Supreme Court of Canada finds Uber’s Mandatory Arbitration Clause Invalid and Paves Way for Gig Economy Class Action

July 3, 2020

In Uber Technologies Inc. v. Heller (Uber), 2020 SCC 16, the Supreme Court of Canada held that the mandatory arbitration clause in Uber’s service agreement that prescribed arbitration take place in the Netherlands and required drivers to pay US$14,500 up front in administrative fees is unconscionable and therefore invalid.

Summary

  • The Court ruled that Uber’s arbitration clause imposed insurmountable procedural barriers that rendered the driver’s contractual rights “illusory”.
  • In so holding, the Court made it clear that Canadian courts may depart from the general rule of arbitral referral where accessibility to arbitration is realistically unattainable.
  • In setting out a two-part test for unconscionability, the Uber decision serves as a warning to employers and companies that use standard-form contracts to take care in drafting dispute resolution clauses so as not to impose procedural barriers or burdens that effectively prevent parties from accessing arbitration.

Background

In 2017, an UberEATS driver (the “Plaintiff”) commenced a proposed class action against Uber in Ontario. He claimed that Uber drivers are employees under Ontario’s Employment Standards Act, 2000 (“ESA”) and entitled to ESA benefits. Uber brought a motion to stay the proposed class proceeding because the Plaintiff had agreed to Uber’s standard-form services agreement. That agreement contained an arbitration clause that required all disputes to be resolved through arbitration in the Netherlands, not a court (the “Arbitration Clause”). Arbitration required that the Plaintiff pay administrative fees of US$14,500, plus legal fees and other costs of participation, an amount that represented most of his annual income. The Plaintiff argued that the Arbitration Clause is invalid because it is unconscionable and because it contracts out of the mandatory provisions of the ESA.

Decision of the motion judge

The motion judge granted Uber’s motion for a stay in favour of arbitration. The motion judge concluded that the ESA does not restrict arbitration and that the arbitration agreement’s validity had to be referred to arbitration in the Netherlands, in accordance with the principle that arbitrators are competent to determine their own jurisdiction. The motion judge rejected the argument that the Arbitration Clause is unconscionable as there was no evidence that Uber had preyed upon or taken advantage of the driver.

Decision of the Court of Appeal for Ontario

The Court of Appeal allowed the driver’s appeal and set aside the motion judge’s stay. It agreed with him that Ontario courts should decide whether the Arbitration Clause is valid. The Court of Appeal determined, among other things, that the Arbitration Clause amounted to an illegal contracting out of the ESA and was unconscionable based on the inequality of bargaining power between the parties and the improvidence of the costly arbitration process.

Supreme Court of Canada Decision

In an 8-1 ruling, the Supreme Court of Canada dismissed Uber’s appeal. It agreed with the Court of Appeal that courts should decide if the Arbitration Clause was valid and found that the Arbitration Clause is unconscionable, and therefore invalid, with the consequence that the proposed class action may proceed to court.

The Arbitration Act, 1991 governs the dispute

As a preliminary matter, the Court considered whether the parties’ dispute was governed by the International Commercial Arbitration Act, 2017 (ICAA) or Ontario’s Arbitration Act, 1991. Writing for the majority of the Court, Abella and Rowe JJ. held that in making such a determination, it is necessary to focus on the nature of the parties’ dispute rather than on their relationship. As the case at hand concerned an employment dispute, which is not covered by the ICAA, the Court held that the Arbitration Act,1991 governs.

Who should determine the validity of the Arbitration Clause?

The Court then addressed the issue of whether the court or arbitrator/arbitral tribunal should decide the validity of the Arbitration Clause. Drawing on its decisions in Dell Computer Corp. v. Union des consommateurs (2007) and Seidel v. TELUS Communications Inc (2011), the majority of the Court reaffirmed that courts should refer all challenges to an arbitrator’s jurisdiction to the arbitrator, unless they raise pure questions of law, or of mixed fact and law that require only superficial consideration of the evidence in the record and where the court is convinced that the challenge is not a delay tactic or will not prejudice the recourse to arbitration.

However, the Court created a new basis for departing from the general rule of arbitral referral, where: (i) there is a bona fide challenge to an arbitrator’s jurisdiction; and (ii) there is a real prospect that doing so would result in the challenge never being resolved by the arbitrator.

Based on the record before it, the Court found that the Plaintiff had made a bona fide challenge to the validity of the Arbitration Clause, and that, given the significant arbitration costs involved, there was a real prospect that if a stay were granted the Plaintiff’s challenge would never be brought before an arbitrator for resolution.

Unconscionability: a two-part test

The majority of the Court held that there are two elements required for the doctrine of unconscionability to apply:

  1. Inequality of bargaining power between the parties; and
  2. A resulting improvident bargain that unduly advantages the stronger party or unduly disadvantages the more vulnerable.

In doing so, the majority rejected Uber’s argument that unconscionability should consist of a more stringent four-part test that would also require that the victim lack independent legal advice and that the stronger party knowingly took advantage of the weaker. The majority held that including these additional factors would only distract from the unfair bargain inquiry. In the majority’s view, the requirements of inequality and improvidence, if properly applied, are sufficient to “strike the proper balance between fairness and commercial certainty.”

The majority found there was inequality of bargaining power between Uber and the Plaintiff given (i) the significant sophistication gap between the parties, and (ii) the finding that the Plaintiff could not be expected to appreciate the financial and legal implications of the Arbitration Clause.

According to the majority, the resulting bargain was improvident because arbitration would entail administrative fees that were very substantial for someone with the Plaintiff’s annual income and which were also disproportionate to the size of any arbitration award that could reasonably have been foreseen when the contract was entered into. Effectively, the Arbitration Clause made the substantive rights that were nominally given by the services agreement essentially unenforceable by the Plaintiff.

In a concurring opinion, Brown J. agreed with the majority that the appeal should be dismissed, and that the Arbitration Clause is invalid, but, among other things, took issue with the majority’s reliance on the doctrine of unconscionability to reach its conclusion. According to Brown J., the application of the unconscionability doctrine to the facts of this case is both unnecessary and undesirable for two reasons:

  • The law already contains settled legal principles outside the doctrine of unconscionability, such as the rule of law and public policy, which courts can use to avoid enforcing contractual terms that, expressly or by their effect, deny access to independent dispute resolution; and
  • It would drastically expand the doctrine’s reach without providing any meaningful guidance as to its application, and only compound the uncertainty that plagues the doctrine and introduce uncertainty into the enforcement of contracts generally.

Côté J., the lone dissenter, found that a stay of proceedings should be granted on the condition that Uber advances the funds needed to initiate the arbitration proceedings. She found that both the majority and Brown J. disregarded the concepts of freedom of contract, party autonomy, and commercial certainty.

Implications of the Uber Decision

As a result of the Uber decision, companies that use standard form contracts will want to be cautious in drafting arbitration clauses to ensure that they are enforceable. Where there is an imbalance of power between the parties, consideration should be given to fairness and accessibility issues. For instance, companies will want to pay attention to whether a clause mandates dispute resolution in a particular jurisdiction and the arbitration fees involved and consider how onerous the clause is, to ensure that parties to the contract are not being effectively excluded from arbitration.

The concurring reasons of Brown J. forecast the potential commercial uncertainty that may arise as a result of the majority’s endorsement of a two-part test for unconscionability that eliminates the requirement that the strong party have knowledge over the weaker party’s vulnerability. It is foreseeable that there will be more challenges to the enforceability of executed standard form agreements on the basis of unconscionability.

In terms of next steps, the Supreme Court of Canada’s decision paves the road for this gig economy class action to move forward in Ontario’s courts, where ultimately some determination will be made as to the classification of Uber drivers as independent contractors or employees.

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