A ridesharing platform driver sued the company for violations of employment standards legislation and the company argued his case should be dismissed because their contract says disputes are to be settled by arbitration in Holland; the Supreme Court of Canada decided in the driver’s favour. That’s nice, you might be thinking, but why am I reading about it on an entertainment law blog? Because the Supreme Court of Canada decision in the recent Heller case (2020 SCC 16) has put forward an expansive interpretation of the doctrine of unconscionability in Canadian contract law, which could impact many different kinds of contracts that are routinely encountered by entertainment lawyers and their clients.
The doctrine of unconscionability allows courts to invalidate certain provisions (or even entire contracts) which are “unconscionable”. This means that a client could find themselves unable to enforce a contract (or particular provisions within it) if the other party to the contract convinces a court that the provisions/contract meet the test for unconscionability. Below, in addition to a brief review of the discussion of unconscionability found in the SCC majority’s reasons, we identify the practical, proactive steps that can be taken in light of the Heller decision.
Identify What Contracts Might Be Impacted
While it might not always be obvious, it is important to appreciate that entertainment clients can make use of a significant number of “standard form” contracts (i.e., contracts which are non-negotiable): submission releases, on-camera appearance releases, “standard form” riders that are attached to cast and crew deal memos, subscriber/access contracts used in connection with apps and online services, etc. Essentially, any contract which someone is asked to sign in which, functionally, none of the terms are changeable (beyond perhaps changing names and dates) is potentially a “contract of adhesion” (the rather dramatic term of art sometimes used to describe standard form contracts). That being said, the concern about unconscionability is most acute for contracts that are routinely entered into with employees and consumers; those are the contracts should be most carefully scrutinized, as those are the circumstances where the concerns of potential unconscionability are amplified, due to the general disparity in bargaining power and because those are the contracts most likely to be non-negotiable.
Particularly Scrutinize “Improvident Bargain” Provisions
Contractual provisions which impose an “improvident bargain” on the weaker contracting party are vulnerable to being deemed unenforceable. What makes something an “improvident bargain”? While it’s difficult to provide a definitive answer, these are the terms that the Supreme Court used when considering the matter: “unfair”, “undue advantage”, “undue disadvantage”, provisions which “flout” reasonable expectations, or cause “unfair surprise”. While the Heller case involved the choice of law, forum, and dispute resolution provisions in a standard form contract (which should be reviewed!), other provisions may be subject to particular scrutiny, including:
- indemnity provisions (e.g., the contract obligates the unsophisticated contracting party to indemnify the company for a broad spectrum of losses or costs without any limit)
- limitations of liability (e.g., the contract caps the more powerful party’s liability at a nominal or modest amount (or at $0))
- waivers of claims (e.g., the unsophisticated contracting party gives up any right to sue, such as for copyright infringement, defamation, etc.)
Revise and Re-Word
If you’ve identified potentially problematic provisions, try to re-draft them with these goals in mind:
- make them easier to understand (keep them as short and as clear as possible)
- take steps to draw the attention of contracting parties to potentially problematic terms
- revise clauses which are onerous or one-sided to make them reflect a more reasonable compromise between the parties’ interests
Recognize that some clauses are just inherently going to be one-sided – there might not be a feasible way to make them “less one-sided”. If you have those kinds of clauses, refer to the first two goals: make them clear, and make sure the other party knows about them and the consequences of what they are agreeing to. Finally, as the Heller decision emphasizes, do not make it difficult or practically impossible for the other party to dispute the contract or enforce their rights under it.
Don’t Just Throw Out All Your Standard Form Contracts!
The decision does not mean that all standard form contracts are inherently vulnerable. The threat of an unconscionability finding (and thus an inability to enforce) may be entirely absent or at least substantially reduced where the contracting parties are of roughly equivalent bargaining power and/or the parties are commercially sophisticated. As seen in para. 88 of the judgment, the majority of the Supreme Court takes pains to note that “Standard form contracts are in many instances both necessary and useful. Sophisticated commercial parties, for example, may be familiar with contracts of adhesion commonly used within an industry. Sufficient explanations or advice may offset uncertainty about the terms of a standard form agreement.”
For our purposes, a basic sketch of the facts in the case will suffice. Mr. Heller, who lives in Ontario, signed up with a ridesharing platform as a driver; as part of that sign-up process, he entered into a “standard form” online contract with the entity who owns and operates the platform – meaning that the contract had been drafted by that entity, and presented to Mr. Heller on a non-negotiable, “take it or leave it” basis; Heller entered into the contract simply by clicking “I agree” in the ridesharing app. The contract stipulated that the governing law of the contract was the law of the Netherlands, and that any dispute between Heller and the ridesharing platform had to be resolved by mediation and arbitration taking place in the Netherlands; commencing any such process required the payment of administrative and filing fees of US$14,500 (an amount which represented a significant percentage of Mr. Heller’s earnings under his arrangement with the ridesharing platform).
Mr. Heller commenced a class action against the ridesharing platform, arguing that drivers such as himself were employees (rather than independent contractors) and thus were entitled to various protections provided for in the Employment Standards Act (Ontario). The ridesharing platform tried to stay the proposed class action, arguing that, by virtue of the arbitration clause in the contract, the proper forum and format for resolution of the dispute was in the Netherlands. The Supreme Court of Canada ultimately decided in favour of Heller, holding that the arbitration clause in the contract was unconscionable and, therefore, unenforceable. While the Court spent time considering other important issues, the remainder of this post is going to focus solely on the unconscionability analysis.
Specifics of the SCC’s Unconscionability Analysis
Unconscionability is an equitable doctrine which enables courts to “set aside” (or decline to enforce”) unfair contracts which arise from an inequality of bargaining power. The Supreme Court describes the purpose of the doctrine as “protect[ing] those who are vulnerable in the contracting process from loss or improvidence to that party in the bargain that was made” (see para. 60 of the judgment; emphasis in original). While originally used – if only sparingly – to protect particular classes of contracting parties (such as vulnerable minors or persons suffering from cognitive impairment) from being unfairly taken advantage of, the doctrine has evolved to cover effectively any contract (see paragraphs 54ff of the judgment for a discussion of the history and trajectory of the doctrine).
The majority reasons in the Heller case confirm that the Canadian test for contractual unconscionability involves a two-part analysis: (1) inequality of bargaining power and (2) a resulting “improvident bargain” (or “unfairness” or “undue advantage or benefit”). Inequality of bargaining power is found where (to quote Professor John McCamus) “one party is incapable of adequately protecting his or her interests”; that incapacity can arise from a wide variety of external and internal factors: it might be due to “differences in wealth, knowledge, or experience”, due to cognitive limitations, or merely from circumstances such that the contracting party was “volitionally impaired or desperately needy” (quoting Professor Mitchell McInnes). It can be found where the contract contains “dense or difficult to understand terms” (para. 71). The inequality of bargaining power has the effect of “impair[ing] a party’s ability to freely enter or negotiate a contract, compromis[ing] a party’s ability to understand or appreciate the meaning and significance of the contractual terms, or both” (para. 70).
What counts as an “improvident bargain”? This is a little more difficult to pin down, as the question can only be answered by considering the specific context of the contract and the “bargain” it represents. The improvidence is assessed by reference to the time at which the contract was entered into. Improvidence requires that the contract (or provision) “unduly advantages the stronger party or unduly disadvantages the more vulnerable” (para. 74). The determination can be made by having reference to whether the weaker party is in desperate circumstances and the contract provides for a price of goods which “departs significantly from the usual market price” (para. 76); alternatively, an improvident bargain can be evidenced by provisions which “flouts the ‘reasonable expectation’ of the weaker party … or cause an “unfair surprise” (para. 77).
As noted above, the majority reasons acknowledge that standard form contracts are an integral part of modern commercial contracting practices. Simply because a contract is a “standard form” contract does not mean it is unconscionable and hence unenforceable. Rather, the reasons are a signal to those drafting standard form contracts that they should “make them more accessible to the other party or to ensure that they are not so lop-sided as to be improvident, or both” (para. 91).