Uber v. Heller and Unconscionability

Introduction:  An Old Tale

In the early days of the 20th Century, two ships, the Port Caledonia and the Anna, were sheltering from a storm in Holyhead Harbour in Wales, when the Port Caledonia came free of its berth and began drifting toward the Anna.  The master of the Port Caledonia called for a tug, but was quoted an exorbitant fee, "£1,000 or no rope".  After protesting, he agreed to pay the fee out of desperation - but the courts later reduced the fee by 80%, because the original bargain was so inequitable, so unjust, and so unreasonable that it could not be allowed to stand.

In general, Canadian courts respect freedom of contract.  However, there are a variety of circumstances, which are traditionally quite narrow, in which they will decline to enforce the terms of an agreement between parties.

On Friday, the Supreme Court of Canada released its decision in Uber Technologies Inc. v. Heller, which will have significant ramifications in the law of unconscionability of contracts.

First, let's explain what the case is - and what it isn't.

The Background

David Heller, an Uber driver in Toronto, launched a class action suit against Uber.  The gist of it was this:  We're actually employees, and we should get the benefits and entitlements due under employment standards legislation.

Uber moved to stay the proposed class action on the basis that Heller agreed to a contract that included a mandatory arbitration clause, excluding the jurisdiction of the court.  Basically, if Heller had a dispute with Uber in terms of the interpretation or application of the agreement, he had to take it to a private arbitrator, not a court.  Under the Rules of Arbitration of the International Chamber of Commerce.

In Amsterdam.

Here's the first problem with that:  David Heller made an average of about $500 per week working as an Uber driver.  Just for the up-front administrative and filing fees of submitting a dispute to arbitration, he would have had to pay $14,500 USD, before even talking about the costs associated with conducting a legal dispute half a world away.

Justice Perell allowed the motion and stayed the action, but the Ontario Court of Appeal overturned it, finding that it effectively contracted out of the Employment Standards Act, 2000.  Strictly speaking, there's a legitimate argument as to whether or not the voiding mechanism in the ESA actually applies to a Forum Selection Clause...but under circumstances where the mechanism made it materially impossible to pursue a claim, it seems fairly coherent to suggest that there's a statutory problem here.

Uber appealed to the SCC, and the majority dismissed the appeal.  To be absolutely clear, this SCC decision does not conclude the proceedings.  Heller hasn't won his class action; Heller has won the right to continue to pursue the class action.  He overcame a procedural hurdle, but the fight to convince the court that he's an employee...is yet to come.

The Majority Decision:  Unconscionability

This is a big decision for contract law in Canada.  In many jurisdictions in Canada, including Ontario and Alberta, unconscionability has had a four-part test for many years:

•         a grossly unfair and improvident transaction;

•         a victim’s lack of independent legal advice or other suitable advice;

•         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 similar disability; and

•         the other party’s knowingly taking advantage of this vulnerability.

This is a high test.  And not only does the language of "grossly" unfair transaction and "overwhelming" imbalance of power make it a substantively high threshold, but the technical elements of the last two points - the source of the imbalance of power, and the requirement that the other party knowingly exploited it - are often not present even in contracts that would be shocking to the conscience.

The gist of the four-part test is this:  Even in a scenario where a party in a superior bargaining position has strong-armed someone else into accepting a horribly lopsided contract, the courts would uphold it so long as the strong-arming was transparent.  If the weaker party understood what they were being asked to agree to, the contract would be enforceable.

It leaves some unsatisfactory circumstances.  But at the same time, it created a degree of certainty.  If I'm drafting a contract, I could protect it from any sort of 'unconscionability' challenge by ensuring that the other party has a meaningful opportunity to obtain legal advice.

A 7-judge majority, in a decision authored by Justices Abella and Rowe, rejected this four-part test, in favour of what they refer to as the "classic 2-part approach" - that unconscionability requires only a finding that there is an inequality of bargaining power, and an improvident bargain.

Notwithstanding the majority's treatment of the four-part test as novel, it's been kicking around for a while, and has been the uncontroversial state of the law in both Alberta and Ontario for well over a decade.  It was first articulated by the Alberta Court of Appeal in Cain v. Clarica in 2005, and adopted by the Ontario Court of Appeal in Titus v. William F. Cooke Enterprises Ltd. in 2007.  These courts, however, didn't seem to feel like they were making anything up, so much as articulating the way that the underlying principles had already been applied for decades - as a high threshold looking for specific types of features.  They were attempting to capture the existing narrowness of the doctrine.

Still, other jurisdictions, like British Columbia, have continued to adhere to a two-part standard, as articulated in Loychuk:

(a)     inequality in the position of the parties arising from the ignorance, need or distress of the weaker, which left him in the power of the stronger; and

(b)     proof of substantial unfairness in the bargain.

The test adopted by the majority relies upon a couple of articulations by 'concurring reasons' panels of the SCC, but ultimately all of these tests (including Cain, Titus, and Loychuk) can be traced back to a 1965 passage by the British Columbia Court of Appeal in Morrison v. Coast Finance Ltd.:

....a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair, just and reasonable....

There are two reasons to think that the Loychuk articulation may fall short of the Morrison standard:  Firstly, the rebuttable presumption allows for scenarios where, despite having obtained a benefit with "substantial unfairness", it might nonetheless be open to the stronger party to establish that the bargain was fair, just, and reasonable under the circumstances.  Secondly, the language of 'fraud' is strong, and does not properly capture a scenario where a stronger party bluntly and transparently pressed a bargaining advantage, tending to an interpretation where the weaker party is bullied into accepting terms without appreciating their effect.  This supports the interpretation later adopted in Cain and Titus.

By adopting the two-part test as being the entire test, and not just as creating a rebuttable presumption, there is no doubt that the SCC in Uber has expanded the doctrine well past the limits delineated in Morrison.

The majority went on to expressly reject any requirement for malfeasance, misconduct, or deliberate exploitation in the formation of the contract by the stronger party, relying on a passage from a recent paper by Professor Stephen Waddams.

The phrases ‘unconscionable conduct’, ‘unconscionable behaviour’ and ‘unconscionable dealing’ lack clarity, are unhistorical insofar as they imply the need for proof of wrongdoing, and have been unduly restrictive.

Freeing itself from the constraints of a requirement of misconduct, the majority went on to conclude that the arbitration clause was unconscionable.

Employment lawyers were hoping for guidance in interpreting employment standards legislation (given the ONCA's findings), but the majority declined to render an opinion on that subject.

Concurring Reasons:  Public Policy

Justice Brown reached the same conclusion, but on a different basis.  He argued, instead, that a contractual provision that effectively bars any access to dispute resolution under law is void for public policy reasons.

This is a much narrower basis in certain ways, though its impact on mandatory arbitration clauses in consumer contexts would bear some parsing.  Still, in principle, it is a fundamentally sound approach that is difficult to challenge:  If an agreement effectively precludes a party from pursuing a remedy under that agreement, then that clause cannot be legally enforceable regardless of any issues of unconscionability.

He further expresses concern about the scope of the majority's conclusion, noting that trying to apply the unconscionability analysis "amounts to forcing a square peg into a round hole", and arguing against changing the law in a way that "would drastically expand the doctrine’s reach without providing any meaningful guidance as to its application", risking turning contract law into a regime governed by "ad hoc judicial moralism".

As well, he points out that the majority decision fails to consider the doctrinal foundations of unconscionability, and the controversy as to whether it is a stand-alone rule of equity, or an umbrella capturing a number of different doctrines permitting a contract to be set aside.

The Dissent

Justice Côté was the only one who would have allowed the appeal, let the arbitration clause stand, and imposed a stay of proceedings - conditionally.  Her conclusion would be that, in light of Heller's inability to pay the filing fees of the arbitration proceeding, Uber could be required to advance the filing fee as a precondition of the stay.

Commentary

I can see the logic underlying the majority analysis.  Of the legal observers watching this case, I don't know anyone who expected Uber to win.  This is one of those 'clearest cases' where there was something obviously wrong with enforcing the arbitration clause.  And yet the existing unconscionability tests don't seem to quite capture it.

In most cases, where there is a disparity between the ostensibly 'just' result and the ability of existing legal doctrines to achieve that just result, my first instinct is that we need to look more closely at why we want the result not supported by legal doctrine.  This is the point of a rules-based system of law: It provides us with principled guidelines for the sake of predictability, certainty, and consistency.

However, in the case of unconscionability, there is good reason to think that there are holes in the framework, and this case is a reasonably good example of such a scenario.  It's not the only such scenario, however; there are plenty of scenarios where a party simply pressing a bargaining advantage, without any misconduct or misrepresentation, may result in a bargain that is sufficiently shocking to the conscience of the community that we think it should be set aside.

The Port Caledonia is a classic example of this.  It is difficult to see how the modern tests from Cain and Titus would allow a result such as was achieved in that case.  This does, indeed, suggest that the modern test has diverged from its historical and doctrinal roots.

Nonetheless, Justice Brown's concurring reasons are compelling.  His dire predictions of ad hoc judicial moralism are concerning:  The test endorsed by the majority leaves a great deal of room for courts to set aside contracts, simply on the basis that the bargain is ultimately 'unfair' in the favour of the party with greater bargaining power.

Furthermore, he is right that the majority analysis is light on doctrinal analysis.  Rather than they embark upon a course of reasoning to justify what amounts to a significant shift in the law, the majority essentially pretends that the test they adopt is a standing status quo.  Their superficial and shallow examination of the doctrinal roots of unconscionability leave a lot of room to criticize this result, and raise questions as to the long-term viability of this new doctrine.

At minimum, it needs refinement, to clarify and delineate the specific standards justifying judicial intervention in the borderline cases.

Implications

For the moment, we don't have much clarity on exactly how this test will be applied.  Here's what we know:

• The relationship must involve an imbalance of power;
• The bargain must be objectively improvident;
• Inequality can take the form of a party who, do to circumstances of desperation (including financial desperation), has little choice but to accept the terms of the other party (para 69), or where one party is less sophisticated than the other (para 71);
• Improvidence can entail an undue advantage to the stronger party OR an undue disadvantage to the vulnerable party (para 74);
• It is not necessary that the imbalance of power be "overwhelming" or that the deal be "grossly" unfair (para 82);
• Improvidence is assessed as at the formation of the contract (para 74);
• Improvidence is assessed contextually, and may include factors such as market prices and the relative position of parties at contract formation (para 75);
• Where the vulnerable party is in particularly desperate circumstances (such that any contract improves their situation), the question will be whether or not an undue advantage has been gained by the more powerful party (para 76);
• A deal can be improvident notwithstanding the presence of independent professional advice, if that professional advice does not assist the party's ability to protect its interests (para 83); and
• Misconduct or deliberate exploitation by the stronger party is not necessary to conclude that the deal is improvident (para 84), though, if present, it may support a finding of improvidence (para 85).

Two omissions stand out:  Firstly, the reasons are loaded with things that are not required to find unconscionability, but lack guidance in terms of factors that must be present - specifically, while a court need not find 'gross' unfairness, what standard of unfairness warrants judicial intervention?  Secondly, the language does not seem to suggest that the discussed "examples" of inequality of bargaining power are in any way comprehensive or discrete, suggesting against any limitations to certain categories of inequality.

In the absence of this guidance, the important questions will be the thresholds:  On the plain language of the decision, it would appear that any scenario in which a court finds that the parties had any bargaining inequality, and any degree of unfairness in the deal, calls for the contract to be set aside.

This would be severe.  Freedom of contract is an important concept, and inviting a judge to nullify any contract on the basis of any perceived unfairness would entirely undermine that concept.  It's impossible to seriously read the majority decision as endorsing such an overwhelmingly broad carte blanche for judicial intervention in contract.  So while we know that the threshold of unfairness is lower than 'gross', we also know that there has to be some threshold of unfairness.  The uncertainty will have an impact.

Contracts in the Post-Uber World

When we draft contracts, we reasonably safely cure any unconscionability under the four-part test by expressly advising the weaker party to obtain appropriate professional advice, and giving them a meaningful opportunity to do so.

Now, we're not sure what's required.  When drafting contracts, lawyers (and their clients!) want to be sure that the terms of the contract will be upheld.  If we're substantively changing the terms we'd otherwise agree on because of a concern that the court will strike it down, that speaks to a limitation of freedom of contract.  (Which isn't necessarily a bad thing in all cases, but that is, bluntly, what it is.)  But an even larger problem occurs when we don't know what the courts will enforce.  We don't know what types of contractual terms the courts will perceive as 'unfair' within the meaning of the new unconscionability standard.

Perhaps even more troubling than the impact of this decision on commercial contracts is the impact on settlement agreements:  In an employment context, when an employee signs a release in exchange for a termination package, these are usually enforceable.  (There are rare cases where this is not the case, such as Rubin v. Home Depot.)  Again, the cure-all for unconscionability for an employment release has traditionally been "Tell the employee to get legal advice, and give them time to do it."  (I recall in law school, when a classmate asked "What do you do if the employee wants to sign it on the spot?"  The response from the instructor, a skilled employment lawyer from the now-defunct firm of Heenan Blaikie, was succinct and correct:  "Don't let them.")

However, if the courts are going to look at substantive unfairness, then it significantly undermines the point of a release.  These are usually compromise solutions, and if the court is going to play referee afterward on whether or not the compromise was fair, that will remove value from the settlement for the employer.

Everyday Power Imbalances

There are certain types of contracts where imbalances of power are presumed or otherwise frequently recognized.  Outside of the exceptional 'desperation' cases like the Port Caledonia, you see bargaining inequality in employment and quasi-employment relationships; in residential tenancy relationships; in franchise relationships; in consumer contracts; and in separation agreements.  (I don't claim that this is a comprehensive list.)

Notably, there are already elaborate legislative schemes conferring procedural and/or substantive protections upon the vulnerable parties in all of these areas.  (This is, perhaps, what is most disappointing about the majority electing to use common law unconscionability, as opposed to the protections inherent in employment standards legislation, to reach its conclusion.  Given the legislature's express decision to grant certain protections, one would think that these would at least be prioritized over common law treatments.)

It is relatively unlikely that, in the ordinary course, the courts would conclude that a contractual term is unconscionable if it falls within a category of terms that the legislature has considered, and decided not to prohibit - as an example, consider minimum wage employment, or a term limiting termination entitlements to the statutory minimums.  It would be a fairly clear case of judicial overreach if the courts were to effectively establish a new minimum wage that were higher than that set by the legislature.

However, in areas where there is no express statutory treatment, expect to see questions about whether or not existing common practices raise concerns about unconscionability.  For example, while the courts have already established robust tests for enforcing non-competition agreements, these tests have traditionally focused on whether or not the employer has a legitimate proprietary interest in such an agreement, with relatively little consideration of the impact on the employee.  Now, expect a second line of argument:  Look, the employer inserted a 12-month non-compete into the contract, and only a statutory minimum termination clause, so that the employer can easily terminate the contract in accordance with its terms and pay the employee virtually nothing, while keeping the employee from earning a living for a full year.  (Currently, we largely get around this problem with General Billposting, but this approach is fundamentally limited by the fact that it requires the employer to have actually breached its contractual obligations.  In an instance where the employer complied with minimalistic contractual termination requirements, that would offer little comfort to the employee.)  I'd say this is a pretty good candidate for the new unconscionability analysis.

Also, for dependent contractors, who almost certainly do not fall under the purview of employment standards legislation, expect courts to scrutinize their contracts on the basis of this new doctrine.

Changing Existing Contracts

Where employers, and other parties in positions of relative power, are going to have real problems moving forward is modifying the terms of existing contractual relationships.

At present, the only requirements for a new employment contract are the same as for any contract - offer, acceptance, and consideration.  We have developed a doctrine of 'fresh consideration', requiring employers to provide something 'new' in the employment relationship (a raise, a signing bonus, etc.), which provides some measure of protection against exploitative employers who force new and onerous contractual provisions on existing employees, while simultaneously providing a relatively clear and bright-line mechanism for employers legitimately looking to implement contractual changes.  Therefore, there have been many cases where employers have tried to implement contracts with limitations on termination entitlements, to displace substantial common law entitlements, but where the contracts have been disregarded for lack of consideration.

The problems with the current framework are two-fold.

Firstly, the doctrinal foundations are questionable.  The requirement for 'consideration' in a contract is traditionally minimalistic, simply requiring that something of value (even nominal value, such as a peppercorn) be committed by each party to the contract.  There are fundamental challenges in concluding that the value contributed under a new contract does not amount to consideration just because it is the same as that under an old contract which was capable of being terminated.  Justice Slatter, in his dissent in Globex, made a compelling argument against this doctrine.

Secondly, the doctrine is easy enough to sidestep, if you know how, that it doesn't fundamentally address the problem, in theory, of an existing employer forcing new and unfavourable terms on vulnerable employees.  That would seem to be the territory of an unconscionability analysis...and yet the four-part test would not usually get at it.  It is conceivable that an employer could have an employee with a 24-month notice entitlement sign such a contract in exchange for a $1 signing bonus, and then dismiss them shortly thereafter on minimal notice.  Existing contractual doctrines don't seem to necessarily provide relief in such a scenario.

It's a lot of weight that the 'fresh consideration' doctrine puts on a peppercorn.

Under the Uber test, an employer would likely be unable to do such a thing.  It provides a more equitable approach for examining such circumstances, and determining whether or not the contractual change was unconscionable.  (I had thought that such issues would draw arguments rooted in Bhasin: Another relatively new doctrine of law imposes a duty of good faith compliance, limiting the ability of a party to strictly enforce terms of the contract in ways that may be unforeseen or oppressive to the other party.  However, Uber may be the cleaner way of dealing with this problem.)

However, the next question is this:  How do you change the contract of an existing employee in a way that is not unconscionable?

The most obvious solution would be to terminate the existing contract in accordance with its terms.  Most employment contracts can be terminated on notice, so...you do it.  You provide the employee with a written notice of termination of the existing contract, and you provide a new contract effective the day after the termination date.

Practically, however, there are reasons why employers are reluctant to go down that road...so the question that we're going to eventually need to wrestle to the ground (to the point of sufficient certainty for drafting) is this:  What, exactly, is 'fair' consideration for compromising on substantial common law notice entitlements?

A Duty to be Fair?

The most fundamentally troubling aspect of this is that, wherever the 'threshold' is, it effectively imposes a duty on parties in positions of strong bargaining power not to press that bargaining advantage beyond the threshold.  If you have the power to effectively dictate terms, you're obligated to set them in a way that is fair.  Historically, that has been essentially a matter of 'process', ensuring that people understand what they're signing, if the terms may seem onerous.  Now, the Supreme Court is clearly signalling that this is a substantive obligation.

At first (or perhaps second) blush, that doesn't seem so terrible.  Where one party is effectively able to set the terms, is it really a 'contract', in the truest sense of the word?  Perhaps it makes a degree of sense to simply let concepts of equity guide the terms of cooperation in such circumstances.

But there are different circumstances for imbalances of power.  In commercial contexts, they often arise from deliberate and successful risks to obtain the ability to set the price - risks that we want businesses to take, and for which the ability to set the price is their due reward.  Similarly, the ability of one market participant to set an exorbitant price tends to attract other market participants to undercut them.  When we say that we want the 'market' to set prices, this is a part of that function, and judicial readiness to step in and dictate terms and prices undermines this dynamic competitive growth.

Certainly, there are cases where price-gouging does not engage these market principles:  Where, for example, an unforeseen catastrophe temporarily drives up demand (or drives down supply) for a product, it seems unnecessary to give a large windfall to those who happen to be holding that supply at the time.  (Hand sanitizer during a pandemic is the most immediate example, but I think the point is more squarely addressed by the gasoline price-gouging during the great eastern power outage in August 2003 - some areas had power restored within hours; others took days.  At the handful of gas stations whose pumps were operational that first night, some of them very significantly increased their price.  Considering that their monopoly was established essentially by a fluke, there seems to be little mischief in denying them the fruits of such monopoly.)

But growth into underserved markets is frequently driven by the expectation of being able to charge higher rates than what might be possible to charge in more competitive markets.

And quite frankly, the courts are poorly equipped to decide fair value for goods and services.  In most circumstances where they are tasked with doing so, the only mechanism they have is with reference to what the otherwise free market would do.  So in an unjust enrichment case where a tradesperson wants the fair value of his labour, the courts look to the customary charges and rates within the industry.  Courts ought to be very reluctant, however, to undermine any contractual terms or rates that are not manifestly at odds with established industrial norms or reasonable expectations of consumers.

We'll be figuring this one out for years yet.  And when we're also still figuring out the scope of the Bhasin duty of good faith compliance...we're effectively reinventing large portions of contract law in a way that significantly departs from the SCC's traditional approach of incremental change.

Summary

I agree with the majority that the four-part unconscionability test was too narrow, and needed expansion.  I expect some good to come of this, as we replace certain results-driven doctrines on rocky foundations, like 'fresh consideration', with an unconscionability analysis that addresses genuine equity concerns for the protection of vulnerable parties.

But I also agree with Justice Brown, that the failure to better address the foundational principles of unconscionability and to clearly delineate the limits of this broader doctrine will create problems moving forward, as parties lack clarity as to exactly what they need to do to ensure that their contracts will be upheld.

*****

Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.