Canada: Beware The Unconscionable Clause: Ontario Court Of Appeal Declines To Stay Class Action Based On An Arbitration Agreement

Last Updated: January 23 2019
Article by Marco P. Falco

Arbitration often represents an efficient alternative to the Courts. The parties to a contract agree to by-pass the Court process in the hope that their dispute is resolved in a faster, more effective way. However, arbitration is not without its limits.  

A 2019 decision of the Ontario Court of Appeal, Heller v. Uber Technologies Inc., 2019 ONCA 1, reinforces that the enforceability of arbitration agreements very much depends on whether they impose "unconscionable" consequences on the parties.

Arbitration Clauses in "Contracts of Adhesion"

Heller involved a proposed class action on behalf of Uber and UberEATS drivers.  

The plaintiff, Heller, an UberEATS driver, commenced a class action in Ontario against Uber claiming $400 million in damages (the "Class Action"). The action alleged that Uber drivers were employees of Uber, governed by the Employment Standards Act, 2000, S.O. 200, c.41 (the "ESA").  

Heller sought a declaration on behalf of the class that Uber was in breach of the ESA and that the arbitration provision in the service agreements entered into between Uber and its drivers (the "Service Agreement") was void and unenforceable. 

The Service Agreement between Uber and its drivers is a contract of adhesion. Each Uber driver is required to accept the Service Agreement when initially subscribing to the Uber App.

The Service Agreement also includes an arbitration clause (the "Arbitration Clause").   The Arbitration Clause provides that the Service Agreement is governed by the laws of the Netherlands. It further provides that any dispute arising out of the Service Agreement is required to be submitted first to mediation. If within sixty days after the request for mediation has been made the dispute has not been settled, it is to be resolved by arbitration in Amsterdam, the Netherlands.   

In order for a driver to participate in this mediation / arbitration process, she must pay initial costs of approximately $14,500USD.

Uber brought a motion in the Ontario Superior Court arguing that the Class Action should be stayed on the basis that the parties agreed to resolve their dispute by way of arbitration.

Under section 7(1) of Ontario's Arbitration Act, 1991, S.O. 1991, c.17 (the "AA"), the Court is required to stay a proceeding where the parties agreed to submit their dispute to arbitration. Section 7(2) provides a number of exceptions to this rule, including where the arbitration agreement is "invalid".

At the stay motion, Heller argued that the Services Agreement was invalid because it required Uber drivers to contract out of protections in the ESA. Heller further argued that the arbitration clause was unconscionable for the average Uber driver, given the $14,500 costs associated with commencing arbitration and the requirement that the arbitration take place in Amsterdam.

The motion judge rejected Heller's arguments and stayed the Class Action. 

The Court of Appeal reversed the motion judge's decision.

Arbitration Agreements in Breach of the ESA Are Invalid

The Court of Appeal held that the arbitration clause in the Services Agreement was invalid as it required Uber drivers to contract out of the protections of the ESA.  

Under section 5 of the ESA, an employer or employee is prohibited from contracting out of or waiving an "employment standard". An "employment standard" is defined as a requirement or prohibition under the ESA that applies to an employer for an employee's benefit.

If the plaintiffs in the proposed Class Action are presumed to be "employees" under the ESA, then they cannot be held to a contractual term that denies them the benefits of the ESA.

The Court held that arbitration clause in the Services Agreement amounted to a "contracting out of the ESA". 

This is because the clause eliminated "the right of the appellant (or any other driver) to make a complaint to the Ministry of Labour regarding the actions of Uber and their possible violation of the requirements of the ESA". Uber drivers were accordingly denied the right to have a complaint investigated by an employment standards officer. The arbitration clause forced drivers "out of the [ESA] complaints process".  

The Court also expressed concern about the lack of evidence in the record regarding the remedy available to a successful applicant in the Dutch arbitration process. The Court did not know if the laws of the Netherlands "would provide greater, lesser, or equal benefits to the appellant" than under the Ontario ESA.

The Arbitration Clause was Unconscionable

The Court further held that arbitral clause imposed unconscionable requirements on Uber drivers, rendering it "invalid" under section 7(2) of the AA.

There was no effective dispute resolution mechanism for Uber drivers in Ontario or elsewhere, other than the arbitration clause in the Service Agreement. The idea that Uber drivers could contact support centers in the Philippines or Chicago, in the Court's view, did not amount to "independent grievance or adjudication procedures".  Accordingly, the only place in which a dispute under the Services Agreement could be adjudicated was the Netherlands. This imposed a substantial burden on Uber drivers, particularly since the Class Action in this case had yet to be certified.

Moreover, the Services Agreement imposed up-front costs of $14,500USD to engage in the mediation / arbitration process. The Court held that these costs, particularly for Uber drivers who on average earned $400-$600 per week, would represent an unconscionable barrier to arbitration. The Court characterised the arbitration clause as a "substantially improvident or unfair bargain". This was especially so given the recognized inequality of bargaining power between Uber and its drivers:

It seems to me that the fundamental flaw in the approach adopted by the motion judge to this issue is to proceed on the basis that the Arbitration Clause is of the type involved in normal commercial contracts where the parties are of relatively equal sophistication and strength. That is not the case....[the arbitration clause in this case] operates to defeat  the very claims it purports to resolve...

Invalid Arbitration Clauses are Unenforceable

The Court's analysis in Heller appears to have been largely guided by the equities of the case.

The Court sensed unfairness in a contract requiring Uber drivers to deny themselves employee protections under the ESA, while at the same time obliging them to resolve significant arbitral disputes in the Netherlands. The inequality between the bargaining powers was clearly on the Court's mind when assessing the arbitral clause.

Heller illustrates that Ontario Courts will show little reticence in assessing the validity of arbitration agreements, particularly in contracts of adhesion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Marco P. Falco
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