B.C. – Stay motion test and the “brick wall framework” – #874

In Wiederhold v Aspen Technology, Inc., 2024 BCSC 1731, the Court declined to grant a stay application under s. 7 of the Arbitration Act, SBC 2020, c. 2 [Act], on the basis that the arbitration clause was unenforceable for lack of consideration, contrary to public policy, and unconscionable. It applied the “brick wall framework” described in Spark Event Rentals Ltd. v Google LLC, 2024 BCCA 148 at paragraphs 19 ss.

Background to dispute – The Plaintiff, Mr. Wiederhold, had been employed as an account manager with the defendant, Aspen Canada Corporation (“Aspen Canada”), since 2008. He commenced a claim against Aspen Canada and its parent company, Aspen Technology Inc. (“ATI”), for unpaid bonuses and commissions under the incentive plan offered to certain employees.

ATI was headquartered in Bedford, Massachusetts. Mr. Wiederhold lived in Vancouver.

Between July 2008 and July 2020, the defendants presented Mr. Wiederhold with incentive plan terms in July of each year, for the following fiscal year. The incentive plan terms set out Mr. Wiederhold’s commission targets and the formula for bonuses. The incentive plan terms also included an arbitration clause requiring that:

“… any legal action brought in support of any claim pursuant to this Plan shall be resolved exclusively by arbitration in the City of Boston, Massachusetts, USA in accordance with the commercial arbitration rules of the American Arbitration Association in a three-arbitrator panel, with all arbitrator fees and expenses shared equally between the Company and the Plan Participant”.

The incentive plan also provided for the application of the laws of Delaware, without regard to its conflicts of law provisions.

Mr. Wiederhold signed the incentive plan terms each year.

In September 2020, the defendants withdrew the form of incentive plan that Mr. Wiederhold had signed in July 2020 (the “July 2020 Plan”) and issued a different set of terms in its place, which would have the effect of reducing the size of the bonuses and commissions that Mr. Wiederhold was eligible for in that fiscal year (the “September 2020 Plan”). Mr. Wiederhold refused to sign it, but the defendants continued to calculate his bonuses and commissions under the new incentive plan terms.

Mr. Wiederhold commenced the action in March 2023, seeking $103,060 to reflect the difference between the bonuses and commissions he received under the revised September 2020 Plan, and what he would have received under the original July 2020 Plan. The defendants applied for a stay under s. 7 of the Act. Mr. Wiederhold opposed the stay application on the basis that the arbitration clause was void, inoperative or incapable of being performed.

The stay application –The Court analyzed the defendants’ stay application, citing  the principles  in Tahmasebpour v Freedom Mobile Inc., 2024 BCSC 726, which provides a good summary of the current state of the law:

  1. A defendant need only satisfy the court that there is an “arguable case” that an arbitrator has jurisdiction.
  2. If the jurisdiction turns on a pure question of law, that question may be determined by the Court. However, where it turns on a question of fact or mixed fact and law, the court should only decide that issue if it can do so with a superficial regard to the record before it.
  3. The question of whether the arbitration clause is void, inoperative or incapable of being performed is also to be referred to the arbitrator for determination unless that question can be clearly answered on a superficial regard to the record.
  4. Alternatively, the court may substantively address the questions of jurisdiction, validity, operability, or ability to perform the arbitration agreement if it is shown on a limited assessment of the evidence that there is a real prospect that referring those questions to arbitration would result in the issues never being resolved.

The Court then applied these principles to the issues that Mr. Wiederhold raised with respect to the arbitration clause: (a) that Mr. Wiederhold had received no fresh consideration in exchange for it in any of the incentive plans; (b) that it was contrary to public policy as it deprived Mr. Wiederhold of the protection of mandatory provisions in the Employment Standards Act, RSBC 1996, c. 113 [ESA], and in particular the mandatory protections therein for Mr. Wiederhold’s wages; and (c) that it was unconscionable, particularly in view of the disproportionate filing fees relative to the size of Mr. Wiederhold’s claim.

In analyzing these claims, the Court noted that it could determine such jurisdictional questions under one of two frameworks: the Court could either find that (1) one of the exceptions to the competence-competence principle applies (as identified in Dell Computer Corp. v Union des consommateurs, 2007 SCC 34 at paragraphs 84-86), i.e., if the jurisdictional challenge is based solely on a question of law, or based on a question of mixed fact and law requiring only superficial consideration of the record; or (2) that there is a real prospect that, if the issue is referred to arbitration, the issue will not be resolved as a “brick wall” stands between the claimant and the arbitrator (or the “brick wall framework” as described in Spark Event Rentals Ltd. v Google LLC, 2024 BCCA 148 at paragraphs 19 ss [Spark]). Once one is beyond the “brick wall” the Court can embark on a thorough analysis of the record to determine the jurisdictional question. Mr. Wiederhold relied on both frameworks.

With respect to the question of consideration, the Court found that the arbitration clause was unenforceable for want of fresh consideration. The employment agreement did not contain an arbitration clause. The arbitration clause was only included in the incentive plans, each of which was sent to Mr. Wiederhold after he began his employment. The terms of the arbitration clause were imposed after Mr. Wiederhold had already begun working for Aspen Canada. As restrictive terms added to an employment contract after the employee has already begun working must be supported by fresh consideration to be enforceable, and the Court could resolve this question on a superficial review of the record, the Court found that the arbitration clause was unenforceable for want of fresh consideration.

With respect to the question of public policy, the court also concluded, on a superficial review of the record, that public policy rendered the clause unenforceable. Mr. Wiederhold argued that the requirement to resolve his dispute under the law of Delaware effectively stripped him of the protections in the ESA for his wages (including commissions). The Court agreed that the effect of the clause would be to have his claim heard in a foreign country under a foreign law, applied by a foreign arbitral tribunal.

The defendants adduced expert evidence opining that an arbitrator applying Delaware law would indeed apply the mandatory provisions of the ESA; however, the Court found that this expert analysis relied on Delaware’s conflicts of law provisions, and such provisions were expressly excluded by the forum selection clause in the incentive plans. As a result, the combined effect of the arbitration clause and the forum selection clause would circumvent the ESA, and Mr. Wiederhold could not rely on the mandatory provisions of that Act. This rendered both clauses unenforceable as contrary to public policy.

Finally, the court considered Mr. Wiederhold’s unconscionability argument. The Court referred to the principle from Uber Technologies Inc. v. Heller, 2020 SCC 16 [Uber]: “A bargain will be set aside as unconscionable where there was an inequality of bargaining power resulting in an improvident bargain.

Mr. Wiederhold argued that his circumstances were similar to those in Uber, and highlighted that he was an employee rather than an independent contractor, any arbitration would have to be conducted by a panel of three arbitrators, and Mr. Wiederhold would be required to pay half of the arbitration fees, regardless of outcome. Mr. Wiederhold claimed the total cost of the arbitration would be $35,000-$76,000.

The defendants highlighted the differences between this case and Uber: Mr. Wiederhold was a sophisticated litigant, earned a six-figure income, and was pursuing a much larger claim than the one in Uber. The defendants claimed the total arbitration cost would be $12,569.75 to $18,221.

The Court’s analysis focused on the proportionality of the filing fees for an arbitration of Mr. Wiederhold’s claim. The Commercial Arbitration Rules of the American Arbitration Association provide that the initial filing fee for the claim, for three arbitrators, would be approximately $11,000.

Further, the Court did not accept either party’s estimate of the total arbitration cost, but found that the total would likely be around the low end of the range presented by Mr. Wiederhold. Regardless of the precise cost, the Court found that the total cost of the arbitration would be disproportionate to the size of Mr. Wiederhold’s claim.

The Court was satisfied that Mr. Wiederhold had satisfied the “brick wall” framework: he had shown that there was a real prospect that requiring him to make his jurisdictional challenge in the manner contemplated by the arbitration clause would effectively prevent that challenge from being resolved at all. The Court also granted a stay on this basis.

Contributor’s Notes:

The unconscionability analysis in this case raises two questions.

First, how disproportionate must arbitration costs be for a court to find a real prospect that referring the claim to arbitration would result in the issues never being resolved? How will a Court identify a brick wall?

On one hand, in Uber, the disproportionality of the arbitration costs seems more clear: there, the claimant had an income of approximately $30,000 annually, and any party would believe that he had to commence arbitral proceedings in the Netherlands and pay a USD $14,500 filing fee. The Supreme Court in Uber found that the arbitration agreement made it “impossible” for any one party to arbitrate (see our discussion of Uber in Case Note #148 – Ontario – determination of exceptions to mandatory stay are for court to make and not arbitrator and Case Note #344 – Courts should not refer jurisdiction challenge to arbitrator if real prospect that challenge might never be resolved).

On the other hand, in Kang v Advanced Fresh Concepts Franchise Corp., 2021 BCPC 262, the Court declined to find that an arbitration clause was unconscionable in the context of a franchise dispute. In that case, the value of the franchise transactions at issue were “significant” and the arbitration filing fees amounted to an initial filing fee of $750 and a final fee of $800 (see our discussion of this case in Case Note #560 – Franchisor addresses Uber arbitration agreement flaws to obtain stay of proceedings).

Similarly, in Spark, the defendant had not argued that it could not afford the filing fees in the arbitration process, only that it would not be economic for it to pursue its claim through the arbitration process. As a result, the Court referred the jurisdictional question to the arbitrator (see our Case Note on the BC Supreme Court case in Case Note #761 – Google wins stay of conspiracy claims; plaintiff refuses to arbitrate. Our Case Note on the Court of Appeal case is coming soon). 

The present case falls somewhere in the middle. The costs of arbitration in this case do not appear to rise to the level of making it “impossible” to arbitrate the claims, but the Court did not grant a stay despite the defendant’s arguments that Mr. Wiederhold was a sophisticated litigant with a six-figure income.

Second, what is the effect of finding of a “brick wall”? Importantly, the brick wall analysis does not conclude a jurisdictional challenge. The Court still needs to undertake the jurisdictional challenge analysis, as stated in Spark at paragraph 24:

Once the threshold test has been met, the court is then entitled to embark on a thorough analysis of the evidence to determine the issue of jurisdiction on the merits as if it were the arbitrator. Once one is beyond the brick wall—precisely because the assumption that if the court does not decide the challenge, the arbitrator will decide has been displaced—the court has free reign to delve as deeply as is necessary into the evidence to resolve legal and factual questions. …

Getting over the “brick wall” only allows the Court, instead of the arbitrator, to decide the jurisdictional challenge. In the context of stay proceedings, the Court must still find whether the arbitration agreement is void, inoperative, or incapable of being performed.

In the present case, the Court’s analysis appears to end upon the determination of the “brick wall”. The Court does not expressly find that the disproportionate costs resulted in an improvident transaction or was otherwise unconscionable. Given that the Court had found the arbitration clause unenforceable on two other grounds, the Court may have found it unnecessary to continue this analysis, but had this been the only ground raised by Mr. Wiederhold, the finding that arbitration costs would be disproportionate to the size of the claim, alone, ought not to satisfy the requirements for a stay of arbitration.