Ontario – Crypto Trading Platform Arbitration Agreement Found Unenforceable – #814

In Lochan v. Binance Holdings Limited, 2023 ONSC 6714, the Court refused to stay a proposed class action against the defendant cryptocurrency trading platform in favour of arbitration. The underlying claim concerns allegations that the defendant sold cryptocurrency derivatives without filing a prospectus, contrary to Ontario’s securities laws. The Court held that the arbitration agreement, embedded in the defendant’s website terms and conditions, was both unconscionable and contrary to public policy – based on the cost of the arbitration contemplated by the agreement and based on the clause’s complexity and lack of transparency. The Court’s overarching concern was that the arbitration provisions were not fair to platform users. The Court also provided a helpful difference between unconscionability and a violation of public policy. 

Background – The defendant faced a proposed class action under section 133 of the Securities Act (Ontario) for selling cryptocurrency derivative products without filing a prospectus. The plaintiffs commenced the action in June 2022 on behalf of a proposed class of Canadians who purchased cryptocurrency derivatives contracts from the defendant.

The defendant sought a stay of the action based on the arbitration agreement contained in its website terms and conditions, which was approximately 50 pages long. Here, the registration process “prompted investors to open Binance Futures accounts in ‘under 30 seconds’” (at para. 13). 

Under the arbitration agreement, the defendant was allowed to make unilateral changes and require users to accept subsequent amendments. Indeed, the defendant made the following changes to the arbitration agreement during the proposed class period:

  • August 2019 – April 2020: the agreement provided for arbitration in Singapore, under Singapore law, administered by the Singapore International Arbitration Centre (SIAC) under SIAC rules;
  • April 2020 – January 2021: the agreement provided for arbitration in an unspecified location, under unspecified law, under unspecified administration and rules;
  • January 2021 – March 2021: the agreement provided for arbitration in Switzerland, under law to be determined in accordance with the International Chamber of Commerce (ICC) rules, administered by the International Court of Arbitration of the ICC under ICC rules;
  • March 2021 – present: the agreement provided for arbitration in Hong Kong, under Hong Kong law, administered by the Hong Kong International Arbitration Centre (HKIAC) under HKIAC rules.

The decision – The defendant argued that the arbitration agreement should be enforced, relying on Seidel v. TELUS Communications Inc., 2011 SCC 15, for the proposition that, “the courts will generally give effect to the terms of a commercial contract freely entered into, even a contract of adhesion, including an arbitration clause.

The plaintiffs argued that the applicable legal framework was the Ontario International Commercial Arbitration Act, 2017 and the UNCITRAL Model Law on International Commercial Arbitration (the Model Law), as the parties were from different states. Article 8(1) of the Model Law recognizes an exception to enforceability when an arbitration agreement is “void, inoperative or incapable of being performed“. They argued that the agreement here was void, as it was unconscionable and contrary to public policy.

The Court dismissed the stay motion, finding that the arbitration agreement was void, as it was both unconscionable and contrary to public policy.

In its preliminary comments, the Court noted that although the defendant was the moving party, it was the plaintiffs who “face an uphill battle” given the Supreme Court of Canada’s explanation in Peace River Hydro Partners v. Petrowest Corp., 2022 SCC 41 that, “[t]he burden is on the plaintiffs as the parties opposing the stay to prove on a balance of probabilities that one of the exceptions applies”. The plaintiffs discharged their onus.

Public Policy Concerns – Under Article 8 of the Model Law, “[a] court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.” 

The Court explained that this is an exception to the competence-competence principle, which would generally allow an arbitrator to determine the issue of jurisdiction. However, the Court, rather than an arbitrator, should determine whether the arbitration agreement is contrary to public policy when the challenge involves a “pure question of law” or one of mixed fact and law where “the relevant factual questions require ‘only superficial consideration of the documentary evidence in the record’”: Uber Technologies Inc v. Heller, 2020 SCC 16 at para. 32.

Here, the issue was one of a pure question of law – the interpretation of a standard form contract, the interpretation of which will have considerable precedential value: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. [2016] 2 SCR 23. This was a standard form contract, with no individual facts raised by the plaintiffs. 

The Court rejected the defendant’s argument that, because the agreement was governed by Hong Kong law (under the current version of the arbitration agreement), the issue of jurisdiction needed to be decided under Hong Kong law. Rather, Ontario law governed the issue of jurisdiction. It is the lex fori – the local law of the forum – that provides “the analytical measuring stick against which the proposed foreign arbitration is measured” (at para. 25). In other words, the issue of whether an arbitration agreement is enforceable in Ontario (which would require the Ontario court to stay the action in favour of arbitration) is a matter of Ontario law and is not a matter of contractual interpretation – even if the contract designates a foreign law as applying to the interpretation of that agreement. 

The Court then applied the factors outlined in the concurring reasons of Justice Brown Uber Technologies Inc v. Heller, 2020 SCC 16 (factors that were also considered by the majority) to assess whether the agreement imposed undue hardship, concluding that it did. The starting point for this analysis was the significant cost of an arbitration under the agreement. 

The Court highlighted the cost-prohibitive nature of the arbitration procedure and that there was no exception for lower value claims. In particular, the Court found that the cost of arbitration in Hong Kong “will cost each claimant just over $36,000 plus legal fees and travel expenses” (at para. 28). The Court observed that a potential claimant could not be assured of a virtual hearing (and could therefore be required to travel to Hong Kong) as the mode of hearing was ultimately a matter that the tribunal could decide. The Court observed: 

“This may be a feasible means of resolving disputes for large investors, but it is not viable for a consumer-type class of investors. Given that the OSC Report discloses that the average crypto investor will have something like a $5,000 claim, the choice of Hong Kong as an arbitral forum – a forum with no other connection to either the potential claimants or to Binance itself as a Cayman Islands company – could effectively amount to a grant of immunity to Binance”.

It was also important that the agreement did not contain any information about these costs. 

The Court also addressed the inequality of bargaining power as part of the public policy analysis. Here, there was a standard form “click” contract with no room for negotiation. The defendant’s requirement of a quick sign-up process, coupled with the extensive terms were also relevant.

Finally, the Court looked at the subject matter of the claim – allegations of breaches of securities laws and failure to make certain disclosures. The Court found that these issues were “crucial to the protection of Ontario’s and Canada’s capital markets” (at para. 34).

Unconscionability – The Court helpfully explained the difference between public policy and unconscionability: “while ‘public policy’ emphasizes the broader societal harm in upholding a particular contract, unconscionability emphasizes the individual unfairness to a vulnerable party if the contract were to be upheld.” (at para 44). The Court held that the arbitration agreement was unconscionable, and was intended to exploit the hidden complexity behind a seemingly benign arbitration clause. The Court found that:

“Binance, as the party that designed and whose professionals drafted the contract, 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. Under English law as well as Canadian law, “[u]nconscionability is an equitable doctrine that is used to set aside ‘unfair agreements [that] resulted from an inequality of bargaining power'”: Uber, at para. 54.

The Court criticized the non-negotiable “click” contract, where critical details, logistical complexity and expense of arbitration were not disclosed. This informational deficit made the arbitration agreement unfair to investors.

The Court also found that the arbitration agreement would require the plaintiffs and other potential class members to arbitrate their claims under Hong Kong law, which would turn “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.” (at para. 43).

Contributor’s Note:

The case is a reminder that drafting arbitration agreements requires careful considerations of fairness, transparency and accessibility, especially when dealing with standard-form contracts, particularly in the consumer context. Arbitration agreements that are not fair to consumers will not be upheld.

The Court followed the Supreme Court of Canada’s decision in Uber, finding that the arbitration agreement was “fundamentally too costly or otherwise inaccessible” (at para. 39) and was therefore unenforceable. The analogies to Uber were clear and it may have been difficult for the defendant to distinguish it from the arbitration agreement in that case in order to assuage the Court’s concerns. The defendant was unable to establish that in this case the users were sophisticated investors such that a different analysis should apply.

The Court’s decision emphasizes the importance of ensuring that arbitration agreements do not create barriers for dispute resolution, aligning with the general public policy principle that agreements to arbitrate should be fair. While there are obvious practicalities to “click” form contracts (and they aren’t going anywhere!), care should be taken to draft an arbitration agreement that does not create undue barriers for consumers and that is upfront and clear. “Anti-arbitration” clauses are not fair. The high cost of a particular arbitration institution should also be considered in the drafting of these clauses, and consumers should not be rushed in their review of the “click” form agreements.