Ontario Court Rejects Crypto Arbitration Agreement as Unenforceable

In Lochan v. Binance Holdings Limited (Binance), the Ontario Superior Court of Justice (Court) dismissed a motion to stay a proposed class action in favour of arbitration. In making its decision, the Court found that the arbitration agreement between the parties was both unenforceable as being contrary to public policy and unconscionable. 

Background

From 2019 until early 2022, Binance Holdings Limited (Binance), the world’s largest cryptocurrency exchange, sold crypto derivative products to Canadian investors. The plaintiff purchasers (Plaintiffs) of Binance crypto products brought a proposed class action in June 2022 on behalf of all Canadians who purchased crypto derivatives contracts from Binance. The proposed class action is based on section 133 of the Ontario Securities Act, which provides purchasers with a right of action against a company selling securities without filing a prospectus.

Binance moved to stay the proposed class action based on arbitration agreements that each Plaintiff digitally signed when registering online for a Binance account. During that process, the Plaintiffs were said to have agreed to roughly 50 pages of terms, including a choice-of-law clause and an arbitration agreement. When the Plaintiffs initiated the proposed class action, the arbitration agreement directed Binance users to arbitration in Hong Kong, under Hong Kong law, that was administered by the Hong Kong International Arbitration Centre (HKIAC) under HKIAC rules. 

The Plaintiffs provided evidence from the Ontario Securities Commission that over half of Canadian crypto investors have less than C$5,000 in crypto assets. The evidence before the Court showed that for disputes under US$1-million arbitrated at the HKIAC, the median cost of arbitration in Hong Kong on an hourly rate basis was US$26,743, not including costs associated with travel and accommodations, and any legal or expert fees. 

The Plaintiffs opposed Binance’s motion to stay in favour of arbitration on the basis that the arbitration agreement was void for being contrary to public policy and unconscionable.

Public Policy

Binance argued the arbitration agreement’s choice of law provision, specifying the agreement was to be governed by Hong Kong law, meant the Court should assess whether the agreement was contrary to public policy under Hong Kong law.

The Court rejected this argument and referred to Supreme Court of Canada (SCC) case law and the recent B.C. Court of Appeal decision in Williams v. Amazon.com Inc.. It held that an assessment of whether an arbitration agreement is against public policy should be made following Canadian law, considering Canadian “public policy.” (For more insight on this case, see our August 2023 Blakes Bulletin: Appeal Courts Stay the Course on Arbitration Clauses in Consumer Contracts.)

The Court applied the decision of the SCC in Uber Technologies Inc. v. Heller (Uber) on when an arbitration agreement should be found contrary to public policy. For more insight on Uber, see our June 2020 Blakes Bulletin: Supreme Court of Canada Finds Arbitration Clause to be “Uber” Unconscionable). The Court held that the substantial cost to bring an arbitration claim before the HKIAC relative to the value of an average claim of an average crypto investor meant the requirement that claimants pursue arbitration in Hong Kong could “effectively amount to a grant of immunity to Binance.” The agreement did not disclose the cost implications of arbitration. The Court also considered that the parties had disparate bargaining power because the arbitration agreement was part of a standard-form “click” contract that the Plaintiffs could not negotiate. Binance advertised account registration as being “so quick as to take almost no time at all.”

The Court concluded that the arbitration agreement required potential claimants to adhere to an expensive and “all-but-inaccessible” arbitration procedure for resolving any and all disputes, without proper disclosure of the elements of that procedure, and was, therefore, contrary to public policy and unenforceable.

Unconscionability

In obiter, the Court held the arbitration agreement was also unenforceable on the basis that it was unconscionable. The Court again applied Uber to hold that the Court should not refer a bona fide challenge to the arbitrator’s jurisdiction to that arbitrator if there was a real prospect that doing so would result in the challenge never being resolved. The Court held the arbitration agreement was unconscionable as it was engineered to be a non-negotiable “click” contract where the details were “buried out of sight”. The cost and logistical complexity of arbitration were not disclosed. The inequality of information and inequality of power in the bargaining relationship between the parties was at a maximum. 

Key Takeaway

Binance is a reminder that while arbitration agreements are generally enforced in Canada, courts may decide that arbitration agreements in standard-form consumer contracts are unenforceable as against public policy or unconscionable where the agreement provides for an expensive and inaccessible arbitration procedure. The decision also confirms the importance of carefully drafting arbitration clauses in such agreements to mitigate and survive potential challenges.

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