In a recent decision in Lochan v. Binance Holdings Limited, the Ontario Court of Appeal (ONCA) affirmed the decision of the lower court setting aside an arbitration agreement as void both because it was contrary to public policy and unconscionable. The lower court decision was previously discussed in our February 2024 Blakes Bulletin: Ontario Court Rejects Crypto Arbitration Agreement as Unenforceable.
Factual Background
The appellant, Binance Holdings Limited (Binance), operates the world’s largest cryptocurrency trading platform. Between 2019 and early 2022, Binance sold cryptocurrency derivatives to Canadians through its website. The motions judge found that cryptocurrency derivative contracts are novel, complex and risky securities, which present investor protection concerns. The Court held that a seller is required to file a prospectus prior to selling cryptocurrency derivatives; however, the appellant did not register with the Ontario Securities Commission, nor seek an exemption from registration. Moreover, the Court held that the appellant did not file a prospectus with respect to any of its securities offerings.
The respondents commenced a proposed class action in June 2022 based on section 133 of the Ontario Securities Act, R.S.O. 1990, c. S.5 (OSA), which provides purchasers with a right of action for rescission or damages against a company selling securities for failure to file or deliver a prospectus. The statement of claim proposed a class defined as everyone in Canada who, from September 2019 to the date of certification, purchased cryptocurrency derivatives from the appellant.
It was common ground that since there was a commercial relationship between parties located in different countries, the governing statute was the ICAA (International Commercial Arbitration Act 2017, 7, SO 2017, c. 2, Sched. 5, Schedule 2) and the Model Law (UNCITRAL Model Law on International Commercial Arbitration, 1985, Sched. 2 to the ICAA). The respondent submitted that article 8(1) of the Model Law recognizes an exception to the general enforceability of arbitration agreements where the agreement is “void, inoperative or incapable of being performed.”
The appellant moved to stay the proceeding on the basis of the terms of use contract agreed to by users of the Binance website requiring that any disputes be resolved by arbitration.
The motions judge noted that a moving party seeking a stay faces an uphill battle since, generally speaking, judicial intervention in commercial disputes governed by a valid arbitration clause should be the exception, not the rule.
Findings of the Motions Judge
In concluding that the arbitration clause was contrary to public policy and unconscionable, the motions judge’s findings included a number of findings as follows:
- The appellant’s website prompted users to open accounts in “under 30 seconds,” which required them to agree to about 50 pages of terms, including the arbitration clause.
- The arbitration clause itself provided that the appellant could change any part of it and that by agreeing to the terms of use, users agreed to any subsequent amendment.
- The record showed that during the proposed class period, the appellant changed the forum of the arbitration four times.
- The last forum for arbitration was set by the appellant as Hong Kong, which was administered by the Hong Kong International Arbitration Centre, which imposed a median cost of arbitration of about US$30,000 (excluding costs of travel, accommodation, tribunal-appointed expert advice, legal fees, transcription services, etc.).
The motions judge found that the cost to access the arbitral tribunal was exorbitant and rendered the forum inaccessible to the average crypto investor and further found that any prospective class members signed an unnegotiable “click” contract where not only were the details buried out of sight, but the logistical complexity and expense of arbitration were not revealed anywhere. Specifically, the motions judge held that Binance engineered the arrangement to take advantage of the complexity that was hidden behind the superficially benign appearance of an arbitration clause.
Grounds of Appeal / Decision on Appeal
First, the appellants argued that the motions judge erred by considering whether the arbitration clause was void as being contrary to public policy without initially considering whether an arbitrator should consider that issue first under the competence-competence principle. This principle provides that challenges to an arbitral tribunal’s jurisdiction should first be decided by the arbitral tribunal, not the court.
The ONCA summarized Canadian law by noting that the competence-competence principle applies except where:
(a) The jurisdictional issue depends on a question of law alone or where questions of mixed fact and law require only a superficial consideration of the documentary record (see for example Dell Computer Corp. v. Union des consommateurs)
(b) Where impediments exist that functionally prevent the party from bringing a matter to arbitration such that, if the issue of validity of the arbitration clause is left to the arbitral tribunal, there is a real prospect that it will never be resolved by the arbitral panel (see for example Uber Technologies Inc. v. Heller)
The ONCA held that the motions judge properly considered whether an exception to the competence-competence principle applied to justify court intervention.
The second ground of appeal was that the motions judge erred in holding that the circumstances fell within an exception to the competence-competence principle. The ONCA held that there were no errors of law or palpable and overriding errors of fact in the motions judge’s finding that exceptions to the competence-competence principle were engaged that justified the Ontario courts deciding whether the arbitration clause was void for public policy reasons and/or unconscionable. Specifically, the ONCA held that the arbitration agreements were standard form, raising a legal issue and, to the extent that a review of the factual record was required, it did not require fact-finding specific to the representative plaintiffs, but rather could be considered on a review of the documentary record and the consideration of the types of disputes likely to arise under the arbitration clause at issue.
Key Takeaways
This decision follows a number of Supreme Court of Canada decisions where the courts are more closely scrutinizing arbitration agreements, which are contained in standard form consumer contracts, to determine if the terms are void based on public policy or are otherwise unconscionable.
While the modern view expressed in Canadian arbitration legislation is that parties should be held to their contractual agreements to arbitrate, recent decisions from the Supreme Court of Canada and other courts have more closely scrutinized standard form consumer contracts entered into by unsophisticated parties to determine whether those are void and inoperative based on being contrary to public policy and being unconscionable. Broadly speaking, each case turns on the specific background facts of the arbitration agreement; however, examples of arbitration agreements being set aside include instances where participation in the arbitral process is overly difficult and/or expensive.
Arbitration agreements in standard form agreements should be carefully drafted and reviewed by experienced counsel to ensure compliance with the law; otherwise, disputes may devolve into a successful class action certification as here.
For more information, please contact the authors of this bulletin or any other member of our Arbitration group.
