In Lochan v. Binance Holdings Limited, 2024 ONCA 784 (Lochan), the Court of Appeal for Ontario (the ONCA) upheld the dismissal of the defendant’s stay motion in a securities class action on the basis that the underlying arbitration clause found in the online agreement between the defendant and proposed class members was contrary to public policy because it was unconscionable. The driving factor here was that the clause appeared to make arbitration inaccessible to proposed class members (by making it prohibitively expensive). Recently, the Supreme Court of Canada has denied leave to appeal.
While the “competence-competence” principle requires that challenges to an arbitral tribunal’s jurisdiction should be first determined by the arbitral tribunal itself and is generally difficult to displace, here the ONCA applied the exceptions to review the issue of jurisdiction itself—because the validity of the clause depended on a question of law alone and did not require findings of fact and because the clause itself made the arbitration inaccessible—such that class members would be unable to bring the matter before an arbitrator to decide jurisdiction.
Background
The appellant, Binance Holdings Limited, operates a large cryptocurrency trading platform. The respondents, Christopher Lochan and Jeremy Leeder, commenced a proposed class action against the appellant under section 133 of the Ontario Securities Act, RSO 1990, c S.5, s 133, for selling cryptocurrency derivatives through its website without filing or delivering a prospectus. The appellant moved to stay the proceedings on the basis that the “Terms of Use” contract agreed to by users of the Appellant’s website includes an arbitration clause.
Motion to stay proceedings dismissed
The Ontario Superior Court of Justice (the ONSC), in Lochan v. Binance Holdings Limited, 2023 ONSC 6714, dismissed the stay motion, invoking exceptions to the competence-competence principle—under which arbitrators typically decide their own jurisdiction. The Court ruled on the validity of the arbitration clause, finding it void as contrary to public policy and unconscionable.
Central to the ONSC’s decision were the following facts:
- The appellant’s website prompted users to open accounts in under 30 seconds, during which they were asked to agree to around 50 pages of terms, including an arbitration clause;
- The arbitration clause allowed the appellant to change the arbitration agreement unilaterally and required users to accept any changes;
- During the proposed class period, the appellant altered the arbitration forum and governing law four times, including to an unspecified location with no clear law or rules;
- The relevant forum was Hong Kong, under Hong Kong law, and administered by the Hong Kong International Arbitration Centre, which imposed prohibitive costs for claimants, with the median arbitration cost being about CA$36,000, excluding legal fees and travel expenses.
The ONSC further held that the cost to access the arbitral tribunal rendered the forum inaccessible to the average crypto investor, and the choice of arbitration effectively granted immunity to the appellant. The appellant “engineered the arrangement to take advantage of the complexity that was hidden behind the superficially benign appearance of an arbitration clause” (see paras. 7-9).
The ONCA dismisses the appeal
On appeal, the ONCA dealt with the following issues:
- Does a finding that an arbitration clause is contrary to public policy constitute an independent ground to refuse a stay in favour of arbitration?
- Did the motion judge err in applying exceptions to the competence-competence principle?
The threshold analysis
The appellant argued that the ONSC erred in holding that an arbitration clause being contrary to public policy was an independent ground for an Ontario court to assume jurisdiction and refuse a stay in favour of arbitration.
Relying on Spark Event Rentals v. Google LLC, 2024 BCCA 148, the appellant argued that a domestic court must first satisfy itself that an exception to the competence-competence principle applies before deciding whether an arbitration clause is void as contrary to public policy.
The ONCA agreed with the proposition in Spark but rejected the appellant’s argument that the ONSC failed to engage in the threshold analysis. The threshold analysis means that the court could not consider arguments that the arbitration clause was invalid due to public policy or unconscionability without first determining if one or more exceptions to the competence-competence principle applies.
The ONCA held that the ONSC satisfied itself of the relevant exceptions to the competence-competence principle set out in Dell Computer Corp v. Union des consommateurs 2007 SCC 34 (Dell) and Uber Technologies Inc v. Heller, 2020 SCC 16 (Uber), which Spark did not change:
- where the jurisdictional issue depends on a question of law alone or where questions of mixed fact and law required only a superficial consideration of the documentary record, and
- where impediments exist that functionally prevent a party from bringing a matter to arbitration such that, if the issue of validity of the arbitration is left to the arbitral tribunal, there is a real prospect that it will never be resolved by the arbitral tribunal.
This second part of the test is referred to as the “brick wall” framework, which is concerned with addressing cases where an arbitration clause is effectively insulated from meaningful challenge, such as through high fees and inability, due to cost, to reach the place of arbitration.
Exceptions to the competence-competence principle
The appellant also argued that the ONSC erred in holding that the circumstances fell within an exception to the competence-competence principle, because the motion judge had in fact findings of fact to determine whether the arbitration clause was void.
The ONCA rejected this argument. The ONSC found that the competence-competence principle was displaced based on a superficial review of the documentary record as permitted by the exceptions set out in Dell and Uber. The Dell exception applied since the contractual terms were standard form and raised a legal issue. To the extent a review of the factual record was required, it did not require fact-finding specific to the representative plaintiffs but rather could be considered based on the documentary record and considering the types of disputes likely to arise under the arbitration clause. The Uber exception also applied since the inaccessibility of the arbitration forum due to cost, distance, and choice of law, meant that there was a real prospect that the challenge to the validity of the arbitration clause could never be resolved if it were referred to the arbitral tribunal (see paras. 23-34).
Finally, the appellant argued that the ONSC erred in its application of the “brick wall” analysis defined in Uber by engaging in more than a superficial analysis of the evidence on the threshold issue of whether, if the dispute was referred to arbitration, the validity of the arbitration clause would likely never be decided. The appellant also argued that the motion judge erred in considering whether average purchasers of cryptocurrency could access the arbitral tribunal, rather than looking at the respondents as representative plaintiffs, who purchased larger values of cryptocurrency compared to an average purchaser. The ONCA rejected these arguments on the basis that the motion judge did not exceed a superficial documentary review as permitted. There was no nuance in the arbitration clause. The clause required all disputes to be arbitrated. There was no error in considering public policy and unconscionability based on the average cryptocurrency investor and the nature of the disputes likely to arise under the arbitration clause (see paras. 25-27).
The ONCA dismissed the appeal.
What do you need to remember
Lochan has affirmed the existing jurisprudence regarding the exceptions to the competence-competence principle that allow a court to rule on the jurisdiction of an arbitral tribunal without first referring the question to the arbitral tribunal itself.
However, this decision illustrates that courts will often examine arbitration clauses in standard form “click” contracts more closely than those in agreements negotiated by experienced commercial parties. In this case, ONSC’s key concerns were the inequality of bargaining power between the parties and the inaccessibility of arbitration. The terms of arbitration were hidden from users and the appellant could unilaterally set and change the terms of arbitration. The forum of arbitration was located far from most class members and the costs of arbitration alone exceeded the average potential claim a class member could have.
In contrast, the British Columbia Court of Appeal in Petty v. Niantic, 2023 BCCA 315, leave to appeal dismissed 2024 CanLII 43098 (SCC) (Niantic), rejected similar arguments and upheld the lower court’s grant of the defendant’s motion to stay in favour of arbitration. The arbitration clause in Niantic was also a standard form “click” contract and provided that the arbitration would occur in the claimant’s jurisdiction, claimants could select between arbitration or advancing a civil claim, users could opt out of the arbitration clause within 30 days, and that the defendant would not seek costs if it was successful, but the claimant could seek costs against the defendant if they were successful.
These cases demonstrate that companies should be aware of whether the arbitration clauses in their standard form “click” contracts constitute a meaningful dispute resolution mechanism. While many such clauses in standard contracts are upheld, their enforceability depends on the specifics, such as hiding the arbitration clause under overly complex terms and logistical barriers rendering arbitration inaccessible.
For more information on this topic, please reach out to the authors, Chloe Snider and Ekin Cinar.
The authors wish to thank Janson Fu, articling student, for his assistance with this article.
