Author: Martin Kwan*
In a recent case, Uber Technologies Inc. v. Heller, the Supreme Court of Canada debated whether to sever or to strike down the arbitration agreement.[1] Whilst the Court considered many other legal issues in the judgment, this piece will focus directly on this specific issue. In particular, Judge Côté partly relied on U.S. law in support of her reasoning, but it is submitted that her Honor has over-simplified the law on this matter. This legal issue is arguably more complicated than it seems and requires some clarifications on the U.S. law.
WHETHER TO VOID OR SEVER
The Facts
To become an Uber driver, Mr. Heller had to accept without negotiation the terms of Uber’s standard form agreement. He was required to sign an arbitration agreement that required (1) the arbitration to take place in Amsterdam and (2) the payment of upfront administrative fees of US$14,500 to begin the arbitration. These fees were close to Mr. Heller’s annual income. When Mr. Heller commenced a class proceeding to sue Uber in court on employment matters, Uber applied to stay it in favor of arbitration. In opposition to that application, Mr. Heller contended in the present case that the arbitration agreement was unconscionable and should be void.
There were three judgements. Judges Abella and Rowe wrote the main judgement with which the majority agreed. Judge Brown wrote a concurring judgement and Judge Côté dissented.
To Void Entirely
Judges Abella and Rowe held that the arbitration agreement was entirely void for unconscionability. Firstly, the lack of power to negotiate a contract of adhesion illustrated clearly the inequality of bargaining power.[2]
Secondly, the hurdles of requiring (1) the disproportionate up-front fees, (2) the governing law of the Netherlands, and (3) Amsterdam as the place of the arbitration, in effect prohibited arbitration.[3]
To Sever
Although Judge Côté did not think that the agreement was unconscionable, her Honour nevertheless answered the hypothetical that were it unconscionable, she would merely sever the unconscionable provisions (e.g. the place of arbitration clause).
First, as a matter of policy, the pro-arbitration stance supports a “generous application of the doctrine of severance”.[4] The courts should therefore strive to sever wherever practical.[5]
Second, the parties’ commitment to submit disputes to arbitration is clear. Finally, severance is required to ensure commercial certainty.[6]
Judge Brown’s Reply
In reply to Judge Côté’s arguments, Judge Brown argued that the arbitration agreement should be voided completely, because the “cumulative effect” of the hurdles was to effectively bar access to arbitration.[7] The agreement did not just embody the intention to arbitrate. In addition, the impugned provisions reflected ‘the intention to prohibit either party from advancing claims valued at less than US$14,500’.[8] It was therefore impossible to sever them without altering the parties’ latter intent.[9]
THE PRACTICE OF ACCEPTING DIVERSE ARGUMENTS
The above debate raises two vital questions, namely (1) whose stance/approach of dealing with severance is more legally supportable and (2) what precedential points can be derived.
The starting point is that courts have the discretion to either find the whole agreement unenforceable or to sever only the unconscionable provision(s). The legal principle is simple: severance can only be done when trivial provisions can be severed without changing the main purport or substance of the agreement.[10] Other common law jurisdictions adopt the same emphasis on preserving of the main intent of the agreement.[11]
However, in practice, courts often accept a wide array of other arguments that go beyond the legal principle. Instead of focusing on the intent, Judge Brown focused on the “cumulative effect”, which is a term propounded in Canada for the first time without citing any precedents. Similarly, Judge Côté focused, in addition to the intent, on the underlying policy considerations, such as the pro-arbitration policy and commercial certainty. These sensible considerations cannot be said to be wrong, especially when they are not precluded by the insufficiently-principled discretion on whether to sever. It vitally shows that courts will consider other relevant arguments in addition to what is supposedly the only question, i.e. whether the main purport or intent is changed.
The lack of a principled and precise focus can easily lead to inconsistent and mistaken application of case law because the focus is more on arguments than past cases. For example, Judge Côté thought that the question of whether there was an employment relationship should be left to arbitration.[12] However, in Shafron, it was approved that:
The doctrine of severability is more rigorously applied to restrictive covenants negotiated between employer and employee; the primary rationale is the imbalance of power which often leaves the employee with little room to manoeuvre in the negotiations. The policy of the law is to discourage employers from using their dominant position to extract unreasonable terms.[13]
Despite the relevance of an employment relationship, this point was not mentioned (even though Judge Côté hypothetically assumed such relationship[14]). The broad discretion to consider diverse arguments can lead to inconsistent outcomes and uncertainty.
COMPARING WITH THE U.S. INSIGHTS
Judge Côté also contended that the law on severance is the same in other jurisdictions (particularly the US): to sever “wherever possible”.[15] However, Judge Côté has over-simplified the U.S. law.
U.S. courts have equal discretion to sever an unconscionable provision or to refuse to enforce the contract in its entirety.[16] The main test similarly depends on whether the unconscionable parts are essential or merely ancillary.[17] However, a closer look at the U.S. precedents would reveal that the U.S. courts are also open to arguments that go beyond the fundamental legal test. There is a wealth of arguments in favor of voiding the clause in Uber.
First, Judge Brown’s notion of “cumulative effect” has been used in the U.S. It was held that severance may be impermissible when “the cumulative effect” of the unconscionable provisions permeated the agreement and thoroughly tainted the central purpose of requiring the arbitration of employment disputes.[18]
Second, “arbitration clauses that force a party to an adhesion contract to travel long distances or otherwise incur prohibitively expensive costs in order to arbitrate claims can be struck down as unconscionable.”[19] In MacDonald v. CashCall, Inc., the court considered that a forum selection clause that chose an illusory place was integral.[20] In Inetianbor, the forum selection clause was found to evidence an intent to have a specific type of arbitration in a particular arbitral forum.[21]
Third, the choice of words is “the best evidence of the intent of the parties”.[22] In particular, the use of the word “shall” has been held to reinforce the centrality of the forum.[23] In that U.S. case and in Uber, the contracts both used the word “shall” when designating the forum.
Fourth, the presence of an employment relationship is similarly important under U.S. law. A “multitude of unconscionable provisions in an agreement to arbitrate will preclude severance and enforcement of arbitration if they evidence a deliberate attempt by an employer to impose an arbitration scheme designed to discourage an employee’s resort to arbitration or to produce results biased in the employer’s favor”.[24]
Thus, “the more the employer overreaches, the less likely a court will be able to sever the provisions and enforce the clause.”[25]
Fifth, pro-arbitration policy matters, but is not determinative. In Doe v. Princess Cruise Lines, Ltd., it was held that the intent of parties matters more than the pro-arbitration policy.[26]
CONCLUSION
Despite the seemingly simple doctrine of severance that merely says not to change the main purport of the agreement, the actual judicial approaches in Canada and the US accept a wide array of other arguments and considerations. Whilst having a holistic analysis is sensible, the argumentative nature causes uncertainty. One drafting suggestion to improve certainty for arbitration agreement is the inclusion of a severability clause, which will more likely prompt courts to sever instead of voiding it entirely. Nevertheless, the presence of a severability clause, whilst helpful, is still not dispositive.[27]
[1] 2020 S.C.C. 16.
[2] Id. at [93].
[3] Id. at [94]-[95].
[4] Id. at [326].
[5] Id. at [326], [332].
[6] Id. at [336].
[7] Id. at [141].
[8] Id. at [142].
[9] Id.
[10] Shafron v. KRG Ins. Brokers (W.) Inc., [2009] S.C.R. 157, [34], [328] (Can.).
[11] See, e.g., Tillman v. Egon Zehnder Ltd [2019] UKSC 32, [84], [87] (appeal taken from [2017] EWCA Civ 1054) (UK) (not changing the “character of the contract” is “the crucial criterion”); Ian Haydn Reed v. Chan Suk Fun the administratrix of the estate of Wan Lai Ha, the administratrix of the estate of Chan Shuk Ching Pinky, DCCJ 4560/2007 (D.C. July 4, 2019) (Legal Reference System), [11] (H.K.).
[12] Uber, 2020 S.C.C. 16 at [297].
[13] Shafron, [2009] S.C.R. 157 at [47].
[14] Uber, 2020 S.C.C. 16 at [299].
[15] Id. at [331].
[16] Hall v. Treasure Bay Virgin Islands Corp., 371 Fed.Appx 311, 314 (3d Cir. 2010).
[17] Inetianbor v. Cashcall, Inc., 768 F.3d 1346, 1352 (11th Cir. 2014); Parilla v. IAP Worldwide Servs., VI, Inc., 368 F.3d 269, 286 (3d Cir. 2004).
[18] Herzfeld v. 1416 Chancellor, Inc, No. 14-4966, 2015 WL 4480829, at *12 (E.D. Pa. July 22, 2015); Parilla, 368 F.3d at 287.
[19] Erin O’Hara O’Connor et al., Customizing Employment Arbitration, 98 Iowa L. Rev. 133, 148 (2012).
[20] 888 F.3d 220, 230-33 (3d Cir. 2018).
[21] Inetianbor, 768 F.3d at 1352.
[22] Id. at 1350.
[23] Id. at 1351.
[24] Parilla, 368 F.3d at 289; Nino v. Jewelry Exchange, Inc., 609 F.3d 191, 206-07 (3d Cir. 2010); Ingle v. Circuit City Stores, 328 F.3d 1165, 1180 (9th Cir. 2003) (entire arbitration agreement is unenforceable where employer’s “insidious pattern” of seeking to tip the scales in its favor during employment disputes).
[25] Booker v. Robert Half Int’l, Inc., 413 F.3d 77, 85 (D.C. Cir. 2005).
[26] 657 F.3d 1204, 1214 (11th Cir. 2011). See also Parm v. Nat. Bank of California, 835 F.3d 1331, 1335 (11th Cir. 2016).
[27] MacDonald, 888 F.3d at 231; Spinetti v. Serv. Corp. Int’l, 324 F.3d 212, 222 (3d Cir. 2003); Inetianbor, 768 F.3d at 1353; Kauffman v. U-Haul Int’l, No. 5:16-cv-04580, 2018 WL 4094959, at *10 (E.D. Pa. Aug. 27, 2018).
* Martin Kwan is an arbitrator and is also a researcher at the OBOR Legal Research Centre.