The Ontario Court of Appeal (the “Court”) in Lochan v. Binance Holdings Limited, 2024 ONCA 784, recently upheld a lower court decision dismissing a large cryptocurrency trading platform’s motion to stay a class proceeding in favour of arbitration. The Court held that the arbitration agreement was unenforceable as it was contrary to public policy and unconscionable.
Background
In June 2022, the plaintiffs commenced a proposed class action against Binance Holdings Limited (“Binance”), the world’s largest cryptocurrency exchange, for failure to file or deliver a prospectus. The claim is based on section 133 of the Securities Act (Ontario), which provides purchasers with a right of action for rescission or damages against a company selling securities for failure to file or deliver a prospectus.
Binance moved to stay the proceeding on the basis that the terms of use on Binance’s website required that any disputes be resolved by arbitration (the “Arbitration Agreement”).
Decision of the motion judge
The motion judge dismissed Binance’s motion for a stay in favour of arbitration on the basis that the Arbitration Agreement was void both as contrary to public policy and because it was unconscionable. In arriving at this conclusion, the motion judge held, among other things, that:
- The Binance website prompted users to open accounts in “under 30 seconds”, during which users were to agree to approximately 50 pages of terms, including the Arbitration Agreement;
- Pursuant to the Arbitration Agreement, Binance could change any part of the Arbitration Agreement, and by agreeing to terms of use on the website, users agreed to any subsequent amendment; and
- Binance changed the forum of the arbitration and governing law four times, to various destinations far from Canada. The last forum set for arbitration was Hong Kong, which imposed prohibitive costs and made the forum inaccessible to the average crypto investor (i.e., starting costs to access the arbitral tribunal was approximately $36,000 CAD, not including legal fees and travel expenses).
Grounds of Appeal
Binance appealed the motion judge’s decision on the grounds that the motion judge had erred in (i) considering whether the Arbitration Agreement was void as contrary to public policy without first allowing the arbitral tribunal to consider the validity of the Arbitration Agreement (per the “competence-competence” principle that provides an arbitral tribunal the power to rule on its own jurisdiction); and (ii) considering the issue of validity through the lens of an average cryptocurrency buyer rather than the proposed representative plaintiffs, who engaged in larger value purchases.
Decision of the Court of Appeal of Ontario
The Court upheld the motion judge’s decision dismissing the motion to stay the proposed class action in favour of arbitration and affirmed that the Arbitration Agreement was void for being contrary to public policy and unconscionable.
Drawing on the Supreme Court of Canada’s decisions in Dell Computer Corp. v. Union des Consommateurs, 2007 SCC 34 (“Dell”) and Uber Technologies Inc. v. Heller, 2020 SCC 16 (“Uber”), the Court acknowledged that before considering whether an arbitration clause is void, a court must first consider whether an exception to the competence-competence principle applies that would justify the court deciding the validity of the arbitration clause, rather than the arbitral tribunal.
The Court held that, contrary to the assertion made by Binance, the motion judge did not go straight into a public policy analysis. Rather, per the jurisprudence, he first considered whether an exception to the competence-competence principle from Dell and Uber applied, namely:
- where the jurisdictional issue depends on a question of law alone or where questions of mixed fact and law require only a superficial consideration of the documentary
record; and
- where impediments exist that functionally prevent a party from bringing a matter to arbitration to decide the jurisdictional issue.
Based on the record before the motion judge, the Court held that the contractual terms at issues were standard form, raising a question of law, and to the extent a review of the factual record was required, it did not exceed a superficial documentary review permitted by Dell and Uber. Moreover, the Court found that because of the inaccessibility of the arbitration forum due to cost, distance, and choice of law, there was no real prospect of a challenge to the validity of the Arbitration Agreement via arbitration. Ultimately, therefore, the Court held that the validity of the Arbitration Agreement did not need to be decided by an arbitrator at first instance, and that the motion judge did not err in finding that the Court had jurisdiction to address the validity of the Arbitration Agreement.
The Court also saw no error in the motion judge considering the issue of public policy and unconscionability based on the average cryptocurrency investor. According to the Court, it was appropriate to consider the average investor as the Arbitration Agreement did not vary depending on the size or type of dispute.
Key Takeaways
- The decision is another example of Canadian courts applying a high standard of scrutiny to standard form contracts, and in particular, arbitration agreements. It underscores how companies using standard form contracts will want to be cautious in drafting arbitration agreements that are enforceable.
- The ultimate determination of whether a particular arbitration agreement is enforceable will depend on the features of the arbitration agreement and the circumstances in which it is being applied. Generally, courts are not likely to enforce an arbitration clause in a standard form contract where arbitration is practically inaccessible.
- The competence-competence principle is not lightly displaced and disputes about the validity of an arbitration agreement are generally resolved by an arbitrator at first instance. The exceptions to this have been summarized by Canadian jurisprudence and include where: i) jurisdictional issues depend on a question of law alone or where questions of mixed fact and law require only a superficial consideration of the documentary evidence; or ii) impediments exist that functionally prevent a party from bringing a matter to arbitration such that, if the issue of validity of the arbitration agreement is left to the arbitral tribunal, there is a real prospect that it will never be resolved by the arbitral tribunal.
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