Mandatory Arbitration Clauses Are No Longer Presumptively Enforceable

January 29, 2021

Written By Rabita Sharfuddin and Charlotte Harman

Last year, we reported on how Canadian courts will uphold mandatory arbitration clauses in some cases, depending on how the plaintiffs are classified.

In 2019, the Supreme Court of Canada held in TELUS Communications Inc. v Wellman that a mandatory arbitration clause found in telephone service contracts prevented a proposed class of business customers from advancing a class action proceeding against TELUS, but the same clause did not preclude a class action of consumers from bringing forward their claim. Mandatory arbitration clauses were only generally unenforceable against consumers under Ontario's Consumer Protection Act, 2002, and that other types of parties to an agreement, such as business customers, are held to the strict terms of a mandatory arbitration clause.

In 2020, the Supreme Court of Canada released its decision in Uber Technologies Inc. v Heller (Bennett Jones acted for an intervener in the appeal), which considered whether Uber drivers could bring a class action despite the existence of a mandatory arbitration clause in Uber's standard form services agreement.

Uber argued for a stay of the proposed class in favour of arbitration, because of the existence of the mandatory arbitration clause in its services agreement. The clause required Uber drivers to pay a large up-front administrative and legal filing fee of US$14,500, and to travel to the Netherlands to arbitrate their claims. The arbitration fees were disproportionate to Uber drivers’ average gross annual income of around C$25,000.

The majority of the Supreme Court held that the mandatory arbitration clause was subject to Ontario's Arbitration Act, 1991, which mandates that actions in court should not be permitted to proceed if the parties had agreed to an arbitration clause, unless an exception to this general rule is found, such as the arbitration agreement being deemed invalid.

Before considering the invalidity of the arbitration clause, the Supreme Court had to determine whether it or the arbitral tribunal had jurisdiction to refuse to order the stay in favour of arbitration. The key consideration on this issue was whether the mandatory arbitration clause provided bona fide access to recourse, meaning that claimants could actually prosecute their claims. The Supreme Court found that the prohibitive filing fees, and the requirement that the arbitration be held in the Netherlands, denied Uber drivers a practical recourse. The onerous terms of the arbitration clause rendered arbitration “realistically unattainable” for Uber drivers, thus leading to concerns that allowing the stay would lead to the matter never being addressed and, ultimately, resolved.

The Supreme Court created a new ground for courts to refuse a stay of proceedings in favour of arbitration, where there are real concerns of access to justice. Here, the Uber drivers were likely unable to seek recourse due to the onerous and unfair terms of the arbitration clause in their standard form services agreement. Thus, the Supreme Court decided that they could hear the arguments about the potential invalidity of the arbitration clause.

The majority of the Supreme Court found that the arbitration clause was invalid under the doctrine of unconscionability as there was: (a) proof of unequal bargaining power between the parties; and (b) proof of an improvident bargain (i.e., gross unfairness). The Supreme Court held that standard form contracts are unconscionable if they create an “unfair and overwhelming benefit” in favour of the drafting party. As the Supreme Court found the arbitration clause to be invalid due to unconscionability, the class is now able to pursue their claims as a class action.

The implications of Heller will likely be far-reaching. Before Heller, mandatory arbitration clauses were presumptively enforceable, even in the class actions context. After Heller, individuals contracting with businesses will be guaranteed access to dispute resolution through the courts if the circumstances of their agreements make arbitration practically impossible. Accordingly, companies will have to consider access to justice issues when drafting alternative dispute resolution clauses in standard form contracts to ensure the clause provides a realistic and effective opportunity for dispute resolution. Existing arbitration agreements, particularly those found in standard form contracts, will also need to be reviewed to ensure they are enforceable and not unconscionable.

Our class action leaders explore the highlights in class action litigation over the last year and make predictions about where the practice and law are heading. Download your copy of the Class Actions: Looking Forward 2021 report here.