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Who’s Taking Who for a Ride? Supreme Court Deems Arbitration Clause Unconscionable in Uber v. Heller

In a decision released on June 26, 2020, Uber Technologies Inc. v. Heller 2020 SCC 16, the Supreme Court of Canada (the “SCC”) found invalid the arbitration clause in Uber’s standard form service agreement with its drivers in Canada, requiring that they arbitrate their disputes in the Netherlands. This decision paves the way for Uber’s drivers to proceed with a proposed $400 million class action.

Key takeaways from this decision:

  • Review the Arbitration Clauses in Standard Form Contracts – All companies should carefully review arbitration clauses in their standard form contracts or where employment contracts call for arbitration. This is particularly important if there are power imbalances between the parties, or the clause mandates a procedure that makes resolving the dispute impractical (such as disproportionate filing fees or where foreign law is deemed to apply).
  • The Doctrine of Unconscionability in Contract Law is Restated – The SCC applied unconscionability to the arbitration clause in Uber’s service agreement and, arguably, expanded the doctrine by determining that a contract can be invalidated, even if one party does not knowingly take advantage of another’s vulnerability.
  • New Exception to Competence-Competence Principle in Arbitration – The SCC created a new narrow exception to the Competence-Competence principle, which gives arbitral tribunals the authority to determine their own jurisdiction. Under this exception, only a court can resolve a jurisdictional dispute where there is a real prospect that an arbitrator may never be able to resolve a genuine challenge to its jurisdiction.

Background

In 2017, David Heller started a $400 million class action on behalf of Uber drivers in Ontario for violations of the provincial Employment Standards Act (“ESA”).

Uber brought a motion to stay the class proceeding, relying on the arbitration clause in the standard form service agreement with its drivers. The clause designated Amsterdam as the “place of arbitration”, and the agreement itself was governed by the laws of the Netherlands. Under the agreement, Mr. Heller was required to pay a filing fee of US$14,500 to commence the arbitration. He argued that arbitration was invalid on the basis of unconscionability, and because it contracts out of the mandatory provisions of the ESA.

Justice Perell of the Ontario Superior Court of Justice ruled in Uber’s favour and held that the validity of the arbitration had to be referred to arbitration in the Netherlands, in accordance with the “competence-competence” principle that arbitrators are competent to determine their own jurisdiction.

The Ontario Court of Appeal overturned Justice Perrell’s decision. In particular, it found that in the circumstances of this case, a court should determine jurisdiction in the first instance. The appellate court found that the arbitration provision was unconscionable given the inequality of bargaining power between the parties and the costs of arbitration that Mr. Heller would have to incur.

The Supreme Court of Canada’s Decision

Justices Rowe and Abella, writing for a seven-judge majority, agreed with the Court of Appeal and dismissed Uber’s appeal. Justice Brown concurred with the result but disagreed with the majority’s unconscionability analysis, and he found Uber’s arbitration agreement invalid on public policy grounds. In dissent, Justice Côté focused on the freedom to contract and would have stayed Mr. Heller’s class action in favour of Uber’s arbitration agreement.

We focus on the following three aspects of the decision:

  • The applicability of Ontario’s International Commercial Arbitration Act in the employment context.
  • A new exception to the well-established “competence-competence” principle.
  • The majority’s application and expansion of the doctrine of unconscionability in contract law.

Ontario’s International Commercial Arbitration Act does not apply to “employment” disputes

The SCC held that Ontario’s International Commercial Arbitration Act (“ICCA”) did not apply in this case, as the ICAA only governs “international commercial arbitration agreements” and this dispute involved an employment relationship.

The majority stated that the ICAA only applies to “commercial” disputes, and it is not intended to govern employment matters. As a result, it held that Ontario’s Arbitration Act (which applies to domestic arbitration) governs Uber’s agreement with Mr. Heller.

However, unlike the Ontario Court of Appeal, the SCC did not assess whether the results would have been the same if the ICAA applied. As a result, the application of this decision to disputes governed by international arbitration legislation in Ontario and other common-law provinces may have to be resolved by the courts going forward.

New Exception to Competence-Competence Principle in Arbitration

The competence-competence principle is a foundational feature of domestic and international arbitration. An arbitral tribunal will normally determine its jurisdiction and a court may only review that decision, on application by one of the parties, at a later stage. Among other things, this principle is intended to reduce judicial intervention in arbitral proceedings and thereby ensure the efficiency of dispute resolution where parties have agreed to arbitration.

Of particular note to commercial arbitration practice, the SCC has carved out a new, albeit narrow, exception to the competence-competence principle, which allows a court to determine an arbitral tribunal’s jurisdiction in the first instance where there is a real prospect that the challenge to the arbitrator’s jurisdiction may never be resolved.

Under this new exception, the court (and not the arbitral tribunal itself) can resolve whether the arbitrator has jurisdiction over the dispute in the first instance if the following criteria are met:

  • there is a genuine challenge to arbitral jurisdiction (it cannot be merely a delay tactic, for example); and
  • there is a real prospect that the jurisdictional challenge may never be resolved by the arbitrator, if the stay of the court action is granted and the matter is referred to arbitration.

However, as Justice Brown noted in his strong concurring opinion, one risk of creating a new exception to the competence-competence principle is that the new procedural mechanism will further delay the arbitration process.

The majority acknowledged the risk of parties advancing “spurious arguments” against the validity of the arbitration as a means of obstructing or delaying the resolution of their disputes. However, in their view, courts have many ways to prevent such misuse of the court processes (such as requiring security for costs, awards of costs and damages for breach of contract). The majority was also careful to add that this assessment of whether there is a real prospect that the jurisdictional challenge may never be resolved by the arbitrator should not devolve into a “mini‑trial” and must remain narrowly focused.

Unconscionability and the Validity of the Arbitration Agreement

The SCC did not consider Mr. Heller’s challenge to the validity of the agreement on the grounds that it contracted him out of the ESA. However, in an 8-1 ruling, the court found the arbitration clause in Uber’s service agreement was unconscionable and, therefore, invalid.

In doing so, the SCC restated the doctrine of unconscionability and, as explained below, arguably expanded it by removing a strict “knowledge requirement.”

The two prongs for assessing whether an agreement is unconscionable are (i) inequality of bargaining power and (ii) an improvident bargain.

i) Inequality of bargaining power

The SCC held that inequality of bargaining power exists “when one party cannot adequately protect their interests in the contracting process.”

In finding that an inequality of bargaining power existed in this case, the majority noted the following key factors: the difference in sophistication between Mr. Heller and Uber; the lack of information in the contract about the cost of filing an arbitration claim; and the foreign choice of law clause, which circumvented legal protections in domestic employment standards law that Mr. Heller would otherwise enjoy.

Proof of a manifestly unfair bargain may support an inference that one party was unable to adequately protect their interests. However, the SCC held that unconscionability “can be established without proof that the stronger party knowingly took advantage of the weaker”, and it concluded that a person in Mr. Heller’s position could not be expected to appreciate the financial and legal implications of the arbitration clause.

ii) An Improvident Bargain

A bargain is improvident if it unduly advantages the stronger party or unduly disadvantages the more vulnerable. The court will look at whether the potential for undue advantage or disadvantage created by the inequality of bargaining power has in fact been realized in the agreement.

The majority noted that the total amount that Mr. Heller needed to proceed with the claim would have been disproportionate to any award that Mr. Heller may have received, if he were successful at arbitration. The $14,500 filing fee imposed under Uber’s standard form service agreement represented a significant portion of Mr. Heller’s annual salary, not to mention the added travel costs to attend the hearing in the Netherlands and any legal fees.

In the SCC’s views, these unfair terms prevented Mr. Heller from effectively seeking a resolution for a claim, regardless of its legal merit. The bargain struck in the arbitration clause was held to be improvident for Mr. Heller and, ultimately, unconscionable.

"Respect for arbitration is based on it being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all... Based on both the disadvantages faced by Mr. Heller in his ability to protect his bargaining interests and on the unfair terms that resulted, the arbitration clause is unconscionable and therefore invalid."

In Justice Brown’s concurring decision, he described the majority’s decision as “drastically expanding the doctrine without providing meaningful guidance as to its application”. Instead, Justice Brown held that the arbitration clause was invalid because it “undermined the rule of law by denying access to justice,” contrary to public policy. 

Going forward, the application of this decision, in terms of both the doctrine of unconscionabililty and the competence-competence principle, will be an important question for businesses, legal counsel and the courts.

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  • Scott  Lucyk
    Associate

    Scott is an associate in the Vancouver office of Lawson Lundell practising in the Commercial Litigation group. Scott has a broad range of experience including contractual disputes, shareholder remedies, joint venture and ...

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