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Decision offers guidance on arbitration clause enforceability

A recent Court of Appeal decision provides valuable guidance on when arbitration clauses will be enforced, Toronto commercial litigator and appellate counsel Brian Radnoff tells AdvocateDaily.com.

The unanimous three-judge panel hearing the matter invalidated the clause used by a major ride-sharing company, which forced its drivers to settle disputes via arbitration in the Netherlands.

The province’s top court found the clause not only violated Ontario’s Employment Standards Act (ESA) but was also unconscionable, reversing a motion judge’s ruling to stay a proposed $400-million class action brought by the drivers against the company.

“This case shows the limitations of these types of arbitration clauses in the context of class actions, particularly when they relate to employment,” says Radnoff, partner with Dickinson Wright LLP.

But at the same time, “It clearly provides some direction on how it might be possible to draft one that is enforceable,” says Radnoff, who notes that an arbitration clause that was worded differently could have been upheld by the court.

“The problem with this one is that the company’s purpose was quite obviously to have disputes settled on its terms, or you could even go further and say that it was to discourage anyone at all from bringing a dispute,” he adds.

The plaintiff in the case delivers food from restaurants to customers using one of the company’s apps and claims he and other drivers were wrongly classified as independent contractors under the ESA, rather than employees.

Writing for a unanimous three-judge panel, Justice Ian Nordheimer found the ESA prohibits the ride-sharing company from enforcing the arbitration clause, which would cause the drivers to waive their rights under the Act.

In addition, the appeal court ruled the arbitration clause, which required the plaintiffs to pay up to US$14,500 in filing and administrative fees, as well as travel and legal fees associated with mediation and arbitration, was “unconscionable” because it would in effect stop the drivers from advancing their case in a neutral venue.

"It can be safely concluded that [the ride-sharing company] chose this arbitration clause in order to favour itself and thus take advantage of its drivers, who are clearly vulnerable to [its] market strength," Nordheimer wrote. "It is a reasonable inference that [it] did so knowingly and intentionally.”

Despite the result in this case, Radnoff, who was not involved in the matter and comments generally, says arbitration clauses remain a viable option for businesses, so long as they don’t impose roadblocks on one party from exercising their rights. 

“This decision doesn’t mean this type of clause is dead, just the one in this case,” he says. “A fundamental component of arbitration legislation is that all legal proceedings covered by a valid clause must be stayed, and courts in Canada have very strongly enforced those provisions.”

As an example, the appeal court panel quoted from a Supreme Court of Canada judgment that upheld an arbitration clause in a cellphone service contract used by a leading telecommunications firm.

Had the ride-sharing agreement mirrored that case by providing that arbitration should occur in the jurisdiction where the drivers were located, Radnoff says it would have stood a better chance of being enforced by weakening the plaintiffs’ case for unconscionability.

Still, he says it will always be challenging to use an arbitration clause to contract out of consumer-protection style legislation or employment–related legislation such as the ESA.

“There are certain areas where any attempt to contract out of statutory rights will be difficult,” Radnoff explains.

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