January 10th, 2019
The past several years have marked an attitude of increasing deference to arbitration clauses by Ontario’s courts, with enthusiastic application of the “competence-competence principle” that a challenge to an arbitrator’s jurisdiction should first be resolved by the arbitrator. A recent decision of the Court of Appeal, however, casts the future of this deferent approach into question, and highlights the risks of including an onerous arbitration clause in a standard form contract of adhesion.
On January 2, 2019, the Ontario Court of Appeal released its decision in Heller v Uber Technologies Inc.,1 overturning the early 2018 decision of Perell J. that enforced an arbitration clause in Uber’s service agreements with drivers.2
The case involves an UberEATS driver based in Toronto who commenced a proposed class action on behalf of Uber and UberEATS drivers in Ontario, alleging violations of the Ontario’s Employment Standards Act (the “ESA”)3 by Uber. Central to the plaintiff’s claims is the question of whether Uber drivers are employees, and therefore entitled to the benefits of the ESA, or independent contractors or customers.
Uber brought a motion to stay the action in favour of arbitration, in accordance with an arbitration clause in Uber’s service agreements. That arbitration clause required that disputes be submitted to mediation under the International Chamber of Commerce Mediation Rules and, if mediation is unsuccessful, then be referred to arbitration in Amsterdam, The Netherlands, under the Rules of Arbitration of the International Chamber of Commerce.
Perell J., at the Ontario Superior Court, granted Uber’s motion and stayed the action in favour of arbitration. The Court of Appeal disagreed, finding that Uber’s arbitration clause amounted to an illegal contracting out of the ESA and was unconscionable. The stay of proceedings was set aside.
For the purposes of this preliminary motion, the plaintiff’s claim that he is an employee was assumed to be true, and the Court of Appeal proceeded on the basis that the ESA applied. Under the ESA, employers are prohibited from contracting out of any employment standard provided in the statute. The Court found that one such employment standard is the right of an employee to trigger an investigation process by submitting a complaint to the Ministry of Labour under s. 96(1) of the Act. By requiring employees to arbitrate complaints against Uber in the Netherlands, Uber was depriving its employees of the benefit of that complaint and investigation process. This amounted to a prohibited contracting out of an ESA employment standard and made the arbitration clause invalid, engaging an exception to the mandatory stay of proceedings provided for in s. 7(1) of the Ontario Arbitration Act.4
Although the ESA was sufficient to invalidate Uber’s arbitration clause, the Court of Appeal went on to find that the clause was also unconscionable. The Court found that it represented a substantially improvident or unfair bargain: regardless of the value of a driver’s complaint, the up-front cost to the driver to initiate an arbitration process pursuant to Uber’s arbitration clause would be $14,500 USD, in contrast to the $400-$600 per week earned by the plaintiff working for Uber. In addition, there was no evidence that the plaintiff had any legal advice prior to entering into the agreement and no reasonable prospect of negotiating any of the terms of the agreement, as well as a significant inequality of bargaining power between the plaintiff and Uber. The Court concluded that Uber had chosen its arbitration clause to favour itself and take advantage of its drivers. The Court suggested that it would reach this conclusion whether Uber drivers are employees or independent contractors or customers, as the drivers would regardless be “at the mercy” of the contractual terms set by Uber.
This case has the potential to mark a change in how Ontario courts approach arbitration clauses. Here, in marked contrast to the courts’ recent preference for deferring to arbitrators at first instance on all matters of jurisdiction, the Court of Appeal distinguished between issues regarding the scope of arbitral jurisdiction and issues regarding the validity of an arbitration clause, finding that the former are matters of jurisdiction engaging the competence-competence principle (and therefore are matters for the arbitrator to decide) and the latter are not (and therefore are matters for the court to decide). However, the validity of an arbitration clause directly informs whether an arbitrator has jurisdiction, and Ontario’s Arbitration Act specifically empowers an arbitral tribunal to rule on objections with respect to the validity of an arbitration agreement.5 The Court of Appeal did not address this in its analysis. The Court of Appeal’s approach may signal a retreat from the highly deferential approach courts have taken to arbitration in recent years.
Considering the progression of this case raises further questions about the future of judicial deference to arbitration clauses. The Court of Appeal based much of its analysis on the assumption that the ESA applies to Uber drivers, as is required in a preliminary motion like this one. However, at trial, it may be held that Uber drivers are not employees, and therefore do not benefit from the ESA. Setting aside the finding that Uber’s arbitration clause was unconscionable, such a finding at trial could mean that the arbitration clause would not violate the ESA and would be enforceable.
Here, the Court of Appeal was careful to suggest that it would have found Uber’s arbitration clause unconscionable, and therefore invalid, regardless of whether the plaintiff is an employee. This precludes the possibility of what might ultimately be found to be an improper avoidance of the arbitration clause. Absent the unconscionability finding, such a result may not have been avoided. Courts should be diligent to ensure that plaintiffs do not strategically draft pleadings in order to survive a jurisdictional challenge and avoid a properly enforceable arbitration clause.
3Employment Standards Act, 2000, SO 2000, c 41.
4Arbitration Act, 1991, SO 1991, c 17.
5Ibid, s 17(1).