Uber v. Heller: Supreme Court Throws Out Dutch Arbitration Clause As Unconscionable

Most people would find that a mandatory $14,500 arbitration fee hidden in their employment contract is an unexpected and unfair contractual term. The Supreme Court of Canada agrees. On June 26, 2020, the Supreme Court of Canada released its decision in Uber Technologies Inc. v. Heller, (“Heller”) settling the elements of the doctrine of unconscionability and clarifying when courts should enforce arbitration clauses. Through this ruling, the Court has allowed a proposed $400 million class action lawsuit by Uber and UberEATS drivers to proceed. This decision will have wider implications to standard form contracts and arbitrations.

Background

David Heller, the plaintiff and a former UberEATs driver, sought a declaration on behalf of the class that Uber and UberEATS drivers are employees under Ontario’s Employment Standards Act, 2000 ("ESA") and therefore are entitled to ESA benefits.

In their contracts with Uber and UberEats, drivers accepted an arbitration agreement to resolve any grievances though the arbitral jurisdiction of the International Chamber of Commerce in Amsterdam, Netherlands.

However, the contract did not mention that this process would cost drivers an up-front fee of US$14,500 plus legal fees to initiate arbitration. Mr. Heller earns less than $30,000 per year.

Before a court could determine whether the drivers were employees under the ESA, Uber brought a motion to stay the proceedings, claiming the matter was arbitrable under its contract. The motions judge agreed with Uber, finding that the ESA did not bar parties from using private arbitration. The Ontario Court of Appeal overturned this ruling. It held that the arbitration clause was void under the equitable doctrine of unconscionability and because it illegally contracted out of the ESA.

The Supreme Court of Canada ruled that the arbitration clause could not be enforceable. Seven of the nine justices, in a decision written by Justices Abella and Rowe, ruled that the arbitration clause was unconscionable. In a concurring opinion, Justice Brown alternatively held that the arbitration clause is unenforceable because it is against public policy as it denies access to justice. Justice Côté’s dissent emphasized the right of two parties to freely negotiate and bind themselves into contractual agreements.

Doctrine of Unconscionability

The majority’s decision has settled the elements of the doctrine unconscionability, rejecting the four-part test under prior Ontario appellate jurisprudence¹ and siding with unconscionability having only two requirements:

1. Inequality of bargaining power; and
2. An improvident bargain.

This test does away with other requirements inserted by prior Ontario Court of Appeal cases, such as an “overwhelming” imbalance of bargaining power, a “grossly unfair” transaction, one party knowingly taking advantage of the other’s vulnerability, and the victim’s lack of independent legal advice. The new test broadens both requirements of unconscionability, giving judges greater discretion to set aside contractual provisions.

The majority of the Supreme Court described the element underlying the inequality of bargaining power as “the presence of a bargaining context where the law’s normal assumptions about free bargaining either no longer hold substantially true or are incapable of being fairly applied.” In these circumstances, courts can provide relief if the bargain is found to be improvident. Examples cited by the majority of where inequality of bargaining power can occur include when a weaker party signs a contract out of necessity to prevent negative consequences or where only one party can fully understand and appreciate a contract’s terms, possibly due to dense, difficult contractual language.

The majority held that Mr. Heller, a deliveryman, had much less sophistication than Uber, a large multinational corporation. It ruled that Mr. Heller was powerless to negotiate or even understand the terms of his boilerplate contract, which made no mention of the costs associated with initiating an arbitration under the selected arbitration rules.

An improvident bargain, the second requirement, must be determined contextually according to the majority. Improvidence is assessed at the time of the contract formation and objectively. In essence, the question is “whether the potential for undue advantage or disadvantage created by the inequality of bargaining power has been realized. Bargains that unduly advantage the stronger party or unduly disadvantage the weaker party is improvident For a person who is in desperate circumstances, for example, the emphasis in assessing improvidence should be on whether the stronger part has been unduly enriched. Enrichment could occur where the price of goods or services departs significantly from the usual market price. Where the weaker party did not understand or appreciate the meaning and significance of important contractual terms, the focus is on whether they have been unduly disadvantaged by the terms they did not understand or appreciate. These terms are unfair when, given the context, they flout the “reasonable expectation” of the weaker party or cause an “unfair surprise”. In the context of Mr. Heller, the majority ruled that $14,500 in up-front arbitration fees plus legal costs constituted an improvident bargain. It said that no reasonable person who understood the arbitration clause would have entered into it.

Justice Brown expressed his concern that the majority’s formulation of unconscionability was too vague, removing any meaningful constraint. He viewed the majority’s formulation as likely to introduce added uncertainty in the enforcement of contracts, where predictability is paramount. Justice Brown warned that the majority’s approach invites “unreasoned intuition and ad hoc judicial moralism” to determine the enforceability of contracts.

New Rules for Deciding Arbitral Jurisdiction

Under the “competence-competence ” principle, (called “systematic referral” by Côté J.) when an arbitration clause exists, arbitrators should first answer challenges to their own jurisdiction. The Supreme Court set out two exceptions to this rule in Dell Computer Corp v. Union des consommateurs and Seidel v. TELUS Communications Inc. Courts may rule on arbitral jurisdiction for: 1) pure questions of law; or 2) questions of mixed fact and law requiring only “superficial consideration” of the evidentiary record.

In Heller, the Court added an additional exception: courts must not set aside challenges to an arbitrator’s jurisdiction when there is a “real prospect that doing so would result in the challenge never being resolved.” For Mr. Heller, the majority ruled that the expensive, up-front cost to initiate arbitration supported the real prospect that the arbitration clause’s validity could not be resolved without a court decision.

Insight

Heller is 2020’s second major decision favouring Canadian gig-economy workers. In February, the Ontario Labour Relations Board held that Foodora couriers may unionize under the Ontario Labour Relations Act (see our discussion here). In Foodora, the Board found that the couriers were employees, though their contracts classified them as independent contractors. Though Foodora subsequently left the Canadian market, the Labour Board’s decision will bolster other gig-workers’ unionization attempts. Moreover, both Heller and Foodora demonstrate that the principle of freedom of contract remains subject to other controlling legal principles.

Standard form contracts, or contracts of adhesion, are subject to legal principles and doctrines that drafters must take into consideration. Unconscionability is one of those principles.

The majority of the Supreme Court expressly noted that they did not mean to suggest by their reasons that a standard form contract, by itself, establishes an inequality of bargaining power. The panel acknowledged that standard form contracts are in many instances both necessary and useful. For example, sophisticated commercial parties may be familiar with standard form contracts within an industry. For others, the majority commented that sufficient explanations or advice may offset uncertainty about the terms of standard form agreements, and that standard form contracts may clearly and effectively communicate the meaning of clauses with unusual or onerous effects.

What the Heller decision underscores is the ability of courts to intervene where the law’s normal paradigm of free bargaining either no longer holds true or is incapable of being fairly applied. Besides doctrines such as contra proferentem and public policy considerations, drafters of contracts of adhesion must have in mind the potential for challenges under the unconscionability doctrine. Context will be everything in those cases, but drafters can mitigate the risk of a contract being found unconscionable by drawing attention to and clearly communicating the meaning of terms that have an unexpected impact or are onerous and depart from typical contractual terms. Freedom of contract is not the only relevant principle courts will apply.

One major concern is that the scope for challenges to the enforceability of all standard-form agreements may have been greatly increased by the majority’s concept of unconscionability. Almost all such agreements involve some form of inequality, but it would be unreasonable to argue that the purchase of groceries in the ordinary course engages the doctrine of unconscionability, notwithstanding the inequality of bargaining power. There is, however, language in the majority reasons that is not as careful as it should have been. Unconscionability should be a very limited remedy, available in only a very few particularly egregious cases; it is not a general remedy to relieve people from improvident bargains.