Insta-fail – waiving goodbye to arbitration

Introduction

As big tech comes under the microscope of Australian regulators, an Australian court has run the ruler over an arbitration clause agreed to by millions of social media users. The Federal Court of Australia’s decision in Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846 (22 December 2020) provides a detailed study of the principles for enforcing foreign arbitration agreements in Australia.  It also sets the table for some of the biggest arbitration battles to come, including whether an arbitration clause can constitute an unfair contract term.  The implications will be felt far beyond the tech sector.  

Background

Dialogue Consulting Pty Ltd (Dialogue) is an Australian company based in Melbourne. It offers a software-as-a-service product known as Sked Social, which helps companies to manage their marketing content on social media. Clients engage Dialogue to interact on their behalf with Facebook or Instagram (which is owned by Facebook), and in the process they hand over their login details for the relevant platform.  

In February 2019, Sked Social’s web domains were banned by Facebook and Instagram. This meant that Dialogue could no longer direct new clients to its product. According to the platforms, Dialogue’s access license was revoked because the company had violated Instagram’s terms of use by collecting user credentials and automating access without permission.  

In April 2019, Dialogue commenced a proceeding against Facebook and Instagram in the Federal Court of Australia. Dialogue alleges breach of Instagram’s terms of use as well as misleading and deceptive conduct, statutory unconscionable conduct, and anti-competitive conduct. For their part, the platforms maintain that Dialogue is the party that violated Instagram’s terms of use.  

In April 2020, Facebook and Instagram requested a stay of the proceeding on the basis that all of Dialogue’s claims, other than the claims of anti-competitive conduct, should be referred to arbitration. For most of the time Dialogue had been in business, Instagram’s terms of use included a clause requiring that disputes be resolved by arbitration under the American Arbitration Association’s (AAA) consumer arbitration rules. That clause was expressed to be governed by the US Federal Arbitration Act, and the terms of use generally were to be governed by the laws of California.  Any action relating to the arbitration clause was to be resolved in a Californian court.  

International commercial arbitration is governed in Australia by the International Arbitration Act 1974 (Cth) (IAA).  Section 7 of the IAA provides for enforcement of foreign arbitration agreements, including in situations where the arbitration is seated in another New York Convention country (s 7(1)(a)) or where a party to the agreement was domiciled in a New York Convention country (s 7(1)(d)). Under s 7(2), Australian courts must stay court proceedings and refer the parties to arbitration in respect of a matter that can be settled by arbitration.  However, under s 7(5), a court must not order a stay if it finds the arbitration agreement is null and void, inoperative, or incapable of being performed.  

Dialogue challenged the stay application on various grounds, and succeeded on one of them.  

Justice Jonathan Beach of the Federal Court addressed the following questions, which offer key insights into the enforcement of foreign arbitration agreements in Australia: 

• First, what is the relevant choice of law applicable to the formation of an arbitration agreement by way of an internet-based contract?  
• Secondly, assuming that an arbitration agreement was formed, should it be declared void for purposes of s 7(5) of the IAA on the basis that it is an unfair contract term?  
• Thirdly, assuming again that an arbitration agreement was formed, should it be declared inoperative for purposes of s 7(5) on the basis that Facebook and Instagram waived their right to arbitrate? 

Whose law is it anyway?

Before considering whether the arbitration clause should be enforced, Beach J asked whether there was an arbitration agreement in the first place. That, in itself, tells us something about the way Australian courts approach enforcement of arbitration agreements.  

The principle of competence-competence is, in Beach J’s words, “a tenet of faith amongst the arbitration set”. It establishes that an arbitral tribunal has the power to determine its own jurisdiction, including the question of whether an arbitration agreement exists in the first place, and that a court should only ask whether prima facie there is a valid arbitration agreement that appears to cover the matter in dispute.  

Although he recognised the competence-competence principle, Beach J did not apply it. This case, he said, involves tricky choice of law questions and matters of Australian consumer law, both of which the court is better placed to decide than an arbitrator. Rather than confining himself to deciding whether there was an arbitration agreement prima facie, which he said “would be a limp effort”, Beach J made a final decision about whether an arbitration agreement existed on the balance of probabilities.  

Next, it was necessary to identify the law applicable to the question of formation. As between the law of the forum, which was Australian law, and the law governing the arbitration agreement, which was US law, Beach J applied forum law. This was consistent with recent authority of the Full Federal Court in Trina Solar (US) Inc v Jasmine Solar Pty Ltd (2017) 247 FCR 1, which drew a distinction between, on the one hand, questions concerning whether parties have reached “consensus ad idem” and, on the other hand, questions of validity. Beach J also sat in that earlier case, and in the judgment he reasoned that it would be “counter-intuitive to suggest that the choice of law to assess consensus ad idem should be that set out in an agreement that an entity says it is not a party to because there was no consensus ad idem. That would be to assume what was to be proved.”  

Applying Australian law to the question in Dialogue, the court found that an arbitration agreement had been formed. Dialogue had reasonable notice at the time it opened an Instagram account that it would be subject to the platform’s terms of use, and by continuing to access the platform Dialogue manifested its assent to those terms.  

Take it or leave it: can an arbitration clause be unfair?

Having decided that an arbitration agreement was formed, the court considered whether that agreement should be declared void or unenforceable as an unfair contract term. If so, as Dialogue insisted, then the court was prevented from ordering a stay.  

Australia’s unfair contract terms regime was introduced in 2010. Although at first it applied only to standard form consumer contracts, since 2016 it has applied also to standard form small business contracts.  The terms of use in force between Instagram and Dialogue constituted a small business contract under the regime.  

Australia’s consumer law is set out in the Competition and Consumer Act 2010 (Cth), Schedule 2 (ACL). It provides that a term in a take-it-or-leave-it contract is “unfair”, and therefore void, if (a) it would cause a significant imbalance in the parties’ rights and obligations, (b) it is not necessary to protect the legitimate interests of one of the parties, and (c) it would cause detriment to the other party. Section 25 of the ACL lists examples of contract terms that would be unfair, including a term that limits one party’s right to sue another party (s 25(k)).  

Dialogue argued that the arbitration agreement in the terms of use would cause a significant imbalance and was not necessary to protect Instagram. According to Dialogue, it was illegitimate for Instagram to require disputes to be arbitrated on its home turf, rather than in the countries in which it operates, particularly because doing so might allow the American company to avoid local laws such as the ACL. Dialogue contended that having to arbitrate overseas would cause it detriment, and that the arbitration clause was not transparent because it did not appear on Instagram’s sign-up page. Dialogue also argued that a user’s right to opt out of the arbitration clause did not temper the significant imbalance between the parties.  

Beach J disagreed with all of Dialogue’s arguments. He explained that “a term does not cause a significant imbalance if there is a meaningful relationship between the term and the protection of a party, and that relationship is reasonably foreseeable at the time of contracting. And that is the case with the arbitration agreement here.” Accordingly, the arbitration clause in Instagram’s terms of use was not an unfair contract term under the ACL.  

In the alternative, Dialogue invoked the statutory prohibition of unconscionable conduct. Section 21 of the ACL provides that a person must not, in trade or commerce, in connection with the supply or possible supply of services, engage in conduct that is unconscionable (s 21(1)(a)).  Dialogue argued that by including the arbitration clause in its terms of use, and by seeking to enforce it, Instagram had contravened the ACL.  

The court emphasised that the statutory concept of unconscionable conduct is not the same as the everyday notion of something not done in good conscience. The statutory norm is informed not by morality but by the text and purpose of the ACL, and industry practice is relevant.  Here, Beach J found that Instagram’s conduct went nowhere close to establishing statutory unconscionability. It is true that Facebook and Instagram are in a stronger bargaining position than Dialogue, that the arbitration clause was not displayed on the sign-up page, and that the clause was not negotiable, but none of that is enough. And it may be true that arbitrating overseas would involve additional cost for Dialogue, and that an arbitrator applying Californian law may not hear Dialogue’s ACL claims. But again, that does not contravene the statutory norm.  

Beach J addressed the Supreme Court of Canada’s recent decision in Uber v Heller 2020 SCC 16, where a clause providing for foreign-seated arbitration in a standard form contract between Uber and a local driver was found to be unconscionable (also see our article on that case, The competence-competence principle under scrutiny in Canada).  However, Uber’s clause did not include an opt-out provision, and in any event the Canadian concept of unconscionability was said to be far more generous to those invoking it than the statutory concept of unconscionable conduct in Australia.  

For all of these reasons, Beach J concluded that Instagram’s arbitration clause did not trigger the relevant provisions of the ACL.  

Use it or lose it: when is a right to arbitrate waived?

In circumstances where an arbitration agreement was formed, which is neither an unfair term nor void by reason of unconscionable conduct, an Australian court would normally stay the matter and refer it to arbitration under section 7(2) of the IAA.  But here, according to Beach J, that ship had sailed. Facebook and Instagram had waived their right to arbitrate.  

As a preliminary matter, it was necessary to revisit the principle of competence-competence. Facebook and Instagram insisted that the court had discretion either to decide the waiver question itself or to refer that question to an arbitrator. According to the platforms, waiver questions should be resolved by the arbitrator.  

Beach J accepted that sometimes it is better for a court to refer to the arbitrator a challenge to the arbitration agreement under s 7(5), insofar as the challenge is intertwined with substantive matters in dispute. But where, as here, a challenge to the arbitration agreement is confined and does not extend to the substantive dispute, the court should resolve it.  

Next, the court identified the law applicable to waiver. As described above in relation to the choice of law applicable to formation, the Full Federal Court’s recent authority distinguished between questions of consensus ad idem and questions of validity. For validity questions, including waiver, the applicable law is the law chosen by the parties.  

Here, Instagram’s terms of use nominated the US Federal Arbitration Act as the law governing the arbitration agreement. Therefore, US law applied to the determination of waiver.  

Applying US law, Beach J found that Facebook and Instagram had waived their right to arbitrate. This is because the platforms had participated in the Federal Court proceeding for 12 months before raising the arbitration question. Their delay in invoking arbitration had the effect of waiving their right to do so.  

In an effort to decide the issue consistent with courts in California, Beach J embarked on a detailed examination of the approach taken by different US circuit courts. Although California falls within the appellate jurisdiction of the Ninth Circuit Court of Appeals, Californian courts have tended to adopt the Tenth Circuit approach to waiver rather than that of the Ninth Circuit. The Tenth Circuit approach calls for a showing that the delay in invoking arbitration affected, misled, or prejudiced the opposing party. Beach J concluded that the stay sought by Facebook and Instagram would prejudice Dialogue by causing unnecessary expense and inefficiency.  

Given that Facebook and Instagram had waived their right to have matters referred to arbitration, the arbitration agreement was inoperative for purposes of s 7(5) of the IAA and the stay application was dismissed.  

(As a postscript, in February 2021 Facebook and Instagram applied for leave to appeal the decision of Beach J.  Dialogue has since filed a notice of cross-appeal.)  

Key takeaways

Australian courts do not apply the competence-competence principle in all cases. Sometimes, particularly where a court considers it is better placed to do so than an arbitrator, the court will finally decide the arbitrator’s jurisdiction.  

Arbitration clauses in internet-based contracts are enforceable in Australia, at least insofar as a web user is put on notice of and offered access to the relevant terms.  

Parties resisting arbitration might seek to challenge arbitration clauses under Australian consumer law, either as “unfair contract terms” or on the basis that efforts to enforce them constitute unconscionable conduct. Australian courts, however, will not lightly strike down an agreed arbitration clause even in cases of unequal bargaining power.