In Lochan v Binance Holdings Limited, 2024 ONCA 784 (“Binance”), the Court considered the appeal of the Motion Judge’s finding that an arbitration clause in a crypto trading agreement was void because it was contrary to public policy and unconscionable. The arbitration clause was part of a standard form contract between the appellant and crypto users. It provided that the appellant could change any part of the arbitration agreement, including the forum and governing law, and that users agreed to any amendments. On appeal, the appellant argued that the Motion Judge had failed to first consider the competence-competence principle in his analysis. The Court dismissed the appeal, finding that the Motion Judge had followed the approach of the Supreme Court of Canada in Dell Computer Corp. v Union des consommateurs, 2007 SCC 34 (“Dell”) and Uber Technologies Inc. v Heller, 2020 SCC 16 (“Uber”) when he considered the competence-competence principle before he considered if an exception to that principle applied to allow the court to consider if the clause was unenforceable.
The Claim: The respondents were representative plaintiffs who purchased cryptocurrency derivatives from the appellant, a large cryptocurrency trading platform. The respondents commenced a proposed class action against the appellant for failure to file or deliver a prospectus as required pursuant to section 133 of the OntarioSecurities Act, RSO 1990, c s.5.
The Stay Motion: The appellant brought a motion to stay the respondents’ action on the basis that the standard form contract on the appellant’s website signed by the respondents required disputes to be resolved by arbitration.
The Motion Judge dismissed the stay motion and found that the arbitration clause was void as contrary to public policy and was also unconscionable. The facts that the Motion Judge relied on were as follows:
- The appellant’s website prompted users to open accounts in under 30 seconds, during which users were asked to agree to about 50 pages of terms, which included an arbitration clause;
- The arbitration clause provided that the appellant could amend any part of the arbitration agreement and that users agreed to any such amendments;
- During the proposed class period, the appellant changed the forum of the arbitration and the governing law four times. This included changing the forum to various locations outside of Canada and saying that “unspecified law” applied; and
- The last arbitration forum that the appellant selected, prior to its application to stay, was Hong Kong. The administrative body was the Hong Kong International Arbitration Centre. The administrative costs for an arbitration were around $36,000.
The Motion Judge found that the cost to access the arbitral tribunal, and forum location, were inaccessible to the average crypto user. This, in the Motion Judge’s view “could effectively amount to a grant of immunity to [the appellant]” (para 8). The Motion Judge emphasized the arbitration clause was part of in an “unnegotiable ‘click’ contract where not only were the details, including the changeable location, of the arbitration clause buried out of site,…the logical complexity and expense of arbitration were not revealed anywhere” (para 8). The Motion Judge concluded that the arbitration clause was contrary to public policy and unconscionable, and therefore unenforceable.
The Appeal: The appellant appealed the order of the Motion Judge on three grounds.
First, the appellant argued that the Motion Judge erred by failing to first consider the competence-competence principle in his analysis. The Court dismissed this ground of appeal. The Court found that the Motion Judge followed the approach of the Supreme Court of Canada in the Dell and Uber by first considering if an exception to the competence-competence principle applied to justify a court deciding if an arbitration clause was void. The exception that the Motion Judge relied on was that a court, instead of an arbitrator, should determine if an 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 considerations require ‘only superficial consideration of the documentary evidence on the record’” (Uber at para 32, citing Dell at para 84).
Second, the appellant argued that the Motion Judge erred in finding that the circumstance fell within an exception to the competence-competence principle. The appellant argued that the “question of law” exception was not engaged because the Motion Judge made findings of fact in his decision. The Court dismissed this ground of appeal. The enforceability of the arbitration clause in the standard form agreement raised a legal issue. In addition, the Court held that the Motion Judge’s review of the documents on the record was a “superficial review” that was consistent with the approach taken in Dell and Uber. To the extent that a review of the factual record was required, it did not require any fact-finding that was specific to the representative plaintiffs. The documents before the Motion Judge allowed him to determine that the arbitration clause was contrary to public policy and unconscionable based on that superficial review.
Third, the appellant argued that the Motion Judge erred by engaging in more than a “superficial review” of the validity of the arbitration clause. The Court dismissed this ground of appeal for the reasons addressed in the second ground of appeal.
The Court dismissed the appeal.
Contributor’s Notes:
First, parties who draft “click” form agreements that include an arbitration clause should be aware that courts have considered, in their assessment of whether the clause is void for public policy reasons or unconscionability, whether the arbitration forum and costs are “prohibitive” to the users of the agreement. If the location and fees are inaccessible to the typical user of the particular standard form agreement, the clause may be found to be contrary to public policy or unconscionable (see Dell, Uber, Binance).
Second, if a party challenges the enforceability of an arbitration clause, and a court engages in an assessment of whether that clause is void for public policy reasons or unconscionable, the court is not precluded from reviewing evidence as part of its assessment. The court may conduct a “superficial review” of the evidence on the record before it and still comply with the competence-competence principle. (Uber at para 32 and Dell at para 84). Based on decisions of the courts, examples of a “superficial review” include review of evidence about the inaccessibility of the arbitration forum due to cost, the typical user of the standard form agreement, and the nature of the disputes that are likely to arise pursuant to the arbitration clause (see Dell, Uber, and Binance).
Third, basic contract law tells us that preventing a counterparty from reviewing the contract will make it difficult to enforce!