Ontario Superior Court Refuses to Enforce Crypto Giant’s "All-but-inaccessible" Arbitration Clause

April 02, 2024

Written By Robert Staley, Cheryl Woodin, Douglas Fenton, Marshall Torgov and Miranda Cooper

In Lochan v Binance Holdings Limited, 2023 ONSC 6714 (Binance), the Ontario Superior Court dismissed a motion brought by Binance Holdings Limited (Binance), the world’s largest crypto trading platform, to stay a proposed class proceeding in favour of an arbitration agreement users had to agree to before engaging with the platform.

Justice Morgan found the arbitration agreement to be unenforceable on public policy grounds, as it required users to engage in costly arbitration in Hong Kong which would have been "all-but-inaccessible" to putative class members in Canada. In reaching this conclusion, Justice Morgan followed the framework for determining when an arbitration agreement is contrary to public policy developed by the Supreme Court of Canada in Uber Technologies Inc v Heller, 2020 SCC 16 (Uber).

The decision serves as a reminder that companies seeking to have disputes determined by way of arbitration—especially parties contracting through "click" contracts—must carefully tailor the arbitration agreement to ensure users have a realistic prospect of accessing the arbitration process.

Background

The plaintiffs are two Ontario residents who commenced a class proceeding against Binance pursuant to section 133 of the Ontario Securities Act, RSO 1990, c S.5 (OSA). Section 133 provides purchasers with a right of action for rescission or damages against companies that sell securities in breach of prospectus requirements.

In response, Binance sought to stay the action, citing an arbitration agreement that all putative class members executed when they first accessed the crypto trading platform. The arbitration agreement was embedded within an approximately 50-page agreement, which also stipulated that it was subject to unilateral amendments by Binance.

Due to several such amendments, the arbitration forum and choice of law stipulated by the agreement changed multiple times throughout the proposed class period. By the time the class proceeding was launched, all disputes were to be referred to arbitration in Hong Kong, under Hong Kong law, administered by the Hong Kong International Arbitration Centre (HKIAC) under HKIAC rules.

Binance argued that users freely entered into the arbitration agreement and as such its terms should be honoured. The plaintiffs responded that the agreement should be declared void and inoperative on the basis that it was (1) contrary to public policy and (2) unconscionable as it pertained to the putative class members.

The Court’s Decision

The Motion Judge held for the plaintiffs and refused to grant a stay of the class proceeding, finding that the arbitration agreement was void ab initio for being both contrary to public policy and unconscionable.

1. Public Policy

Binance argued that because the arbitration agreement included a governing law provision naming Hong Kong, the Court was required to assess whether the agreement was contrary to public policy with reference to the laws of Hong Kong. The argument was rejected on the basis that there had been no finding that the arbitration agreement was enforceable.

Based on his finding that Ontario law was applicable in these circumstances, the Motion Judge concluded that the arbitration agreement was contrary to public policy because it was prohibitively expensive, and the nature of the standard-form "click" contract deprived the plaintiffs of any opportunity to negotiate its terms.

In reaching this result, the Motion Judge found that, in many cases, the financial burden to pursue the arbitration process would be disproportionate to the potential recovery. The evidence showed that the average crypto investor in Canada would have a claim for approximately $5,000, while the median cost for arbitrating a dispute of this kind is just over $36,000 per claimant, excluding travel costs, legal and expert fees, and other associated expenses. The HKIAC rules also required claimants to post security for costs, which would inevitably increase as the arbitration progressed. The fact that claimants could not be guaranteed a virtual hearing even on consent of both parties was another relevant factor.

The Motion Judge also found a disparity in bargaining power between the parties when the claimants signed the arbitration agreements. The arbitration agreement itself was only one portion of a lengthy standard-form contract that the putative class members were forced to take or leave in order to engage with Binance’s platform. In this way, the Motion Judge found that agreeing to the terms of the arbitration agreement required “almost no comprehension at all”.

The Motion Judge ultimately concluded that “requiring adherence to an expensive and all-but-inaccessible arbitration procedure for resolving any and all disputes, without proper disclosure of the procedure’s difficulties, offends the public policy of Ontario”.

2. Unconscionability

Although not strictly necessary to his reasons, the Motion Judge held that the arbitration agreement was also unenforceable on the basis that it was unconscionable. While Binance sought to apply foreign law to disputes with Ontario investors, the plaintiffs’ cause of action was grounded in the OSA. The Motion Judge expressed concern that staying the action in favour of arbitration under Hong Kong law would be tantamount to denying relief altogether. Moreover, giving Hong Kong law primacy over the OSA would create tension between the policy objectives of arbitration statutes and those of securities legislation in a way that “makes no overall sense”.

Unconscionability may be present when there is an inequality of bargaining power. The “click” contract distributed by Binance was found to have buried crucial details like the arbitration forum, and it omitted entirely the logistical complexity and expense that such arbitration would entail. In designing the agreement this way, the Motion Judge found that Binance “engineered the arrangement to take advantage of the complexity that was hidden behind the superficially benign appearance of an arbitration clause”. A substantial inequality of information and bargaining power resulted which, in the Motion Judge’s view, made the arbitration agreement unconscionable and therefore unenforceable.

Binance is currently seeking leave to appeal.

Key Takeaways

Following in the Supreme Court’s footsteps in Uber, Binance provides a reminder that, despite their presumptive enforceability, arbitration agreements may nonetheless be set aside if found to be contrary to public policy or unconscionable.

In drafting “click” contracts, companies must ensure that their terms do not prescribe dispute resolution processes which are disproportionately onerous or costly to the consumers and/or users who engage with their services. While these remain useful methods for large and sophisticated parties to engage with customers, due to the inequality of bargaining power inherent in such arrangements, providing transparency about arbitral processes is also critical to their enforcement.

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