaterally chose and imposed on the Drivers.
·         There was no evidence that the Drivers had any legal or other advice prior to entering into the Agreements or had the ability to negotiate any terms. In that sense, the Drivers were like consumers such as the users of Facebook in Douez, since they were at the mercy of terms, conditions and rates set by Uber.
·         The Arbitration Clause required that the rights of the Drivers be determined in accordance with the laws of the Netherlands, but the Drivers were not provided with any information as to what those laws were.
·         There was a significant inequality of bargaining power between the Appellant and Uber.
·         Uber chose the Arbitration Clause to favour itself and thus take advantage of its drivers, who were clearly vulnerable to the market strength of Uber.
·         The Arbitration Clause operated to defeat the very claims it purported to resolve.

Application to Alberta

In line with the Ontario approach, the Alberta Courts favour the four-part test for unconscionability.[9] The Heller case provides useful guidance on the factors that a Court might consider in deciding whether an arbitration clause should be rendered unconscionable.

[1] Geoff R Hall, Canadian Contractual Interpretation Law, 3rd ed (Toronto: LexisNexis Canada Inc, 2016) at 269-70.
[2] Arbitration Act, RSA 2000, c A-43, s 6.
[3] Arbitration Act, RSA 2000, c A-43, s 7.
[4] Heller v Uber Technologies Inc, 2019 ONCA 1 [Heller].
[5] Employment Standards Act, 2000, SO 2000 C 41.
[6] Arbitration Act, 1991, SO 1991, c 17 [Arbitration Act].
[7]  What constitutes “other suitable advice” is not clear from the case law. It does not include advice from an assistant at a law firm informing an individual that the firm does not practice in a certain area of law (Swampillai v Royal & Sun Alliance Assurance Company of Canada, 2018 ONSC 4023) but it does include advice from a lawyer friend in the absence of a retainer (Grixti v Kingston (City), 2010 ONSC 5161).
[8] Douez v Facebook, Inc, 2017 SCC 33.
[9] See Cicalese v Saipem Canada Inc, 2018 ABQB 835 at para 171, citing Cain v Clarica Life Insurance Co, 2005 ABCA 437 at para 32.

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