Not At Any Cost: the Court of Appeal for Ontario Holds that certain Mandatory Arbitration Terms are Unconscionable
1. Introduction
In Lochan v. Binance Holdings Limited, The Court of Appeal for Ontario refused to enforce the arbitration clause in the standard-form contract of Binance Holdings Limited (“Binance”).
The Court of Appeal upheld the Ontario Superior Court decision dismissing Binance’s motion for a stay of proceedings in favour of arbitration, on the basis that Binance’s arbitration clause was unconscionable.[i]
2. Background
The defendant, Binance, operates the world’s largest cryptocurrency trading platform. Binance sold cryptocurrency derivatives to Canadians online through its website between 2019 and early 2022. Binance did not register with the Ontario Securities Commission or seek an exemption from registration. Nor did it file a prospectus.[ii]
In June 2022, the plaintiffs commenced a putative class action. The plaintiffs’ claim relied on section 133 of the Ontario Securities Act, which provides purchasers with a right of action for recission or damages against a company selling securities, if the company fails to file or deliver a prospectus.[iii]
The plaintiffs proposed a class that included, “everyone in Canada who, from September 2019 to the date of certification of the proposed class proceeding, purchased crypto derivatives contracts from Binance”.[iv]
Binance sought a stay of the plaintiffs’ action based on the mandatory arbitration clause in its website terms and conditions, which required disputes to be resolved by way of arbitration in Hong Kong (the “Arbitration Clause”).[v] The plaintiffs argued against staying the action, maintaining that the Arbitration Clause should not be enforced on the basis that it was unconscionable and contrary to public policy.[vi]
3. The Ontario Superior Court Decision
The Honourable Mr. Justice Morgan dismissed Binance’s motion for a stay of proceedings.
As a threshold issue, before he could consider the Arbitration Clause, Justice Morgan held that the Court, and not the arbitrator, should decide who had jurisdiction over Binance’s motion. Prior to concluding that he had jurisdiction to decide the motion, Justice Morgan considered the “competence-competence” principle, which holds that an arbitrator should rule on the scope of their own jurisdiction, prior to court involvement.[vii] Justice Morgan relied on the Supreme Court of Canada’s holding that Canadian courts may take decisions on a challenge to an arbitrator’s jurisdiction prior to an arbitral ruling, if: (a) the jurisdiction challenge only concerns a question of law; or (b) it requires only a superficial review of the facts in the underlying case.[viii] Justice Morgan held that assessing the Arbitration Clause fell within an exception to the “competence-competence” principle.[ix]
Justice Morgan went on to hold that Binance’s Arbitration Clause was unconscionable, and therefore unenforceable.[x] Justice Morgan relied on the Supreme Court of Canada’s direction in Uber v. Heller, in which the Supreme Court held that unconscionability requires “inequality of bargaining power and a resulting improvident bargain.[xi] The Supreme Court went on to emphasize that an analysis of unconscionability accounts for “the individual unfairness to a vulnerable party if the contract were to be upheld.”[xii]
Using this guidance, Justice Morgan found that the inequality of both information and power in the bargaining relationship of the parties was at a maximum,[xiii] stressing that:
- Binance’s own motion record showed that Binance’s website prompted investors to open Binance accounts in “under 30 seconds”, meaning that investors agreed to roughly 50 pages of Binance Terms (including a choice of law clause and the Arbitration Clause) in 30 seconds;[xiv]
- Binance’s terms and conditions provided that Binance could make any changes to any part of the terms and conditions, and that by agreeing to the terms, users agreed to any subsequent amendments to those terms;[xv]
- the record showed that during the proposed class period, Binance changed the forum of the arbitration and the governing law four times, to various destinations far from Canada, including at one point, to an “unspecified location, under unspecified law, under unspecified administration and rules[xvi]”; and
- the most current arbitration forum listed in the terms and conditions, Hong Kong, imposed high costs on the plaintiffs. The Court found that for disputes under $1 million USD, the median cost just to arbitrate was approximately $36,000 CAD, with additional costs, including travel, accommodation and legal fees.[xvii]
With regard to the nature of the bargain, Justice Morgan found that the Arbitration Clause created an improvident bargain because the crypto investors faced an up-front $36,000 administrative fee just to start the arbitration process.[xviii]
Having found that there was both inequality of bargaining power and an improvident bargain, Justice Morgan held that the Arbitration Clause was unconscionable.
4. The Ontario Court of Appeal’s Decision
Binance appealed Justice Morgan’s decision on three grounds, arguing that the Motion Judge erred in:
- holding that an arbitration clause being contrary to public policy is an independent ground a court can consider in deciding to take jurisdiction and refusing to stay in favour of arbitration;
- holding that this matter fell within an exception to the “competence-competence” principle; and
- engaging in an analysis of the evidence that was more than “superficial”, such as considering whether the average purchasers of crypto could access an arbitral tribunal, as compared to the plaintiffs, who engaged in larger value purchases than the average crypto buyer.
The Court of Appeal dismissed all three grounds of appeal raised by Binance.[xix]
First, the Court of Appeal rejected Binance’s argument that the motion judge went straight to considering whether the Arbitration Clause was contrary to public policy, seemingly skipping over the starting point, the “competence-competence” principle. The Court of Appeal accepted that the first step in a challenge to an arbitrator’s jurisdiction must be the “competence-competence” principle, with the onus resting with the party challenging the arbitrator’s jurisdiction to demonstrate an exception to the principle.[xx] However, the Court of Appeal found that the motion judge did just that – Justice Morgan first considered whether an exception to the competence-competence principle applied to justify an Ontario court deciding whether the arbitration clause was void as contrary to public policy or on the basis of unconscionability.[xxi]
Second, the Court of Appeal rejected Binance’s submission that the motion judge erred in finding that the circumstances fell within an exception to the “competence-competence” principle. The Court of Appeal held that in general the “competence-competence” principle “is not lightly displaced”.[xxii] However, the Court of Appeal highlighted that the motion judge relied on exceptions identified in the jurisprudence, such as the contractual terms of the arbitration agreement principally concerning a pure legal issue, and that the motion only required a superficial review of the record, and did not require fact-finding “specific to the representative plaintiffs”.[xxiii]
Third, the Court of Appeal rejected Binance’s position that the motion judge engaged in more than a superficial analysis of the evidence on the threshold issue, namely unconscionability, and that the motion judge erred in considering the average crypto purchaser, instead of the respondents who were making large value purchases.[xxiv] The Court of Appeal affirmed that in determining whether an arbitration clause is unconscionable, courts are entitled to make findings related to the cost of arbitration, the arbitral forum’s distance from the domicile of the parties and the relative capacity of the parties to bear these costs. The Court of Appeal held that facts concerning costs and distance were “superficial”, allowing the motion judge’s review to remain within the bounds of an exception to the “competence-competence” principle.[xxv] Further, the Court of Appeal reiterated that there was no nuance in the Arbitration Clause, and that there was no error in the motion judge’s consideration of the average crypto user when considering issues of public policy and unconscionability.[xxvi]
5. Why this matters
While the Court of Appeal recognized that the “competence-competence” principle is “not lightly displaced”,[xxvii] this case signals that courts are ready and willing to make jurisdiction decisions when it is appropriate to do so.
This case highlights that in the post Uber v. Heller legal landscape, companies must think carefully about mandatory arbitration terms, particularly those in standard form contracts.
Notwithstanding arguments advanced by many representative plaintiffs in class actions, Uber v. Heller does not stand for the proposition that arbitration agreements which preclude class actions are unconscionable. Uber v. Heller, and this case, concerned an arbitration agreement that appeared to preclude the very arbitration that was bargained for.
Companies contracting with consumers would do well to implement consumer-friendly terms in their arbitration agreements. Arbitrations that include high upfront costs and forums far from the plaintiffs’ domicile or residence are strong indications of an improvident bargain and therefore an unconscionable arbitration clause.
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[i] A stay that was directed pursuant to section 9 of the International Commercial Arbitration Act. International Commercial Arbitration Act 2017, S.O. 2017, c. 2, Schedule. 5, s. 9.
[ii] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 10.
[iii] Securities Act, RSO 1990, c S.5, s. 133.
[iv] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 12.
[v] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 5.
[vi] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 19.
[vii] Uber Technologies Inc. v. Heller, 2020 SCC 16 at para 122.
[viii] Uber Technologies Inc. v. Heller, 2020 SCC 16 at para 122.
[ix] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at paras 21-22.
[x] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 52.
[xi] Uber Technologies Inc. v. Heller, 2020 SCC 16 at para 65.
[xii] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 44.
[xiii] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 51.
[xiv] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 13.
[xv] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 14.
[xvi] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 14.
[xvii] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 16.
[xviii] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714 at para 28.
[xix] Compromising of Justices Huscroft, Young and Copeland.
[xx] On this topic, also see Uber Technologies Inc. v. Heller, 2020 SCC 16, Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, and Spark Event Rentals v. Google LLC, 2024 BCCA 148.
[xxi] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 19.
[xxii] On this topic, also see Uber Technologies Inc. v. Heller, 2020 SCC 16, Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, and Spark Event Rentals v. Google LLC, 2024 BCCA 148.
[xxiii] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 23.
[xxiv] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 26.
[xxv] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 27.
[xxvi] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 27.
[xxvii] Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para 22.