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Contracts - Unconscionability

. Difederico v. Amazon.com, Inc.

In Difederico v. Amazon.com, Inc. (Fed CA, 2023) the Federal Court of Appeal considers (and dismisses) an appeal involving the application of an international arbitration forum selection clause, here in a context of Competition Act [s.45 and 46] allegations of price-fixing. The central issue is whether the transaction were consumer or commercial.

In these quotes the Federal Court of Appeal sets out it's forum selection analysis on the issue of contractual 'unconscionability':
(2) Did the Judge err in finding that there is an enforceable arbitration agreement between the parties?

[53] The issue of the enforceability of the arbitration agreement at issue raises firstly the question of whether it is void on the grounds of unconscionability.

[54] In this regard, Ms. Difederico contends that the Judge misapplied Article II(3) of the New York Convention and failed to apply the exception set out in Uber. Specifically, she alleges that the arbitration agreement is void by virtue of being unconscionable and that, as such, even if the dispute otherwise met the requirements of Article II(3) of the New York Convention, the Judge erred when she referred the matter to an arbitrator.

[55] More particularly, Ms. Difederico submits that the Judge should have found that the arbitration agreement is unconscionable because (i) Ms. Difederico did not have the bargaining power to protect her interests nor was she aware of the full import of the clauses and, (ii) the clauses unduly advantage Amazon and unduly disadvantage Ms. Difederico when assessed contextually, by making it practically impossible for her to obtain damages for violations of the Competition Act (Appellants’ Memorandum of Fact and Law at paras. 56-57). Ms. Difederico further alleges, again on the basis of Uber, that the choice of law provisions set forth in the dispute resolution clauses contribute to the unconscionability of the arbitration agreement because they do not “affirmatively provide” Ms. Difederico with the right to obtain damages from an American arbitrator in the event that her claims are made out (Appellants’ Memorandum of Fact and Law at paras. 63-66).

[56] Ms. Difederico’s arguments regarding unconscionability must fail. A fair reading of the Judge’s reasoning demonstrates a careful consideration of the evidence before her and a proper application of the jurisprudence on what amounts to being “unconscionable” (Judge’s decision at paras. 117-26). Indeed, the Judge determined that the inequality of bargaining power alleged by Ms. Difederico was not analogous to that found in Uber because Ms. Difederico was not dependent on Amazon for “important elements of everyday life” akin to employment that would make her particularly dependent or vulnerable (Judge’s decision at paras. 124-26). Ms. Difederico fails to point to evidence in the record that would establish any such vulnerability or dependence on her part relative to Amazon.

[57] In reality, Ms. Difederico appears to suggest that entering the arbitration agreement results in a denial of access to justice (Appellants’ Memorandum of Fact and Law at paras. 58-63). Yet, as noted by the Judge, this would only be the case if there were a clear reason to conclude that referral to arbitration would make it truly impossible for the claim to proceed. In the words of the Judge at paragraph 112 of her reasons: “[a] mere possibility, in my view, is not enough to overcome the competence-competence principle.”

[58] The Judge likewise properly considered the cost of arbitration in the circumstances and rejected Ms. Difederico’s contention that it would render the arbitration “illusory”, as was the case in Uber. Instead, The Judge found that here, the upfront cost to initiate arbitration was not disproportionate and that the arbitration procedure set out in the agreement was not prohibitive:
Ms. Difederico is only required to pay a relatively modest up-front administrative fee of $200 to initiate arbitration. Amazon is bound under the Arbitration Clauses to refund these fees for claims less than $10,000, unless the arbitrator determines the claim to be frivolous. The arbitration may be conducted by telephone, written submission, or in a mutually agreed upon location. A claimant has the option of proceeding in small claims court where the claims fall within the jurisdiction of that court.

(Judge’s decision at para. 118)
[59] In addressing Ms. Difederico’s various contentions, the Judge also took care to draw the following distinction between the present case and Uber at paragraph 126:
Here, Ms. Difederico’s argument arises not from the Arbitration Clauses, but from the type of claim she now seeks to raise. This means that rather than the bargain being improvident at the time it was made, as was the case in Uber (at para 74), the Plaintiff’s argument is that the Arbitration Clauses are now unconscionable in light of her particular claims. In my view, this argument is not supported by the law of unconscionability.
[60] Finally, the Judge, in rejecting the Ms. Difederico’s choice of law argument, considered the conflicting expert evidence adduced by the parties as to whether a referral to arbitration and the choice of U.S. law would preclude Ms. Difederico from asserting her claims under the Competition Act in the United States. On the basis of the record before her and given the fact that Amazon made an undertaking that it would not argue that the choice of law operates to exclude the Competition Act before an arbitrator, the Judge properly concluded that Ms. Difederico’s contention remained hypothetical (Judge’s decision at paras. 104, 116). The impact of foreign law is an issue of mixed fact and law that is seldom easy to resolve on the face of the record and, following the competence-competence principle, is indeed best left to the arbitrator to determine.

[61] As illustrated by the foregoing, the Judge fully considered each of Ms. Difederico’s unconscionability arguments. Ms. Difederico has failed to point to any palpable and overriding error on the part of the Judge in finding, on the basis of the evidence, that the arbitration agreement at issue is not, on its face, an improvident bargain for her or otherwise likely to deny her access to justice. In light of both the principle of competence-competence and the framework established by the Supreme Court of Canada in Dell and Uber, the Judge was correct to refuse to analyse this issue any further.
. Uber Technologies Inc. v. Heller

In Uber Technologies Inc. v. Heller (SCC, 2020) the Supreme Court of Canada considers whether an arbitration agreement was unconscionable [para 53-91]. It is essential current reading for anyone concerned with unconscionability, and it's root doctrines 'inequality of bargaining power' and 'improvident bargains'.
Note:
Within the case, this unconscionability exploration is done for purposes of - successively: (1) deciding whether the Canadian courts could (2) decide whether they or a foreign arbitrator could (3) decide who had jurisdiction to (4) decide whether the arbitration agreement was valid. And of course, incidentally, it also decides whether the arbitration agreement was itself valid (I think I've got that right, this is a messy,messy area of law that I hope the Supreme Court will want to revisit later.)
The court finds the arbitration agreements to be unconscionable, and the factors it looks to are relevant as examples:
[92] This brings us to the appeal before us and whether Mr. Heller’s arbitration clause with Uber is unconscionable.

[93] There was clearly inequality of bargaining power between Uber and Mr. Heller. The arbitration agreement was part of a standard form contract. Mr. Heller was powerless to negotiate any of its terms. His only contractual option was to accept or reject it. There was a significant gulf in sophistication between Mr. Heller, a food deliveryman in Toronto, and Uber, a large multinational corporation. The arbitration agreement, moreover, contains no information about the costs of mediation and arbitration in the Netherlands. A person in Mr. Heller’s position could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC Rules or under Dutch law. Even assuming that Mr. Heller was the rare fellow who would have read through the contract in its entirety before signing it, he would have had no reason to suspect that behind an innocuous reference to mandatory mediation “under the International Chamber of Commerce Mediation Rules” that could be followed by “arbitration under the Rules of Arbitration of the International Chamber of Commerce”, there lay a US$14,500 hurdle to relief. Exacerbating this situation is that these Rules were not attached to the contract, and so Mr. Heller would have had to search them out himself.

[94] The improvidence of the arbitration clause is also clear. The mediation and arbitration processes require US$14,500 in up-front administrative fees. This amount is close to Mr. Heller’s annual income and does not include the potential costs of travel, accommodation, legal representation or lost wages. The costs are disproportionate to the size of an arbitration award that could reasonably have been foreseen when the contract was entered into. The arbitration agreement also designates the law of the Netherlands as the governing law and Amsterdam as the “place” of the arbitration. This gives Mr. Heller and other Uber drivers in Ontario the clear impression that they have little choice but to travel at their own expense to the Netherlands to individually pursue claims against Uber through mandatory mediation and arbitration in Uber’s home jurisdiction. Any representations to the arbitrator, including about the location of the hearing, can only be made after the fees have been paid.

[95] The arbitration clause, in effect, modifies every other substantive right in the contract such that all rights that Mr. Heller enjoys are subject to the apparent precondition that he travel to Amsterdam,[7] initiate an arbitration by paying the required fees and receive an arbitral award that establishes a violation of this right. It is only once these preconditions are met that Mr. Heller can get a court order to enforce his substantive rights under the contract. Effectively, the arbitration clause makes the substantive rights given by the contract unenforceable by a driver against Uber. No reasonable person who had understood and appreciated the implications of the arbitration clause would have agreed to it.

[96] We add that the unconscionability of the arbitration clause can be considered separately from that of the contract as a whole. As explained in Bremer Vulkan Schiffbau und Maschinenfabrik v. South India Shipping Corporation Ltd., [1981] A.C. 909 (H.L.), an arbitration agreement “constitutes a self-contained contract collateral or ancillary to the [main] agreement” (p. 980; see also p. 998, per Lord Scarman). Further support comes from the severability clause of the Uber Rasier and Uber Portier agreements, and s. 17(2) of the AA.[8]

[97] Respect for arbitration is based on it being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all. As our colleague Justice Brown notes, under the arbitration clause, “Mr. Heller, and only Mr. Heller, would experience undue hardship in attempting to advance a claim against Uber, regardless of the claim’s legal merit” (para. 136). The arbitration clause is the only way Mr. Heller can vindicate his rights under the contract, but arbitration is out of reach for him and other drivers in his position. His contractual rights are, as a result, illusory.

[98] Based on both the disadvantages faced by Mr. Heller in his ability to protect his bargaining interests and on the unfair terms that resulted, the arbitration clause is unconscionable and therefore invalid.
. Swampillai v. Royal & Sun Alliance Insurance Company of Canada

In Swampillai v. Royal & Sun Alliance Insurance Company of Canada (Ont CA, 2019) the Court of Appeal set out these basic elements of unconscionability:
[6] At para. 38 of Titus, this court endorsed four elements necessary for unconscionability:

1. a grossly unfair and improvident transaction;

2. the victim's lack of independent legal advice or other suitable advice;

3. an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. the other party knowingly taking advantage of this vulnerability.
. Redstone Enterprises Ltd. v. Simple Technology Inc.

In Redstone Enterprises Ltd. v. Simple Technology Inc. (Ont CA, 2017) the Court of Appeal sets out the considerations involved in determining whether a contractual deposit may be forfeited and when statutory (CJA) relief from forfeiture may be granted, here focussing particularly on the issue of unconscionability:
[15] Section 98 of the Courts of Justice Act provides simply that: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” The application judge referred to Varajao in specifying the two steps of the test as:

1. whether the forfeited deposit was out of all proportion to the damages suffered, and

2. whether it would be unconscionable for the seller to retain the deposit.

This is sometimes referred to as the test in Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.). .....

.....

(2) Is the Forfeiture Unconscionable?

[18] The analysis of unconscionability requires the court to step back and consider the full commercial context.

[19] Deposits are commonplace in the operation of the market, especially for larger assets such as residential and commercial real estate. Their purpose was explored at learned length by Newbury J.A. speaking for a five-person panel in Tang v. Zhang, 2013 BCCA 52 (CanLII), 359 D.L.R. (4th) 104. At issue in the case was the forfeiture of a deposit of $100,000 on a residential real estate purchase of slightly more than $2 million. The trial judge relieved against forfeiture on the basis that the vendor had been able to re-sell the property for more than the original purchase price so that he had not suffered any loss. The court of appeal reversed the trial decision.

[20] While Newbury J.A. rejected the argument that simply labelling a payment as a deposit immunized it against the court’s equitable jurisdiction to relieve from forfeiture, she declined relief. She distilled several relevant principles from English and Canadian case law, at para. 30. Two are especially pertinent to this appeal:
A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price;

The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller's retention of it would be penal or unconscionable, the court may relieve against forfeiture….
[21] The decision of this court in Peachtree II Associates-Dallas L.P. v. 857486 Ontario Ltd. (2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.), leave to appeal refused, [2005] S.C.C.A. No. 420, is instructive, even though it involved stipulated penalty clauses, not deposits. The case explored the distinction between penalties and forfeitures.

[22] Justice Sharpe noted, at paras. 31-32:
[C]ourts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.

[C]ourts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses.
Accordingly, he pointed out that: “the strict rule of the common law refusing to enforce penalty clauses should not be extended” (at para. 33). The reason, he explained, is “the policy of upholding freedom of contract” (at para. 34).

[23] Justice Sharpe continued, noting that: “Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach” (at para. 34). He cited in support Dickson J., who decried the prohibition of penalties as “blatant interference with freedom of contract”, and advocated treating both penalties and forfeitures under the rubric of unconscionability: Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916 at p. 937, 83 D.L.R. (3d) 1, 1978 CarswellOnt 1235, at para. 47 (WL Can).

[24] The point is well made in Union Eagle Ltd. v. Golden Achievement Ltd., [1997] UKPC 5, [1997] A.C. 514, by Lord Hoffmann for the Judicial Committee of the Privy Council said, at p. 519 (A.C.)
[I]n many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be "unconscionable" is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic.
[25] I would agree that the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.

[26] Can unconscionability be established purely on the basis of a disproportionality between the damages suffered and the amount forfeited? While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.

[27] As to quantum, Newbury J.A. quoted, at para. 24 of Tang, the statement of the Privy Council in Workers Trust & Merchant Bank Ltd v. Dojap Investments Ltd., [1993] A.C. 573 (P.C.), at p. 578:
In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract. [Emphasis in Tang.]
[28]Justice Newbury cited one case in which a deposit at 20% was found to be reasonable, but added, at para. 27, the amount of the deposit must not be excessive. I agree, but I would be reluctant to specify a numerical percentage, since much turns on the context. I note, however, that in this case the deposit was slightly more than 7%. There is no evidence that this was a commercially unreasonable deposit.

[29] Where, as here, there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability. This is an analysis the application judge did not undertake. By failing to do so, the he erred in law.

[30] The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.
. Heller v. Uber Technologies Inc.

In Heller v. Uber Technologies Inc. (Ont CA, 2019) the Court of Appeal sets out the test for unconscionability in contract in Ontario:
[60] I pause at this juncture to address the proper test to be applied in determining whether a contractual provision is unconscionable. In Ontario, the existing case law establishes that there are four elements to the test. Those elements are set out in Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573 (CanLII), 284 D.L.R. (4th) 734, at para. 38, recently affirmed in Phoenix Interactive Design Inc. v. Alterinvest II Fund L.P., 2018 ONCA 98 (CanLII), 420 D.L.R. (4th) 335. They are:

1. a grossly unfair and improvident transaction;

2. a victim's lack of independent legal advice or other suitable advice;

3. an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. the other party's knowingly taking advantage of this vulnerability.
. Brown v. Hanley

In Brown v. Hanley (Ont CA, 2019) the Court of Appeal discusses the elements of unconscionability:
(i) Unconscionability

[27] The appellant submits that the statement of claim failed to plead the requisite elements of unconscionability, which in his view are: (i) a pronounced inequality of bargaining power, (ii) a substantially improvident bargain, and (iii) abuse of the inequality of power. He submits that the claim merely alleges an inequality of bargaining power and this does not in itself render a contract unconscionable. In his view, the motion judge erred in finding that additional facts, though not pleaded, somehow arose from vulnerabilities supposedly inherent to union membership itself. In particular, the appellant points to the motion judge’s reasons at para. 71:
I disagree with the Defendants’ submission that the Plaintiffs have only pleaded an adhesion contract and no facts upon which an abuse of power could be established. Those facts arise from the circumstance that the union members are notoriously in a situation of dependency, vulnerability, lack of independent representation, peer pressure, and reliance on the collective constituted by the union. And, as Justice Iacobucci noted in Berry v. Pulley (SCC), it must be borne in mind that a statutory labour relations scheme is superimposed over the contract between the member and the union and can create legal obligations. The contract, its terms, and the notion of the bargaining associated with membership must be viewed in this overall statutory and historic context.
[28] The appellant submits that this is a “remarkably pejorative” analysis that reflects derogatory assumptions about unions that were not expressly pleaded.

[29] Local 113 adopts the submissions of the appellant. In addition, it submits that the court should recognize that union constitutions are not ordinary commercial contracts, but are instead developed democratically over time by the members whom they bind. These constitutions should not be subject to the common law doctrine of unconscionability, because application of the doctrine would undermine their democratic, evolutionary nature.

[30] I do not agree. There is no reason to eliminate the doctrine of unconscionability in the context of this case. This court has previously held that the doctrine of unconscionability applies in disputes between a union and its members. In Birch, at para. 39, Armstrong J.A. said:
I can discern nothing in the unique contractual relationship between a union member and his or her union which would suggest to the court that we should refuse to apply the doctrine of unconscionability in appropriate circumstances. To suggest otherwise would be to deny the exercise of the equitable jurisdiction of the court to provide a remedy to individual members who have suffered an injustice at the hands of their union.
[31] In Ontario, the test for unconscionability contains four elements, as set out in Heller v. Uber Technologies Inc., 2019 ONCA 1, 52 C.C.E.L. (4th) 10, at para. 60:
1. a grossly unfair and improvident transaction;

2. a victim's lack of independent legal advice or other suitable advice;

3. an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. the other party's knowingly taking advantage of this vulnerability.
[32] As confirmed by the Supreme Court in Berry v. Pulley, union contracts, as contracts of adhesion, entail an inherent inequality of bargaining power. The respondents allege that the International took advantage of this dynamic by incorporating into the Constitution what they describe as three fundamentally inequitable provisions: the 10-member veto on disaffiliation; the forfeiture of assets upon disaffiliation; and the suppression of disaffiliation-related activities through the threat of internal discipline. There is no indication that the respondents received legal advice or that they would have been able to negotiate the terms of the union contract had they received it: see Uber, at para. 68. The claim of unconscionability was therefore arguable and should not have been struck at the pleadings stage. The motion judge correctly disposed of this issue.



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Last modified: 28-07-23
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