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.

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[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.

Streamlining Contractual Disputes with an Expert

By Richard Wong & Peter Major, Q.C.

Carefully drafted alternative dispute resolution (“ADR”) clauses can be tailored to parties’ needs in solving disputes in a timely manner. Binding arbitration has commonly been implemented to limit the time and cost spent in court by providing finality to the dispute at issue. Similarly, limits on discovery can streamline issues and in a recent Alberta Court of Queen’s Bench case, the Court confirmed that a properly drafted contractual clause can provide selected experts with significant decision making authority, including the ability to consider and resolve legal issues when fulfilling their mandate.

In Applied Industrial Technologies, LP v Sirois, 2018 ABQB 818 (“Applied”) Applied Industrial Technologies, LP (the “Purchaser”) was scheduled to purchase the shares of several companies known as the Reliance Group (the “Vendors”) pursuant to a share purchase agreement (“SPA”). A term of the SPA provided that disputes over certain adjustments to the purchase price of the Vendors were to be determined by a nationally recognized accounting firm “as expert and not arbitrator”, the expert’s determination was to “be final and binding on all parties” and “not be subject to appeal, absent manifest error”. 

In this case the Purchaser delivered a Closing Balance Sheet to the Vendors, who objected, thus engaging the expert determination process. The Vendors’ objection included the argument that the relevant figures for Reliance USA (one of the Vendors) at April 30, 2014 in the Closing Balance Sheet and the Combined Target April 2014 Net Profits Statement must be converted from US dollars to Canadian dollars at the prevailing exchange rate at closing, rather than at par. The parties selected a mutually agreeable expert pursuant to the SPA and the expert determined that the currency conversion must be made at the prevailing currency exchange rate at the closing date. 

The Purchaser applied to set aside the expert’s decision arguing that the expert’s professional qualifications (i.e., financial and not legal) meant that the expert could not decide questions of mixed fact and law including interpretation of the contract. As the expert was not an expert in law the parties would not have intended that it answer legal matters and was confined to only ascertain accounting practices, assess compliance with generally accepted accounting principles, and compile financial information based on same.

The Vendors and McLennan Ross LLP’s partner, Corbin Devlin, disagreed and were successful. In the reasons resulting in the dismissal of the Application, three issues the Court considered were whether an expert appointed under an expert determination clause in a share purchase agreement can decide questions of mixed fact and law, how the expert’s decision should be reviewed and whether the expert in this case committed a manifest error.

Mixed Fact and Law

The Court recognized that the SPA provided the Vendors’ representative an ability to object to “any item or aspect” of the Closing Balance Sheet or the Combined Target April 2014 Net Profits. The Court noted that the plain meaning of the phrase “any item or aspect” went far beyond calculations, compilations and accounting principles as argued by the Purchaser.

Additionally, the Court recognized that these were sophisticated parties engaging in a transaction worth over $200,000,000, and that any reasonable party in the same position with legal advice would know that expert determination clauses often refer to compilations, calculations, appraisals or valuations rather than “any item or aspect”, and that an aspect is even wider than an item. As such, the Court found that the parties must have known and should be presumed to have known there were issues of mixed law and fact which could arise in ascertaining the information or methods used in the Closing Balance Sheet that was provided.

Ultimately, considering the plain words of the contract and the contextual matters, the parties provided flexibility to design a suitable process to accommodate any specific matter in dispute, giving the expert broad discretion to determine the rules and procedures to be followed in the proceedings.

Standard of Review

Anytime a court is reviewing the decision of another body, the review is expected to be performed in accordance with a recognized standard. Sometimes that review known as the “correctness standard” enables a court to replace the other body’s decision if the law was applied incorrectly. On other occasions, a court will apply a “deferential standard” and defer to the findings and conclusions exercised by the other body. Here the Court acknowledged that an expert determination is binding unless the expert departed from the contractual instructions in a material respect or the contract otherwise provides. However, that may not always be the case. The Court noted that parties can install a safety valve in the contract clauses to challenge the contractually binding nature of the experts determination, if one is concerned that the expert’s determination were to contain a “manifest error”.

Since the SPA contained a “manifest error” clause, the Court concluded it could conduct a review that should be performed on a deferential standard for a variety of reasons. First, the review involved contractual interpretation which is a question of mixed fact and law. If the same issue arose from the decision of a trial judge, that decision could only be interfered with in the case of a palpable and overriding error or the decision was unreasonable. Likewise, in Canadian appellate courts, the term manifest error has been equated with conclusions that are clearly wrong or palpable errors. Palpable errors are those which are so obvious that they can easily been seen or known; readily or plainly seen. Secondly, if the same issue arose out of an arbitration, the appeal would be limited to questions of law and the standard of review, except in limited circumstances, is one of deference if the arbiter’s decision was reasonable. Thirdly, even in administrative law cases, a reviewing court must consider multiple criteria, as set out in Dunsmuir v New Brunswick, [2008] 1 SCR 190, to avoid imposing a correctness standard and undercutting the integrity of the process to be used.  

In this case, the court found by its interpretation of the SPA that the parties’ words did not simply except an “error”. The parties chose to except only “manifest error”. The word “manifest” must have been intended to express a higher standard than simply looking to see whether some error is apparent from the papers. The parties’ choice to include words of limitation implies deference to the expert’s determination, especially as they did not insert a clause to bifurcate the review standard. Additionally, the Court concluded that taking the plain language of the contract in its context, the parties’ choice of the words “manifest error” indicates the parties wanted the opinion of a financial expert, not the Court, and a speedy process with some degree of finality.

No Manifest Error

This blog does not leave room for explaining multiple reasons why the Court did not find that the expert committed a manifest error in arriving at its decision but the analysis used reflected the Court’s concern that deferential standards are critical for protecting the integrity of the decision making process, respecting the expertise of the decision maker, and recognizing that in many questions, reasonable minds can differ over the outcome. The Court found that an error is manifest or obvious where it is unreasonable: the conclusion is outside the range in which experts could reasonably differ. If the conclusion is within the range and sufficiently intelligible in the context of any contractually required reasons, as it was here, an error is not “obvious” or manifest.

With a strong reputation in commercial litigation, McLennan Ross LLP is well positioned to provide you with the best advice and representation. If you have any questions or concerns with respect to the ADR mechanisms in you contracts, your rights to engage such processes or any other matter, please contact do not hesitate to contact a member of our Commercial Litigation Team.

Quick Auto and the Principle of Unconscionability

By: Eric Appelt, Student-at-Law and Peter Major, Q.C.
 
Many business people are familiar with the basic requirements of an enforceable contract; clear offer and acceptance, some form of value given, and a ‘meeting of the minds’ between the contracting parties. These features are all necessary in the formation of a binding agreement, and the absence of any may provide the basis for one party’s challenge of the contract. What may be surprising to some, however, is the existence of another element, lurking beneath the surface of all contractual arrangements; the principle of unconscionability. A recent Manitoba Queen’s Bench decision – Quick Auto Lease v Jason Hogue et al., 2018 MBQB 126 [Quick Auto] – shed light on the role of unconscionability in the context of lending transactions, and what creditors and debtors should be aware of in entering same.

The principle of unconscionability applies where an inequality of bargaining power between parties is used to extract a substantially unfair bargain in favour of the ‘stronger’ party. Many jurisdictions have addressed issues surrounding unconscionability through legislation aimed at protecting the ‘weaker’ of the two parties. Manitoba’s Unconscionable Transactions Relief Act, CCSM c U20 [Act], for example, allows a court – after having regard to all surrounding circumstances, including risk – to relieve all or a portion of a loan that is found to be excessive, harsh or unconscionable. Lenders and borrowers residing in Alberta should note that the wording in our own legislation (the Unconscionable Transactions Act, RSA 2000, c U-2) is virtually identical to that of Manitoba.

While unconscionability is a concept that can play a role in all contracts (as an equitable remedy), it should be noted that the aforementioned Act applies specifically to proceedings dealing with the lending of money. Under the Act, unconscionability is available as a statutory remedy. It is this context – unconscionability as it relates to lending contracts – that will be the focus of this particular blog post.

Section 2 of the Act was at center stage in the Quick Auto case. In Quick Auto, the lessee obtained a 2001 vehicle from the lessor by way of a financing lease with option to purchase. The acquisition cost ($18,273) differed significantly from the total transaction cost ($37,912), and the 29.9% interest rate was to be bumped up to 36%, compounded daily, in the event of default. The lessee did ultimately default, and subsequently brought an action under section 2 of the Act for relief from the loan.

The Court reiterated the general test to be applied in circumstances of alleged unconscionability, which is two-fold. First, the debtor is required to demonstrate the inequality of the parties and “improvidence” of the bargain. If the debtor is able to do so, the burden then shifts to the creditor to show the agreement was freely entered into by the parties and fair and reasonable in the circumstances. Only where the creditor is unable to satisfy this burden will a court be able to set aside the agreement as “unconscionable”.

In applying this test to the facts of Quick Auto, the Court found various aspects of the particular lease agreement to expose it as an unconscionable one:

·       Despite the agreement opening with the statement “We’ve written this Lease Agreement in simple and easy-to-read language because we want you to understand its terms…”, the agreement was long, complicated, and contained dense provisions, printed single-spaced, in exceedingly small font;

·       The lessee was not allowed to terminate the agreement under any circumstances (or set-off its claims for losses against rental payments due), notwithstanding any potential breach by the creditor;

·       The pre-default interest rate (29.9%) was significantly higher than prevailing interest rates at the time of the agreement, and the post-default interest rate (36%) breached section 4 of Canada’s Interest Act, RSC 1985, c I-15; and

·       The lessee was required to insure the vehicle in the form of a “Mortgage Endorsement (Broad Form SPE – 23 or Equivalent)”, though this form was not set out or defined in any way.

The Court ultimately held that, considering the risk and total circumstances surrounding the loan, the agreement was clearly unconscionable pursuant to section 2 of the Act. Accordingly, the lessees were relieved of any further obligations under the arrangement.

While cases such as Quick Auto may represent the ‘extreme’ end of the spectrum, business realities suggest that some inequality of bargaining power between parties is quite common. This inequality will not always meet the statutory threshold of being ‘unconscionable’, but it is nonetheless important for those regularly involved in lending transactions (and entering contracts, more generally) to inform themselves of these rules. This is because it is not difficult to imagine a less egregious arrangement that nonetheless meets the test for unconscionability as laid out in Quick Auto.

For creditors – especially those viewed as being sophisticated and experienced in their particular industry – this means avoiding some of the red flags emphasized in Quick Auto. Plain and ordinary language, reasonable terms, and a willingness to assist the debtor in meeting its procedural obligations should all be standard practice, particularly when entering in to agreements with potentially vulnerable debtors (such as the elderly or those with language difficulties). Debtors, meanwhile, can avoid the litigation process (and associated costs) altogether by seeking independent legal advice to ensure all contractual terms are understood and complied with, and perhaps taking some time to ‘shop around’ and get an idea for standard market rates.

McLennan Ross LLP has years of experience and a strong reputation in a variety of practice areas, including drafting, reviewing and litigating commercial contracts. If you or your company have questions regarding unconscionability, enforcement of contracts, or any other litigation-related issue, please do not hesitate to contact any member of the McLennan Ross Commercial Litigation practice group.