Ontario – consumer contract arbitration clauses resist unconscionability/undue influence challenges – #266

Master Karen E. Jolley in Evans v. Mattamy Homes Limited, 2019 ONSC 3883 and Master Robert A. Muir in Wang v. Mattamy Corporation, 2019 ONSC 6675 each dismissed Plaintiffs’ attempts to resist application of an arbitration agreement based on arguments that the agreements were invalid due to unconscionability and undue influence.  Both concluded that Plaintiffs failed to demonstrate any of the elements required to invalidate the agreements.  Any alleged pressure was market driven, due more to Plaintiffs vying to purchase a property from a finite number being sold by Defendant and subject to ongoing sales efforts to other prospective purchasers.

Both cases involved the same Defendant as vendor in a series of individual pre-construction agreements of purchase and sale (“APS”) for new homes. For each APS, the purchase/sale transaction was scheduled to close on a particular date but did not close due to Plaintiffs’ refusals to proceed.  Plaintiffs in each case decided to institute litigation. Evans v. Mattamy Homes Limited involved 32 plaintiffs (“Evans Plaintiffs”) while Wang v. Mattamy Corporation involved two (2) (“Wang Plaintiffs”).  

In both cases, Defendant applied for an order under section 7 of the Arbitration Act, 1991, SO 1991, c 17 to stay the actions. This note first introduces Master Jolley’s earlier reasons and closes with limited comments made later in by Master Muir in his subsequent decision.

(i) decision by Master Jolley – Master Jolley was the first of the two Masters to consider the same arbitration agreement in light of the same arguments based on unconscionability and undue influence.  As Master Muir later said in his own reasons, he relied heavily on Master Jolley’s prior work:

It is important to note that Master Jolley’s decision in Evans involves the same defendants as this action and the same development and sales process. The language in the subject APS in this action setting out the agreement to arbitrate was also the same as the arbitration agreement before Master Jolley. Many of the arguments made by the plaintiffs on this motion were the same arguments considered by Master Jolley. Ultimately, Master Jolley made an order staying the court action in Evans.

Master Jolley noted that Evans Plaintiffs raised two (2) arguments: the SPAs and the arbitration agreement are unconscionable; and, the SPAs and the arbitration agreement were obtained as a result of undue influence.

She preceded her analysis by distinguishing between Plaintiffs’ challenges to the APS and to the arbitration agreement.  She cautioned that her task was to determine the narrower issue of whether to refer the parties to arbitration and not to deal with the validity of the SPA.  The latter issue would be dealt with at any subsequent hearing on the merits and not at the application to stay.

To determine whether an arbitration agreement was unconscionable Master Jolley adopted the level of proof stipulated in Harry v. Kreutziger, 1978 CanLII 393 (BC CA) and applied in Huras v. Primerica Financial Services Ltd., 2000 CanLII 16892 (ON CA).  That standard required that the court determine “whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded”.

She looked next at the most recent application of unconscionability to arbitration agreements, examining the facts and reasons in Heller v. Uber Technologies Inc., 2019 ONCA 1 (leave to appeal granted Uber Technologies Inc., et al. v. David Heller, 2019 CanLII 45261 (SCC), under advisement following the November 6, 2019 hearing).

After reproducing the arbitration agreement in Heller v. Uber Technologies Inc. at para. 14 of her reasons, Master Jolley then identified the key facts in that case.

[15] The evidence before the Uber court was that the up-front administrative/filing-related costs for a driver to participate in the ICC mediation-arbitration process mandated by the arbitration clause was USD $14,500. This did not include the costs of travel to Amsterdam, accommodation and retaining counsel to participate in the arbitration.  The court contrasted these costs with Heller’s claim for minimum wage, overtime and vacation pay brought by a person earning $400-$600 per week.

She noted that earlier case law had set some limits to what type of bargain would be unconscionable, citing Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573 para. 36: “[a]n agreement must be more than foolhardy, burdensome, undesirable or improvident to be held to be unconscionable”.

Master Jolley then identified each element of a four (4) part test applicable to proving unconscionability and which counsel agreed must be met:

1. A grossly unfair and improvident transaction;

2.  A victim’s lack of independent legal advice or other suitable advice;

3. An overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other similar disability; and

4. The other party’s knowingly taking advantage of this vulnerability.

(i) Element 1 – “Does the Arbitration Agreement represent a grossly unfair and improvident transaction?” paras 18-29

Evans Plaintiffs argued that the arbitration agreement had not been brought to their attention and was embedded in a standard form contract which was not open for negotiation. Master Jolley responded by mentioning three (3) sources which counterbalanced Evans Plaintiffs’ starting argument.

First, she pointed to TELUS Communications Inc. v. Wellman, 2019 SCC 19 which, at para. 84, affirmed that the “starting presumption” is the opposite of asserting that standard form arbitration agreements, characterized by an absence of meaningful negotiation, are per se unenforceable. Second, the Consumer Protection Act, 2002, SO 2002, c 30, Sch A (“CPA”) at section 2(f) expressly excludes real estate transactions from the CPA prohibition against enforcing arbitration agreements in certain types of consumer contracts.  Third, Ontario New Home Warranties Plan Act, RSO 1990, c O.31 at section 17(4) deems that such contracts between vendors and prospective owners contain a written agreement to submit present or future disputes to arbitration subject to appeals to the Divisional Court and application of the Arbitration Act.

Master Jolley turned to consider Huras v. Primerica Financial Services Ltd. and Heller v. Uber Technologies Inc.  She compared each case to the facts before her and determined that the facts were not the same.

[24] The facts in Uber and Huras are markedly different from the facts before me.  Unlike Huras and Uber, the plaintiffs’ claims are substantial.  The purchase price set out in the 25 agreements of purchase and sale range from $1,152,990 to $2,230,990, prior to upgrades, with the average price being roughly $1,500,000.  The damages claimed in the statement of claim are $50,000,000, in addition to punitive and aggravated damages claims of $10,000,000 each.  I do not find that requiring these plaintiffs to have their dispute determined by arbitration in Ontario under the provisions of the Act represents a substantially improvident or unfair bargain.

Master Jolley also disagreed that the arbitration agreement was improvident.  Evans Plaintiffs argued that removing the right to have all their cases heard together would deny them substantial costs savings.  She considered that, unlike Huras v. Primerica Financial Services Ltd. and Heller v. Uber Technologies Inc., each Evans Plaintiff would be required to testify separately as to the circumstances before, during and after signing their respective SPA and could lead an arbitrator to come to different conclusions in each case regarding undue influence.

Influenced by the size of each Evans Plaintiff’s claim in contrast to those smaller ones in Huras v. Primerica Financial Services Ltd. and Heller v. Uber Technologies Inc., Master Jolley concluded that “I do not find that requiring the plaintiffs to try their cases separately makes the Arbitration Agreement a substantially improvident or substantially unfair bargain”.  Some of the Evans Plaintiffs adduced evidence that “it would likely cost twice as much to arbitrate as to pursue a civil claim because being part of a group allows the plaintiffs to share the costs of various steps in the litigation process, which would not be possible in private arbitrations”.  Due to objections raised regarding solicitor-client privilege, cross-examination on these affirmations did not proceed and Master Jolley did not put “much” weight on the evidence.

Master Jolley concluded that the facts did not support a conclusion that the arbitration agreement represented a grossly unfair or improvident transaction.

(ii) Element 2 – “Did the plaintiffs obtain independent legal advice or other suitable advice?” paras 30-41

The evidence adduced before Master Jolley confirmed that none of the Evans Plaintiffs had a lawyer accompany them at the sales site to review the arbitration agreement before they signed the SPA and none obtained legal advice before signing.  She did not find that these facts in and of themselves were conclusive of the issue.

The evidence also disclosed that (i) some of the Evans Plaintiffs had signed earlier iterations of the SPA in earlier years with similar wording and had had legal advice before and (ii) for those that did not obtain legal advice, they could have obtained it before signing.

(iii) Element 3 – “Was there an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other similar disability?” paras 42-46

Unlike in Heller v. Uber Technologies Inc., Defendant did not acknowledge any significant inequality of bargaining.  Rather Defendant argued that any pressure arose by the nature of the market with more purchasers vying for the opportunity to be first among others to reserve a lot.

Unlike Uber, there is no evidence of ignorance of business, illiteracy or disability on the part of the plaintiffs as it pertains to the Arbitration Agreement.  To the extent the plaintiffs allege ignorance of the language of the bargain, at least Evans and Shahid had actual legal advice on the Arbitration Agreement historically.  As for an overwhelming imbalance in bargaining power, the most that can be said is that the plaintiffs wanted to purchase properties being sold by Mattamy, of which there were a finite number and which were subject to ongoing sales efforts to other prospective purchasers.

(iv) Element 4 – “Did Mattamy knowingly take advantage of the plaintiffs’ vulnerability?” paras 47-48

Master Jolley found no evidence that Evans Plaintiffs were vulnerable and no evidence that Defendant took advantage of any vulnerability.

Undue influence – Master Jolley then addressed Evans Plaintiffs’ arguments that Defendant exerted undue influence.  See paras 49-55.

Master Jolley stated that Evans Plaintiffs had a “high hurdle” to establish that they had “no realistic alternative” but to sign the SPA with the arbitration agreement.  The Evans Plaintiffs asserted that they were coerced by the time frame in which they had to decide and, if they hesitated, would lose their choice of lot.

The plaintiffs argue that the pressure in relation to the Arbitration Agreement stems from the fact that they were obliged to pick a lot and give their deposit cheques before they were even able to see the agreement of purchase and sale with the Arbitration Agreement.  They were also told that they would miss their chance to get into the market if they did not buy during that release, as the prices had escalated from the first release to the second and were expected to increase again for the third release.

First, Master Jolley held that “most, if not all” of the Evans Plaintiffs had affirmed the terms of the SPA with its arbitration agreement by subsequently signing amending and upgrading agreements well after their visits to the sales site.  Second, she also disagreed that the circumstances involved the Evans Plaintiffs being “forced to sign” in “a pressure-packed environment”.  Rather, Master Jolley concluded that the pressure was more market driven and not particular to unfair measures applied by Defendant as vendor.

Mattamy denies these allegations but takes the position that, even if they were true, this “pressure” was market driven and caused by the plaintiffs’ desire to purchase a home, not by pressure brought to bear by Mattamy, as it had significant demand for its homes at that time.

Based on her analysis, Master Jolley concluded that the Evans Plaintiffs had not met their burden to demonstrate that the arbitration agreement was invalid due either to unconscionability or undue influence.  As not of the exceptions in section 7(2) of the Arbitration Act applied, she had no discretion to exercise and granted the stay.

(ii) decision by Master Muir – Master Muir in his later reasons had the benefit of the reasons provided by Master Jolley and, after having identified them and referred the reader to them, undertook an analysis more summary in relation to that of Master Jolley.

Master Muir began his analysis by first reproducing the text of section 7 and then referring to the ‘thorough review’ of the law applicable to stay applications set out by Master Karen E. Jolley in “recent decision” in Evans v. Mattamy Homes Limited.

Master Muir reproduced the text of the arbitration clause at para. 17 of his reasons and characterized that wording as “very broad” and “very clear”.

In regard to allegations of undue influence and unconscionability, Master Muir noted the criteria identified by Master Jolley at paras 50 and 16 respectively and then referenced the facts particular to the case before him. 

Regarding undue influence, Wang Plaintiffs had to establish that Defendant had coerced them and abused their power and that Wang Plaintiffs had no realistic alternative but to submit to the arbitration agreement.

[24] The evidence on this motion does not reach that level. The pre-construction purchase process may give rise to a sense of urgency on the part of potential purchasers. With the competitive market and high demand that prevailed at the time, purchasers needed to act with some alacrity if they wanted to secure their preferred lot before someone else agreed to purchase the property. However, the plaintiffs had many weeks before the sales event to research their purchase. They could have asked for a copy of the form of agreement they would be expected to sign. The plaintiffs were present at the sales event for more than six hours before they signed the APS. They had an opportunity to review the APS with the defendants’ representatives. They could have sought legal advice. They were advised in writing on several occasions that the APS would be final and legally binding.

He held that unconscionability requires a high threshold of proof.  Referring to Master Jolley’s reasons at para. 16, he reiterated that: (i) the challenged transaction must be grossly unfair and improvident; (ii) Wang Plaintiffs must have been denied an opportunity for independent advice; (iii) an overwhelming imbalance in bargaining power and Defendant knowingly taken advantage of that vulnerability.

Master Muir further noted that Wang Plaintiffs executed amending agreements on three (3) additional occasions in which they affirmed the terms of the APS.  In addition, they appeared to be educated and sophisticated purchasers with prior experience in acquiring real estate as investment property to generate rental income.

I do not view the fact that this was the plaintiffs’ first purchase of a pre-construction property as significant. Any purchase of real property is a significant transaction. All agreements of purchase and sale contain detailed terms and conditions that require careful consideration.

Master Muir expressly distinguished the case before him from Heller v. Uber Technologies Inc.  He noted that arbitration in the latter case required a US $14,500.00 initial filing fee with arbitration conducted in the Netherlands for claims approximating a few hundred dollars per claim based on limited earnings.  In contrast, the arbitration for the Wang Plaintiffs would take place in Toronto with Ontario law with less additional costs for more significant claims by individuals who “appear to be able to afford any additional cost associated with arbitration”.  The cost of arbitration was therefore modest in comparison with the claims.

urbitral note – Each of the reasons will be revisited in light of the upcoming release of reasons by the Supreme Court in Heller v. Uber Technologies Inc.  The latter reasons will serve to identify which, if not all, of the distinctions made by the Masters between the facts before them and those in Heller v. Uber Technologies Inc. will be determinative in future disputes involving consumers and merchants imposing arbitration agreement in their standard form contracts.

The cases illustrate the recurring court appearances required for defendant merchants who impose arbitration clauses in their standard form contracts with consumers.  Though Master Muir readily noted that Defendant had already prevailed on the same arbitration agreement, he was correct in undertaking his own fulsome analysis and would have been entitled to decide otherwise had the facts prompted him to do so.

See also the recent reasons and results on the related issue of forum selection clause in B.C. in Schuppener v. Pioneer Steel Manufacturers Limited, 2020 BCCA 19, reversing Schuppener v. Pioneer Steel Manufacturers Limited, 2019 BCSC 425.