Employer Beware: One-Sided Standard Form Clauses may be Unenforceable after Uber Technologies Inc. v. Heller
July 6, 2020
By Alex Warshick, Lawyer at McInnes Cooper,
Andrew Kinley, Lawyer at McInnes Cooper
On June 26, 2020, the Supreme Court of Canada released Uber Technologies Inc. v. Heller, a much-awaited decision regarding the enforceability of an arbitration clause in Uber’s standard form driver agreement. The decision is tremendously important for those involved in the gig economy. The gig-economy is where individuals engage in temporary and flexible jobs often through online platforms and apps to provide services like ride-sharing, food and package delivery, and pet sitting.
In the decision, the Court held that the arbitration clause in the agreement between Uber and a food delivery driver was so unfair it was unenforceable, which will now permit a sizeable class-action lawsuit against Uber in Ontario to proceed. The decision has significant implications for many commercial contexts, but it is especially important for employers that rely on standard form agreements and contract with workers online.
The Court did not answer whether the Ontario Employment Standards Act (the “ESA”) applied to the agreement between Uber and the food delivery driver. Accordingly, the issue of whether Uber drivers are employees or contractors remains for determination in the class action in Ontario, the outcome of which could have a massive effect on the gig-economy.
David Heller (“Heller”) provided food delivery services in Toronto through the Uber Eats food delivery app. To become a food delivery driver for Uber, Heller had to accept online, without negotiation, the terms of Uber’s standard form agreement (the “Agreement”). The arbitration clause in the Agreement provided that Heller was required to resolve any dispute with Uber through mediation and arbitration in the Netherlands, which required up-front administrative and filing fees of $14,500 (USD) (the “Arbitration Clause”) that were not specified in the Arbitration Clause.
In 2017, Heller commenced a class action in Ontario against Uber for alleged violations of the ESA. Uber brought a motion to stay the class action in Ontario arguing that the dispute had to proceed by arbitration in the Netherlands under the Arbitration Clause. Heller contended that the Arbitration Clause was invalid for two reasons. First, the Arbitration Clause was unconscionable – which is where a contract or term of a contract is invalid if it is significantly unfair or one-sided. Second, the Arbitration Clause contracted out of mandatory provisions of the ESA. The judge sided with Uber. Heller appealed the decision.
The Ontario Court of Appeal allowed the appeal and found that the Arbitration Clause was unconscionable because of the difference in bargaining power between Heller and Uber and the previously undisclosed and significant costs associated with an arbitration under the Arbitration Clause.
The Supreme Court of Canada agreed with the Ontario Court of Appeal and held that the Arbitration Clause was unenforceable as it was unconscionable because it made it essentially impossible for Heller to arbitrate the dispute with Uber thereby depriving him of essentially any remedy under the Agreement.
In the decision, the Court confirmed that if parties agree to resolve disputes through arbitration in an agreement, courts should respect such arbitration agreements or clauses and preclude matters arising out of the agreement to proceed through the courts. However, there are exceptions, such as if the arbitration agreement or clause is invalid. One reason for the invalidity of an arbitration agreement or clause is unconscionability. If a court finds that an arbitration agreement or clause is unconscionable, the court can set aside the arbitration agreement or clause and the matter arising out of the agreement can proceed through the courts. For unconscionability to apply there must be an inequality of bargaining power between the parties and the contract or offending clause must be sufficiently one-sided at the time of contracting such that the bargain is unconscionable (in other words, unreasonably unfair).
Inequality of bargaining power will exist when one party cannot adequately protect their interests in the contracting process and may include differences in wealth, knowledge, experience or capabilities that impair a party’s ability to freely enter or negotiate a contract. Examples of this include where a party has no choice but to enter into an agreement or does not understand the contract they are signing. This does not require proving the stronger contracting party knowingly took advantage of the weaker contracting party. However, one party knowingly taking advantage of another’s vulnerability provides strong evidence of the inequality of bargaining power. Further, the Court found that the existence of a significant advantage or disadvantage under the contract in itself, as existed here, could establish an inequality in bargaining power between the parties.
A contract is one-sided if it significantly advantages or disadvantages a contracting party. To assess this, courts are to look at the surrounding circumstances during contract formation and consider things such as the market price, the commercial setting and the position of the parties. For example, if the price of goods or services significantly departs from the usual market price or the terms of the contract are manifestly unfair, the contract may be one-sided.
The Court also cautioned that a standard form contract, by itself, does not establish an inequality of bargaining power or unconscionability. Standard form contracts are in many instances both necessary and useful. However, standard form contracts can impair a party’s ability to protect their interests in the contracting process and make them more susceptible to challenge as one party drafts the contract and may include provisions that are difficult to read or understand or otherwise buried in excessively long agreements. Clauses such as choice of law, forum selection and arbitration clauses in standard form contracts can deprive a party of remedies and are prone to be unconscionable.
Rather than find any particular inequality in bargaining power between Heller and Uber, the majority of the Court appears to have found that the Agreement and the Arbitration Clause gave rise to an inequality in bargaining power in the circumstances. Two justices of the Court did not agree with the majority’s findings regarding unconscionability. For different reasons, the justices were concerned that the majority was overextending the doctrine of unconscionability to a point where it would apply far too frequently.
The Arbitration Clause
There was an inequality of bargaining power between Uber and Heller concerning the Arbitration Clause. The Arbitration Clause was part of a standard form contract. Heller could not negotiate any of the terms of the Agreement. He could only accept or reject the Agreement and Heller, a food delivery driver agreeing to an online form, lacked the sophistication to understand the Arbitration Clause and its potential implications, which Uber worsened by not providing information in the Agreement about the costs of mediation and arbitration in the Netherlands.
The Arbitration Clause was also one-sided. The mediation and arbitration under the Arbitration Clause required $14,500 (USD) in up-front administrative fees, an amount close to all of Heller’s annual income, without factoring in the additional costs of travel, accommodation, representation and lost wages to arbitrate under the Arbitration Clause. These costs were disproportionate to the size of an arbitration award that Heller could have reasonably foreseen when he entered into the Agreement. Further, the Arbitration Clause deprived Heller of all his rights under the Agreement because to enforce any of those rights he had to travel to the Netherlands, initiate an arbitration, pay the required fees and then receive an arbitral award. No reasonable person who had understood and appreciated the implications of the Arbitration Clause would have agreed to it.
Given the Court held the Arbitration Clause was invalid as it was unconscionable, the majority of the Court did not consider whether the Arbitration Clause was also invalid because it contracted out of the ESA. In a dissenting opinion, one justice of the Court held that the Arbitration Clause did not contract out of the ESA because the ability to file a complaint under the ESA in her view was not an employment standard.
This decision is going to have an impact on employers that rely on one-sided arbitration clauses and other clauses in employment agreements to deprive employees of certain remedies because such clauses may be subject to challenge or are unenforceable. This is particularly the case where an employer relies on online standard form agreements where employees agree by digital signature or checking a box. In the wake of this decision, employers should:
- keep standard form agreements as short possible while including all necessary terms, use plain language in these agreements and draw the worker’s attention to key terms in the agreement, particularly if contracting online;
- review existing standard form agreements and consider updating one-sided clauses to reflect more reasonable terms and covert these agreements to plain language; and
- if using one-sided clauses, make sure that these clauses are unambiguous, clearly set out the implications of such clauses and do not impose undue restrictions on employees from enforcing their rights under the contract.
Please contact your McInnes Cooper lawyer or any member of our Labour & Employment Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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