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In Uber v Heller (“Heller”) the Supreme Court of Canada recently rendered a decision that is likely to have important and potentially far-reaching consequences for the doctrine of unconscionability. Heller may be particularly impactful with respect to standard-form contracts of adhesion as well as other circumstances where one contracting party has a heavily limited ability to negotiate terms.
We note that this article does not consider the implications of Heller with respect to the law of arbitration, including the limits to the applicability of the competence-competence principle in Canada. David Edinger will discuss the latter subject in detail in a forthcoming article to be published on Singleton Reynolds’ website.
David Heller (“Mr. Heller”) entered into a standard-form agreement with Uber in order to work as an Uber food delivery driver. In entering this agreement, Mr. Heller had no opportunity to negotiate the terms and conditions, meaning it was a contract of adhesion.
The agreement contained a mandatory arbitration clause requiring mediation and (failing a successful mediation) arbitration pursuant to the International Chamber of Commerce’s mediation and arbitration rules (the “ICC Rules”). The initial fees required under the ICC Rules totaled USD $14,500.00, representing most of Mr. Heller’s annual income. In addition, the arbitration clause contained a choice of law clause mandating that the agreement be “governed by and construed in accordance with the laws of the Netherlands”. Amsterdam was named as the place of arbitration.
Mr. Heller initiated a class action on behalf of Uber drivers against Uber for alleged violations of the Employment Standards Act, but Uber moved to stay the class action in favour of arbitration.
Decisions of the Courts Below
At first instance, the Ontario Superior Court of Justice stayed the class action in favour of arbitration. The Court found that the matter of the arbitration clause’s validity had to be referred to arbitration, in accordance with the competence-competence principle (i.e. the principle that arbitrators have the jurisdiction to determine their own jurisdiction). The Court also held, among other things, that the arbitration clause was not invalid due to unconscionability, because despite the parties’ unequal bargaining power, Uber had not preyed on or taken advantage of Mr. Heller, or “extracted an improvident agreement by inserting an arbitration provision.”
The Court of Appeal allowed Mr. Heller’s appeal, finding that the arbitration clause was void because it was unconscionable and because it contracted out of the Employment Standards Act. With respect to unconscionability, the Court of Appeal found that the arbitration clause was unconscionable because it was an improvident bargain, resulting from significant inequality of bargaining power. In addition, the Court of Appeal noted that there was a minimal chance that Mr. Heller had received any legal advice, and that it was safe to conclude that Uber knowingly and intentionally included the arbitration provision to take advantage of its drivers.
Uber was granted leave to appeal to the Supreme Court of Canada.
The Supreme Court’s Decision
The majority of the Court began by providing a detailed analysis of how unconscionability fits within the general paradigm of freedom of contract. While the general presumption is that parties are best positioned to protect their interests in contracting, this presumption does not always hold true in actual fact. In circumstances where parties are not in a position to protect their own interests, the arguments for freedom of contract are weaker and judicial intervention (e.g. applying the doctrine of unconscionability) is more easily justifiable.
With that in mind, the majority determined that the test for unconscionability requires two criteria to be satisfied: first, there must be inequality of bargaining power between the parties; and second, there must be an improvident bargain. By contrast, the majority rejected a narrower, four-part test for unconscionability that would also require 1) a lack of independent legal advice by the weaker party, and 2) the stronger party knowingly taking advantage of the weaker party’s vulnerability.
With respect to inequality of bargaining power, the majority found that this criterion is met where one party cannot adequately protect its interests in the contracting process. This inability can arise from a number of factors, including personal characteristics (e.g. lack of knowledge or experience) and particular circumstances (i.e. a specific situation renders a party needy or desperate because a failure to agree to the terms would be dire). The majority gave as an example the circumstance where a party is unable to appreciate the contract’s terms because of dense, legalistic language, but specified that this inability is only relevant to the extent that the party’s inability to understand a given term is directly related to the improvident bargain.
With respect to an improvident bargain, improvidence must be assessed “contextually”, with the key question being whether the potential for “undue advantage” created by inequality of bargaining power has been realized. The majority suggested that this could occur where the price of goods or services departs significantly from the usual market price, but generally must be considered in light of all surrounding circumstances at the time of contract formation. Notably, the majority suggested that a finding of an improvident bargain could support an inference that one party was unable to protect their interests, given that “it is a matter of common sense that parties do not often enter a substantively improvident bargain when they have equal bargaining power.”
On the topic of standard-form contracts of adhesion, the majority affirmed that such contracts in and of themselves do not establish an inequality of bargaining power, insofar as they may be commonly used within an industry and may clearly communicate the meaning of clauses with particularly onerous effects. However, the majority also highlighted the risk that such contracts can easily create an inequality of bargaining power and enhance the vulnerability of the weaker party, particularly where the weaker party has no opportunity to negotiate the terms of the agreement.
Returning to the rejected four-part test for unconscionability, the majority clarified that a lack of independent legal advice should not be its own criterion, but rather should be subsumed within the analysis of inequality of bargaining power insofar as legal advice would alleviate any inequality. The majority also justified its rejection of the criterion that the stronger party knowingly take advantage of the weaker, explaining that such a requirement improperly emphasizes the state of mind of the stronger party, rather than the protection of the vulnerable.
In view of the foregoing, and in light of the severability doctrine (which holds that an arbitration clause is its own self-contained agreement, even when contained within another agreement), the majority concluded that the arbitration clause at issue was unconscionable. Notably, the majority did not discuss in any detail the fact that it applied unconscionability to only the arbitration clause rather than the agreement in its entirety, despite the fact that this was an unsettled point of law (which fact, as discussed below, was raised in both the concurring and dissenting judgments).
In a concurring set of reasons, Brown J cautioned that the majority’s approach would add uncertainty to the doctrine of unconscionability. Emphasizing that unconscionability is intended primarily to redress procedural unfairness, Brown J highlighted that the critical consideration should therefore be identifying a particular vulnerability of the weaker party, and that mere inequality of bargaining power should not itself be sufficient. Brown J also cautioned that eliminating the knowledge requirement would create significant commercial uncertainty, as contracting parties would be left to wonder whether an unknown state of vulnerability will later open up their agreement to review on grounds of “fairness”. Finally, Brown J highlighted that the majority did not adequately address the fact that it had applied the unconscionability doctrine to a single clause of the contract, which arguably constituted a novel proposition of law.
In separate dissenting reasons, Côté J reached a similar conclusion to Brown J in disagreeing with the majority’s approach to unconscionability. In particular, Côté J expressed concern that the majority’s approach created a “vague and illusory” standard that risks exposing the terms of every standard form contract to review in order to ensure that they are substantively reasonable, which would undermine private ordering and commercial certainty. As to whether the clause at issue was in fact unconscionable, Côté J concluded that the question was properly one for an arbitrator to determine. Finally, Côté J echoed Brown J’s concern regarding the majority’s application of the unconscionability doctrine to a single clause of the contract.
Given the significant changes to the law occasioned by the majority’s analysis of unconscionability, Heller raises several important issues for further consideration.
First, and as observed in both the concurring and dissenting judgments, the majority’s approach raises questions with respect to how unconscionability applies to standard form contracts, which is problematic in light of the majority’s statement that unconscionability “has a meaningful role to play in examining the conditions behind consent to contracts of adhesion”. At a general level, it appears the majority’s approach was driven in large part by the conclusion that the rationale for freedom of contract is weaker in respect of standard form contracts and contracts of adhesion, and by its desire to ensure that such contracts are clear and accessible to all parties.
Because the majority’s analysis indicated that inequality of bargaining power can be found where the weaker party does not understand relevant contract terms that create an improvident bargain, drafting the impugned terms in clear language should remedy this type of potential flaw. So, for example, to the extent that contractors use standard form contracts with smaller subcontractors, contractors would be well advised to review their standard forms to ensure that relevant language is as clear and accessible as possible for lay persons. Of course, one can question the extent to which this practice would be effective in respect of those persons unlikely to read terms and conditions at all (e.g. ordinary consumers), but that issue is distinct from the questions raised in Heller and is unlikely to apply between commercial parties.
Second, in light of the majority’s finding that an improvident bargain may itself support an inference of unequal bargaining power owners and contractors should proceed cautiously and in good faith.
For example, in light of COVID-19 (including its continuing effects, such as potential future waves of the virus), contractors may bid aggressively for projects in an attempt to recoup lost revenue streams, resulting in artificially suppressed bids that might seem at first glance to fall well below ordinary market prices. Indeed, pricing for “volume” has, in the past, featured in the insolvencies of some contractors. In such circumstances, certain procurements taking place in the new “normal” course could appear to result in improvident bargains, thus heightening the risk of an inference that unequal bargaining power was a factor. To the extent possible, owners would therefore be well advised to enhance the transparency of and maintain strict compliance with applicable procurement processes and procedures, including the review of bids in respect of their balance.
In this regard, it is important to emphasize that improvidence is to be measured at the time the contract is formed, assumedly utilizing an objective standard, and will not assist parties trying to “escape from a contract when their circumstances are such that the agreement now works a hardship upon them”.
Third and finally, the concurring and dissenting judges observed that the majority’s application of unconscionability to a single clause is in fact an unsettled point of law, despite possible support for such a proposition from the Supreme Court in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways). While much of the bar understood Tercon to support the majority’s approach, the concurring and dissenting reasons have now raised this issue anew by questioning the precise scope of Tercon. Interestingly, the majority’s approach leaves this issue unanswered, as their application of the severability doctrine meant that they did find an entire agreement unconscionable – i.e. the stand-alone agreement to arbitrate. Accordingly, it remains unclear whether it is possible for a judge or arbitrator to find a single clause unconscionable, or whether the doctrine of unconscionability can only be applied to an agreement in its entirety.
The implications for the construction industry remain to be seen.
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