Are Your Contracts Fair? New Rules for Unconscionability in Uber v Heller
Written By: Matthew Cressatti, Associate
On June 26, 2020 the Supreme Court shook up the doctrine of unconscionability in the long-awaited decision of Uber v Heller. At issue in this case was whether a mandatory arbitration clause was unconscionable. The Court set out a context-driven analysis for determining whether a contract is unconscionable and further held that standard form contracts can often be unconscionable. The Court also rejected a different test for unconscionability created in Alberta in 2005. Uber will have a major impact on businesses, especially those that regularly utilize standard form contracts.
The dispute arose from an Uber driver’s attempt to initiate a class action suit against the ride-hailing service in the Ontario Superior Court. At first instance Uber argued that the driver could not bring a suit in Ontario because the standard form employment contract signed by Uber drivers required that all disputes be submitted to mandatory arbitration in the Netherlands. Although not mentioned in the contract, the specified method of arbitration required the driver to pay an upfront non-recoverable fee of $14,500USD. This sum essentially represented the driver’s entire annual income from Uber. The driver gave evidence that his usual dispute with Uber would involve non-payment of a less than $100 fee.
The majority decision, written by Justices Abella and Rowe, held that the appropriate test for determining whether an agreement is improvident involves two parts. First, the parties must have unequal bargaining power. Second, the resulting agreement must be improvident, meaning that the agreement unduly advantages the stronger party or unduly advantages the weaker party.
Unequal bargaining power exists in situations where one party cannot adequately protect its own interest. Where unequal bargaining power exists, the law’s normal assumptions about free bargaining no longer apply. Relative bargaining power should be understood through both aspects personal to a party, such as mental capacity, and through circumstances, such as whether a party has recently become unemployed. The majority stressed that this part of the test should be applied by judges in a contextual manner. Judges should look at the relationship between the parties and at the substance of the contract to determine whether the agreement is fair in the circumstances.
A contract is improvident if, as mentioned, the agreement unduly advantages the stronger party or unduly advantages the weaker party. Improvidence is measured at the time of the contract’s formation. The question is whether the potential for undue advantage or disadvantage that was created by unequal bargaining power has been realized. This can include situations where a weaker party did not appreciate the terms of a contract, leading to undue disadvantage. This weaker party need not be so weak as to lose capacity. Again, the circumstances and context will drive this branch of the analysis. Terms can be improvident when they flout a reasonable expectation or cause an unfair surprise.
Rejection of the Alberta Test
The majority also specifically rejected the test for unconscionability developed in the Alberta courts. The Alberta test, which Uber argued should be adopted by the Supreme Court and applied nation-wide, required the agreement to be “grossly improvident” and a “overwhelming imbalance of bargaining power” between the parties. The Alberta test also required the stronger party to knowingly take advantage of the weaker. Finally, the weaker party having received independent legal advice was a full defence to a later claim of unconscionability.
The majority rejected the Alberta test’s requirements that the agreement be “grossly” improvident and that there be an “overwhelming imbalance” of bargaining power, finding that these requirements were too strict. Instead, the majority appears to say that any contract arising between parties with an unequal bargaining power is at risk of being unenforceable if the agreement is also improvident. The majority also rejected the requirement that the stronger party “knowingly” take advantage of the weaker party. The majority held that knowledge is irrelevant as wrongdoing is not necessary and because the relevant points are the circumstances of the agreement, not the parties’ knowledge. The majority further held that independent legal advice can only act as a defence if the advice is competent.
Additionally, the majority held that standard form contracts create the potential for unequal bargaining power, and possibly, are inherently unequal. This stems from the fact that standard form contracts can be difficult to read or understand and may contain clauses that violate the reasonable expectation of the parties.
The majority concluded that Uber had an unequal bargaining power vis a vis the driver and that the $14,500USD arbitration fee was improvident as the fee essentially blocked the driver from initiating arbitration. The majority therefore held that the mandatory arbitration clause was unenforceable.
Impact on Business
Uber will have a wide-ranging impact on commerce in Canada and will lead to increased uses of the unconscionability doctrine by parties seeking to avoid contractual obligations. First, Uber lowers the threshold for unconscionability claims, removing the requirements of gross improvidence, overwhelming imbalance of power, and knowingly taking advantage. Most, if not all, contracts are entered into by parties with unequal bargaining power. Stronger parties can no longer plead ignorance of the weaker party’s weakness as a defence. Second, the context-driven approach will create more uncertainty in the law as context and circumstance can vary by the eye of the beholder. Third, stronger parties cannot take comfort in weaker parties taking legal advice as legal advice must now be “competent” to act as a bar to future claims. How a stronger party is to assess the competence of a weaker party’s legal advice remains to be determined. Fourth, and crucially for many organizations, standard form contracts are once again at risk. Many businesses rely on standard form contracts as employment agreements, releases, and commercial contracts. Businesses should ensure that their standard form contracts do not contain provisions that could be seen as contravening otherwise usual expectations.
There will likely be a period of uncertainty over the next few years as courts attempt to provide some meaning to the context and circumstance-driven analysis prescribed by the majority.
Disclaimer: This article is to be used for educational and non-commercial purposes only. Parlee McLaws LLP does not intend for this article to be a source of legal advice. Please seek the advice of a lawyer before choosing to act on any of the information contained in this article.