Why this decision matters
In Lochan v. Binance Holdings Limited, the Court of Appeal for Ontario dismissed a crypto currency trading platform's appeal of a motion judge's order denying its motion to stay proceedings in favor of arbitration.
The motion judge had found the arbitration clause in the online "click" contract was contrary to public policy and unconscionable, as it allowed Binance to unilaterally change arbitration terms and impose prohibitive costs, making arbitration inaccessible to average investors. Our analysis on the motion judge's decision can be read here. The Court of Appeal upheld the motion judge's decision, finding that there were no palpable and overriding error of fact or error of law.
Background and Factual Overview
The underlying dispute concerned a class proceeding initiated by Ontario investors against Binance Holdings Ltd. and related companies ("Binance") pursuant to section 133 of the Securities Act (Ontario) Act. The Act establishes a statutory right of action for rescission or damages against a company selling securities for failure to file or deliver a prospectus. Binance did not file a prospectus for any of its offerings in Ontario, nor did it register with the OSC or obtain any registration exemption.
Binance brought a motion to stay proceedings in favour of arbitration based on the agreement entered into by class members as part of their registration on Binance's website. The approximately 50 page agreement was embedded in the website's terms and conditions and permitted Binance to change any part of the agreement. By agreeing to the terms, users also pre-emptively agreed to any subsequent amendments.1
At the time the class proceeding was initiated, the arbitration agreement specified that the arbitration would be governed by the laws of Hong Kong and subject to the HKIAC Rules, which in turn specified that the substantive law of Hong Kong would be applied to any dispute.2 The arbitration venue and choice of law had changed multiple times during the proposed class period.
In opposing Binance's stay motion, the plaintiffs/respondents argued that the arbitration agreement was unenforceable on public policy grounds, relying on article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration.3
The Underlying Superior Court Reasons
The motion judge refused to stay the proceedings, finding the arbitration agreement contrary to public policy and void ab initio.4 The arbitration agreement was also found to be unconscionable due to the inequality of information and power in the bargaining relationship. The Superior Court determined that the agreement effectively used arbitration to bypass consumer protection provisions in Ontario's securities legislation. The motion judge concluded that the arbitration forum was inaccessible to the average crypto investor, had no connection to Binance or potential claimants, and effectively granting Binance immunity from suit.5
The respondents had also argued that the contract (and by extension the arbitration clause therein) was void ab initio for illegality because Binance had not filed a prospectus, such that the technical requirements for seeking a stay in favour of arbitration ― namely the existence of an arbitration agreement ― were not met. This argument was not squarely addressed by the motion judge's reasons.
The Court of Appeal's Decision and Reasons
Binance raised three grounds of appeal of the motion judge's decision:
- The motion judge erred in holding that an arbitration clause being contrary to public policy is an independent ground for an Ontario court to assume jurisdiction;
- The motion judge erred in finding the exceptions for questions of law was engaged as the analysis included impermissible findings of fact; and
- The motion judge erred in his application of Uber by undertaking more than a superficial evidentiary analysis.
The respondents maintained their argument that the illegality of the contract (and absence of an effective arbitration agreement) precluded Binance from seeking a stay in favour of arbitration. The Court of Appeal opted to resolve the appeal on the grounds proffered by Binance, rather than address the respondents' argument.6
(1) Exception to the competence-competence principle: order of analysis
Binance argued that the motion judge inappropriately considered whether the arbitration clause was void as contrary to public policy without first considering whether an exception to the competence-competence principled might apply.7 The Court of Appeal held the motion judge's approach was consistent with the Supreme Court of Canada's Decisions in Dell Computer Corp v. Union des consommateurs8 and Uber.9 It also disagreed with Binance's characterization of the motion judge's approach, finding that he correctly first considered whether an exception to the competence-competence principle applied that would justify a domestic court deciding whether an arbitration clause is void.
(2) Exception to the competence-competence principle: questions of law vs findings of fact
Binance also argued that the motion judge erred in finding that the exception for questions of law was engaged, as findings of fact were made in his analysis. The Court of Appeal rejected this argument, finding the motion judge relied on the record before him to find the competence-competence principle did not apply. Any findings of fact in the public policy and unconscionability analyses were permissible, as they were based on a superficial review of the documentary record akin to the majority's approach in Uber.10
(3) Exception to the competence-competence principle: would the validity of the arbitration clause ever be decided?
Binance's third argument again focused on the level of factual analysis undertaken by the motion judge. According to Binance, the motion judge erred by engaging in more than superficial factual analysis of whether if the dispute was referred to arbitration, the validity of the clause would likely never be decided.11 Having already found the motion judge engaged in only a superficial documentary review, as permitted by Dell and Uber, the Court of Appeal found no palpable and overriding error in the motion judge's reasons.
Concluding Thoughts
The legacy of Uber Technologies Inc v. Heller continues to guide judicial hesitance to enforce arbitration clauses in online "click" contracts when such clauses are excessively burdensome, costly, or otherwise inaccessible to everyday consumers. Parties preparing dispute resolution clauses in consumer facing e-commerce contracts should take note of the continued emphasis on public policy concerns by Canadian courts and draft accordingly.
Footnotes
1 Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 13.
2 Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 39-40.
3 Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 4-7.
4 Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 35.
5 Lochan v. Binance Holdings Limited, 2023 ONSC 6714 para. 28, 35.
6 Lochan v. Binance Holdings Limited, 2024 ONCA 784 paras. 10-13.
7 Lochan v. Binance Holdings Limited, 2024 ONCA 784 para. 15
8 2007 SCC 34.
9 Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para. 16.
10 Lochan v. Binance Holdings Limited, 2024 ONCA 784 at para. 24.
11 Lochan v. Binance Holdings Limited, 2024 ONCA 784, para. 25.
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