Beclause I said so: Federal Court of Appeal refuses to revert back to interventionist role for Canadian court in assessing the validity of arbitration clauses
Why this decision matters
In Difederico v Amazon.com, the Federal Court of Appeal of Canada (the “FCA”) upheld the decision of the Federal Court that stayed a class action in favour of arbitration.
We wrote about the lower court’s decision in our blog post here.
The FCA’s decision further confirmed competence-competence principle and reinforced the binding nature of contracts of adhesion. Importantly, the FCA demonstrates that only the limited exceptions as developed by the Supreme Court of Canada will vitiate the enforceability of arbitration clauses in consumer contracts of adhesion.
Overview of the lower court decision
In 2020, Stephanie Difederico brought a proposed class action in the Federal Court against Amazon and its subsidiaries. The class action alleged that Amazon entered into price-fixing agreements with third-party sellers contrary to sections 45 and 46 of the Competition Act, R.S.C., 1985, c. C-34 (the “Competition Act”). The claim sought damages under section 36 of the Competition Act. In response, Amazon brought a motion to stay the proceedings on the grounds that the parties were subject to an arbitration agreement the plaintiffs entered into when they created their Amazon accounts.
The Federal Court granted the motion to stay pursuant to the United Nations Foreign Arbitral Awards Convention Act, R.S.C., 1985, c.16 (2nd Supp.) (“UNFAACA”). In so doing, the Federal Court determined that a valid arbitration agreement existed in relation to the disputes over Ms. Difederico’s purchases, and that Ms. Difederico failed to demonstrate any exceptional grounds on which to deny the stay, including on the basis of public policy or unconscionability. The Federal Court held that any challenge to the arbitrator’s jurisdiction or to the validity of the arbitration clause should be referred to the arbitrator.
Ms. Difederico appealed the Federal Court’s decision on the grounds that the court erred when enforcing the arbitration agreement pursuant to UNFAACA, and in finding that her claims were commercial in nature.
The FCA identified three issues on appeal:
- Did the court err in determining that the UNFAACA is applicable in the present case?
- Did the court err in finding that there is an enforceable arbitration agreement between the parties?
- Did the court err in concluding that section 36 of the Competition Act does not preclude mandatory arbitration?
The FCA’s observations on the competence-competence principle
Before addressing each of the above issues in turn, the FCA noted the significance of the competence-competence principle in Canadian jurisprudence. Specifically, the FCA noted the New York Convention is meant to promote uniformity in the treatment of arbitration agreements and awards internationally, as well as to recognize and enforce arbitration agreements. The Court commented on the state of Canadian courts’ approaches to this issue:
It is now well-established that Canadian courts will only consider challenges to the jurisdiction of an arbitrator or the enforceability of an arbitration agreement where such challenges raise a pure question of law or a question of fact or mixed fact and law that only requires a superficial consideration of the record (Dell at paras. 84-86). These questions may go to whether the arbitration agreement is null and void, inoperative, or incapable of being performed, as stated in Article II(3) of the New York Convention, or, since Uber, invalid for being unconscionable. As such, cases involving an arbitration agreement will be systematically referred to arbitration, subject to one of these limited exceptions.
In light of the above, the FCA focused its analysis on three main questions: (1) the definition of “commercial legal relationship” in the absence of one within the text of the UNFAACA; (2) the threshold for unconscionability in relation to arbitration agreements in the aftermath of Uber; and (3) interpretation of the Competition Act in light of the Supreme Court’s decision in Pioneer Corp v Godfrey, 2019 SCC 42 (“Godfrey”).
(1) Does the UNFAACA apply to this case (i.e., do Ms. Difederico’s claims arise out of a “commercial legal relationship”?)
In the face of Ms. Difederico’s contention that her claims fell outside the scope of UNFAACA as they were “consumer” claims rather than “commercial”, and in the absence of a definition set out in the text of the UNFAACA, the FCA took the opportunity to consider the definition of “commercial legal relationship”. The FCA disagreed with Ms. Difederico’s narrow definition of the term, instead favouring the lower court’s broader use of a “unified, textual, contextual and purposive” interpretation.
The Plaintiff relied on the Supreme Court’s decision in Uber wherein it addressed Ontario’s arbitration framework including the International Commercial Arbitration Act (the “ICAA”). However, the Court noted that in the Supreme Court’s discussion of the ICAA, which incorporates both the New York Convention and the UNCITRAL Model Law, the Supreme Court expressly noted that only the Model Law was relevant for its analysis. Thus, the definition of “commercial legal relationship” as articulated in Uber is inapplicable in the circumstances. The Federal Court of Appeal further noted that, in defining a “commercial legal relationship”, the Court in Uber stated that the nature of the dispute and the nature of the relationship between the parties to the arbitration agreement should be considered. As the lower court in the present case observed, the nature of the dispute between the parties was indeed a commercial one. The FCA saw no reason to depart from the lower court’s reasoning.
The New York Convention allows the contracting state to declare that “it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration.” With this approach in mind, the FCA determined that in order to interpret the UNFAACA in harmony with the purpose and objective of the New York Convention, consumer relationships must fall within the meaning of “commercial legal relationship” as contemplated by the UNFAACA.
(2) Does an enforceable arbitration agreement exists between the parties?
Relying on the Supreme Court’s decision in Uber, Ms. Difederico argued that Amazon’s arbitration agreement was unconscionable because (i) she did not have the bargaining power to protect her interests, nor was she aware of the full import of the clauses, and (ii) the clauses unduly advantage Amazon and unduly disadvantage Ms. Difederico when assessed contextually by making it practically impossible for her to obtain damages for violations of the Competition Act.
The FCA disagreed with Ms. Difederico, finding that a mere possibility of the arbitration agreement resulting in a lack of access to justice was insufficient to overcome the competence-competence principle. Instead, the FCA stated that “the competence-competence principle has long been understood to be in the interest of justice. Until Parliament legislates otherwise, and unless the limited exceptions established by Dell and Uber apply, stays in favour of arbitration are to be granted in relation to claims brought under the Competition Act.”
Further, unlike in Uber, Ms. Difederico was not dependent on Amazon for “important elements of everyday life” akin to employment that would make her particularly dependent or vulnerable; thus, she failed to make out a reasonable case for unconscionability.
(3) Does the public interest preclude arbitration?
Lastly, Ms. Difederico challenged the FCA’s 2013 decision in Murphy v. Amway Canada Corporation, that “the Competition Act does not contain language which would indicate that Parliament intended that arbitration clauses be restricted or prohibited”, arguing that this interpretation was no longer tenable in the face of the Supreme Court’s more recent decision in Godfrey.
The plaintiff relied on the Supreme Court of Canada’s 2019 decision of Godfrey which recognized the public interest objectives of the Competition Act. Using this general pronouncement, Ms. Difederico argued that claims under section 36 of the Competition Act was no longer compatible with private dispute resolution.
The FCA rejected this argument. It found that Godfrey neither decided any issues relating to arbitration, nor did it distinguish or make any reference to Murphy.
Accordingly, the FCA determined that claims for damages brought under section 36 of the Competition Act may be subject to arbitration. In light of the similarities between the facts of this case and those in Murphy, the court noted that Ms. Difederico would need to demonstrate that the holding of the panel in Murphy was “manifestly wrong”. She failed to do so.
The FCA rejected the plaintiff’s invitation to “revert back to a more interventionist role for Canadian courts in arbitration matters.” This appellate level decision further entrenches the competence-competence principle in Canadian jurisprudence. It also confirmed that arbitration agreements contained in contracts of adhesion are not unconscionable, except in very narrow and limited circumstances.
Difederico v Amazon.com, 2023 FCA 165.
 Decision at para 35
Rizzo & Rizzo Shoes Ltd. (Re),  1 S.C.R. 27, 154 D.L.R. (4th) 193; decision at para 41
 Article I(3) of the New York Convention
 Decision at para 55
 Decision at para 57
 Decision at para 56
 Judge’s decision at para 89
 Decision at para 76
arbitration international arbitration commercial arbitration International Commercial Arbitration Act Arbitration Agreements Arbitration Act arbitration clauses dispute resolution