The Application of Uber v. Heller

Why This Decision Matters

The Supreme Court’s decision in Uber brought into question the enforceability of arbitration agreements found in standard form contracts.

The majority decision in Uber created a new category of cases where courts, rather than arbitral tribunals hearing the arbitration, could determine jurisdictional questions. Once the new “issue of accessibility” ground was engaged, the court determined the arbitration clause was unconscionable due to the inability to negotiate the terms, the inequality of bargaining power, and the “gulf of sophistication” between the parties.

The Uber decision has been criticized as a moving away from Canadian courts’ previous enforcement of the primary of arbitration and protecting private parties’ rights to agree to arbitration as a valid, and alternative method of dispute resolution.

Until recently, it remained to be seen how lower courts would apply the reasoning of the majority of Supreme Court. The Gupta decision perhaps demonstrates the court’s unwillingness to retreat from years of jurisprudence which focuses on the freedom of contract between private parties.

Background Facts

In July 1994, Charles Kettles purchased, from a local distributor, materials and a design in order to build a family cottage in Bruce Mines, Ontario. The materials and design were sourced from a supplier Lindal Cedar Homes Ltd. (Lindal) and purchased through a local dealer. In 2014, the family cottage was transferred to Charles Kettles’ children, Margaret Gupta and Michael Kettles, along with their spouses (collectively, the plaintiffs). Four years later, the plaintiffs discovered extensive wood rot throughout the cottage leading the plaintiffs to commence an action against Lindal and the company they believed to be the successor to the local distributor. The action itself was based in negligence, a failure of the duty to warn, and breaches of a lifetime structural warranty.

Lindal filed a motion to stay the proceedings arguing that, as a result of the company’s standard form Purchase and Sale Agreement (PSA) all disputes between the parties must be resolved through arbitration.

Lindal’s evidence was that every customer must sign the standard form PSA before a design and materials would be shipped for distribution. Although neither of the parties could locate the PSA that was allegedly made between Lindal and Charles Kettles, Lindal held firm that every transaction, without exception, required an executed PSA. The plaintiffs argued that Charles Kettles, before his death, reported to his children that he never signed a PSA.

Without an executed PSA, Lindal was left to produce the standard form of contract in use around the time Charles Kettles purchased Lindal’s product. To complicate matters slightly, in 1994, Lindal was in the process of restructuring its PSA and therefore had two possible agreements that Charles Kettles may have signed.

The Decision

Faced with two possible arbitration clauses, the court reviewed the language of both and determined that the minor differences between the two did not impact the court’s reasoning in this case.

In order to determine whether the action should be stayed in favor of arbitration, the court applied the analytical framework developed in Haas v. Gunasekaram, 2016 ONCA 744:

1. Is there an arbitration agreement?
2. What is the subject matter of the dispute?
3. What is the scope of the arbitration agreement?
4. Does the dispute arguably fall within the scope of the arbitration agreement?
5. Are there grounds on which the court should refuse to stay the action?

After examining the first four considerations in the framework, the court found that it was arguable that Charles Kettles had entered into an arbitration agreement, the scope of which covered the dispute at hand.

Moving to the fifth consideration, the plaintiffs argued that the arbitration clause was unconscionable, relying on the recent decision in Uber. As articulated in Uber, unconscionability requires “inequality of bargaining power and a resulting improvident bargain” in order to justify relief. Uber, para 65.

According to the Ontario Superior Court of Justice, “[t]his case is a far cry from Uber.” Gupta, para 43. The court articulated that the general rule of freedom of contract remains paramount. The plaintiffs failed to persuade the court that the “ordinary assumptions of the bargaining process [did] not apply.” Gupta, para 44. Consistent with the Uber decision, the court found that “standard form contracts do not by themselves establish an inequality of bargaining power.” Gupta, para 46 with reference to Uber, para 88. The court examined the evidence to find that Charles Kettles had developed a comfortable and personal relationship with representatives from Lindal and discussed questions and concerns before ordering their product.

The plaintiffs argued that re-starting the process in arbitration might make it unaffordable. However, the plaintiffs failed to provide evidence in support of such claims and the court was quick to note that the claim was in early stages having only filed the commencement documents.

Lastly, in dealing with the forum selection clause in the PSA, the plaintiffs argued that the bargain was improvident and that they met the “strong cause” test to avoid application of the forum selection. Both PSAs arbitration clause was located within the provisions on resolution of disputes. The resolution of disputes clauses included a procedure clause which stipulated that the arbitration would be held in Seattle, Washington, or Vancouver, British Columbia. The plaintiffs argued that the forum selection favored Lindal and made the arbitration expensive as a result of travel expenses.

Ultimately, the court found that the forum selection clause obviously favored Lindal and was designed to establish fixed locations for arbitrations to keep the company from having to arbitrate all over North America. However, that did not make the bargain improvident. The court noted that the “arbitrator controls the procedure of the arbitration” and would be the appropriate party to address location of the arbitration and issues related to costs (possibly through video-conferencing solutions). Gupta, para 50.

Therefore, the court did not conclude that the bargain was improvident and stayed the proceeding.

Conclusion

The court stayed the action, showing great deference for the arbitration process and the jurisdiction of the arbitrator. This decision perhaps provides a pause on the concerns voiced surrounding the recent decision in Uber.

Although the PSA was a standard form contract, the evidence did not support a finding of inequality of bargaining power. Just the opposite.

The court clearly signaled that arbitration clauses within standard form agreements are not, by their very nature, unconscionable so long as a fair and proportionate arbitration process can occur between the parties.

Jocelyn Turnbull Wallace is an associate at McCarthy Tétrault LLP in their Calgary, Alberta, Canada, office. Andrew Kalamut is a partner at the firm’s Toronto, Ontario, Canada, office.

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