July 2, 2020
Uber Technologies Inc v Heller, 2020 SCC 16 ("Uber") is a landmark case in Canadian contract law, creating significant uncertainty in the enforceability of contracts, particularly for businesses that employ standard-form agreements or that contract with large numbers of individuals. In deciding that an arbitration clause in a standard form agreement was unenforceable, the majority of the Court vastly expanded the doctrine of unconscionability without providing meaningful guidance or constraints.
This article is the first in a series that will be published on the Uber decision. The focus of this article is on the issue of inequality of bargaining power, which is the first element of the test for unconscionability.
Background
This decision arose out of a motion for a stay of court proceedings, brought on the basis that the applicable contract contained an arbitration clause.[1] This motion was brought within a class action commenced by Heller, an individual, against Uber,[2] alleging various breaches of employment standards legislation.[3]
The key issue to be decided was whether the stay should be granted through adherence to the “competence-competence” principle.[4]
Heller was a delivery driver in Ontario, who used Uber’s software to earn a living. To use this software, Heller accepted a standard-form agreement which allowed him receive requests to deliver food to UberEats’ customers ("Contract").[5] The Contract contained an arbitration clause ("Clause").[6] The effects of the Clause were to:
- Require that Heller post USD$14,500 up front to commence arbitration, in addition to whatever legal fees and costs he may incur;
- Give the impression that Heller would have to travel to Amsterdam to pursue any claim or realize any rights under the Contract; and
- Submit to Dutch law for the arbitration and the interpretation of the Contract.[7]
Noting among other things that the upfront costs were close to the entirety of Heller’s annual salary,[8] and finding that invoking the “competence-competence” principle to refer the jurisdictional dispute to arbitration would shield the arbitration agreement from meaningful challenge,[9] the seven-judge majority decision (led by Abella and Rowe JJ) held that the Clause was unconscionable and therefore invalid, dismissed the appeal, and denied the stay.
Brown J. described the Clause as a “non-arbitration agreement”[10] and agreed that the Clause was invalid, but did so on the basis of public policy, not unconscionability.
In dissent, on the condition that Uber advance the fees necessary for Heller to commence the arbitral proceedings, Côté J. would have enforced the Clause and referred the parties to arbitration.
Part 1: Unequal Bargaining Power
Analysis
There is little room for debate about the result of the decision. The legitimacy of and respect for the arbitral process is founded on its ability to resolve disputes in a just manner. A party who attempts to use an arbitral clause or the arbitral process to deprive their counterparty of any dispute resolution process, cannot reasonably expect assistance or shielding from the law or the courts in that endeavour.
The more interesting issues raised by Uber arise from the manner in which justice was provided for Mr. Heller.
As noted by Côté J. in dissent, this case involves policy considerations that include the freedom of individuals to contract, party autonomy, commercial certainty, and respect for the arbitral process.[11] Brown J. emphasized that freedom of contract is a hallmark of a free society, is of central importance to the Canadian commercial and legal system, and often trumps other societal values.[12] In this case, these values were pit against what was an obviously unfair clause in a standard-form contract between an individual and a large and sophisticated commercial party.
The majority noted that there are two assumptions underlying the principle that parties ought to be held to their bargains: that contracting parties are best-positioned to judge and protect their interests, and that the contracted is “negotiated, freely agreed, and therefore fair”.[13] The majority notes there can be serious flaws in the contracting process that challenge these assumptions, and adherence to them should not be doctrinal when such flaws do occur.[14]
The majority states that, through the doctrine of unconscionability, courts can “avoid the inequitable effects of enforcement” of unfair bargains which cannot be linked to fair bargaining.[15] The purpose of the unconscionability doctrine has traditionally been to protect those who are vulnerable in the contracting process.[16]
The test for unconscionability as set forth by the majority is:
- An inequality of bargaining power, arising because one party cannot adequately protect their interests in the contracting process;[17] and
- A resulting improvident bargain.[18]
Crucially, the majority finds that unconscionability can be established without proof that the stronger party took advantage of the weaker party,[19] or what Justice Brown refers to as the “knowledge requirement”.[20]
Applying this doctrine to the facts, the Court found that there was inequality of bargaining power, that the Clause was so manifestly unfair as to constitute an improvident bargain, and that the Clause was therefore unenforceable.[21] The Court stated that “no reasonable person who had understood and appreciated the implications of the arbitration clause would have agreed to it.”[22]
Brown J. took aim at the approach of the majority to unconscionability, noting that it had the potential to lead to “ad-hoc judicial moralism” and “palm tree justice”, inviting a “freewheeling approach” and “appeals to unreasoned intuition”.[23] There is little doubt that the majority’s opinion will open the door to widespread claims seeking to set aside regrettable contracts as unconscionable.[24]
Far from restricting this case to unfair arbitration agreements within standard form contracts, the majority explicitly confirms this doctrine applies to all contracts (or any type of clause) in any context.[25] This is problematic, as the Court provides very little guidance on how this test is to be applied, and in what circumstances.
Focusing in this article on the element that requires inequality of bargaining power, the majority provided almost no guidance as to the extent of the inequality required, stating merely that: “what matters is 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’….”.[26] Yet, the majority expressly stated that unconscionability can be found without an overwhelming imbalance of bargaining power.[27] It is unusual for contracting parties to have the same bargaining power. It is not uncommon for one party to perceive a higher degree of need or benefit from striking a bargain. Where is the line that must be crossed before one party is allowed to escape its contractual obligations?
In addition, it can be expected that, given the absence of guidance in the majority decision, lower courts will have difficulty determining whether there is sufficient “personal vulnerability” of one party or whether the contractual terms are sufficiently “dense or difficult to understand”. This also raises the question as to the kind of inquiry that one party may need to make of its potential counterparty, to assess whether there is sufficient vulnerability present to enable an unconscionability defence to be made in the future. How are counsel to advise as to enforceability at the time of contracting or as to the prospects of success on a contract dispute?
The problem with floodgates litigation is not that all such claims are meritorious, but that there is enough uncertainty or enough of a chance for success that undue numbers of unmeritorious claims or defences are advanced. This is important to note given that the majority decision in Uber was animated by a concern about access to justice. Floodgates litigation leads to substantial waste and further overloads the already severely congested litigation dockets throughout the country.[28]
For instance, it would normally be assumed that a claim of unconscionability would never arise in the commercial context between parties who each obtained legal advice about the transaction. However, the majority’s reasoning at least arguably opens this door. Nowhere does the majority state that the unconscionability doctrine does not apply to commercial parties. There is even less certainty if the sophistication level of the counterparties differs. The majority decision simply notes that a difference in wealth, knowledge or experience may result in an inequality of bargaining power, and there are no “rigid limitations” on what types of inequality may be subject for review.[29] The majority does not set any minimum threshold of sophistication, nor any bar for the difference in relative sophistication, before unconscionability might be found.
There are varying levels of sophistication between commercial counterparties in almost every transaction. Some degree of inequality in bargaining power is the norm, not the exception. There is a continuum of scenarios. At one end, there will be rare situations with entities which are exactly as sophisticated as the other and who know exactly the same amount about the proposed contract in question. At the other end, there are parties with manifestly unequal bargaining power as in the Uber case. There are many points on the continuum in between those extremes.
The extent to which the contract is actually negotiated between the parties is another continuum that must be considered in the unconscionability analysis, between ad hoc agreements which are the product of extensive due diligence, negotiation, and business and legal advice such as in the M&A context, and the “take it or leave it” standard form agreements such as the Contract at issue in Uber.
At what point on these two spectrums does unconscionability kick in? At what point should it kick in? How are we to assess the interaction between these two spectrums?
Does a mid-size firm contracting with an international conglomerate raise the spectre of unequal bargaining power? What about a relatively large company contracting with Amazon for its web services? Does Google’s near-monopoly on online advertising create a “necessity case” when an organization uses its services? What about a sophisticated but distressed company selling assets to avoid insolvency?[30] Is a standard form purchase contract between two sophisticated entities ripe for an unconscionability challenge if one party accepts it without deliberation or negotiation?
Prior to Uber, an answer to at least some of these questions might have been if the counterparty represented that it either received legal advice or had the opportunity to do so. Unfortunately, this can no longer provide complete comfort. The majority notes that legal advice is not necessarily sufficient to strengthen a vulnerable position such that unconscionability cannot apply. The majority states that independent legal advice is “relevant only to the extent that it ameliorates the inequality of bargaining power”, and that parties may nevertheless enter into an improvident bargain out of necessity, thereby attracting the doctrine.[31] This creates substantial uncertainty as to the enforceability of contracts in general.
Brown J. picks up on the majority’s discussion of legal advice and bargaining inequality and states that a party must therefore know the actual content of the other party’s legal advice before it can be reasonably assured of the enforceability of its bargain.[32] Quite apart from the practical difficulties that would arise, this is an impossibility in our legal system which features solicitor-client privilege as foundational. Is it thereby impossible to avoid unconscionability review?
It may be that it will become a feature of commercial disputes to seek to marshal evidence about what the entities subjectively knew about the meaning and effect of the contract in the hope of attracting or avoiding a finding of unconscionability, despite the fact that evidence about subjective understanding of contractual terms has previously been understood to be irrelevant.
In addition, the majority notes that the removal of the “knowledge” requirement brings standard-form contracts within the ambit of the unconscionability doctrine. In fact, the motivation to do away with the knowledge requirement appears to be to permit review of such contracts.[33] The Court essentially puts entities making use of such contracts on notice,[34] but stops (perhaps just) short of saying contracts of adhesion are definitionally the products of unequal bargaining power. Brown J. strongly criticizes the majority’s statements in this respect, noting that they have essentially opened up every standard-form contract to review on substantive reasonableness which will lead to “profound” uncertainty about the enforceability of contracts.[35]
Indeed, it appears that standard-form agreements between sophisticated entities and individuals now have one foot in the grave when it comes to the new unconscionability doctrine. While the clause in Uber may have been obviously unfair, and its effect of denying access to justice was particularly distasteful to the Court, standard-form contracts are a widespread fixture of the modern economy. As Justice Brown observed, contracts of adhesion should not, by definition, denote the inequality of bargaining power necessary to trigger an unconscionability review.[36]
Overall, in his concurring reasons, Brown J. used a much more surgical approach to fix the problem in this case. He found the Clause to be invalid on the basis that it was contrary to public policy. That provided the same result, without expanding and distorting the doctrine of unconscionability in the absence of meaningful constraints or guidance.
Bryan C. Duguid QC, FCIArb is a partner at JSS Barristers. Click here for his bio.
David Marshall is an associate at JSS Barristers. Click here for his bio.
[1] At first instance, Perell J. granted the stay: Heller v Uber Technologies Inc, 2018 ONSC 718. That was reversed by a unanimous Court of Appeal decision: Heller v Uber Technologies Inc, 2019 ONCA 1. Uber appealed, and leave was granted: Uber Technologies Inc, et al v David Heller, 2019 CanLII 45261 (SCC).
[2] There are four corporate respondents, Uber Technologies Inc., Uber Canada, Inc., Uber B.V. and Rasier Operations B.V. (collectively “Uber”).
[3] Uber at para 3.
[4] Section 7(1) of Ontario’s Arbitration Act, 1991, SO 1991 c 17 provides that a party may apply to stay litigation when the parties have agreed to arbitrate the dispute, subject to certain exceptions, including that the arbitration agreement was invalid. Determining the jurisdiction of an arbitrator would ordinarily involve the “competence-competence” principle, which provides that disputes over the jurisdiction of the arbitrator(s) prima facie should be decided by the arbitrator(s) and not by a court, unless the arbitration clause is “manifestly tainted by a defect rendering it invalid or inapplicable”: Heller at paras 33-34, citing Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34. This could be established when the challenge to jurisdiction (1) involves a pure question of law, or (2) when the question is of mixed fact and law but requires only a superficial examination of the record.
[5] Uber at para 2.
[6] The clause in question reads as follows:
Governing Law; Arbitration. Except as otherwise set forth in this Agreement, this Agreement shall be exclusively governed by and construed in accordance with the laws of The Netherlands, excluding its rules on conflicts of laws... Any dispute, conflict or controversy howsoever arising out of or broadly in connection with or relating to this Agreement, including those relating to its validity, its construction or its enforceability, shall be first mandatorily submitted to mediation proceedings under the International Chamber of Commerce Mediation Rules (“ICC Mediation Rules”). If such dispute has not been settled within sixty (60) days after a request for mediation has been submitted under such ICC Mediation Rules, such dispute can be referred to and shall be exclusively and finally resolved by arbitration under the Rules of Arbitration of the International Chamber of Commerce (“ICC Arbitration Rules”)... The dispute shall be resolved by one (1) arbitrator appointed in accordance with ICC Rules. The place of arbitration shall be Amsterdam, The Netherlands...
[7] Uber at paras 50 and 93-94.
[8] Uber at para 2.
[9] Uber at para 39.
[10] Uber at para 138, per Brown J (concurring in the result).
[11] See, e.g., Uber at paras 177, 257, and 332.
[12] Uber at para 107.
[13] Uber at para 56.
[14] Uber at para 58. The Court cites the following examples: “the elderly person with cognitive impairment who sells assets for a fraction of their value,” “the ship captain stranded at sea who pays an extortionate price for rescue,” and “the vulnerable couple who signs an improvident mortgage with no understanding of its terms or financial implications.”
[15] Uber at para 59.
[16] Uber at para 60.
[17] The majority notes that a finding of inequality of bargaining power is not subject to any “rigid limitations” and can be reflected in a difference in wealth, knowledge, or experience between the parties (para 67), in the so-called “necessity cases” where the “weaker party is so dependent on the stronger that serious consequences would flow from not agreeing to a contract” such as an extortionate price for a rescue at sea (para 70), or where only one party could understand and appreciate the full import of the contractual terms including personal vulnerability of one party or “dense or difficult to understand terms” (para 71). The majority held that inequality does not need to rise to the level of a lack of capacity (para 67).
[18] The majority then discusses that an improvident bargain unduly advantages one party, or unduly disadvantages the vulnerable party (or, presumably, both). Improvidence is measured at the time the contract is entered into (para 74). The Court notes that a manifestly unfair bargain can be proof of an inequality of bargaining power, as it is a “matter of common sense that parties do not often enter into a substantively improvident bargain when they have equal bargaining power” (para 79).
[19] Uber at paras 84-85.
[20] Uber at para 164.
[21] Uber at para 93.
[22] Uber at para 95.
[23] Uber at paras 152-153, per Brown J.
[24] As recently as Pioneer Corp. v. Godfrey, 2019 SCC 42, the Court reiterated the need to avoid indeterminate liability due to the “floodgates” of litigation in the duty of care analysis in negligence. It is suggested that there is a similar concern as a result of the Uber decision, leading to an opening of the floodgates for those hoping to avoid obligations under standard-form agreements.
[25] Uber at paras 89, 96 and 173. That unconscionability applies to all contracts is not new; see Brown J. at para 154.
[26] Uber at para 72.
[27] Uber at paras 38-39.
[28] The Supreme Court has recently re-affirmed that congestion of Canadian courts presents a serious access to justice problem: see Nevsun Resources Ltd v Araya, 2020 SCC 5 at para 261 per Brown and Rowe JJ, dissenting in part.
[29] Uber at para 67.
[30] See Uber at para 76, which contemplates that the sale of assets well below market price appears to satisfy the “improvident bargain” element.
[31] Uber at para 83.
[32] Uber at para 167.
[33] Uber at para 85.
[34] Uber at paras 87 and 89-91. For example:
“The potential for such contracts to create an inequality of bargaining power is clear. So too is their potential to enhance the advantage of the stronger party at the expense of the more vulnerable one, particularly through choice of law, forum selection, and arbitration clauses that violate the adhering party’s reasonable expectations by depriving them of remedies. This is precisely the kind of situation in which the unconscionability doctrine is meant to apply” (para 89). [Emphasis added.]
[35] Uber at para 163.
[36] Uber at para 162.
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