The new case from the Supreme Court of Canada highlights the importance of drafting accurate arbitration clauses in employment / independent contractor agreements, and sheds further light on the doctrine of unconscionability.
Summary of the Facts:
Uber’s Arbitration provision required the driver to adjudicate any issue of their contract in the Netherlands, with the International Chamber of Commerce (“ICC”) acting as the Arbitrator. The associated cost of any dispute would start at around $14,500.00 USD. Thus, when a class action was brought in Canada, Uber moved to stay the action, until the Arbitrator in the Netherlands decided if it had jurisdiction to deal with the substantive issue.
The Motions judge granted the Order for a stay of the action. The Court of Appeal reversed that decision, and the Supreme Court has upheld the Court of Appeal’s decision with substantial reasons that will likely impact every future arbitration provision in such contracts.
The Supreme Court relied on the equitable doctrine of unconscionability, which requires both: 1. an inequality of bargaining power; and 2. a resulting improvident bargain.
1. Inequality of Bargaining Power
Inequality of bargaining power exists when one party cannot adequately protect their interests in the contracting process.
The Supreme Court provided two examples of inequality of bargaining power:
"One common example of inequality of bargaining power comes in the “necessity” cases, where the weaker party is so dependent on the stronger that serious consequences would flow from not agreeing to a contract. This imbalance can impair the weaker party’s ability to contract freely and autonomously. When the weaker party would accept almost any terms, because the consequences of failing to agree are so dire, equity intervenes to prevent a contracting party from gaining too great an advantage from the weaker party’s unfortunate situation. As the Privy Council has said, “as a matter of common fairness, ‘it [is] not right that the strong should be allowed to push the weak to the wall”"
"The second common example of an inequality of bargaining power is where, as a practical matter, only one party could understand and appreciate the full import of the contractual terms, creating a type of “cognitive asymmetry” (see Smith, at pp. 343-44). This may occur because of personal vulnerability or because of disadvantages specific to the contracting process, such as the presence of dense or difficult to understand terms in the parties’ agreement. In these cases, the law’s assumption about self-interested bargaining loses much of its force. Unequal bargaining power can be established in these scenarios even if the legal requirements of contract formation have otherwise been met [...]."
2. Improvident bargain
The second part of the test is whether the bargain provides an undue advantage to the stronger party, or an undue disadvantage to the vulnerable party.
The Supreme Court stated, “For a person who is in desperate circumstances, for example, almost any agreement will be an improvement over the status quo. In these circumstances, the emphasis in assessing improvidence should be on whether the stronger party has been unduly enriched. This could occur where the price of goods or services departs significantly from the usual market price.”
Is the Arbitration Clause Unconscionable?
The Court then went on to assess the facts and factors that make the Uber Arbitration clause unenforceable and the power dynamic between the driver and Uber:
“ The arbitration clause, in effect, modifies every other substantive right in the contract such that all rights that Mr. Heller enjoys are subject to the apparent precondition that he travel to Amsterdam, initiate an arbitration by paying the required fees and receive an arbitral award that establishes a violation of this right. It is only once these preconditions are met that Mr. Heller can get a court order to enforce his substantive rights under the contract. Effectively, the arbitration clause makes the substantive rights given by the contract unenforceable by a driver against Uber. No reasonable person who had understood and appreciated the implications of the arbitration clause would have agreed to it.”
Ultimately, the Supreme Court held that the arbitration clause was unconscionable. The Uber Decision has therefore reinforced equity in contracts. As a result, large companies should reconsider the contracts that they provide to clients, suppliers, independent contractors, employees, and others to ensure that the terms in their standard form contracts are not unconscionable.
Uber, like most contracting parties, did not set out to create an unconscionable contract. The costs of dealing with legal issues in each country imposes its own challenges for Uber. These are the inherent costs and risks that a large corporation needs to consider in the formation of its contracts.
Uber likely sought to create a singular location of dispute resolution to ensure consistent precedent that would apply to their global operation. While this may have been an honest attempt to streamline its operations and ensure all drivers are treated the same no matter where they were located in the world, Uber failed to consider the broader implication on how its arbitration clause would apply to Ontario / Canadian law. Had Uber simply tailored their agreement to include an Arbitrator located in Ontario / Canada (rather than the Netherlands), its mandatory arbitration clause would likely have been upheld.
The Supreme Court decided that the price for admission for dispute resolution was too high for the low paid worker of a large multinational corporation. The draconian terms of the arbitration provision ultimately made it unenforceable.
Takeaway for Businesses:
Be careful when drafting standard form documents for clients, employees, and contractors. You should always consider the doctrine of unconscionability and how your contract affects the weaker party.
You should always retain a competent lawyer to draft those contracts, and reduce the possibility that the provision you will be relying on is not found unenforceable.
Employee / Contractor:
Be aware that parts of the contract you entered may be unenforceable. There may be provisions within your contract that are unconscionable and that a Court will not enforce. Seek legal advice when these questions arise.
Written by Eric Florjancic, an Associate Lawyer at CLP Law.
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DISCLAIMER: This is not legal advice. This article is meant to provide general information on new decisions released by appellant courts in Ontario and Canada. The law is necessarily contextual, and depends entirely on your individual circumstances. An analysis of all contextual factors relating to your employment / business is absolutely necessary before competent advice can be provided. Call our office or another lawyer if you need advice.