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Court of Appeal Invalidates Uber’s Arbitration Clause

January-15-2019

Lawyer Ryan Cookson, Tamryn Jacobson, Julie Rosenthal
Area Litigation

Summary

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The Ontario Court of Appeal’s first decision of 2019 bucks Ontario’s general trend of enforcing arbitration agreements, and may have far-reaching consequences for arbitration in Ontario. In Heller v. Uber Technologies Inc., the Court of Appeal declared invalid the arbitration agreement in Uber’s driver services agreement, paving the way for the driver’s proposed class action to continue in the court system. All companies who use arbitration agreements should be aware of this decision and its potential consequences, especially those who use arbitration agreements in their employment or independent contractor agreements.

Background to the Heller decision and some of its practical consequences are set out below. 

Background

The plaintiff, David Heller, was an Uber Eats driver. In his proposed class action, Mr. Heller alleges that all Uber drivers in Ontario are employees of Uber and therefore entitled to the benefits of Ontario’s Employment Standards Act (ESA).

When Mr. Heller became an Uber driver, he entered into a services agreement which contained an arbitration clause requiring all disputes arising out of the agreement to be resolved by arbitration in Amsterdam under the Rules of Arbitration of the International Chamber of Commerce.

Ontario’s domestic and international arbitration statutes require courts to stay proceedings covered by arbitration agreements subject to certain exceptions, one of which is where the arbitration agreement is “invalid” (domestic legislation) or “null and void” or “inoperative” (international legislation).

Uber moved to stay Mr. Heller’s claim in favour of arbitration. Mr. Heller argued that the arbitration agreement did not apply to his employment dispute and, furthermore, should not be enforced because it was illegal on the grounds of unconscionability. 

The Motion Judge’s Decision to Stay the Action

The motion judge granted Uber’s motion to stay the action in favour of arbitration. In doing so, he relied on case law from the Supreme Court of Canada, which held that courts should generally enforce arbitration agreements freely entered into by the parties, including clauses in standard form contracts like the one entered into by Mr. Heller. The motion judge noted that any restriction on the parties’ freedom to arbitrate must be found in legislation, and went on to conclude that the plain language of the ESA does not contain any such restriction.

In addition, the motion judge relied on the general rule that challenges to the arbitrator’s jurisdiction should first be resolved by the arbitrator (known as the “competence-competence” principle). On this issue, the motion judge relied on comments from the Supreme Court of Canada that, if a challenge to an arbitrator’s jurisdiction requires production and review of factual evidence, the court should generally refer the matter to arbitration.

Finally, the motion judge rejected Mr. Heller’s argument that the arbitration agreement was unconscionable, stating, “I do not see how it can be said that Uber preyed or took advantage of Mr. Heller or the other Drivers or extracted an improvident agreement by inserting an arbitration provision.”

The Ontario Court of Appeal’s Decision to Invalidate the Arbitration Clause

The Ontario Court of Appeal reversed the lower court’s decision and found that the arbitration agreement was invalid. It did so for two reasons.

First, the Court found that the arbitration agreement amounted to an illegal contracting out of the ESA. For the purpose of deciding this issue, the Court presumed that Uber drivers were employees, which is the very issue in dispute in Mr. Heller’s claim, stating that the Court should presume that the plaintiff “can prove that which he pleads”. 

In addition, the Court held that the competence-competence principle had no application since issues of jurisdiction relate to the scope of the arbitration clause as opposed to the validity of the clause.

Relying on its presumption that Uber drivers were employees, the Court found that the arbitration clause amounted to an improper contracting out of the ESA – and was therefore invalid – because it would prevent Mr. Heller from making a complaint to the Ministry of Labour about employment standards violations, which is a right granted to employees under the ESA. It is not clear why the Court chose to strike down the arbitration clause in its entirety, rather than invalidating it only to the extent of its interference with this complaint right.  (Of course, the plaintiff was not seeking to complain to the Ministry, but rather was seeking to proceed with his proposed class action.)

Second, the Court of Appeal found that the arbitration agreement was invalid because it was unconscionable. In deciding that issue, the Court relied upon the following facts and findings:

  • the arbitration clause represented a substantially improvident or unfair bargain because, among other things, it requires individuals to incur large up-front costs to commence an arbitration;
  • there was no evidence Mr. Heller had received any legal advice before entering the services agreement;
  • there was a significant inequality of bargaining power between the parties; and
  • given those findings, the Court found it could be safely concluded that Uber chose the arbitration clause to favour itself.

As a result, the arbitration clause was held to be invalid and unenforceable in any context, not merely in cases involving employment disputes.

Potential Consequences of the Court of Appeal’s Decision

The Court of Appeal’s reasoning could have a significant impact on the enforcement of arbitration agreements in Ontario and, therefore, on Ontario’s reputation as an arbitration-friendly jurisdiction.

First, clauses in many employment contracts providing for mandatory arbitration may be unenforceable, since they could be interpreted as preventing the employee from making a complaint to the Ministry of Labour, which would amount to an illegal contracting out of the ESA. This would be a departure from the current norm in Ontario where, as the motion judge noted, courts have regularly enforced arbitration agreements in the employment context.

The Court of Appeal’s finding can be contrasted with a recent decision by the United States Supreme Court in Epic Systems Corp. v. Lewis, which upheld agreements that required employees to submit all employment-related disputes to arbitration and waive their right to participate in class actions. The majority concluded that such clauses must be enforced pursuant to the Federal Arbitration Act. In contrast, Justice Ginsburg wrote a dissenting opinion in which she argued that such arbitration clauses were invalid because they conflicted with employees’ right to engage in collective action under the National Labor Relations Act. While the Epic Systems case was decided under a different statutory context than Heller, it raised similar policy issues, with the Court split on how those issues should be resolved.

Parties drafting or negotiating future arbitration agreements, whether in the employment context or otherwise, should consider inserting language that explicitly excludes disputes that cannot be arbitrated by law.  Without such language, an arbitration agreement may be found invalid in its entirety because it has the potential to conflict with a particular statutory regime, even in non-employment cases.

More generally, and running contrary to the general trend in Ontario law that has increasingly favoured enforcement of arbitration agreements, the decision may make it more difficult for parties to enforce an arbitration agreement.  By limiting the application of the competence-competence principle, the Court expanded the circumstances in which the courts, rather than the arbitrator, will determine whether the matter is properly the subject of arbitration.

In addition, the Court appears to have made it easier for plaintiffs to invalidate an arbitration clause, as the Court will presume that the plaintiff “can prove that which he pleads”. A plaintiff seeking to avoid a stay may now be able to rely on mere allegations of invalidity in its pleadings (or factual allegations that lead to a conclusion of invalidity), rather than having to prove the factual foundation for invalidity based on evidence. In other words, it may be possible for plaintiffs to plead their way out of an arbitration agreement.

Finally, the Court’s finding that the arbitration clause was unconscionable could have implications for similar arbitration clauses in other standard form contracts. In this case, the Court relied heavily on the fact that the arbitral institution specified in the agreement requires parties to incur relatively significant up-front costs to commence an arbitration.  However, that is frequently the case with international (and even many domestic) arbitral institutions. Moreover, the other elements of unconscionability relied on by the Court, such as a lack of independent legal advice and an inequality in bargaining power, will usually be present in standard form contracts.

Uber has 60 days from the date of the decision to seek leave to appeal the case to the Supreme Court of Canada. For further information about this case or its potential implications, please contact any member of our Litigation Group.

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