Seeking to Set Aside an Arbitration Agreement? Not So Fast.

Importance of this Decision

In Evans v. Mattamy Homes, 2019 ONSC 3883, the Ontario Superior Court reaffirmed that arbitration agreements will only be invalidated in narrow circumstances.

The plaintiffs commenced a civil proceeding relating to subject matter that falls within the scope of an arbitration agreement between the parties. Under the domestic arbitration act in Ontario, the Court shall stay a civil proceeding if the matter is to be submitted to arbitration, unless an exception applies. One of those exceptions is that the arbitration agreement is invalid. In this case, the plaintiffs argued that the arbitration agreement was invalid as unconscionable and obtained as a result of undue influence. The Court disagreed, and stayed the civil proceeding in favour of arbitration, once again affirming the high bar needed to invalidate arbitration agreements.

Facts

The five plaintiffs in this action signed pre-construction agreements for the purchase and sale of new homes from Mattamy Homes (“Mattamy”). These agreements contained an arbitration clause (“Arbitration Agreement”).

The plaintiffs asserted that the Arbitration Agreement was embedded in a standard form contract that was not open for negotiation, and that they did not obtain legal advice on the Arbitration Agreement, that there was an imbalance of bargaining power, and that Mattamy knowingly took advantage of the plaintiffs’ vulnerability. Further, the plaintiffs took the position that Mattamy exerted undue influence on them to enter into the agreement. Mattamy argued that, as a result, the Court should exercise its discretion to invalidate the Arbitration Agreement.

Analysis

The plaintiffs argued that the presumptive stay of proceedings operating through subsection 7(1) of the Arbitration Act should be refused under subsection 7(2) because the arbitration agreement was invalid. In arguing invalidity the plaintiffs advanced two grounds: (1) unconscionability and (2) undue influence. The Court rejected both arguments.

The agreement was not unconscionable

The Court affirmed that the legal test for unconscionability is a stringent one: “whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded.” The Court also affirmed that the existence of a standard form contract and inequality of bargaining power do not, on their own, render an arbitration provision unconscionable.

The four part test to prove unconscionability was not met in this case:

  1. The transaction was not grossly unfair and improvident: The Court held that the fact that the contract was standard form and not open to negotiation was not sufficient to show it was grossly unfair and improvident. Further, the legislature has implicitly endorsed upholding arbitration agreements in real estate transactions since it specifically excluded real estate transactions from section 2(f) of the Consumer Protection Act, 2002O. 2002 c.30, which provides that arbitration agreements in certain consumer contracts are not binding. The size of the claim was also considered – since each claim was in the range of $1.5M to $2.2M it was not an improvident bargain for each of the five plaintiffs to try their cases separately pursuant to the Arbitration Agreement. The Court distinguished the matter before it from the recent decisions of Huras v. Primerica Financial Services Ltd., 2000 CarswellOnt 149 (“Huras”) and Heller v. Uber Technologies Inc., 2019 ONCA 1 (“Heller”) where the damages sought by the plaintiffs were significantly lower and the plaintiffs’ claims could be decided together.
  2. The plaintiffs did not lack independent legal advice or other suitable advice: While none of the plaintiffs obtained independent legal advice on the Arbitration Agreement, several of the plaintiffs had obtained legal advice on the same Arbitration Agreement with Mattamy through the purchase of previous homes. This was sufficient to find that some of the plaintiffs had obtained legal advice. For those that did not obtain legal advice, the court accepted Mattamy’s submission that they could have done so in advance of signing the Arbitration Agreement.
  3. There was not 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 other similar disability: The court found it instructive that when the plaintiffs contacted Mattamy to attempt to be released from their agreements of purchase and sale, none took the position that the Arbitration Agreement was a grossly unfair bargain.
  4. Mattamy did not knowingly taking advantage of this vulnerability: There was no evidence that Mattamy took advantage of a vulnerability and such advantage could not be reasonably inferred from the circumstances as it was in Heller.

There was no undue influence

The plaintiffs failed to demonstrate that they were coerced by Mattamy or that Mattamy abused its power to compel the plaintiffs to sign the Arbitration Agreement. The plaintiffs also failed to show that they had “no realistic alternative” but to sign the agreement. The Court found that the general atmosphere of the sales environment, which required the plaintiffs to pick a lot and give their deposit cheque on the spot, did not amount to undue influence. Further, most, if not all, of the plaintiffs signed various amending and update agreements which affirmed the Arbitration Agreement. Since these agreements were signed outside the context of the sales environment, undue influence was not established.

Concluding Remarks and Stay Tuned

Once again, the Ontario Courts have reaffirmed their reluctance to interfere with arbitration agreements and reasserted the primacy of arbitration. Further, this case reiterated the high threshold needed to invalidate an arbitration agreement for being unconscionable or as a result of undue influence, even where the arbitration agreement is part of standard form contract.

However, this may change once the Supreme Court of Canada’s decision in the Uber appeal is released, where the issue of unconscionability of arbitration agreements in contracts of adhesion was considered. Stay tuned for our commentary on the Supreme Court’s decision once it comes down.

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