Why this decision matters
In Lochan v. Binance Holdings Limited,1 the Ontario Superior Court of Justice declined to stay a class proceeding against a crypto currency trading platform in favour of arbitration.
In so doing, the Court held that the arbitration agreement embedded in the trading platform website — which, at the time the litigation was launched, required arbitration in Hong Kong, under Hong Kong law — was both unconscionable and contrary to public policy as it effectively turned "arbitration into a vehicle for circumventing the consumer protection provisions of Ontario's securities legislation."
As this decision illustrates, following the Supreme Court of Canada's lead in Uber Technologies Inc v. Heller,2 courts may be reluctant to enforce arbitration provisions in online "click" contracts where those provisions are prima facie onerous or unfair, or appear to be designed to deprive adherents — especially consumers or members of public — of statutory protections.
Factual overview
Binance Holdings Ltd. and related companies ("Binance") are the world's largest crypto trading platform. The court described in its reasons that from 2019 until early 2022, Binance offered crypto derivative products to the general public across Canada, including in Ontario, on its website. In 2021, the Ontario Securities Commission ("OSC") issued regulatory guidance which clarified that such products are regulated under capital markets legislation in Canada, including the prospectus requirement (for products that are considered securities), dealer registration and marketplace recognition under the Securities Act (Ontario) (the "Act"). Binance never filed a prospectus with respect to any of its offerings in Ontario, nor did it register with the OSC or obtain exemption from such registration.
The plaintiffs, Ontario investors, initiated a class proceeding against Binance pursuant to section 133 of Act, which establishes a statutory right of action for rescission or damages against a company selling securities for failure to file or deliver a prospectus.
Binance sought a stay of the plaintiffs' action based on the arbitration agreement entered into by class members as part of their registration on the Binance website. The registration process prompted investors to open accounts in "under 30 seconds."3 The agreement was embedded in the website terms and conditions and comprised approximately 50 pages.4 It provided that Binance could make changes to any part of the agreement, and that by agreeing to its terms, users would also agree to any subsequent amendments to those terms.5
During the course of the proposed class period, the arbitration venue and choice of law ranged from Singapore and Singaporean law, to Switzerland and with the choice of law to be determined under International Chamber of Commerce arbitration rules, to Hong Kong and Hong Kong law at the time the claim was initiated. For a significant period, no venue or choice of law was specified.6
The plaintiffs relied on section 9 of the International Commercial Arbitration Act and article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration to argue that the arbitration agreement was unenforceable insofar as it was void, inoperative, or incapable of being performed.7
The Court's decision
The Court declined to grant a stay of the class proceeding on the basis that the arbitration agreement, being contrary to public policy, was void ab initio and that it was unconscionable in any event.
Contrary to public policy
Based on the Supreme Court of Canada's decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.8, the Court held that the enforceability of the arbitration agreement was a question of law (rather than mixed fact and law), as the arbitration agreement was a standard form contract and the plaintiffs had raised no individual facts or factual matrix specific to the parties.9
The local law of the forum (lex fori) governed the public policy analysis. As such, the Court considered the factors outlined in Uber Technologies v. Heller to determine whether a contractual limitation on access to the courts imposes undue hardship and is therefore contrary to public policy. The Court held that in requiring adherence to an expensive and all-but-inaccessible arbitration procedure for the resolution of all disputes (without regard to quantum or complexity), the arbitration agreement offended public policy and was therefore unenforceable.
In particular, the Court found:
- Other than as a choice of forum, Hong Kong had no connection with the plaintiffs or with Binance, a Cayman Islands company. The dollar amount for disputes likely to arise under the contract between Binance and investors was disproportionate to the cost to pursue a claim under the arbitration agreement. While the average investor's claim would likely total around $5,000 dollars, it would cost $36,000 excluding legal fees and travel expenses to arbitrate a dispute at the Hong Kong International Arbitration Centre ("HKIAC"), as required under the agreement and there was no guarantee the parties would be able to proceed virtually.10
- The arbitration agreement was a standard form contract that did not allow any room for negotiation. Investors had no bargaining power, as they "click" the agreement online to invest and had no opportunity to negotiate its terms. The unspoken premise of Binance's quick "30 second" sign up marketing was that "agreeing" to the terms and conditions, including the arbitration agreement, took almost no comprehension at all.11
- There was no nuance to the arbitration agreement. Every claim, regardless of subject matter or quantum, was mandated to go to the HKIAC.12
Unconscionability
At the time the class proceeding was initiated, the arbitration agreement specified that the arbitration would be governed by the laws of Hong Kong and subject to the HKIAC Rules, which in turn specified that the substantive law of Hong Kong would be applied to any dispute.13
Given that the basis of the plaintiff investors' claims against Binance for failure to deliver a prospectus was a statutory cause of action under the Act, the Court held that staying the action in favour of arbitration under Hong Kong law would be tantamount to denying relief for the claim — applying foreign law to determine whether Binance's conduct contravened the Act would give Binance an "out" for failure to comply with the requirements of the Act.14
The non-negotiable "click" contract engineered by Binance buried key details of the arbitration agreement (including choice of law and location) to its own advantage. The inequality of information and inequality of power in the bargaining relationship that resulted from this informational deficit was at a maximum. As such, the arbitration agreement was unconscionable in that it was fundamentally unfair to investors, and therefore unenforceable.15
Concluding Thoughts
The Court followed the Supreme Court of Canada's decision in Uber closely, finding that an arbitration agreement within a contract of adhesion with onerous and costly arbitral procedures was unenforceable.
Standard form and click-through agreements remain important tools for sophisticated commercial parties and in the context of consumer facing e-commerce. Parties preparing these contracts will need to continue to be mindful of the dispute resolution provisions included in these agreements to ensure that they can withstand the court's scrutiny and remain enforceable.
Footnotes
1. 2023 ONSC 6714.
2. 2020 SCC 16.
3. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 13.
4. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 13.
5. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 14.
6. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 11.
7. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 4-7.
8. 2016 SCC 37.
9. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 22.
10. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 28-31.
11. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 32.
12. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at para. 33.
13. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 39-40.
14. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 42-43.
15. Lochan v. Binance Holdings Limited, 2023 ONSC 6714 at paras. 50-51.
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