Lochan v. Binance Holdings Limited: Not All Mandatory Arbitration Provisions Are Here To Stay

Introduction

Courts continue to clarify which mandatory arbitration provisions are enforceable following Uber Technologies Inc. v. Heller[1]. Corporations rely on mandatory arbitration provisions, often twinned with collective action waivers, to prohibit claimants from bringing civil proceedings that seek collective redress. Scholars observe that this strategy of “private procedural ordering”[2] – in which parties impose private procedural rules for dispute resolution, displacing the role of public courts – harnesses freedom of contract to eliminate class actions and, consequently, certain types of claims.[3]

Over the past few years, Canadian courts have considered the circumstances in which proposed class proceedings should be stayed in favour of mandatory arbitration. The Court of Appeal’s recent decision in Lochan v. Binance Holdings Limited[4] reiterates that a central concern for courts is whether an arbitration provision genuinely offers an alternative dispute resolution process or practically extinguishes the ability of claimants to vindicate their rights.

Background

The appellant, Binance Holdings Limited (“Binance”),[5] operates the world’s largest cryptocurrency trading platform. Between 2019 and early 2022, Binance sold cryptocurrency derivates to Canadians through its website. Cryptocurrency derivates contracts are novel, complex, and risky securities that present investor protection concerns. A cryptocurrency derivates seller is required to file a prospectus.[6]

In the underlying action, the representative plaintiffs commenced a proposed class proceeding against Binance, under s. 133 of the Ontario Securities Act,[7] for rescission or damages because Binance never filed or delivered a prospectus to investors with respect to its securities offerings.[8]

The Motion to Stay

Binance moved to stay the action on the basis that users of Binance’s website agreed to a terms of use contract (“TOU”), which required that any disputes be resolved by arbitration. The motion judge dismissed Binance’s stay motion. He found that the arbitration clause in the TOU was void both as contrary to public policy and because it was unconscionable based on several findings, including the following:

• Binance’s website prompted users to open accounts under 30 seconds, during which they were purported to agree to roughly 50 pages of terms, including the arbitration clause;
• The arbitration clause provided that Binance could change any part of the arbitration agreement, and users agreed to subsequent amendments by agreeing to the TOU;
• Binance had changed the forum of arbitration and the governing law four times to various destinations far from Canada, and in one period to “an unspecific location, under unspecified law, under unspecified administration and rules”; and
• The last forum for arbitration set by Binance – Hong Kong – imposed prohibitive costs. The median cost of disputes under $1M USD was approximately $36,000 CAD, excluding costs of travel, accommodation, tribunal appointed expert advice, legal fees, transcript services, etc.[9]

The motion judge found that the starting cost to access the arbitral tribunal rendered the forum inaccessible to the average cryptocurrency investor. He also found that Binance drafted the TOU to “take advantage of the complexity…hidden behind that superficially benign appearance of an arbitration clause”, with details of the arbitration clause “buried out of sight, and the logistical complexity and expense of arbitration […] not revealed anywhere.”[10]

The Appeal

The central issue on appeal concerned whether the motion judge properly established an exception to the competence-competence principle to assume jurisdiction and determine the validity of the arbitration clause.

Binance argued that the motion judge erred in his approach to jurisdiction. According to Binance’s characterization, the motion judge held that an arbitration clause being contrary to public policy was an independent ground for the court to take jurisdiction and refuse a stay in favour of arbitration. Relying on Spark Event Rentals v. Google LLC,[11] Binance argued that the motion judge decided the substantive issue of whether the arbitration clause was void without first considering the threshold issue of whether it had jurisdiction.

The proper analysis on a motion for a stay of proceedings in favour of arbitration is to first determine whether an exception to the competence-competence principle exists. As the Court of Appeal noted, both Dell Computer Corp. v. Union des consommateurs[12] and Uber hold that, in general, challenges to an arbitral tribunal’s jurisdiction must be first decided by that tribunal under the “competence-competence” principle.[13] If a plaintiff fails on this threshold issue, then the validity of an arbitration clause remains for the arbitral tribunal to decide.

The exceptions to the competence-competence principle in Dell and Uber differ. Under the Dell exception, a court may rule on a challenge to the arbitrator’s jurisdiction that involves
(a) a legal question alone or (b) questions of mixed fact and law that “require only a superficial consideration of the documentary record.”[14]

The Uber exception, on the other hand, considers the Dell framework and whether “impediments exist that functionally prevent a party from bringing a matter to arbitration such that … there is a real prospect that it will never be resolved by the arbitral tribunal.”[15] That is, the practical reality is that the question of jurisdiction will never even reach the arbitral tribunal. Noting that the Uber analysis is often jurisprudentially referred to as the “brick wall” framework, the Court of Appeal explained that the Uber exception addresses the concern that “an arbitration clause is effectively insulated from meaningful challenge.”[16]

In conclusion, the Court of Appeal found that the motion judge’s approach was consistent with Spark, Dell, and Uber, and it upheld his decision to dismiss Binance’s stay motion. The Court of Appeal found that the motion judge first considered the threshold issue of whether there was an exception to the competence-competence principle and then moved on to decide whether the arbitration clause was void.[17] As the motion judge found, the Uber exception to the competence-competence principle applied. A superficial review of the record showed that, “because of the inaccessibility of the arbitration forum due to cost, distance, and choice of law, there was a real prospect that the challenge to the validity of the arbitration clause would never be resolved if it were referred to the arbitral tribunal.”[18]

Final Comments

There is an ongoing debate about the appropriateness of mandatory arbitration in the context of aggregable claims, including whether it signals the demise of meritorious, low-value claims. As one scholar observes with respect to the U.S., increased use of arbitration, coupled with collective action waivers, has disproportionately impacted the working poor – many of whom are racial minorities and women – because arbitration is almost always too expensive for typical wage-and-hour employees to pursue.[19]  

Canadian courts continue to honour mandatory arbitration provisions that appear to lead to a genuine alternative dispute resolution path. However, as in Lochan, courts are equally willing to find an exception to the competence-competence principle – and to refuse to stay a class proceeding – where an arbitration provision is sufficiently onerous to practically foreclose access to arbitral resolution.

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