Ontario Court of Appeal Strikes Important Balance in Applying Exceptions to the Kompetenz-Kompetenz Principle

November 07, 2024

Written By Artem N. Barsukov, FCIArb and Jonas Patron

Last week, the Ontario Court of Appeal released its decision Lochan v Binance Holdings Limited, 2024 ONCA 784 [Binance], in which it refused to stay a class action proceeding in favour of arbitration. In doing so, the Court reaffirmed two key exceptions to the kompetenz-kompetenz principle, which gives an arbitral tribunal the power to rule on its own jurisdiction. We discussed these exceptions earlier this year in the context of the Alberta Court of King’s Bench decision in Orica Canada Inc v ARVOS GmbH, 2024 ABKB 97.

Binance involved a class action by traders of cryptocurrency against the world’s largest cryptocurrency trading platform, Binance Holdings Limited (Binance). The class action was commenced in the face of an arbitration clause in Binance’s Terms of Use that required all disputes between Binance and its users to be resolved by arbitration in Hong Kong. 

On an appeal against a motion judge’s refusal to stay class action proceedings, the Ontario Court of Appeal applied existing Supreme Court jurisprudence and confirmed that courts are empowered to rule on the jurisdiction of an arbitral tribunal without first referring the question to the arbitral tribunal itself pursuant to the kompetenz-kompetenz principle, where:

1. the jurisdictional challenge engages a pure question of law or requires only superficial consideration of the evidentiary record; or
2. there is a real prospect that the jurisdictional challenge will never be resolved by the arbitral tribunal. 

At the same time, the Court of Appeal also held that the kompetenz-kompetenz principle cannot be displaced lightly, and that a court may only rule on the jurisdiction of an arbitral tribunal if one of the exceptions above has been made out. In the context of this case, this meant that the court could not entertain arguments that an arbitration clause was void for reasons of public policy or unconscionability without first establishing one or more of the exceptions.

The careful balance struck by the Court of Appeal in Binance reaffirms Canada’s reputation as an arbitration-friendly jurisdiction. At the same time, it also serves as an important reminder for consumer-facing businesses that any arbitration process contemplated by their consumer agreements must be accessible by the consumer, in line with the 2020 Supreme Court of Canada decision in Uber Technologies Inc v Heller, 2020 SCC 16 [Uber].

Background

Binance sold cryptocurrency derivatives to Canadians through its website but had failed to file or deliver a prospectus with respect to its securities offerings. The representative plaintiffs, being cryptocurrency traders who had purchased cryptocurrency derivatives, brought a class action in Ontario against Binance for selling securities without a prospectus, as required by the Ontario Securities Act.

Binance applied to have the class action stayed on the basis that the plaintiffs had agreed to resolve any disputes by arbitration pursuant to a dispute resolution clause included in the Terms of Use that traders were required to accept when creating an account at Binance’s website. 

The arbitration clause permitted Binance to change any part of the arbitration agreement without traders’ consent. In this regard, the Court noted that Binance had changed the seat of arbitration and governing law four times over the class action period. The most recent version of the arbitration clause provided for arbitration in Hong Kong under Hong Kong law. The median cost of arbitration in Hong Kong was C$36,000, not including out-of-pocket expenses such as legal fees and travel expenses that would have to be borne by plaintiffs.

Binance’s application for a stay was first heard by a motion judge of the Superior Court of Justice, who applied the analysis in Uber to find that the costs of submitting to arbitration made it inaccessible to an average cryptocurrency investor, who would be expected to have a claim in the C$5,000 range. The motion judge also held that the arbitration clause was contrary to public policy and unconscionable because Binance’s website prompted users to open an account in under 30 seconds, during which time the users purported to agree to roughly 50 pages of terms, including the arbitration clause. The motion judge also expressed concerns with Binance’s ability to unilaterally change the terms of the arbitration clause without the traders’ consent.

The motion judge ultimately declined to stay class action proceedings in favour of arbitration. Binance appealed.

On appeal, the following issues were before the Court of Appeal:

1. Does a finding that an arbitration clause is contrary to public policy constitute an independent ground to refuse a stay in favour of arbitration?
2. Did the motion judge err in applying exceptions to the kompetenz-kompetenz principle?

Decision

Courts May Rule on Arbitral Jurisdiction Only if an Exception to the Kompetenz-Kompetenz Principle Applies

The Court of Appeal began by considering whether the motion judge erred by relying on his finding that the arbitration clause was contrary to public policy as an independent ground to refuse a stay.

On this point, Binance argued that validity of an arbitration clause was a matter of jurisdiction which ought to be resolved by the arbitral tribunal pursuant to the kompetenz-kompetenz principle. Binance argued that the motion judge erred by considering whether the arbitration clause was void for public policy reasons without first determining whether an exception to the kompetenz-kompetenz principle applied.

The Court of Appeal confirmed that, notwithstanding the exceptions articulated by the Supreme Court of Canada in Dell Computer Corp v Union des Consommateurs, 2007 SCC 34 [Dell] and Uber, this line of jurisprudence still requires Canadian courts to abide by the kompetenz-kompetenz principle. The Court of Appeal agreed with Binance that a court can only void an arbitration clause—thereby effectively depriving the tribunal of its jurisdiction—if the court is first satisfied that there is an exception to the kompetenz-kompetenz principle allowing it to bypass the tribunal’s authority to decide on its own jurisdiction:

[16] Before a domestic court can entertain arguments that an arbitration clause is void for reasons such as unconscionability or being contrary to public policy, it must first be satisfied that the circumstances fall within an exception to the application of the competence-competence principle to justify the domestic court deciding whether the arbitration clause is void, rather than allowing the arbitral tribunal to first decide the issue.

The Court of Appeal, however, disagreed with Binance that the motion judge erred in this regard. The Court found that the motion judge did not go straight into a public policy analysis, but instead properly began with a consideration of whether any of the established exceptions to the kompetenz-kompetenz principle applied. Finally, the Court of Appeal affirmed the motion judge’s finding that the kompetenz-kompetenz principle is not lightly displaced.

The Two Exceptions to the Kompetenz-Kompetenz Principle in Canadian Law

As we previously discussed in our update on Orica Canada Inc v ARVOS GmbH, 2024 ABKB 97, in the wake of Dell and Uber, Canadian law recognizes two scenarios in which departure from the kompetenz-kompetenz principle may be warranted:

1. The Dell Exception: if the jurisdictional challenge involves:
   
   a. pure questions of law; or
   
   b. questions of mixed fact and law requiring only superficial consideration of the evidentiary record.
   
   
2. The Uber Exception: if there is a bona fide jurisdictional challenge that only a court can realistically resolve. The Uber exception involves a two-part test:
   
   a. taking the facts pleaded as true, there must be a genuine challenge to arbitral jurisdiction; and
   
   b. there must be a real prospect that the challenge may never be resolved by the arbitrator.

In this case, Binance argued that the motion judge had erred because he made findings of fact when holding that the arbitration clause was unconscionable and contrary to public policy. Binance also argued that the motion judge had engaged in more than a superficial review of the evidence when determining whether there was a real prospect that the validity of the arbitration clause might never be resolved by an arbitral tribunal.

The Court of Appeal disagreed on both points, finding that there was no error of law or palpable and overriding error of fact in the motion judge’s finding that the Dell and Uber exceptions to the kompetenz-kompetenz principle were engaged.

In particular, the Court of Appeal agreed with the motion judge that the arbitration clause was part of a standard form agreement, raising a legal issue. The Court further held that, to the extent that the motion judge engaged in a review of the factual record, both at the threshold stage and in his findings in relation to public policy and unconscionability, he did so based on a superficial review of the documentary record.

The Court of Appeal also found no error in the motion judge’s conclusion that an average cryptocurrency buyer could not realistically access the arbitral tribunal to resolve the jurisdictional challenge. In particular, the Court held that the motion judge did not err in considering the effect on an average cryptocurrency buyer of the arbitral forum being in Hong Kong with a median cost of approximately C$36,000 before out-of-pocket expenses.

Discussion and Implications

The Ontario Court of Appeal’s decision in Binance builds on the line of authority in Dell and Uber, offering further refinement and striking a careful balance between the kompetenz-kompetenz principle and exceptions thereto. While recognizing these exceptions, the Court of Appeal held that a court cannot simply bypass an arbitral tribunal’s authority to rule on its own jurisdiction—for example, by finding an arbitration agreement to be unconscionable or contrary to public policy—without first determining that an exception to the kompetenz-kompetenz principle is made out. The decision in Binance thus maintains Canada’s reputation as an arbitration-friendly jurisdiction while recognizing important public policy exceptions.

The balanced approach articulated by the Ontario Court of Appeal will likely find ongoing application to the extent Canadian courts establish additional public policy exceptions to the kompetenz-kompetenz principle in the future. Canadian courts will continue to respect an arbitral tribunal’s authority to rule on its own jurisdiction and will intervene only where a recognized exception can be established.

In practical terms, the ruling in Binance is yet another stark reminder for consumer-facing businesses that rely on standard-form agreements—particularly those entered into with a single click—to ensure that their dispute resolution clauses provide a mechanism that is reasonably accessible by their customers. Consumer-facing businesses that wish to take advantage of the speed and privacy afforded by arbitration will be well-served by crafting a dedicated dispute resolution process that is accessible to their average consumer, as many sophisticated entities have done in the wake of Uber. To discuss your specific needs and to receive tailor-made advice, please contact the author or the Bennett Jones International Arbitration Practice group.