An Uber Decision on Arbitration Clauses

Rideshare companies like Uber have already completely transformed the transportation industry, but they are not without their detractors. As I first mentioned in 2017, a class action launched against the company, and has recently made its way to the Ontario Court of Appeal.

The Superior Court motion decision, summarized on Slaw here, relied on the Arbitration Act, 1991, the International Commercial Arbitration Act, 2017, and case law such as Seidel v. TELUS Communications Inc., Wellman v. TELUS Communications Company, and Douez v. Facebook, Inc., to stay the action in favour of a mandatory arbitration clause.

The Court of Appeal decision, released this week, allowed the appeal, concluding that the arbitration clause potentially amounted to an illegal contracting out of an employment standards, thereby making the clause invalid. The court also came to a separate conclusion that the clause was unconscionable at common law.

The core issue in this matter is whether the appellant and other members of the proposed class are employees rather than independent contractors. The court held that the necessary presumption in interpreting the exceptions to upholding an arbitration clause under s. 7(2) of the Arbitration Act, 1991 is whether the the plaintiff’s allegations are true or capable of being proven, namely that the plaintiff was an employee.

The court rejected Uber’s submissions that arbitration was included in the definition of a civil proceeding under the Employment Standards Act (ESA), or that the competence-competence principle applied here. This principle was described by the Supreme Court of Canada in Dell Computer Corp. v. Union des consommateurs as follows:

84 First of all, I would lay down a general rule that in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator. A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law. This exception is justified by the courts’ expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator’s decision regarding his or her jurisdiction can be reviewed by a court. It allows a legal argument relating to the arbitrator’s jurisdiction to be resolved once and for all, and also allows the parties to avoid duplication of a strictly legal debate. In addition, the danger that a party will obstruct the process by manipulating procedural rules will be reduced, since the court must not, in ruling on the arbitrator’s jurisdiction, consider the facts leading to the application of the arbitration clause.

85 If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record.

86 Before departing from the general rule of referral, the court must be satisfied that the challenge to the arbitrator’s jurisdiction is not a delaying tactic and that it will not unduly impair the conduct of the arbitration proceeding. This means that even when considering one of the exceptions, the court might decide that to allow the arbitrator to rule first on his or her competence would be best for the arbitration process.

[emphasis added]

The effect of Uber’s arbitration clause would be to deprive the driver entirely of the ability to avail themselves of the choice of the Ministry’s mechanism under s. 96 of the ESA or the civil proceedings process. The deprivation of that choice is itself a requirement or prohibition under the ESA, and therefore an ESA standard that could not be contracted out of. The court found that if the Uber drivers are presumed employees for the purposes of the Act, the prohibitions against contracting out of employment standards under s. 5 of the ESA would apply,

[41] Given my conclusion regarding the meaning of “employment standard”, it follows that the Arbitration Clause constitutes a contracting out of the ESA. It eliminates the right of the appellant (or any other driver) to make a complaint to the Ministry of Labour regarding the actions of Uber and their possible violation of the requirements of the ESA. In doing so, it deprives the appellant of the right to have an ESO investigate his complaint. This is of some importance for, among other reasons, if a complaint is made then the Ministry of Labour bears the burden of investigating the complaint. That burden does not fall on the appellant. Under the Arbitration Clause, of course, the appellant would bear the entire burden of proving his claim.

One of the central benefits of the Class Proceedings Act, 1992 is that the plaintiff was availing himself of the civil proceeding process to have the central issues determined for what would be an entire proposed class, which is a benefit that would not be available through mandatory arbitration. The public record of such finding would support a broader public policy consideration of allowing a public civil proceeding to continue.

Although the motion judge dismissed the allegation of unconscionability, the Court of Appeal reversed this finding as well based on a palpable and overriding error of fact that any claimants had a “dispute resolution mechanisms readily available from Ontario,”

[55] What the factual record actually shows is that there is no dispute resolution mechanism either in Ontario, or elsewhere, short of the Arbitration Clause. The other avenues available to a driver, who has a complaint, are located in the Philippines or in Chicago. Though accessible from Ontario, they are procedures run by Uber personnel and are completely controlled by Uber. They are not, in any way, independent grievance or adjudication procedures.

The motion judge also erred in attempting to evaluate the impact of Uber’s arbitration clause in the context of the class action,

[58] However, the proposed class action is just that, a proposed class action. It has not yet been certified. Until it is certified, it remains, in essence, a single claim by the appellant. What makes the Arbitration Clause clearly improvident is the fact that any driver with a claim, that might ordinarily amount to nothing more than a few hundred dollars, must undertake an arbitration in the Netherlands in order to have their rights determined independently. That arbitration must be held in Amsterdam, under the law of the Netherlands, and must be conducted in accordance with the ICC Rules.

[59] It must be remembered, in this regard, that the evidence shows that the cost of initiating the arbitration process alone is US$14,500. This does not include the costs of travel, accommodation and, most importantly, counsel to participate in the arbitration. These costs are to be contrasted with the appellant’s claim for minimum wage, overtime, vacation pay and the like brought by a person earning $400-$600 per week.

Although technically correct, this analysis runs directly contrary to the Court of Appeal’s own analysis of the public policy considerations of utilizing the class proceeding mechanisms to provide a strong test case. Where the motion judge’s analysis was perhaps most flawed was in concluding that the arbitration clause could not be improvident given the size of the claim.

The Court of Appeal applied Ontario’s test for unconscionability (which differs slightly from other jurisdictions, such as in Douez), based on Titus v. William F. Cooke Enterprises Inc. and Phoenix Interactive Design Inc. v. Alterinvest II Fund L.P.:

1. a grossly unfair and improvident transaction;
2. a victim’s lack of independent legal advice or other suitable advice;
3. an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
4. the other party’s knowingly taking advantage of this vulnerability.

Given the significant costs of arbitration that would occur for even a small claim, the clause was substantially improvident or an unfair bargain. The court noted that there was no notice or information provided to the plaintiff about what the laws of Netherlands, where the arbitration was to occur, actually consisted of. Uber failed to produce any evidence in this matter as to what these laws might be.

It was not realistic to expect the plaintiff to obtain ILA, and Uber acknowledged the inequality in bargaining power. The court concluded that the arbitration clause was chosen to favour Uber and take advantage of its drivers, and that they did so knowingly and intentionally.

Where the motion judge failed the most was by treating this contract as a normal commercial contract with parties of relatively equal sophistication and strength. Employment law, including claims by independent contractors who claim to be employees, are instead treated with a presumption of an imbalance of power. In Wallace v. United Grain Growers Ltd., the Supreme Court of Canada stated,

91 The contract of employment has many characteristics that set it apart from the ordinary commercial contract. Some of the views on this subject that have already been approved of in previous decisions of this Court (see e.g. Machtinger, supra) bear repeating. As K. Swinton noted in “Contract Law and the Employment Relationship: The Proper Forum for Reform”, in B. J. Reiter and J. Swan, eds., Studies in Contract Law (1980), 357, at p. 363:

. . . the terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.

92 This power imbalance is not limited to the employment contract itself. Rather, it informs virtually all facets of the employment relationship. In Slaight Communications Inc. v. Davidson, 1989 CanLII 92 (SCC), [1989] 1 S.C.R. 1038, Dickson C.J., writing for the majority of the Court, had occasion to comment on the nature of this relationship. At pp. 1051-52 he quoted with approval from P. Davies and M. Freedland, Kahn-Freund’s Labour and the Law (3rd ed. 1983), at p. 18:

[T]he relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power. In its inception it is an act of submission, in its operation it is a condition of subordination. . . .

93 This unequal balance of power led the majority of the Court in Slaight Communications, supra, to describe employees as a vulnerable group in society: see p. 1051. The vulnerability of employees is underscored by the level of importance which our society attaches to employment. As Dickson C.J. noted in Reference Re Public Service Employee Relations Act (Alta.), 1987 CanLII 88 (SCC), [1987] 1 S.C.R. 313, at p. 368:

Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.

94 Thus, for most people, work is one of the defining features of their lives…

Although subsequently refined in Honda Canada Inc. v. Keays, employers who take advantage of this imbalance are subject to additional aggravated and punitive damages.

The Court of Appeal here went even further to emphasize the vulnerability of the drivers here,

[71] I would add that, for the purposes of this analysis, I do not see any reasonable distinction to be drawn between consumers, on the one hand, and individuals such as the appellant, on the other. Indeed, I would note that, if Uber is correct and their drivers are not employees, then they are very much akin to consumers in terms of their relative bargaining position. Alternatively, if Uber is wrong, and their drivers are employees, we are not speaking of employees who are members of a large union with similar bargaining power and resources available to protect its members. Rather, the drivers are individuals who are at the mercy of the terms, conditions and rates of service set by Uber, just as are consumers. If they wish to avail themselves of Uber’s services, they have only one choice and that is to click “I agree” with the terms of the contractual relationship that are presented to them.

The particular vulnerability of the food delivery drivers, who would also be included in this claim if it proceeds, has been highlighted recently in the media. Disputes and protest over pay cuts go back a couple years, and the Workplace Safety and Insurance Board (WSIB) is launching a review over the status of these couriers when they are injured on the job.

The court’s finding here was not particularly surprising for employment lawyers who have been accustomed to applying strict construction to employment contracts in recent years, especially as it relates to termination provisions. What it does mean is that employers will also have to be particularly careful about how and when they include arbitration clauses in their independent contractor agreements.