Unconscionability in the Gig Economy:  Ontario Court of Appeal Tackles Uber’s Mandatory Arbitration Clause

June 2019

Article by: Raema Quam

Previously printed in the LexisNexis Labour Notes Newsletter.

The Ontario Court of Appeal recently issued a decision in Heller v. Uber Technologies Inc., 2019 ONCA 1 and found that the mandatory arbitration clause in Uber’s form of services agreement was unconscionable.

The appellant, Dave Heller, an Ontario-based UberEATS driver, launched a proposed class action lawsuit in which he is seeking a declaration that drivers working for Uber — either to deliver food or provide personal transportation services — are actually employees of Uber and governed by the Ontario Employment Standards Act, 2000 (“ESA”).  He is also seeking declarations that Uber has violated the provisions of the ESA, and the arbitration clause in the services agreement between drivers and Uber is void and unenforceable.

Uber provides a platform to connect users:  those in search of food or a ride to those willing to deliver or drive.  All users download the Uber app and use it to connect to one another.  The app also processes the payments made between users.  Drivers must accept a services agreement in order to start working.  They accept it by clicking “Yes, I agree” after reading a statement confirming that they have reviewed all of the relevant documents.  Presumably, they actually read the documents but because this is a contract of adhesion, or a standard form contract prepared by one party without the other party having the ability to alter its terms, a driver’s only choice if he or she wants to work is to click on the “Yes”.

The services agreement to which Mr. Heller agreed contained a mandatory arbitration clause stating that any dispute arising out of the agreement was governed by the laws of the Netherlands and had to be submitted to mandatory mediation proceedings under the International Chamber of Commerce (“ICC”) Mediation Rules.  If the dispute was not settled in 60 days, it would be referred to final and exclusive arbitration under the ICC Arbitration Rules.

Under the ICC rules, the drivers would have to pay filing fees ($2,000 for mediation and $5,000 for arbitration) along with administrative fees:  for arbitration it could cost upwards of $14,000 to initiate the arbitration process.  Those fees do not include the cost of legal counsel, travel expenses or the cost of the mediator and arbitrator.

In response to the proposed class action, Uber filed a motion to stay the action in favour of arbitration.  The motion judge granted Uber’s motion finding that “courts must enforce arbitration agreements freely entered, even contracts of adhesion” and “[a]ny restriction on the parties’ freedom to arbitrate must be found in the legislation”.

The judge concluded that the language of the ESA does not restrict parties from arbitrating and rejected Mr. Heller’s argument that the arbitration clause was unconscionable.

Mr. Heller appealed the decision of the motion judge and argued that the arbitration clause was invalid because it:  (a) amounted to contracting out of the ESA; and (b) is unconscionable.

The Court of Appeal accepted both of those arguments.

Turning to the issue of contracting out, the Court of Appeal considered how the arbitration clause and the substance of the appellant’s underlying claim — i.e. a determination of whether he and other Uber drivers are employees rather than independent contractors — squared with the relevant provisions in the Arbitration Act, 1991 and the ESA.  Generally, the Arbitration Act provides that if a party to an arbitration agreement commences a proceeding which should be submitted to arbitration under the agreement, the court must stay the proceeding.  This, however, is subject to certain exceptions including a finding that the arbitration agreement is invalid.

The ESA prohibits any contract which waives or contracts out of an employment standard that exists for the benefit of an employee.  This includes an employee’s statutory right to make a complaint to the Ministry of Labour that his or her employer has contravened the ESA.  This right restricts an employee from making concurrent complaints to the Ministry and in a civil proceeding but empowers employment standards officers to launch investigations and make determinations and orders on employer contraventions.

The Court of Appeal proceeded on the presumption that the appellant could prove his claim and therefore would be covered by the ESA.  The Court of Appeal found that the investigation and determination process is in fact an employment standard and, as such, cannot be contractually waived.  Uber’s arbitration clause would deny employees their right to this standard.

The Court of Appeal rejected Uber’s submission that civil proceedings include arbitration and noted that nothing in the Ontario Courts of Justice Act or Rules of Civil Procedure or the ESA supports the proposition that arbitration is included in the definition of a civil proceeding.

Independent of the conclusion that the clause was invalid because it was prohibited by the ESA, the Court of Appeal also found that the arbitration clause was invalid on the basis of unconscionability.

The Court identified two approaches for determining whether a contractual provision is unconscionable but, in this case, it was not necessary to make a determination as to which approach was the proper one because both approaches led to the same conclusion:  Uber’s arbitration clause was unconscionable.

Unconscionability in contracts is an equitable determination and is meant to assist in situations where there is substantial inequality between the parties and where the more sophisticated party has taken advantage of the inequality for its own benefit.  A court will look to determine if:  (a) the transaction itself was grossly unfair or improvident; (b) whether the victim had independent legal advice or other suitable advice; (c) if there was an overwhelming imbalance in bargaining power because of ignorance of business, illiteracy or some other capacity issue; and (d) the other party knowingly took advantage of these vulnerabilities.

Here, the Court of Appeal found that:

  1. The arbitration clause was substantially improvident because it required an individual with a small claim (in Mr. Heller’s case, he was seeking minimum wage but only earning about $400 per week) to incur substantial costs and expenses out of proportion to the amount involved. The individual also had to incur those costs and expenses up front.  It was “self-evident” that Uber would be in a much better position to incur the costs and expenses associated with the arbitration procedure which it chose and imposed on the drivers.
  2. There was no evidence that the appellant had any legal advice prior to entering into the services agreement and it was unrealistic to expect that he would have. Further, he had no reasonable prospect of negotiating any of the terms because it was a contract of adhesion.
  3. There was significant inequality between the appellant and Uber.
  4. It was clear based on the preceding factors that the arbitration clause favoured Uber and took advantage of the drivers. It was fair to infer that Uber crafted the clause knowingly and Uber admitted as much.

Regardless of the ultimate determination on the appellant’s underlying claim — whether he is an employee or a contractor — the drivers were in a unequal bargaining position relative to the sophistication and strength of Uber and the arbitration clause was accordingly invalid.

Takeaways

  • Courts will interpret any ambiguity in a contract against the party responsible for drafting it — especially in the case of a standard form contract.
  • If one party has drafted a contract, it is advisable to encourage the other party to seek independent counsel before signing the contract and agreeing to its terms.

While every effort has been made to ensure accuracy in this article, you are urged to seek specific advice on matters of concern and not to rely solely on what is contained herein.  The article is for general information purposes only and does not constitute legal advice.