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Choice of law clauses: a “loophole” to avoid result in Uber v Heller?

8 minute read

Unless you have been practising social distancing from a cave without Wi Fi, you will have seen lots of commentary about Uber Technologies Inc. v Heller, 2020 SCC 16, which was released by the Supreme Court of Canada on June  26, 2020.  Most of that commentary focuses on the decision’s implications for employment and arbitration law.

 

The majority of the Court also tantalized us with mention of a choice of law clause in a contract of adhesion, “which could present a potential loophole for contractual drafters to exploit” to avoid the result in this case.

 

Basic facts

In brief, Heller started an Ontario class action, claiming that he was an employee of Uber and that it had violated employment standards legislation.  Uber brought a motion to stay the action on the ground that the arbitration clause in the parties’ agreement required Heller to arbitrate any dispute with Uber in the Netherlands under Dutch law.  Heller argued that the arbitration clause was unconscionable and therefore invalid.

 

The motion judge stayed the action in favour of arbitration on the basis that the arbitrator, not the courts, should determine whether it had jurisdiction to decide the dispute, under the competence-competence principle. The Ontario Court of Appeal overturned this decision, finding that the arbitration clause was void because it was unconscionable and constituted an improper contracting out of employment legislation.  The Supreme Court of Canada majority agreed that the mandatory arbitration clause was unconscionable, dismissed Uber’s appeal, and permitted the class action to proceed.

 

The “inaccessibility” issue – a departure from the Dell Computer framework

Key to the decision was that the parties’ agreement was a contract of adhesion whose terms Heller could not negotiate, some of which he may not have understood, and there was a real possibility that the validity of the arbitration clause would never be resolved if the matter was referred to arbitration. The Court observed at para. 47:

“The fees impose a brick wall between Mr. Heller and the resolution of any claims he has levelled against Uber.   An arbitrator cannot decide the merits of Mr. Heller’s contention without those – possibly unconscionable – fees being paid. Ultimately, this would mean that the question of whether Mr. Heller is an employee may never be decided.  The way to cut through this Gordian Knot is for the court to decide the question of unconscionability.”

 

The majority cited s. 7(2) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, which provides that on a motion to stay a court proceeding where there is an arbitration agreement, the court has discretion to retain jurisdiction and decline to stay the proceedings in five circumstances, including where the arbitration agreement is invalid.

 

However, the Act is silent on the principles a court is to consider in exercising that discretion.  Therefore, the majority took guidance from  the Court’s earlier decision in Dell Computer Corp. v Union des consommateurs, [2007] 2 S.C.R., which sets out a framework to determine when a court should decide who has jurisdiction over a dispute instead of referring that question to the arbitrator.

 

According to the Dell Computer framework, the extent to which courts may decide a jurisdictional issue depends upon the nature of the challenge to the arbitrator’s jurisdiction.  A court should refer to the arbitrator all such challenges unless they raise: (1) pure questions of law, which the court may resolve; or (2) questions of mixed fact and law, which the court must refer to arbitration unless the relevant factual questions “require only a superficial consideration of the documentary evidence in the record”, in which case the court may decide them.  Where questions of fact alone are at issue, the court must “normally” refer the case to arbitration. [See Dell Computer, paras. 83-85.]

 

In this case, the validity of the arbitration clause was a matter of mixed fact and law because it involved interpretation of the parties’ contract: see Sattva Capital v Creston Moly, 2014 SCC 53.  It was possible to resolve the validity of the arbitration clause through a superficial review of the record. Under the Dell Computer framework, this allowed the Court to exercise its discretion to determine the issue of the validity of the arbitration clause, rather than refer it to arbitration.

 

However, the Dell Computer framework presumes that if the court does not decide the jurisdictional issue, the arbitrator will do so.  In this case, it was clear on the facts that if the Court did not decide the issue, no arbitration would proceed.  This raised an “accessibility” issue not contemplated in Dell Computer and justified a departure from the general rule of referral to the arbitrator.  As a result, the majority decided the validity issue and concluded that the arbitration clause was unconscionable and therefore invalid. Mr. Heller was free to continue his claim against Uber in the courts. The Court postulated that a foreign choice of law clause could also give rise to this “accessibility” issue if, for example, it prevented the arbitrator from giving effect to Ontario employment law (para. 39).

 

A loophole?

The majority observed (at paras 49 and 50) that departing from the general rule of arbitral deferral also has the benefit of avoiding a “significant loophole for contractual drafters to exploit”, which could arise because of a choice of law clause in the agreement:

“…It will prevent contractual drafters from evading the result of this case through a choice of law clause.   A choice of law clause could convert a jurisdictional question that would be one of law (and which therefore could be decided by the court) into a question as to the content of foreign law, which would require hearing evidence in order to make a finding as to the content of foreign law, something that one would not ordinarily contemplate in a superficial review of the record.

 

… As [an] intervenor…submitted, this Court should presume that Dutch law governs the question of whether the arbitration agreement is unconscionable because the contracts have a choice of law clause indicating Dutch law.”

 

However, because no party led evidence on Dutch unconscionability law, there was no dispute on this issue and the Court applied Ontario law.  The significance of this to the outcome was described as follows in paragraphs 50 and 51:

“…If Uber had adduced evidence of Dutch law, then under the two exceptions to arbitral referral recognized in Dell, this Court would have had to grant the stay in favour of an arbitrator determining the unconscionability argument [Emphasis added].

 

As well, even though this case could have been resolved base on undisputed facts, such an approach may not be sustainable in future cases. An approach to arbitral referral that depends upon undisputed facts would invite parties to dispute facts.  Were that standard to apply, unreasonably disputing facts would allow a party to evade any review of the merits, by use of an arbitration clause.  There would be no negative consequence, in this context, to a party unreasonably disputing facts if it meant the stay in favour of arbitration would be granted. This differs significantly from the standard civil litigation context, wherein unreasonable disputes of facts can be deterred by costs awards.”

 

How choice of law clauses have the potential to flout Uber v Heller in future

There are lots of questions that arise out of paragraphs 49 to 50 of the majority decision and it will be interesting to see how the lower courts interpret them. The majority remarked that the approach adopted in this case had “beneficial consequences” in that it would prevent contract drafters from “evading the result of this case” through a choice of law clause in the event of a challenge to arbitral jurisdiction.

 

It is unclear whether these “beneficial consequences” follow only where the arbitration clause gives rise to an “accessibility” issue, including one created by a foreign choice of law clause. See para. 39.

 

The minority decision, at para. 126, would have limited the application of the principle in this way, but suggested that the majority would decline to refer the issue to arbitration “merely because the parties’ agreement contains a foreign choice of law provision”.

 

However, there is some language in the majority decision that suggests that the majority and minority decisions are actually aligned on this issue.  The contract at issue provided that it was to be “construed in accordance with the laws of The Netherlands”; any challenge to the validity of the arbitration agreement, including the issue of unconscionability, was to be determined under Dutch law. This would have required a hearing with evidence on the content of foreign law, which cannot ordinarily be done in a superficial review of the record. The majority said at para. 50 that had these been the facts, it would have granted a stay of the court proceeding to allow the arbitrator to decide the unconscionability issue under Dutch law.

 

This would allow a contract drafter to be selective in the choice of law to which the agreement was to be subject and to choose a jurisdiction, for example, in which a clause would be upheld that is likely to be struck as unconscionable under Ontario law.

 

(For an analysis that focuses on the applicable international law principles that arise from the choice of law provision issue, see the dissenting decision at paras. 227 – 273, 271 – 280, and 303 - 306, which would have referred the matter to arbitration – so long as Uber would advance the fees necessary for Heller to initiate the arbitration, thereby eliminating the “accessibility” issue.)

Lisa C. Munro, Q.Arb

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