Some employment agreements attempt to force employees and employers to resolve disputes through arbitration rather than permit them to approach the courts for a resolution. These types of agreements may, for example, prevent an employee from bringing a wrongful dismissal action in the courts. 

We recently reported on the Ontario Superior Court of Justice’s decision that a mandatory arbitration clause was unenforceable because the employment contract was invalid for lack of consideration.

While the court was prepared to decide on the validity of the clause, this won’t always be the case. Sometimes, the courts decide that the validity of the mandatory arbitration clause is a question that needs to be determined in the arbitration itself. This article looks at two court cases that reached different outcomes on this issue.

The provisions of the Arbitration Act

Under section 7 of the Arbitration Act 1991 (the Act), if a party to an arbitration agreement commences a court proceeding in respect of a matter to be submitted to arbitration under the agreement, the court shall, on the motion of another party to the arbitration agreement, stay the proceeding.

The court can refuse to stay the proceeding in some specified circumstances, such as where the arbitration agreement is invalid. 

According to section 17 of the Act, the tribunal in arbitration may rule on its jurisdiction to conduct the arbitration. It may, in that connection, rule on objections with respect to the existence or validity of the arbitration agreement.

These provisions raise the question of when it is appropriate for the court to determine the validity of a mandatory arbitration clause and when it should be left to the arbitrator to decide.

Court of Appeal strikes down an Uber mandatory arbitration clause

The first case is when the court is prepared to find a mandatory arbitration clause invalid.

In Heller v Uber Technologies Inc., the plaintiff brought a proposed class action seeking a declaration that the class members were employees of Uber. Uber sought to rely on a mandatory arbitration clause contained in the Uber food delivery service agreement. The clause required any disputes to be submitted to mandatory arbitration in the Netherlands. The process was subject to an administrative fee of US$14,500, not including legal and travel expenses.

The Court of Appeal held that this clause was invalid and declined to stay in the court proceedings. Section 96 of the Employment Standards Act 2000 (ESA) allows a person alleging that the ESA is being contravened to file a complaint with the Ministry of Labour. The Court decided that this was an employment standard that could not be contracted out of, under section 5 of the ESA. The mandatory arbitration clause was invalid for preventing the filing of such a complaint.

The Court also found the mandatory arbitration clause invalid on the basis of unconscionability at common law.

Supreme Court agrees, finding the mandatory arbitration clause unconscionable

In Uber Technologies Inc. v Heller, the Supreme Court of Canada upheld the Court of Appeal’s decision, finding the arbitration clause unconscionable. The majority did not deal with the arguments based on contracting out of the ESA.

The Supreme Court explained that:

Where pure questions of law are in dispute, the court is free to resolve the issue of jurisdiction. Where questions of fact alone are in dispute, the court must “normally” refer the case to arbitration. Where questions of mixed fact and law are in dispute, the court must refer the case to arbitration unless the relevant factual questions require “only superficial consideration of the documentary evidence in the record”.

It decided to assess the validity of the arbitration clause because there was a real prospect that the plaintiff’s challenge may never be resolved at arbitration due to the fees involved. The Supreme Court held that the clause was unconscionable because there was an inequality of bargaining power between Uber and the plaintiff, and the terms were unfair, with the court noting things like the huge up-front fee.

Court of Appeal decides that validity of mandatory arbitration clause to be determined in arbitration

The second case is an example of when the court stayed the court proceedings, deciding that the validity of the mandatory arbitration clause was a matter for the arbitration itself.

In the recent decision of the Court of Appeal for Ontario in Irwin v Protiviti, an employee sued for constructive dismissal. Her employer applied to stay the proceedings, relying on a mandatory arbitration clause which said that awards of costs and punitive damages would not be available in arbitration. The employee argued the clause was unconscionable and inconsistent with the ESA.

The Court decided to stay the proceedings, leaving the issue of the validity of the mandatory arbitration clause to be decided in the arbitration. It found that the determination of unconscionability in the case would involve a “probing factual inquiry” and that the question of the clause’s consistency with the ESA was one of mixed fact and law and could not be decided in the abstract. 

As a result, these matters would need to be determined at arbitration after considering the evidence. The Court noted that the case was different from Uber because “none of the access to justice concerns” were present – the employee earned a base salary of $350,000 and had the assistance of legal counsel during the negotiation of her employment agreement. 

Contact Haynes Law Firm in Toronto for Guidance on Employee Termination and Employment Contracts

Haynes Law Firm helps employers and employees throughout Ontario achieve effective solutions to legal issues and conflict management in employment law and civil litigation. We ensure our employee clients leave nothing on the table when negotiating the terms of their dismissal, so they have the resources they need while they seek new employment. We also help employers manage employee terminations to limit their exposure to legal claims. We carefully draft employment contracts and advise on mandatory arbitration clauses. Please contact us online or call us at 416.593.2731.