Court of Appeal for Ontario Invalidates Foreign Arbitration Clause in Standard Form Contract

The Ontario Court of Appeal (Court) has unanimously overturned the lower court’s decision in Heller v. Uber Technologies et al. that stayed a proposed class action against Uber Technologies Ltd. (and related companies, together, Uber) on the basis of a mandatory foreign arbitration clause in the driver’s services agreement. Undertaking a contextual analysis, the Court concluded that the foreign arbitration clause was invalid, and the lower court had discretion to refuse to stay the action pursuant to an exception in the arbitration legislation.

BACKGROUND

The plaintiff, David Heller, commenced a proposed class action alleging that he and other Uber drivers were employees of Uber, and therefore entitled to certain rights and benefits under Ontario’s Employment Standards Act, 2000 (ESA). The proposed class action sought declarations that Uber violated the ESA and damages in the amount of C$400-million.

The plaintiff’s agreement with Uber, which was a standard form contract of adhesion, contained a clause stating that it “shall be exclusively governed by and construed in accordance with the laws of the Netherlands,” and required disputes to be submitted to the International Chamber of Commerce (ICC) for mediation and, if unsuccessful, to arbitration in the Netherlands (Arbitration Clause).

Prior to certification of the class action, Uber brought a motion to stay the action in favour of arbitration. Justice Perell allowed Uber’s motion and granted the stay. In doing so, he held that absent express statutory language prohibiting arbitration (which is not the case with the ESA), he was required to enforce the parties’ arbitration agreement and allow the arbitrator to determine any jurisdictional disputes. He also rejected the argument that the Arbitration Clause was unconscionable. The plaintiff appealed.

COURT OF APPEAL’S DECISION

The Court held the Arbitration Clause to be invalid on two independent grounds: (i) the Arbitration Clause constituted an illegal contracting out of an employment standard, contrary to the ESA; and (ii) the Arbitration Clause was unconscionable at common law.

With respect to the first ground, section 5 of the ESA restricts the ability of employers and employees to contract out of or waive an employment standard and deems any such contracting out or waiver to be void. The Court held that the right of an employee to make a complaint to the Ministry of Labour under section 96 of the ESA, and the investigative process that is triggered when that right is exercised, constitutes an employment standard.

The Court held that by forcing drivers to arbitrate any complaint they may have against Uber in the Netherlands, the Arbitration Clause takes away their right to engage the section 96 complaint process and amounts to a prohibited contracting out of the ESA, rendering the Arbitration Clause void and invalid.

With respect to the second ground, the Court noted that there was significant inequality of bargaining power between the plaintiff and Uber, and it was not reasonable to expect that the plaintiff received any legal or other advice before entering the services agreement, nor could he negotiate any of the terms of Uber’s standard form contract.

The Court concluded that the Arbitration Clause was a substantially unfair bargain. In reaching its decision the Court considered that Uber drivers:

  • Had no avenue for resolving disputes in Ontario
  • Were required to individually arbitrate all claims (no matter how small) in the Netherlands (a jurisdiction which has no connection to where the drivers reside or provide their services) in accordance with Netherland laws and under ICC Rules, and
  • Had to incur substantial and disproportionate upfront costs.

The Court further concluded that it was a reasonable inference that Uber knowingly and intentionally chose the Arbitration Clause to favour itself and take advantage of its drivers.

DISCUSSION

The Court’s decision reflects an Ontario court’s unwillingness to enforce a mandatory arbitration clause in the context of a standard form contract of adhesion involving parties with unequal bargaining power and providing for arbitration in a foreign jurisdiction subject to foreign law.

The Court acknowledged that the relationship between Uber and its drivers was not a purely a commercial one, but more akin to a consumer dealing with a business. Accordingly, this decision is unlikely to impact the enforceability of arbitration clauses between relatively sophisticated and commercial parties.

However, mandatory arbitration clauses in standard form agreements with employees or contractors that provide for arbitration in a foreign jurisdiction and subject to foreign law, without regard for the parties’ relationship, relative sophistication, or the nature and size of dispute are unlikely to be enforced. A mandatory arbitration clause that provides for arbitration in the employee’s or contractor’s jurisdiction and application of the laws of that jurisdiction is more likely to be enforced by the courts.

The Court’s statements about arbitrator jurisdiction and the applicability of the competence-competence principle in this case could also have significant ramifications for future application of the competence-competence principle, and whether invalidity of an arbitration provision is an issue relating to arbitrator jurisdiction. The Court did not fully delve into this issue. Clarity from the courts on this issue would assist parties to arbitration agreements.

This decision could be subject to appeal to the Supreme Court of Canada.

For further information, please contact:

Rahat Godil                              416-863-4009
Skye Sepp                                416-863-3887
Anna Abbott                             416-863-4277

or any other member of our Arbitration group.

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We would be pleased to provide additional details or advice about specific situations if desired.

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