ONTARIO – Arbitration – International Commercial Arbitration Act, 2017, SO 2017, c. 2, Sched. 5, Schedule 2 (“ICAA”) and the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) – Stay of court proceedings refused where the arbitration agreement was held to be contrary to Ontario public policy and unconscionable and therefore, unenforceable.
ONTARIO – Arbitration – An arbitration agreement embedded in a website and agreed to by Ontario investors in crypto derivatives contracts by clicking onscreen with only 30 seconds to read the terms and which allowed for the forum and choice of law to be changed without notice, was held to be unenforceable as contrary to Ontario public policy and unconscionable. The defendants chose a very expensive arbitral procedure in Hong Kong under Hong Kong law, which had no connection with the parties and was not viable for consumer-type investors. The defendants failed to provide a prospectus and did not comply with Ontario Securities Commission orders. The defendants selected a forum and choice of law to make enforcement of the agreement more difficult for investors, which created an unconscionable inequality of bargaining power.
ONTARIO – Arbitration – Unenforceability of Arbitration Agreement – Whether an arbitration agreement is unenforceable on the basis of violation of Ontario public policy or unconscionability is a matter for the Ontario court to decide, not for the arbitral tribunal, as an exception to the competence-competence principle.
Lochan v. Binance Holdings Limited
2023 ONSC 6714 (CanLII), (December 13, 2023)
Ontario Superior Court (E.M. Morgan J.)
Binance is the world’s largest crypto trading platform. From 2019 until early 2022, Binance sold crypto derivatives products to Canadians over their website. These instruments have been described by the Ontario Capital Markets Tribunal as “novel and complex products that are inherently risky”. (para. 9)
The Plaintiffs commenced a proposed class action for rescission and damages in respect of investments in crypto contracts with Binance, which contained incorrect information, were made without a prospectus and which were contrary to orders of the Ontario Securities Commission. (paras. 10-12)
Binance sought a stay of the action based on an arbitration agreement embedded in its website terms. The Plaintiffs rely on section 9 of the ICAA and article 8 of the Model Law to state that the agreement to arbitrate is void or inoperable and contrary to public policy. Binance replies that under article 8 of the Model Law, an agreement to arbitrate is presumptively enforceable provided that certain technical requirements are met. (para. 18-19)
Binance’s motion record shows that the company prompted investors to open Binance Futures accounts in “under 30 seconds.” The prompt was the same regardless of whether an investor already had a Binance account or not, and whether an investor was logged in or not. Instructions that appear above the prompt state: “If you already have a Binance account, click [Log In], or click [Register] to create an account.” The investors are said to have thereby agreed to roughly 50 pages of Binance terms, including a choice of law clause and an arbitration agreement. (para. 13)
The Binance arbitration agreement gave Binance the right to make changes to any part of the agreement and by agreeing to the terms, users agreed to any subsequent amendments. (para. 13)
Between August 2019 to March 2021, Binance changed the arbitration four times by changing the place of arbitration, the applicable law and/or the arbitration organization administering the arbitration, including Singapore, Switzerland and Hong Kong (“HK”). The court also noted that for disputes under USD $1 million, the median cost of arbitration at the HK International Arbitration Centre (“HKIAC”) was equivalent to over CAD $36,000 just for registration, tribunal and administration, not including travel, accommodation, lawyers’ fees and potential costs. (paras. 14-16)
Justice E.M. Morgan analyzed the Plaintiff’s submission that the arbitration agreement was contrary to public policy.
Article 8 of the UNCITRAL Model Law provides that a court shall stay an action which is the subject of an arbitration agreement and shall refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. [Editor’s italics]. The exception is part of the exception to the competence-competence principle that the arbitrator decides their jurisdiction. However, in most cases, the court, not the arbitrator, should determined whether the arbitration agreement is contrary to public policy: Uber Technologies Inc v. Heller, 2020 SCC 16, (“Uber”) para. 32 (paras 20-21)
Morgan J. rejected the argument that the public policy issue should be determined under HK law and held that in a challenge that alleges that arbitration in a foreign forum under foreign law contravenes public policy, the “public policy” in issue is Canadian: Williams v. Amazon.com Inc., 2023 BCCA 314, at para 141. The point of the public policy challenge is that what may be valid in a foreign legal system is not valid and enforceable in Ontario and that cannot be done by the application of the foreign law. (paras. 23-26)
The Court held that undue hardship was a factor in the public policy analysis. While average fees for an HKIAC arbitration of over CAD $36,000 plus legal fees and travel expenses might be suitable costs for large investors, it is not viable for a consumer-type class of investors like the proposed Plaintiff class. (para. 28)
In the present case, there was evidence that some investors might have claims as small as $5,000. Moreover, the members of the class were in Ontario and Canada. Binance was a Cayman Islands company. None of the parties had any connection with HK. The Court also noted that there was no assurance that HKIAC would permit a virtual hearing and that the matter would only be determined after the arbitration process was initiated. (paras. 29-31)
Morgan J. also considered the relative bargaining power of the parties. This was an onscreen arbitration agreement to which wsas agreed by a click after a very short time limit which allowed no time to consider the terms. (paras. 32)
Morgan J. concluded that “requiring adherence to an expensive and all-but-inaccessible arbitration procedure for resolving any and all disputes, without proper disclosure of the procedure’s difficulties, offends the public policy of Ontario.” The Court further held that “if the sale of shares in contravention of public policy makes the sale contract void ab initio, then an agreement to arbitrate entered into contrary to public policy makes the arbitration agreement void ab initio as well. In that case, there would literally be nothing to enforce.” The Court held that the arbitration agreement was unenforceable on public policy grounds. (paras. 33-36)
While it was unnecessary to consider the unconscionability argument, Morgan J. nevertheless provided analysis about it. Morgan J. referred to TELUS Communications Inc. v. Wellman, 2019 SCC 19, para. 85, which held that “arguments over any potential unfairness resulting from the enforcement of arbitration clauses contained in standard form contracts are better dealt with directly through the doctrine of unconscionability” and also noted that a challenge to the validity of the arbitration agreement on the basis of unconscionability is for the Court, not the arbitrator, to resolve. (paras. 37-38)
Referring to Uber, supra., para. 49, Morgan J. pointed out that “[t]he approach advocated by Binance – giving the contractually stipulated foreign law primacy over Ontario’s regulatory regime – pits the policy objectives of arbitration statutes directly against the policy objectives of securities legislation in a way that makes no overall sense. In effect, it would turn our statutory encouragement of the use of arbitration as a consumer-friendly alternative to litigation into a vehicle for circumventing the consumer protection provisions of Ontario’s securities legislation.” (paras. 39-43)
The Court further noted, again referring to Uber, paras. 34, 39 that the unconscionability analysis, like a public policy analysis, applies to “click” contracts such as the one at issue here. Online click contracts are not necessarily unenforceable, and they have been upheld in other cases depending on the particular facts, but as the SCC held “unconscionability is potentially triggered ‘when an arbitration is fundamentally too costly or otherwise inaccessible”. (para. 45)
In a concluding observation, Morgan J. noted that the law of unconscionability rests on “inequality of bargaining power”. The Plaintiffs and other prospective class members signed an unnegotiable “click” contract where not only were the details, including the changeable location, of the arbitration clause buried out of sight, the logistical complexity and expense of arbitration were not revealed anywhere. (para. 50)
Binance designed and drafted the contract, and engineered the arrangement to take advantage of the complexity that was hidden behind the superficially benign appearance of an arbitration clause. The inequality of information and inequality of power in the bargaining relationship that resulted from this informational deficit was at a maximum. (para. 51).
For these reasons, the Court also held that the arbitration was unconscionable and therefore unenforceable. The motion to stay the action was dismissed.