A New Ground to Challenge the Enforceability of Arbitration Agreements – An Analysis of the Supreme Court of Canada’s Decision in Uber Technologies Inc. v. Heller
Why This Case Matters
The Supreme Court of Canada recently released its much anticipated decision in Uber Technologies Inc. v. Heller, 2020 SCC 16, in which a majority of the Court ruled that the arbitration clause in Uber’s standard form services agreement is unconscionable and therefore unenforceable
In so doing, the Court cleared the way for a class action to be commenced in Ontario court, rather than for the dispute to be subject to mediation and arbitration in the Netherlands per the arbitration clause within the contract.
The majority’s decision raises serious questions about the enforceability of arbitration provisions in contracts of adhesion (i.e., standard form contracts), which are used frequently in the consumer context and by businesses in the gig economy, as noted in Justice Côté’s dissenting reasons. But perhaps more importantly, rather than increasing certainty for contracting commercial parties, the majority decision may have the effect of diluting recent jurisprudence protecting the right of private parties to agree to alternative methods of dispute resolution.
Background to the Dispute
Mr. Heller is an Ontario resident who entered into several contracts with Uber, and using Uber’s software application (“Uber App”), he delivers food from restaurants to consumers. In 2017, he launched a proposed class action against Uber for violations of the Ontario Employment Standards Act (“ESA”) and alleged that he was actually an employee, not a contractor, of Uber. Mr. Heller’s relationship with Uber was defined by a services agreement which he signed when he first licensed the Uber App for meal delivery. The services agreement contained a dispute resolution provision requiring disputes with Uber to be resolved through mediation and arbitration in the Netherlands, which Mr. Heller argued would require an up-front payment of USD $14,500.
Following the launch of the proposed class action, Uber brought a motion to stay the class proceeding in favour of arbitration in the Netherlands, relying on the arbitration clause in the services agreement. In response, Mr. Heller argued that the arbitration clause wrongfully contracted out of mandatory provisions of the ESA, and was unconscionable due to Mr. Heller’s inability to pursue the mandatory dispute resolution process, and was therefore invalid.
The motion judge stayed the proceeding, holding that the arbitration agreement was valid. On appeal, the Court of Appeal for Ontario unanimously set aside the motion judge’s order, concluding that the arbitration clause was unconscionable as the procedural steps required under the agreement could not be met by Mr. Heller, and that Mr. Heller’s objections to the arbitration clause did not need to be referred to an arbitrator and could be settled by a court in Ontario.
The Majority Reasons: Uber’s Arbitration Clause is Invalid for Unconscionability
Which Arbitration Legislation Governed?
The first issue raised on appeal at the Supreme Court was which statute applied to Uber’s request for a stay of the class proceeding in favour of arbitration: the International Commercial Arbitration Act, which (as the name suggests) governs international commercial arbitrations in Ontario, or the Arbitration Act, 1991, which governs domestic arbitrations of all kinds.
Despite not addressing the merits of the underlying dispute as to whether Mr. Heller was an employee of Uber or an independent contractor, the majority nevertheless concluded that employment disputes are not “commercial” disputes. Therefore, the International Commercial Arbitration Act did not apply, and the Arbitration Act, 1991 governed.
Who Determines the Validity of the Arbitration Agreement – Arbitrator or the Court?
The second issue on appeal was whether the validity of the arbitration clause should be determined by the Court or by the arbitrator hearing the dispute.
The Supreme Court previously set out a framework for when a court should decide if an arbitrator has jurisdiction over a dispute rather than referring the jurisdictional question to the arbitrator in Dell Computer Corp. v. Union des consommateurs,  2 SCR 801, and Seidel v. TELUS Communications Inc.,  1 SCR 531.
Departing from the Court’s past decisions, the majority added a new category of cases where courts, rather than arbitral tribunal hearing the dispute, should decide jurisdictional questions: where an “issue of accessibility” arises.
The majority concluded that an issue of accessibility arises in this case because the seat of arbitration was in the Netherlands and the cost was prohibitive for this particular claimant. The majority assumed that if it sent the issue of whether a stay should be granted to the arbitrator, it would in reality never be decided because Mr. Heller said he did not have the financial means to engage the arbitral process set out in the services agreement with Uber.
Thus, because the new “issue of accessibility” ground was engaged in this case, the Court was permitted to determine whether the arbitration agreement was valid.
A New Test for Unconscionability?
Mr. Heller raised two arguments as to why the arbitration agreement with Uber was invalid: that the clause was void for unconscionability, and that it is void because it contracts out of the ESA. The Court only decided the first issue, declining to answer the ESA question.
Unconscionability is established through two elements: unequal bargaining power, and a resulting improvident (or unfair) bargain. An inequality of bargaining power exists when one party cannot adequately protect their interests in the contracting process. A bargain is improvident if it unduly disadvantages the stronger party or unduly advantages the more vulnerable.
The majority concluded the arbitration agreement was unconscionable. First, the arbitration agreement formed part of a standard form contract, meaning that Mr. Heller was unable to negotiate its terms. His only options were to either accept or reject the terms of the agreement. While the majority explicitly stated that this did not mean a standard form contract by itself will establish inequality of bargaining power, it certainly seems to play a decisive role in this case.
Second, the majority concluded there was a significant “gulf of sophistication” between Mr. Heller, a food delivery driver, and Uber, a large multinational corporation. The majority focused in particular on the fact that arbitration clause did not contain any information about the costs of mediation and arbitration in the Netherlands, which included an upfront fee of $14,500 USD. The majority’s finding of unconscionability leaned heavily on the notion that a person in Mr. Heller’s position could not be expected to appreciate the financial and legal implications of accepting such a stipulation.
What is notable in the majority’s decision is that, in the past, part of the unconscionability assessment required that the court to determine whether the stronger party had knowledge of the weaker party’s vulnerability, or at least constructive knowledge of it. The majority effectively ignored that consideration. As Justice Brown noted in his critique of the majority reasons:
The wholesale shift in the law that my colleagues advance by removing knowledge as a requirement, seemingly in response to the equities of this particular case, drastically expands the scope of unconscionability. It is neither supported by the jurisprudence nor counselled by academic commentary, and rightly so. Not only is eliminating the knowledge requirement a recipe for further uncertainty in the doctrine of unconscionability, it is commercially unworkable. Contracting parties are left to wonder whether an unknown state of vulnerability will someday open up their agreement to review on grounds of “fairness”. This alone should give pause, but my colleagues do not stop there. Under their approach, a party who contracts exclusively with individuals who have received independent legal advice still cannot take comfort in the finality of their agreements. According to my colleagues, only competent legal advice will ameliorate an imbalance in bargaining power (para. 83). A potential defendant therefore cannot be assured of finality unless it knows the content of the advice its counterparty has received.
Justice Côté’s Dissent: Freedom of Contract is Paramount
Justice Côté’s criticisms of the majority’s decision centers on the importance of freedom of contract.
Justice Côté critiques the majority’s decision to decline to follow decades of precedents, including cases from the Supreme Court, concerning the enforcement of arbitration agreements. Worrying that this decision “threaten[s] to roll back the tide of history and Canadian jurisprudence to the days when judges were overtly hostile to arbitration”, Justice Côté concluded that the majority reasons extend the grounds for judicial intervention in the arbitration process by proposing new exceptions to the rule of systemic referral.
Justice Côté cautioned against respect for arbitral jurisdiction being predicated on the accessibility of arbitration in a given case. She noted the majority’s decision is inconsistent with Canadian courts’ otherwise “hands-off” approach to arbitration and the legislative intent embodied in both the Arbitration Act, 1991 and International Commercial Arbitration Act to respect the sanctity of parties’ ability to choose to arbitrate instead of litigation in court.
The Enforceability of Arbitration Agreements Going Forward
Parties have typically been free to enter into whatever agreements to which they wish to bind themselves, with very limited exceptions. This includes arbitration agreements.
The “wholesale shift” in the law resulting from the majority’s drastic expansion of the scope of unconscionability will inevitability inject uncertainty into contractual relationships. Contracting parties are now left to wonder if their agreement is enforceable, or if an unknown state of vulnerability will render it subject to review on fairness grounds at some later date.
This expansion is especially serious in the context of arbitration agreements, which have always been protected and upheld as an example of freedom of contract: parties have the freedom to contract out of courts as the jurisdiction for dispute resolution, and Canadian law has worked to protect that freedom for decades, through case law and statutes.
The majority’s reasoning may have been driven by the equities, where in this case, it may have been difficult for Mr. Heller to pursue his substantive rights given the procedural steps he agreed to should a dispute arise. Nevertheless, there is significant force to Justice Côté’s argument in dissent that Ontario’s two arbitration statutes are strong statements of public policy in favour of permitting all individuals and corporations, regardless of their sophistication relative to each other, to agree to arbitration for dispute resolution. These statutes do not contemplate different rules for standard form agreements versus fully negotiated contracts via counsel.
Standard form agreements remain important tools both for sophisticated commercial parties entering into agreements with each other and for businesses who contract with large numbers of similarly situated parties, such as drivers (in the case of Uber) or end consumers. The majority’s decision may result in the need for commercial parties to reconsider how they draft the dispute resolution provisions in their standard form agreements to ensure that it remains valid and enforceable.
Uber Technologies Inc. v. Heller, 2020 SCC 16
Date of Decision: June 26, 2020
arbitration international arbitration commercial arbitration