Exceptions to the enforceability of arbitration agreements in the Canadian context

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, obliges signatory States to not only recognize and enforce arbitral awards but also valid arbitration agreements. This fundamental principle of arbitration law, in combination with the separability of arbitration agreements and the competence-competence doctrine, all provide arbitration agreements in Canada with robust protection. That said, the validity of the arbitration agreement itself is a threshold consideration in determining its recognition and enforceability.

In general, Canadian courts are reluctant to intervene in arbitration proceedings preferring to give deference to the tribunal, as is expected under the competence-competence doctrine. In instances where courts are asked to determine questions of validity they again, generally, uphold the validity of arbitration agreements unless they are void, inoperative, or “incapable of being performed.” Recently Canadian courts have examined specific instances in which arbitration agreements may be found to be unenforceable on these grounds.

In its 2020 decision, Uber Technologies Inc v Heller, the Supreme Court of Canada (SCC) developed a new and narrow exception to the enforceability of arbitration agreements: unconscionability. Mr. Heller had launched a class action lawsuit against the ride-hailing app Uber claiming that Uber drivers were employees pursuant to the Ontario Employment Standards Act, and therefore entitled to certain benefits. Uber’s position was that the standard form contract entered between Uber and its drivers required disputes to be resolved through mediation and arbitration in the Netherlands. However, to commence the arbitration, a claimant was required to pay a filing fee of US$14,500, as well as other fees. This was almost equal to a drivers’ annual income and thus created significant practical barriers to bringing a claim.

To address concerns over the inequality of bargaining power, the Court held that a party must be able adequately to protect their interests in the contracting process and employed the equitable doctrine of unconscionability “When the traditional assumptions underlying contract enforcement lose their justificatory authority, this doctrine provides relief from improvident and unfair contracts.” The Court explained that the concept of unconscionability is to protect those who are vulnerable in the contracting process from loss or improvidence in the bargain that was made. The Court held that a stronger party must not unduly disadvantage or obtain an advantage over a more vulnerable party.

The SCC’s decision in Uber to declare the arbitration agreement invalid provides insight into a narrow but clearly defined exception to the Court’s general deference to tribunals, the ‘competence-competence’ principle, and in doing so provides clarity around contractual conditions that may render an arbitration agreement unenforceable.

In its 2022 decision, Peace River Hydro Partners v Petrowest Corp., the SCC addressed whether it would enforce an otherwise valid arbitration agreement in the context of ongoing insolvency proceedings. Peace River had subcontracted work to Petrowest as part of a hydroelectric dam project. The subcontracts contained arbitration agreements. When Petrowest became insolvent, its receiver initiated a claim against Peace River for unpaid invoices under the subcontracting agreements. Relying on British Columbia’s Arbitration Act, Peace River sought a stay of proceedings on the basis that the dispute must proceed by arbitration. The Court was tasked with determining the circumstances in which a valid arbitration agreement would be deemed unenforceable in the insolvency context. In doing so, the Court was required to address the conflict between the voluntary nature of arbitral proceedings and the involuntary, collective forum in which insolvency proceedings occur. In resolving the issue, the Court took a two-part approach:

1. First, the Court specified the technical prerequisites required to grant a stay of proceedings in favor of arbitration: (a) whether there was an arbitration agreement; (b) whether the court proceedings were started by a party to the arbitration agreement; (c) whether the proceedings involved a dispute the parties had agreed to resolve by way of arbitration; and (d) whether Peace River had, as a first step, applied for a stay of proceedings.
2. Second, the Court shifted the onus to the receiver to establish that the arbitration agreement at issue was “void, inoperative, or incapable of being performed” within the meaning of the Arbitration Act. The Court warned that the scope of that language should be interpreted narrowly to prevent parties from avoiding arbitration to which they have contractually agreed, in favor of what they now view as a preferable procedure.

The Court provided guidance on how each aspect of the criteria upon which an agreement to arbitrate may be voided, stating that:

• To be “void” the arbitration agreement must be intrinsically defective according to the usual rules of contract law, including when it is undermined by fraud, undue influence, unconscionability, duress, mistake or misrepresentation, expressly noting that this would be rare.
• “Inoperative” had no universal common law definition, but possible reasons for finding an arbitration agreement inoperative include frustration, discharge by breach, waiver or a subsequent agreement between the parties.
• Arbitration agreements are “incapable of being performed” where the arbitral process cannot effectively be set into motion because of a physical or legal impediment beyond the parties’ control. Physical impediments may include inconsistencies, inherent contradictions or vagueness in the arbitration agreement that cannot be remedied by interpretation or other contractual techniques; the non availability of the arbitrator specified in the agreement, the dissolution or non existence of the chosen arbitration institution, political or other circumstances at the seat of arbitration rendering arbitration impossible. Legal impediments include express legislative overrides of the parties’ agreement to arbitrate.

In Peace River Hydro, the Court concluded that while Step 1 had been satisfied, the arbitration agreement would have had the effect of compromising the resolution of the insolvency proceedings, and, as such, the arbitration agreement was found to be unenforceable. The Court, however, took the opportunity to highlight the outcome, and emphasized that courts should, in almost all cases, enforce arbitration agreements even where one party becomes insolvent, underscoring the public policy objective that such agreements help achieve in the insolvency context: the “expeditious, efficient and economical clean-up of the aftermath of financial collapse.”

Most recently, the British Columbia Court of Appeal applied the unconscionability analysis from Uber in its 2023 decision, Williams v Amazon.com Inc. Distinguishing the facts in Uber, the Court found that the arbitration agreement contained in the conditions of use agreement was reasonable and neither an affront to public policy nor unconscionable. The Court upheld a partial stay of a proposed class action in favor of referring the dispute to arbitration.

By and large, Canadian courts continue to show resolve in ensuring that arbitration agreements are enforced. There are, however, circumstances in which courts may find them unenforceable.

Care should be taken when drafting arbitration agreements so that the mode of arbitration is suitable for the resolution of any anticipated disputes, especially in the case of standard-form contracts. To quote the SCC in Uber:

“Respect for arbitration is based on its being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all.”

Likewise, it may be that public policy requires the orderly and efficient collective resolution of insolvency proceedings take precedence over arbitration.