Uber v Heller: Analysing How Indian Courts Have Interpreted “Unconscionable” Arbitration Agreements

[Yash More and Hitoishi Sarkar are II year students at Gujarat National Law University]

On 26 June 2020, the Supreme Court of Canada in Uber Technologies Inc. v. Heller ruled on the validity of unconscionable arbitration clauses. The Court found two elements to determine the arbitration clauses’ unconscionability – inequality of bargaining power and improvidence of the arbitration clause. The decision is a cautionary tale for businesses that may assume their arbitration clauses in standard form contracts serve as a roadblock to class action litigation.

In this article, the authors consider the implications of the judgment and the lesson that it delivers for domestic businesses. The authors explore the majority opinion, which reinforces the principle of “accessibility” to dispute resolution as the inherent right of individuals. The post also briefly discusses the concurring opinion of Justice Brown, who argued that one-sided arbitration agreements are violative public policy.

Background

Heller, a driver for Uber, had to accept the terms of Uber’s standard form services agreement. Under the terms of the agreement, he was required to resolve any dispute with Uber through mediation and arbitration in the Netherlands to be governed by Dutch law. The mediation and arbitration process required up-front administrative and filing fees of US $14,500, plus legal fees and other costs of participation.

In 2017, Heller commenced a class action against Uber, alleging that the company breached the Ontario Employment Standards Act, 2000 (“ESA”) by not treating drivers as employees and depriving them of benefits and protections that employees are entitled to under the ESA.  Uber brought a motion to stay the class proceeding in favor of arbitration in the Netherlands, relying on the arbitration clause in its services agreement.

Heller argued that the arbitration agreement was part of a standard form contract, and a person in his position could not be expected to understand that the arbitration clause imposed a US$14,500 hurdle to relief. Further, he termed the arbitration clause as improvident because the fees were close to his annual income and are disproportionate to the size of an arbitration award that could reasonably have been foreseen when the contract was entered into.

The motion judge stayed the proceeding, holding that the arbitration agreement’s validity could be determined by arbitrators in the Netherlands, in accordance with the principle that arbitrators are competent to determine their own jurisdiction. The Court of Appeal allowed Heller’s appeal and concluded that Heller’s objections could be dealt with by a court in Ontario. It also found the arbitration clause to be unconscionable, based on the inequality of bargaining power and the improvident cost of arbitration. Uber filed an appeal before the Supreme Court of Canada.

Majority & Concurring Opinion

Justice Abella and Justice Rowe authored the majority opinion on behalf of the seven judges who formed the majority. The judgment explained the contours of the doctrine of unconscionability and its particular implications for standard form contracts. It expounded that the potential for such contracts to create an inequality of bargaining power is clear, as is the potential to enhance the advantage of the stronger party at the expense of the vulnerable one, mainly through the choice of law, forum selection, and arbitration clauses that violate a party’s reasonable expectations by depriving them of remedies.

The Court held that arbitration’s fundamental acceptance is based on its being a cost-effective and efficient method of resolving disputes. If arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all. In this case, the arbitration clause was the only way Heller was permitted to vindicate his rights under the contract. However, if an agreement renders arbitration out of his reach, his rights are illusory. Thus, based on Heller’s inability to protect his bargaining interests and on the unfair terms that resulted, the arbitration clause was declared invalid.

Justice Brown delivered a rather interesting concurring opinion. There was an agreement with the majority that the mandatory arbitration requirement is invalid, but he disagreed with the majority’s reliance upon the doctrine of unconscionability to reach this conclusion. He opined that the law already contains settled legal principles which operate to prevent contracting parties from insulating their disputes from independent adjudication. In his mind, the public policy doctrine provides grounds for setting aside contractual provisions that harm the justice system’s integrity.

The doctrine applies when a provision penalises or prohibits one party from enforcing the terms of their agreement, which serves to uphold the rule of law. The law does not distinguish between a clause that expressly blocks access to a legally determined resolution and one that has the ultimate effect of doing so. To the courts, arbitration is an acceptable alternative to civil litigation because it can provide a resolution according to law, but where a clause expressly provides for arbitration while simultaneously having the effect of precluding it. These considerations promote curial respect for arbitration dissolve. Thus, the public policy principle prevents an ouster of the court jurisdiction.

Lessons for India and Beyond

Indian courts have, for long, struggled with the validity of such unconscionable arbitration agreements. This is because if such arbitration agreements are upheld, they become a case of witticism and do not help the institution of arbitration. Similar sentiments were echoed by the Supreme Court of India in ICOMM Tele Ltd. v Punjab State Water Supply and Sewerage Board and Ors. where it ruled that “deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the Court system, and would render the arbitral process ineffective and expensive.

Uber’s agreement with its drivers can be construed as a contract of adhesion, i.e., contracts in which there is unequal bargaining power and is liable to be set aside if it is deemed to be unconscionable. The Supreme Court of India in Central Inland Water Transport Corporation v. Brojo Nath Ganguly has held that the only exception to the above principle is in cases concerning commercial contracts, i.e., between two business entities. Thus, considering the unequal bargaining power between the driver as an employee and Uber as an employer, the aforementioned arbitration clause is likely to be set aside if a similar matter were to come up before an Indian court.

Conclusion

However, a significant criticism of the decision was that the majority held that the arbitration law applicable to the arbitration agreement was Ontario’s domestic arbitration law and not Ontario’s International Commercial Arbitration Act (“ICAA”) which is based on the UNCITRAL Model Law. The judgment is also likely to be subject to significant academic discourse as the majority relying on the UNCITRAL Commentary on the Model Law held that that labor or employment disputes are not covered by the term “commercial.” (discussed here)

The judgment needs to be appreciated for dealing a substantial blow to corporations which engage in coercive jurisdiction/venue shopping by virtue of arbitration agreements. For instance, many consumer dispute arbitration agreements are seated in New York as punitive damages are not available there. Such arbitration agreements that are structured solely to circumvent law cannot be upheld as it would result in significant detriment to the institution of arbitration. 

– Hitoishi Sarkar & Yash More

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