Supreme Court of Canada develops a narrow exception to the enforceability of arbitration agreements

In its long-awaited decision in the Uber matter, the Supreme Court of Canada rules that as the dispute between Uber and its drivers relates to employment, it exceptionally falls outside of the normal legal framework that requires the systematic referral of challenges to the jurisdiction of an arbitrator to the arbitrator. 

Background

In 2017, Mr. Heller commenced a proposed class action against Uber on behalf of Uber drivers providing food delivery or personal transportation services. He sought a declaration that he and other Uber drivers were employees governed by the Employment Standards Act (ESA) and $400 million in damages for alleged breaches of the ESA. Uber brought a motion to stay the action in favour of arbitration in accordance with the terms of the arbitration clause set out in its standard services agreement.

The motions judge found Uber’s arbitration clause to be valid and granted the motion to stay. The Ontario Court of Appeal disagreed and allowed Mr. Heller’s appeal.

The domestic arbitration act applies to employment disputes

The majority of the Supreme Court of Canada held that the International Commercial Arbitration Act (ICAA) does not apply in this case. While the agreement between Mr. Heller and Uber is indisputably international, it is not in fact “commercial.” The majority held that whether the ICAA applies is predicated on the nature of the parties’ dispute, which can be determined from an analysis of the pleadings. 

According to the majority, the parties’ dispute in this matter is “fundamentally about labour and employment,” which is not the type of dispute that the ICCA is intended to govern. The applicable statute is therefore Ontario’s domestic Arbitration Act, 1991 (Arbitration Act). 

Justice Côté, dissenting, took the view that the arbitration at issue is both international and commercial in nature. Uber’s services agreement expressly states that it creates a software licensing agreement, not an employment relationship. Disputes arising from this type of commercial relationship fall within the scope of the ICAA.

New exception to the competence-competence principle

On the issue of whether Mr. Heller’s class action should be stayed in favour of arbitration, the majority examined the provision of the Arbitration Act, which allows a court to refuse to stay a civil proceeding in favour of arbitration if the arbitration agreement is invalid.

The majority endorsed the framework set out in its earlier decision in Dell that, pursuant to the competence-competence principle, all challenges to the jurisdiction of an arbitral tribunal should normally be referred to the tribunal, unless they raise: (i) pure questions of law; or (ii) questions of mixed fact and law that require only superficial consideration of the evidence in the record.¹ The majority clarified that the second limb of the Dell test will be available only where “the necessary legal conclusions can be drawn from facts that are either evident on the face of the record or undisputed by the parties.”² 

More importantly for the resolution of Uber’s appeal, however, the majority explained that there are “abnormal” cases, not contemplated within the Dell framework, that raise issues requiring a departure from the normal application of the competence-competence principle, the Uber case being one of them. In particular, where aspects of an arbitration agreement would effectively insulate the agreement from challenge, a court may determine the validity of the agreement. 

In order to ensure that only bona fide validity challenges are examined by the courts, the court must find that (i) there is a genuine challenge to arbitral jurisdiction and (ii) there is a real prospect that the challenge may never be resolved if a stay is granted. The majority recognizes that this second prong requires a limited assessment of the evidence and cautions against such motions turning into “mini-trials.” 

Justice Côté is of the opinion that the arbitral tribunal should decide the validity of Uber’s arbitration clause, consistent with the competence-competence principle. She rejected the creation of a new exception to the rule of systemic referral to the arbitrator of challenges to jurisdiction as contrary to legislative intent and the court’s precedents.

Unconscionable arbitration agreements are invalid

The majority characterized this matter as a “classic case of unconscionability.” Recognizing the inconsistent application of the unconscionability doctrine in lower courts, the majority reiterated the two-prong test requirement of an inequality of bargaining power and a resulting improvident bargain. The majority rejected the proposition of a four-prong test which would include the victim’s lack of independent legal advice and the stronger party knowingly taking advantage of the other party’s vulnerability. It also concluded that the unconscionability of an arbitration clause can be considered separately from that of the contract as a whole. 

On the inequality of bargaining power, the majority held that there are no “rigid limitations” on this concept. The crux is that one party cannot adequately protect its own interests. While the majority asserted that standard form contracts do not, in themselves, establish inequality of bargaining power, it pointed to the “many ways in which standard form contracts can impair a party’s ability to protect their interest in the contracting process.” On the improvidence of the bargain, the majority noted that it can either unduly advantage the stronger party or unduly disadvantage the more vulnerable party. Improvidence is to be assessed contextually. 

In this particular case, the majority concluded that the up-front administrative fees required of Mr. Heller, when consideration is given to the small amount of the claims likely to arise under the contract, made the arbitration clause improvident. It noted that the total payable in up-front fees is close to Mr. Heller’s annual income and does not include other related costs such as legal fees. 

Justices Brown and Côté both parted with the majority on this issue. Justice Côté did not find the arbitration clause to be unconscionable. In her view, the majority’s approach restricts the use of arbitration clauses in standard form contracts and opens the door to abuse of the unconscionability doctrine, creating commercial uncertainty. In her view, any restrictions on the use of arbitration clauses in standard form contracts, which are of significant importance to the sharing economy, should be left to the legislature.

Justice Brown also rejected the majority’s expansion of the doctrine of unconscionability. While he concurred that the arbitration agreement is invalid, he concluded that its invalidity stems from the fact that, as a matter of public policy, “courts will not enforce contractual terms that, expressly or by their effect, deny access to independent dispute resolution” and thereby offend the rule of law.

Take-aways

The majority’s reasons afford courts a somewhat broader discretion in deciding stay applications. However, the majority expressly left the Dell framework intact for “normal” cases, which should include the vast majority of commercial cases in which the validity of an arbitration agreement – even one found in a standard form contract – is challenged.
 
With respect to the majority’s “expansion” of the doctrine of unconscionability, particular care should be taken in drafting and reviewing standard form contracts, especially when a co-contracting party is an individual. Standard form contracts that clearly and effectively communicate the meaning and legal implications of their clauses, including any arbitration clause contained in the agreement, will both offset uncertainty in respect of their terms and help ensure their enforceability. 

As the majority did not address the question of whether the arbitration agreement was invalid on the basis that it allegedly contracted out of mandatory protections contained in the ESA, that issue remains unresolved.