Supreme Court of Canada Adopts Two Part Test For Unconscionability

In a recent case, Uber Technologies Inc. v. Heller, the Supreme Court of Canada upheld the two-part test for unconscionability in contract law. This decision voids the controversial arbitration clause in Uber drivers’ contracts and will allow for a class action lawsuit against Uber for violation of the Employment Standards Act. The case also has significant implications for anyone operating under a standard-form contract.

Freedom to Contract And Unconscionability

The Supreme Court of Canada spent a significant portion of their decision considering freedom of contract. This doctrine holds that the court should generally not interfere in contracts without a valid reason. In past decisions, the courts and legislatures have created a variety of reasons to override contracts and therefore limit Canadians’ freedom of contract. One tool that is commonly applied is unconscionability.

Unconscionability exists when part or all of a contract is considered too unfair to be upheld. This doctrine exists because the freedom to contract “presumes equality between the contracting party and that ‘the contract is negotiated, freely agreed, and therefore fair”’ The court considered two different tests for unconscionability, but ultimately settled on the classic two-part test:

1. there is inequality of bargaining power between the parties, such as where the weaker party is dependent on the stronger party and would therefore be inclined to agree to unfair terms, or where the weaker party is incapable of understanding the meaning of the contract; and

2. an improvident bargain exists at the time the contract is formed, viewed in the context of the surrounding circumstances.

In Uber, the Supreme Court held that the standard nature of the contract as it existed in the Uber App was designed so most drivers would not read it and no driver could reasonably expect to negotiate different terms. The inflexible nature of the contract contributed to the case satisfying the first part of the test.

The court ultimately held that Uber’s Arbitration clause was “improvident” to the point of being unconscionable. The arbitration clause required drivers to agree to be governed by Dutch law and to settle contractual disputes with Uber before an arbitrator in the Netherlands. The court held that no reasonable driver would ever be able to attend an arbitration hearing due to the prohibitive costs involved relative to the potential award if they won their dispute. This clause was so unfair that it was unconscionable.

Implications of the Uber decision for employers

The court acknowledged that the Uber judgement had repercussions for standard form contracts, however, the judgement does not go so far as to invalidate standard form contracts that are drafted without input from one of the parties. The decision instead encourages businesses to make their contracts “more accessible to the other party or to ensure that they are not so lop-sided as to be improvident, or both.”

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