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When Is a Contract of Adhesion Unconscionable?

Vendors of goods and services utilize standard form contracts to reduce or minimize transaction costs and to ensure consistency in the terms applied to similar transactions. Since such contracts are offered on a “take it or leave it” basis there is no ability to negotiate terms and they are described as contracts of adhesion. There is a tendency in contracts of adhesion for the vendor using the standard form to use terms that benefit the vendor and disadvantage the other party. That trend has increased in electronic commerce transactions especially at the business to consumer level as terms have become ever more protective of the drafter.

While Courts rarely interfere in bad contracts they may do so when the contract is void as against public policy or is unconscionable. The jurisdiction to do so comes from equity when the common law strays into rigidity that leads to injustice.

The Supreme Court has had the occasion to consider when a contract of adhesion is unconscionable.[1] In doing so the Court asserts its ability to apply equitable considerations in cases of unconscionable contracts and should bring caution to the minds of all contract drafters so that their terms are communicated better and onerous terms or outcomes are brought to the attention of the vulnerable party.

The Court sets the stage as follows:

Heller provides food delivery services in Toronto using Uber’s software applications. To become a driver for Uber, Mr. Heller had to accept, without negotiation, the terms of Uber’s standard form services agreement. Under the terms of the agreement, Mr. Heller was required to resolve any dispute with Uber through mediation and arbitration in the Netherlands. The mediation and arbitration process requires up-front administrative and filing fees of US$14,500, plus legal fees and other costs of participation. Mr. Heller earns between $400-$600 a week. The fees represent most of his annual income.[2]

Heller started a class proceeding against Uber in 2017 for violations of the Employment Standards Act.[3] Uber brought a motion to stay the class proceeding in favour of arbitration in the Netherlands.

Heller took the position that the arbitration clause in Uber’s services agreements is invalid, because it is unconscionable and because it contracts out of mandatory provisions of the Employment Standards Act. The motion judge held that he did not have the authority to decide whether the arbitration agreement was valid and stayed the class proceeding. The Court of Appeal reversed this order, determining that the arbitration agreement was unconscionable based on the inequality of bargaining power between the parties and the improvident cost of arbitration.

The Supreme Court agreed with the appeal court finding “This is an arbitration agreement that makes it impossible for one party to arbitrate. It is a classic case of unconscionability.”

In their analysis, Justice Abella and Rowe, writing for the majority, found that Ontario’s Arbitration Act would be applicable. Under that Act, a Court can refuse arbitration on several grounds, including if the arbitration agreement is invalid.[4]

The Supreme Court confirmed the test requires the court must “refer the parties to arbitration unless the arbitration agreement is manifestly tainted by a defect rendering it invalid or inapplicable”. To be so manifestly tainted, the Supreme Court notes that the invalidity must be “incontestable”, such that no serious debate can arise about the validity.[5]

The Supreme Court noted that this framework did not address the issue of accessibility namely “a scenario wherein the matter would never be resolved if the stay were granted”.[6] The Court noted in cases such as the high cost of the arbitration, amount others, “staying the action in favour of arbitration would be tantamount to denying relief for the claim” as the agreement “would, in effect, be insulated from meaningful challenge”.[7]

The Court noted that validity challenges could be a delay tactic and noted safeguards under the current test to address such cases. The Supreme Court stated that for a Court to assess the bona fides of a validity challenge to the arbitration agreement that only a Court can resolve requires:

(a) First, the court must determine whether, assuming the facts pleaded to be true, there is a genuine challenge to arbitral jurisdiction.

(b) Second, the court must determine from the supporting evidence whether there is a real prospect that, if the stay is granted, the challenge may never be resolved by the arbitrator.[8]

The Court concluded that “a court should not refer a bona fide challenge to an arbitrator’s jurisdiction to the arbitrator if there is a real prospect that doing so would result in the challenge never being resolved. In these circumstances, a court may resolve whether the arbitrator has jurisdiction over the dispute and, in so doing, may thoroughly analyze the issues and record”.[9]

In the present case the Supreme Court found Heller had raised a genuine challenge to jurisdiction and that due to the fees that “impose a brick wall between Mr. Heller and the resolution of any of the claims he has levelled against Uber” an “arbitrator cannot decide the merits of Mr. Heller’s contention without those — possibly unconscionable — fees first being paid. Ultimately, this would mean that the question of whether Mr. Heller is an employee may never be decided. The way to cut this Gordian Knot is for the court to decide the question of unconscionability.”[10]

Before it proceeded to address the unconscionability of the agreement the Supreme Court noted that the choice of law was the Netherlands but the parties chose not to bring evidence on Dutch law on unconscionability. The result was that Ontario law was applied to this analysis.[11]

On the question of unconscionability the Supreme Court followed its prior guidance that “arguments over any potential unfairness resulting from the enforcement of arbitration clauses contained in standard form contracts are better dealt with directly through the doctrine of unconscionability”.[12]

The Supreme Court described the doctrine as follows:[13]

Unconscionability is an equitable doctrine that is used to set aside “unfair agreements [that] resulted from an inequality of bargaining power”.[14] Initially applied to protect young heirs and the “poor and ignorant” from one-sided agreements, unconscionability evolved to cover any contract with the combination of inequality of bargaining power and improvidence.[15] This development has been described as “one of the signal accomplishments of modern contract law, representing a renaissance in the doctrinal treatment of contractual fairness”.[16]

The Supreme Court confirmed that the Canadian doctrine of unconscionability has two elements:

[t]he availability of a plea of unconscionability in circumstances where the contractual term is per se unreasonable and the unreasonableness stems from inequality of bargaining power was confirmed in Canada over a century ago . . . .[17]

The Supreme Court then examined examples of both an inequality of bargaining power and a resulting improvident bargain.

Inequality of bargaining power

The Court noted the important role equity plays in the “necessity” line of cases “where the weaker party is so dependent on the stronger that serious consequences would flow from not agreeing to a contract. This imbalance can impair the weaker party’s ability to contract freely and autonomously. When the weaker party would accept almost any terms, because the consequences of failing to agree are so dire, equity intervenes to prevent a contracting party from gaining too great an advantage from the weaker party’s unfortunate situation. As the Privy Council has said, “as a matter of common fairness, ‘it [is] not right that the strong should be allowed to push the weak to the wall’”.[18]

The Court noted that a second example of unequal bargaining power arises when practically “only one party could understand and appreciate the full import of the contractual terms, creating a type of “cognitive asymmetry”.[19] This may occur because of personal vulnerability or because of disadvantages specific to the contracting process, such as the presence of dense or difficult to understand terms in the parties’ agreement. In these cases, the law’s assumption about self-interested bargaining loses much of its force.”[20]

Improvident bargain

Noting that improvidence can take so many forms, the Supreme Court distilled that the Court’s exercise of equity cannot be reduced to an exact science.[21]

The Supreme Court rejected applicability of a higher test that would require “that the transaction to be “grossly” unfair, that there was no independent advice, that the imbalance in bargaining power was “overwhelming”, and that there was an intention to take advantage of a vulnerable party”.[22]

Instead, the Court adopted the flexible equitable approach that “the requirements of inequality and improvidence, properly applied, strike the proper balance between fairness and commercial certainty. Freedom of contract remains the general rule. It is precisely because the law’s ordinary assumptions about the bargaining process do not apply that relief against an improvident bargain is justified.”[23]

The Court noted that not all standard form agreements were unconscionable. On standard form agreements the Court noted:

Standard form contracts are in many instances both necessary and useful. Sophisticated commercial parties, for example, may be familiar with contracts of adhesion commonly used within an industry. Sufficient explanations or advice may offset uncertainty about the terms of a standard form agreement. Some standard form contracts may clearly and effectively communicate the meaning of clauses with unusual or onerous effects.

Our point is simply that unconscionability has a meaningful role to play in examining the conditions behind consent to contracts of adhesion, as it does with any contract. The many ways in which standard form contracts can impair a party’s ability to protect their interests in the contracting process and make them more vulnerable, are well-documented. For example, they are drafted by one party without input from the other and they may contain provisions that are difficult to read or understand.[24] The potential for such contracts to create an inequality of bargaining power is clear. So too is their potential to enhance the advantage of the stronger party at the expense of the more vulnerable one, particularly through choice of law, forum selection, and arbitration clauses that violate the adhering party’s reasonable expectations by depriving them of remedies. This is precisely the kind of situation in which the unconscionability doctrine is meant to apply.

This development of the law of unconscionability in connection with standard form contracts is not radical. On the contrary, it is a modern application of the doctrine to situations where “the normative rationale for contract enforcement . . . [is] stretched beyond the breaking point”.[25]

Applying the unconscionability doctrine to standard form contracts also encourages those drafting such contracts to make them more accessible to the other party or to ensure that they are not so lop-sided as to be improvident, or both.[26]

Applying these principles to the current case the majority found Heller was clearly in an unequal bargaining position as his only options were to accept or reject the standard form terms.

The majority also found the unspecified costs of $14,500 to commence arbitration in the Netherlands lead to clear improvidence of the arbitration clause. The Court found that the “arbitration clause, in effect, modifies every other substantive right in the contract such that all rights that Mr. Heller enjoys are subject to the apparent precondition that he travel to Amsterdam, initiate an arbitration by paying the required fees and receive an arbitral award that establishes a violation of this right.”[27]

The majority found “the arbitration clause is unconscionable and therefore invalid.”[28]

Justice Brown also agreed that the clause was invalid but would not rely upon the doctrine of unconscionability to reach this conclusion. Instead his view was that “contractual stipulations that foreclose access to legally determined dispute resolution … are unenforceable not because they are unconscionable, but because they undermine the rule of law by denying access to justice, and are therefore contrary to public policy.”[29]

Justice Côté, writing in dissent, focused on the need for contractual certainty and that “concepts of party autonomy, freedom of contract, legislative intent, and commercial practicalities … are disregarded in the majority’s reasons.”[30]

The bottom line for contract drafters relying on standard form agreements is to stop the escalation of legal tricks to deprive a vulnerable counterpart of basic fairness in the bargain. If unusual terms are to be used then the court will focus on whether there was real assent, that it was informed, and that genuine efforts are taken to explain and bring the consequences of unusual or onerous terms in standard form agreements to the attention of the party sought to be bound. Since the Courts may be expected to scrutinize standard form terms with equitable lenses, then contract drafters would be prudent to make sure that the approach that they take is not so one sided and harsh as to circumvent the reasonable expectations of the contracting party.

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[1] See Uber Technologies Inc. v. Heller, 2020 SCC 16.

[2] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 2.

[3] 2000, S.O. 2000, c. 41.

[4] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 30. The other ground that a Court can refuse arbitration were: (1) A party entered into the arbitration agreement while under a legal incapacity; (2) The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law; (3) The motion was brought with undue delay; or (4) The matter is a proper one for default or summary judgment. See S 7(2) Arbitration Act, Ontario.

[5] See Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801 at para. 75, 76 quoting Éric Loquin, “Compétence arbitrale”, in Juris-classeur Procédure civile (loose-leaf), fasc. 1034, at No. 105; cited by Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 33.

[6] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 38.

[7] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 39 citing Jonnette Watson Hamilton, “Pre‑Dispute Consumer Arbitration Clauses: Denying Access to Justice?” (2006), 51 McGill L.J. 693; Catherine Walsh, “The Uses and Abuses of Party Autonomy in International Contracts” (2010), 60 U.N.B.L.J. 12; and Cynthia Estlund, “The Black Hole of Mandatory Arbitration” (2018), 96 N.C. L. Rev. 679.

[8] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 44.

[9] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 46.

[10] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 47.

[11] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 50 citing Pettkus v. Becker, [1980] 2 S.C.R. 834, at pp. 853-54; Das v. George Weston Limited, 2017 ONSC 4129, at para. 215 (CanLII)).

[12] See in TELUS Communications Inc. v. Wellman, [2019] 2 S.C.R. 144, at para. 85; followed by Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 53.

[13] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 54.

[14] See John D. McCamus, The Law of Contracts (2nd ed. 2012), at p. 424).

[15] See Mitchell McInnes, The Canadian Law of Unjust Enrichment and Restitution (2014), at p. 521; see also pp. 520-24; Bradley E. Crawford, “Restitution — Unconscionable Transaction — Undue Advantage Taken of Inequality Between Parties” (1966), 44 Can. Bar Rev. 142, at p. 143.

[16] See Peter Benson, Justice in Transactions: A Theory of Contract Law (2019), at p. 165; see also Angela Swan, Jakub Adamski and Annie Y. Na, Canadian Contract Law (4th ed. 2018), at p. 925.

[17] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 63 citing Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, at p. 512, 462 Emphasis in original; See also Douez v. Facebook Inc., [2017] 1 S.C.R. 751; Norberg v. Wynrib, [1992] 2 S.C.R. 226, at p. 247.

[18] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 69 citing Janet Boustany v. George Pigott Co (Antigua and Barbuda), [1993] UKPC 17, at p. 6 (BAILII), quoting Alec Lobb (Garages) Ltd. v. Total Oil (Great Britain) Ltd., [1985] 1 W.L.R. 173, at p. 183; see also Lloyds Bank Ltd. v. Bundy, [1975] 1 Q.B. 326 (C.A.), at pp. 336-37.

[19] See Smith, Stephen A. Contract Theory. New York: Oxford University Press, 2004, at pp. 343-44.

[20] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 71.

[21] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 78.

[22] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 81.

[23] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 86.

[24] See Margaret Jane Radin, “Access to Justice and Abuses of Contract” (2016), 33 Windsor Y.B. Access Just. 177, at p. 179; Stephen Waddams, “Review Essay: The Problem of Standard Form Contracts: A Retreat to Formalism” (2013), 53 Can. Bus. L.J. 475, at pp. 475-476; Thal, at pp. 27-28; William J. Woodward, Jr., “Finding the Contract in Contracts for Law, Forum and Arbitration” (2006), 2 Hastings Bus. L.J. 1, at p. 46.

[25] See Radin, Margaret Jane. “Access to Justice and Abuses of Contract” (2016), 33 Windsor Y.B. Access Just. 177, at p. 179.

[26] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at paras. 88-91.

[27] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 95.

[28] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 98.

[29] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 101.

[30] See Uber Technologies Inc. v. Heller, 2020 SCC 16 at para. 178.

Comments

  1. David Collier-Brown

    I find Justice Brown’s view interesting, in that he objects to a contract term being able to deny Mr Heller access to justice.

    From the point of view of a public-policy wonk, this is a much more important consideration (;-)) In other areas of the law, statute law commonly overrides contract terms, with some well-debated exceptions.

    My own experience was with a convoluted clause in the license to a computer program, one that purported to prohibit I and my employer from informing the public or police that it was stolen goods. I view Uber’s “arbitration” clause in a rather similar way.

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