This article first appeared on Global Arbitration News by Baker McKenzie, here.
In Uber Technologies Inc. v. Heller, 2020 SCC 16 (“Uber v. Heller“) the Supreme Court of Canada upheld the Ontario Court of Appeal’s decision that Uber’s arbitration agreement is invalid and unenforceable, leaving disputes under the clause to be litigated in the courts. The Court re-affirmed the competence-competence principle and the deference generally afforded to arbitrators by the courts, while creating an exception to the general rule of arbitral referral.
The case arises from an UberEATS driver, David Heller, and his efforts to bring a class action on behalf of Uber drivers in Ontario against Uber for allegedly violating the Employment Standards Act (ESA). To become a driver for UberEATS, Mr. Heller was required to accept the terms of Uber’s standard form services agreement, which obligated him to resolve any dispute with Uber through mediation and arbitration under the International Chamber of Commerce Rules of Arbitration (“ICC Rules”). The contract was governed by Dutch law, and the Hague was the seat of arbitration. However, the mediation and arbitration process under the ICC Rules requires up-front administrative and filing fees of US$14,500, plus legal fees and other costs of participation. Mr. Heller makes CAD$400-$600 per week and these costs represent most of his income.
Ontario Superior Court Decision
Uber brought a motion to stay Mr. Heller’s proposed class action in favour of arbitration in the Netherlands under the service agreement. The motion judge held that the Court did not have the authority to decide whether the arbitration agreement was valid and stayed the proceeding in favour of arbitration in the Netherlands.
Ontario Court of Appeal Decision
The Ontario Court of Appeal set aside the order of the motion judge, determining that the arbitration agreement was unconscionable because of the inequality of bargaining power between the parties and the improvident cost of arbitration. Uber appealed the decision. The Supreme Court agreed with the Court of Appeal that the arbitration agreement was a classic case of unconscionability and dismissed Uber’s appeal.
Applicable statutory framework: domestic vs. international
The Court first considered which statute governed the dispute. Ontario’s International Commercial Arbitration Act (“ICAA”) applies to international commercial arbitrations and the Arbitration Act (“AA”) applies to all other Ontario arbitrations to which the ICAA does not apply. To determine whether the ICAA applies, the Court was required to examine the nature of the parties’ dispute, rather than the nature of their relationship. The Court held that characterising the dispute requires the decision-maker to examine only the pleadings, but characterising the relationship requires consideration of a variety of factors in order to make a finding of fact.
The Court deferred to the commentary on the UNCITRAL Model Law, which revealed that labour and employment disputes are not considered “commercial” and will not be covered by the ICAA. The Court found that the agreement was not commercial and the domestic AA applied.
Determining jurisdiction over the agreement and the competence-competence principle
Section 7 of the AA directs courts to stay judicial proceedings when there is an applicable arbitration agreement. However, under section 7(2), a court has discretion to retain jurisdiction and decline to stay the proceedings in five circumstances:
In this case, the second exception applied. However, the AA is silent on what principles the courts should consider in exercising their discretion to determine the validity of an arbitration agreement under section 7(2). Under the Dell Computer Corp. v. Union des consommateurs 2007 SCC 34 framework, the degree to which courts are permitted to analyse the evidentiary record depends on the nature of the jurisdictional challenge. The Dell test requires a court to refer all challenges of an arbitrator’s jurisdiction to the arbitrator unless they raise:
The Dell framework respects the competence-competence principle, which considers arbitrators competent and having jurisdiction to determine their own jurisdiction.
Access to Justice: a novel exception to the rule of arbitral referral
The Court acknowledged that Uber v. Heller raised an accessibility issue not contemplated in Dell, which justified a departure from the general rule of referral to arbitration. Dell presumes that if the court does not decide a jurisdictional issue the arbitrator will do so.
This case presented a novel scenario as there was a real possibility that the validity of the arbitration clause would not be resolved and the arbitration would not proceed if the Court did not decide the case. This would raise access to justice problems that the Ontario legislature could not have intended when giving the courts the power to refuse a stay.
In light of this, the Court created an exception to the general rule of arbitral referral. The exception applies where arbitration is fundamentally too costly or otherwise inaccessible, such that staying the action in favour of arbitration would be tantamount to denying substantive relief. The exception applies where:
The parties’ agreement in this case was a contract of adhesion and the terms could not be negotiated by Mr. Heller. The Court found that Mr. Heller made a genuine challenge to the validity of the arbitration agreement and that the prohibitive fees meant resolution of the claims may never occur. The Court determined it would resolve the arguments against the validity of Uber’s arbitration agreement, rather than refer them to arbitration in the Netherlands.
Validity of the agreement: unconscionability and access to justice
This decision expands the scope of the doctrine of unconscionability in Canada. As the Court held, the doctrine’s purpose is to protect those who are vulnerable in the contracting process from loss resulting from an unfair bargain. Uber argued for a more stringent threshold for unconscionability, that the Court rejected on the grounds that it would be formalistic and less equity-focused. The Court reiterated the test for unconscionability as:
Further, the Court noted that a party knowingly or deliberately taking advantage of another’s vulnerability may provide strong evidence of inequality of bargaining power, but it is not essential for a finding of unconscionability.
The Court found clear inequality of bargaining power and improvidence of the arbitration clause between Uber and Mr. Heller. The reasoning was based on the fact that the agreement effectively bars Mr. Heller from advancing any legal claim against Uber and that the clause operated “to defeat the very claims it purports to resolve”. The Court found this to amount to undue hardship and undermining the rule of law. The arbitration agreement was found to be unenforceable, the Court dismissed the appeal and affirmed the Court of Appeal’s decision.
Impact of decision
This decision is an important application of the doctrine of unconscionability in the modern context, where standard form contracts dominate the gig economy. The Court likened Uber drivers with consumers as “individuals at the mercy of the terms, conditions and rates of service set by Uber”, whose only option is to click “I agree” to the terms of the contractual relationship that are presented to them.
In Forest Hill Homes (Cornell Rouge) Limited v. Wei 2020 ONSC 5060, the court emphasized that Uber had brought the doctrine of unconscionability “from the backburners to the forefront of contract law”, reflecting that in this day and age often the freedom of parties to negotiate their own terms is impaired because one party simply has the market power to demand whatever it wants. Uber v Heller has determined that where a party has such power, the law will ensure that it has not been used unfairly to force an improvident bargain on a weaker party.
It is unlikely that this decision will have much impact in true commercial arbitration cases under the ICAA, which is based on the 2006 Model Law. However, companies should consider this case when reviewing their arbitration clauses, in particular for online contracts of adhesion.
In this episode of the Arbitration Conversation Amy interviews Arbitrator Professor Maureen Weston, Professor of Law and Director of the Entertainment, Media & Sports Dispute Resolution Project at Pepperdine Law's...By Maureen Weston, Amy Schmitz
This article first appeared on the Securites Arbitration Alert (SAA) Blog here. FINRA has issued a Regulatory Notice reminding industry parties on the proper use of predispute arbitration agreements (“PDAA”)...By George Friedman