July 8, 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.
In this part, we consider the second element of the Court’s statement of the test for unconscionability analysis: the improvident bargain.
Part 2: The Improvident Bargain
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; and
- A resulting improvident bargain.
The majority decision of the Court devotes little discussion to the concept of improvidence, and provides minimal guidance on what it actually means. The majority states that a “bargain is improvident if it unduly advantages the stronger party or unduly disadvantages the more vulnerable” (emphasis ours), and notes that improvidence is measured at the time of contract formation.
The majority notes that “undue” is to be assessed contextually, having regard to factors such as market price, commercial setting, or the positions of the parties (all as at the time of contract formation).
The majority decision of the Court states that improvidence could be found:
- When one party is in desperation and the stronger party becomes unduly enriched, for instance, if the contract price departs significantly from the usual market price;
- When the weaker party has been unduly disadvantaged by terms that they did not understand; or
- When terms are unfair because they flout the “reasonable expectations” of, or cause “unfair surprise” for, the disadvantaged party.
This is not an exhaustive list. On the contrary, the majority holds that improvidence may take many forms and finding it is not an exact science.
From the perspective of the weaker party, any disadvantage or advantage may seem undue. This vagueness in the concept of “undue-ness” and the dearth of guidance on how to apply it, will exacerbate the litigation floodgates problem that we noted in part 1 of this series. The majority acknowledges this vagueness, and simply (and expressly) leaves it up to judges to decide. In fact, the majority expressly rejected the position of Uber that the transaction should need to be “grossly unfair.” So, at what point is a contract too unfair or undue (in the eyes of a particular judge) to require a party to honour its obligations?
This vagueness was part of the concern expressed in Justice Brown’s dissent, when he noted that the majority’s decision leaves it to judges to “mete out justice as they deem fair and appropriate, thereby returning unconscionability to a time when equity was measured by the length of the Chancellor’s foot”. While equity has an important role to play in protecting the vulnerable, the majority decision “invite[s] judges to apply their own subjective, even idiosyncratic understandings of ‘[f]airness’ and ‘situationa[l] … appropriate[ness]’ in deciding whether a contract should be enforced. It is difficult to reconcile this “undisciplined expansion of the scope of unconscionability” with the important values of freedom of contract, respect for individual autonomy, and commercial certainty.
The majority states that unconscionability is not intended to provide after-the-fact assistance to parties that face a hardship from their bargain. However, with the vagueness of the doctrine articulated by the majority coupled with the challenge of ignoring the benefit of hindsight, unconscionability will often likely be litigated based to a significant degree on outcomes, not forecasts.
Some of the general concepts provided by the majority support this concern. For example, the concept of “surprise” necessarily requires that the outcome could not have been predicted at the outset. Also, “reasonable expectations” by definition cannot be flouted at the formation of a contract. That can only occur as a product of an outcome, not the bargaining process.
One of the most troubling aspects of the majority’s discussion of improvidence is that it appears to contemplate that improvidence (and unconscionability generally) can arise in a commercial context. The majority does not state that sophisticated commercial entities cannot enter into an improvident bargain, even when they receive legal advice. As we discussed in Part 1, legal advice prior to executing a contract does not appear to foreclose the possibility of unconscionability. It is difficult to see how commercial parties can insulate themselves from an unconscionability challenge.
As a result, it is likely that the concept of improvidence will apply widely and lead to commercial uncertainty.
Consider a mortgage contract. These are largely or wholly standard form agreements between, on the one hand, the largest and most sophisticated of commercial entities (banks), and on the other hand, individuals, often without legal advice. Many individuals applying for a mortgage are in a vulnerable position. In many circumstances, they have a short window of time to get a mortgage in place to satisfy the financing condition on a residential purchase transaction. The purchase of a home with a mortgage is often the single largest transaction that an individual will undertake. These circumstances would seem to constitute an inequality of bargaining power sufficient to meet the first prong of the test as stated by the majority.
What, then, of improvidence? A mortgage can work significant hardship on the mortgagor. For instance, mortgage contracts often, if not always, contain a provision that the mortgagee is entitled to full-indemnity costs if it has to litigate its rights under the mortgage. Foreclosure is a draconian (though necessary) process, which it is fair to assume may not be fully appreciated by the mortgagor at the time of signing the mortgage. All of these hardships are inherent in the contract and objectively foreseeable at the time of contract formation, but could be argued to cause a “surprise”, a flouting of “reasonable expectations”, or work to the undue disadvantage of the mortgagor or undue advantage of the mortgagee. It can fairly be assumed that many mortgagors do not have the “reasonable expectation” that they could end up paying large amounts to the bank’s lawyers to repossess the home in which they live.
Faced with the prospect of losing one’s home and equity in it, taking a run at the contract on the basis that it is unconscionable is not irrational, and not even unwise. Again, the floodgates seem open.
Justice Brown’s concern that the improvidence of a bargain must be assessed in light of the entirety of the bargain, and not on the operation of a single clause, is well-taken. While foreclosure and full-indemnity costs may, by themselves, work undue hardship, it must also be considered that the lender is, in many cases, lending many times the annual income of the borrowers. A mortgage is the only way the vast majority of Canadians can afford to purchase a home. Traditionally, mortgage-borrowing is thought of as a critical wealth-building tool, and its importance to the economy and the well-being of Canadians is evident in many legislative initiatives encouraging home-buying. All of these are substantial benefits to the mortgagee, and the perceived unfairness of particular clauses should be evaluated in that light. Conversely, the mortgagor assumes most of the risk of equity depletion in the event of a significant market downturn. Foreclosure is the only realistic way a mortgagee can recover its investment if the mortgagor defaults.
On this holistic analysis, neither the disadvantages the mortgagor may realize nor the advantages the lender may realize seem undue. However, the majority’s reasons allow the mortgagor to have a court consider merely that the bank may reap an “undue” advantage in, for example, earning interest at a particular rate, having recourse to the collateral through foreclosure, and being protected (in theory) from the expenditure of legal fees. A focus on individual clauses without a requirement to consider the entirety of the bargain raises the spectre of unconscionability in all mortgage transactions. On the majority’s analysis, it would be reasonable to challenge the full indemnity legal fee recovery clause on a foreclosure action as unconscionable, with the remainder of the bargain not being considered.
With this example in mind, what is the extent or nature of the “undue” advantage or disadvantage that is not allowed? All commercial contracts are the product of the parties’ assessment and allocation of risk. Often, risk is allocated between sophisticated parties in an efficient manner, to the party best able to assess or manage the risk. The law should support this allocation of risk by enforcing bargains made on these assessments, not cast it into doubt through “ad hoc judicial moralism” which is apparently permitted to consider the outcome of a transaction in the unconscionability analysis.
Again, while it might be argued that the majority did not intend unconscionability to apply to most (or even the vast majority of) transactions, nothing in the decision can be relied upon as authority for that point. To the contrary, the decision is presented as a pronouncement of general application. It can be expected that parties will test how far the unconscionability doctrine may be taken to set aside regrettable outcomes.
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.
 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).
 Uber at para 74.
 Uber at para 75.
 Uber at paras 76-77.
 Uber at para 78.
 Uber at para 78.
 Uber at para 80.
 Uber at para 153.
 Uber at para 166.
 Uber at para 170.
 Uber at para 163.
 Uber at paras 162, 166 and 169-170.
 Uber at para 74.
 Uber at paras 75-76 (see the references to “commercial setting” and “market price”).
 Uber at para 172. The majority expressly found that unconscionability can apply to single clauses (para 96).
 Uber at paras 152-153.
 This is particularly ominous given the majority’s statement that “proof of a manifestly unfair bargain” can support the inference that there was an inequality of bargaining power: para 79. This suggests that a manifestly unfair outcome, by itself, may come close (or may even succeed) in meeting the test for unconscionability.
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