Late last year the Supreme Court of Canada released a decision in Uber Technologies Inc. v. Heller in which one party challenged the enforceability of an arbitration clause in a standard form services agreement. In that case, the Court found the clause unconscionable and unenforceable, leading some to conclude that the case marked a new direction with less certainty for commercial and consumer parties. A more recent decision in Gupta v. Cedar Homes Ltd., reviewed some of the lessons from Uber but showed deference to the arbitration provisions and the right of parties to freely contract.
Agreement Signed in 1994 Contained Arbitration Clause
In July 1994 Charles Kettles ordered a design and materials to build a cottage in Bruce Mines, Ontario. The design and materials originated from Lindal Cedar Homes Ltd. (Lindal) which sold the products through distributors. Twenty years later, Charles Kettles transferred title to his children. In 2018 they discovered wood rot throughout the cottage including in the cottage’s structural beams.
They commenced an action against Lindal for negligence, failure of a duty to warn that the materials were defective, and breach of a lifetime warranty, alleging the duty was owed to subsequent purchasers of the cottage. In response, Lindal brought a motion to stay the action on the grounds that there was a mandatory arbitration clause contained within their standard Purchase and Sale Agreement.
The Agreement in use at the time of the original 1994 sale could not be located by any of the parties. At the time, Lindal was transitioning between two versions of the Agreement, though the Court concluded that they did not fundamentally differ and only contained minor differences.
In support of their motion to stay the action, Lindal cited section 106 of the Courts of Justice Act and subsection 7(1) of the Arbitration Act which requires courts to stay proceedings that must be submitted to arbitration under an arbitration agreement. The only issue to determine was whether the action should be stayed on the basis of the arbitration clause in the Agreement.
Assessing the Applicability of an Arbitration Clause
In reviewing the principles governing the jurisdiction of arbitrators, the Ontario Superior Court of Justice noted that courts are generally to take a “hands-off” approach and give effect to arbitration agreements. The Court also looked to the prior decision in Haas v. Gunasekaram, which requires the arbitrator to determine the scope of arbitral jurisdiction, and states that overall a court should grant a stay when it is “arguable” that the dispute falls within the arbitration agreement.
The next step involves applying the analytical framework laid out in Haas, which poses the following questions:
- Is there an arbitration agreement?
- What is the subject matter of the dispute?
- What is the scope of the arbitration agreement?
- Does the dispute arguably fall within the scope of the arbitration agreement?
- Are there grounds on which the court should refuse to stay the action?
On these questions, it was determined that due to the numerous issues in dispute regarding the arbitration agreement, a more detailed factual finding was necessary which was better left to the arbitrator. It was overall arguable that the dispute fell under the scope of the arbitration agreement.
Assessing Unconscionability in a Standard Form Contract
The Plaintiffs argued the proceeding should not be stayed, citing authority in section 7(2) of the Arbitration Act which authorizes courts to refuse a stay on the basis the arbitration agreement is invalid. The Plaintiffs alleged that the agreement in question should be considered invalid for reasons of unconscionability.
Here, the Plaintiffs relied on the Supreme Court of Canada’s decision in Uber, which suggested an opening for courts to decline to enforce arbitration provisions. However, the Superior Court of Justice found that “this case is a far cry from Uber”. Unconscionability requires inequality of bargaining power and an improvident bargain, with freedom of contract remaining the general rule in most cases. For unconscionability to arise, the ordinary assumptions about the bargaining process must not apply, and it is that which justifies relief from an improvident bargain.
In this case, the Court was not convinced that the ordinary assumptions of the bargaining process did not apply. In reaching this conclusion, the Court outlined that although the Plaintiffs stated that re-starting arbitration might be unaffordable for them, there was nothing to support the assertion, since they had submitted no evidence about their finances. In addition, apart from the current motion, the only other litigation step they had taken was the drafting of a Statement of Claim.
Likewise, there was nothing to support an inequality of bargaining power. The contract Lindal used was a standard form, but Uber indicated that standard form contracts alone do not suggest an inequality of bargaining power. Further, the Court accepted evidence that Charles Kettles had a personable relationship with representatives of Lindal and had an opportunity to raise concerns prior to entering into the agreement.
Courts Generally Defer to Arbitration Provisions in Contracts
The decision in Gupta reinforces the overall principle of deference to arbitration provisions within contracts. The case confirmed that unconscionability requires inequality of bargaining power, and such a finding will be a departure from the ordinary assumption that parties may freely contract.
In coming to this conclusion, the Court did recognize the fact that the standard form contract was only two pages long, unlike the 14-page standard form agreement and $14,500 USD arbitration cost required by the agreement in Uber.
Overall, the arbitration clause in the case at hand provided a fair process without any indication of hardship for the Plaintiffs. The case may suggest there is less room for courts to decline enforcing arbitration provisions than was originally contemplated following Uber.
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