Ontario Court of Appeal declines to enforce arbitration agreement as unconscionable and contrary to public policy

The Ontario Court of Appeal’s recent decision in Lochan v. Binance Holdings demonstrates the courts’ continued scrutiny of arbitration clauses in certain types of standard form contracts¹. In refusing to uphold the arbitration clause at issue in Lochan, the Court’s decision stands in contrast to a number of recent decisions in which courts have stayed proposed class actions in favour of arbitration clauses in standard form agreements. A review of these cases, and the different arbitration clauses at issue, reveals that courts are more likely to enforce an arbitration clause found in a standard form contract when a finding is made that proposed class members are practically able to access the arbitration procedure. Where arbitration is found to be pragmatically inaccessible, courts are likely to refuse to stay a proposed class action in favour of arbitration².

What you need to know

• Disputes about the validity of an arbitration clause or the jurisdiction of an arbitrator are generally resolved at first instance by an arbitrator, except where:
  • jurisdictional issues depend on a question of law alone or a question of mixed fact and law that only requires a superficial consideration of the evidence; or
  • impediments exist that functionally prevent an individual from bringing a matter to arbitration, which would have allowed them to resolve these questions.
• Courts may scrutinize arbitration clauses in standard form contracts more closely than in contracts negotiated by sophisticated commercial parties. Many arbitration clauses in standard form contracts are upheld by courts. The ultimate determination of whether a particular arbitration clause is upheld will turn on the details of the clause and the context of a given dispute, but features of clauses upon which courts have looked favourably include:
  • arbitrations governed by local law;
  • local or virtual hearings;
  • non-prohibitive costs; and/or
  • opt-out provisions.
• In the class actions context, courts may analyze the implications of an arbitration clause in a standard form contract for an average class member, rather than just the representative plaintiff(s).

Background

The plaintiffs commenced a proposed class action in June 2022 alleging that Binance, a trading platform for cryptocurrency and related derivatives, sold securities without delivering a prospectus³.

The defendant moved to stay the proposed class action in favour of arbitration. On joining the platform, new users were told they could sign up in under 30 seconds and were asked to agree to standard terms that contained an arbitration clause which could be amended by the defendant at will⁴. During the proposed class period, the defendant unilaterally amended the arbitration clause four times⁵.

The most recent amendment to the arbitration clause required parties to arbitrate all disputes (regardless of size) in Hong Kong, under Hong Kong law. The median cost of arbitration for the arbitration rules agreed to by the parties for disputes under US$1 million was US$26,743⁶. However, the average investor was believed to have a C$5,000 claim⁷.

The Court of Appeal addressed the validity and unconscionability of the arbitration clause in this circumstance.

Is there a valid contract?

The first question for a court in assessing whether to stay a proposed class action in favour of arbitration is whether the agreement itself is an enforceable contract⁸. In many cases this is not contested. The Court of Appeal, however, emphasized that it is important to keep in mind the basic requirements of contract formation and the risk that a contract may be void.

In this case, the Plaintiff argued that the contract was void because it was illegal. However, the Court did not address this argument, ruling instead on other grounds⁹.

Who decides validity?

The Court of Appeal emphasized that, pursuant to the competence-competence principle, an arbitrator will typically have the initial jurisdiction to decide questions about the validity of an arbitration clause or the arbitrator’s jurisdiction. In general, a court will defer to the arbitrator’s decisions in this regard. However, this ordinary manner of proceeding is subject to narrow exceptions, including two applied by the Court in this case:

1. Where deciding whether the clause was void depends on a question of law alone. The Court determined that validity depended on a question of law alone on the basis that the judge was tasked with interpreting a standard form contract (which is a question of law¹⁰), and to the extent to which the Court referred to the factual record, it did not need to make findings of fact specific to the representative plaintiff¹¹.
2. Where impediments to arbitration exist that functionally prevent an individual from bringing a matter to arbitration to decide jurisdiction¹². The Court found that the cost, distance and choice of law imposed by the arbitration clause in this case resulted in no real prospect of a challenge to the validity of the agreement through arbitration¹³.

The Court therefore decided that the validity of the arbitration clause, in this context, did not need to be decided by an arbitrator at first instance.

Is the arbitration clause valid?

Having determined the Court had jurisdiction to address validity, the Court considered the defendant’s argument that the motions judge had erred in looking at the issue of validity from the perspective of the average class member rather than the perspective of the representative plaintiffs, who had engaged in larger value purchases than the average cryptocurrency investor and therefore had larger claims¹⁴. The Court found that in the context of this case—where the arbitration clause was the same regardless of size or type of dispute—it was appropriate for the Court to look at the average investor rather than the representative plaintiffs¹⁵. Through the lens of that analysis, the Court affirmed the decision below, refusing to stay the class action in favour of arbitration on the basis of public policy and unconscionability.

Implications

Many arbitration clauses in standard form contracts are upheld by courts even in the class action context. The ultimate determination of whether a particular arbitration clause is upheld will turn on the details of that specific arbitration clause. In recent cases where courts have found arbitration clauses in standard form contracts to be valid, the clauses have had some or all of the following features, which made the dispute resolution procedure accessible to average class members: (1) arbitrations governed by local law¹⁶; (2) local or virtual hearings¹⁷; (3) non-prohibitive costs and/or costs borne by the business drafting the contract and arbitration clause¹⁸; and even (4) opt-out provisions giving individuals a choice of the dispute resolution mechanism they preferred¹⁹. Each case will turn on the particular features of the arbitration clause and the context in which it is applied.