The competence-competence principle under scrutiny in Canada

Introduction

The competence-competence principle, which recognizes the power of an arbitrator to determine his or her own jurisdiction under the arbitration agreement, is widely recognized in most jurisdictions around the world. However, the so-called “negative effect” of the principle - the notion that courts ought not to pronounce on the validity and scope of the arbitration agreement, which should first be determined by the arbitrator - is less widely and consistently accepted. In a case involving Uber Technologies Inc. and its related companies (Uber), the Supreme Court of Canada has re-affirmed the application of the competence-competence principle to the vast majority of challenges to an arbitrator’s jurisdiction, including challenges based on the alleged invalidity of the arbitration agreement, but created a new and narrow exception where referral of a jurisdictional challenge to the arbitrator would effectively prevent access to arbitration (Uber Technologies Inc., et al. v. David Heller, SCC No. 38534). 

Factual background

In 2017, David Heller, an Uber driver based in Ontario, Canada, commenced a proposed class action on behalf of Ontario Uber drivers who provide services using Uber apps. In the proposed class action, Mr. Heller sought declarations that Uber drivers are employees of Uber and therefore governed by the Ontario Employment Standards Act (ESA), that Uber has violated the ESA, and that the mandatory arbitration provisions of the services agreements between Uber and the drivers are void and unenforceable. He also claimed $400 million in damages on behalf of the putative class.

Before the class received certification, Uber moved to stay the action in favour of arbitration based on the arbitration clause in the standard service agreement between the parties. The arbitration clause required the parties to engage in International Chamber of Commerce (ICC) mediation and, failing resolution, ICC arbitration. The service agreement is governed by the laws of the Netherlands and provides that Amsterdam shall be the place of arbitration.

The motions judge determined that the arbitration clause was valid and granted Uber’s motion to stay the proposed class action. The Ontario Court of Appeal unanimously reversed. The Court of Appeal held that the competence-competence principle has no application where challenges to the jurisdiction of an arbitrator are based on the alleged invalidity of the arbitration agreement. The court proceeded to hold that the arbitration clause was invalid as an illegal contracting out of the ESA. 

Further, the Court of Appeal found that, even if the clause were valid, the clause was unenforceable because the cost of overseas mediation and arbitration, relative to a driver’s salary, rendered the clause unconscionable. The evidence before the court was that the up-front costs that an Uber driver could be expected to incur in pursuing the ICC med-arb process provided for in the agreement were approximately USD$14,500. The Court concluded that this was out of proportion to the amount in dispute, by reference to Mr. Heller’s individual claim and his weekly salary of $400 to $600, which he earns based on 40 to 50 hours of work as an Uber driver. 

The Court of Appeal also determined that the Uber app’s click-through interface, contract of adhesion and drivers’ lack of independent legal advice created an overwhelming imbalance in bargaining power. The Court concluded that Uber had crafted the dispute resolution clause in its service agreement to take advantage of its drivers and that it did so “willingly and intentionally”.

Appeal to the Supreme Court of Canada

Uber appealed to the Supreme Court of Canada. Seventeen separate organizations intervened in the appeal, evenly divided between those intervening on arbitration-related issues and those intervening on access to justice and employment-related issues. The ICC, represented by the authors, intervened on two arbitration-related issues raised in the appeal: 

• First, on whether the competence-competence principle applies where a challenge to the jurisdiction of the arbitrator is based on the alleged invalidity of the arbitration agreement; and 


• Second, on the proper approach for determining the suitability of arbitration, including ICC arbitration, for resolving certain categories of disputes.

Does competence-competence apply to validity challenges?

When is arbitration unsuitable to resolve a commercial dispute?

With respect to the second issue, the ICC took the position that the suitability of arbitration to resolve certain categories of dispute should be decided having regard to clearly-expressed legislative policy choices, applying the competence-competence principle and the allocation of judicial and arbitral responsibilities reflected in the Model Law. 

A fundamental tension in the case, on which the parties and many of the interveners expressed diametrically opposed views, pertained to the proper characterization of the relationship between Uber and its drivers: are Uber and its drivers in a commercial relationship, subject to the principles of the Model Law, or an employment relationship, subject to the mandatory provisions of local employment standards legislation? 

The Supreme Court of Canada’s ruling 

In a majority judgment, the Supreme Court of Canada affirmed the applicability of the competence-competence principle to questions concerning the validity of an arbitration agreement, consistent with the Court’s prior jurisprudence. That is, normally courts should systematically refer to the arbitrator questions relating to the arbitrator’s jurisdiction, including questions relating to the validity of the arbitration agreement, all of which should be decided by the arbitrator in the first instance.

However, the majority of the court developed a new and narrow exception to the rule of systematic referral in circumstances where the jurisdictional challenge “would never be resolved” (at paragraph 38 of the judgment) or, as articulated by Justice Brown in his concurring opinion, where referring the jurisdictional challenge to the arbitrator would “effectively prevent access to arbitration” (at paragraph 125). 
The majority was alive to the possibility that, in creating an exception to the rule of systematic referral, its decision risked encouraging plaintiffs to raise spurious validity challenges. The majority therefore adopted a two-part analysis requiring that a court assess, first, whether, assuming the facts pleaded to be true, there is a genuine challenge to arbitral jurisdiction and, second, whether there is a real prospect that, if the stay is granted, the challenge may never be resolved by the arbitrator. 

The majority acknowledged that the second limb of the analysis requires some limited assessment of evidence and cautioned that the assessment must not devolve into a mini-trial. However, this assessment appears indeed to go well beyond a prima facie review of the case, insofar as it may entail a review of contested evidence. While the court proposed means for managing the risk of this assessment turning into a mini-trial, namely efforts on the part of counsel and judges to ensure the hearing remains narrowly focused, these are unconvincing. 

Observations

The Uber judgment is unlikely to affect commercial arbitration in Canada, where courts display an overall positive attitude toward commercial arbitration.

A live issue in the appeal was whether there should be a broad carve-out from the legal framework developed by the Supreme Court of Canada in its prior cases for challenges to arbitral jurisdiction based on the alleged invalidity of the arbitration agreement. The Court did not accept to make such a carve-out. 

While judicial attitude toward commercial arbitration in Canada is unlikely to change as a result of the Uber judgment, the development of an exception to the rule of systematic referral of validity challenges to the arbitrator has the potential - at least in the immediate aftermath of the judgment, as parties seek to test the limits of the exception - of multiplying validity challenges and rendering them more complex and therefore more costly. It will be important for the courts to assert clearly the narrow scope of the newly-developed exception to the competence-competence principle. 

Back to main page

Previous editions