Are your Terms of Service unconscionable?

The Supreme Court of Canada has substantially broadened the application of the doctrine of unconscionability and its application to contracts of adhesion. The result is a further elevation of the role of reasonable expectations in determining the enforceability of contractual provisions. As the court concluded:

Applying the unconscionability doctrine to standard form contracts also encourages those drafting such contracts to make them more accessible to the other party or to ensure that they are not so lop-sided as to be improvident, or both.

Uber Technologies Inc. v. Heller, 2020 SCC 16, per Abella & Rowe, at para 91.

The court’s approach to unconscionability suggests that there is a social compact involved in the enforceability of contracts of adhesion.

The court will overlook – to a point – the fiction of meaningful agreement on the terms of a click through standard form contract of adhesion. However, the court’s willingness to enforce such contracts comes at a price. If the contract is between manifestly unequal parties, the bargain must be in a zone of fairness. Tilting the balance too far in favour of the drafter may result in a fundamentally unfair bargain that is beyond the reasonable expectations of the other party — and, as a result, may risk unenforceability.

This post examine what happened, why we should care, and what SaaS providers can do.

What happened?

The case before the court involved an Uber driver’s challenge to the applicability of an arbitration clause in the services agreement between Uber and its Uber drivers.

The facts weren’t great for Uber. The arbitration clause required drivers in Canada to arbitrate disputes in the Netherlands. Worse, initiating an arbitration would require an upfront payment of US$14,500 plus the cost of legal fees and other costs of participation.

The facts showed that the upfront fee alone would have consumed the vast majority of the driver’s annual income using the Uber app. The practical result, of course, would be that few drivers would actually pursue a dispute under these circumstances. It seems Uber had no evidence to the contrary.

Although one judge (Justice Côté) found in favour of Uber, the facts were bad enough that the result was as close to a foregone conclusion as one might get. The question really was how the court would get there. Brown J. would have found the arbitration clause invalid on the basis that it was a barrier to access to justice – it was, in effect, an anti-arbitration clause.

However, the majority of the court favoured the application of the doctrine unconscionability and, in doing so, substantially broadened its potential application.

Unconscionability involves two elements:

  • Inequality of bargaining power
  • A resulting improvident bargain

The court found that “inequality of bargaining power exists when one party cannot adequately protect their interests in the contracting process” (para. 66).

It is not necessary to show that one party intended to take advantage of the other party or even that the imbalance was overwhelming. Instead, the court stated that an inequality of bargaining power can arise from many circumstances where the end result is that only one party could really understand the full implications of the contractual terms:

[…] example of an inequality of bargaining power is where, as a practical matter, only one party could understand and appreciate the full import of the contractual terms, creating a type of “cognitive asymmetry” […]. This may occur because of personal vulnerability or because of disadvantages specific to the contracting process, such as the presence of dense or difficult to understand terms in the parties’ agreement. In these cases, the law’s assumption about self-interested bargaining loses much of its force. […].

Uber Technologies Inc. v. Heller, at para. 71.

An improvident bargain is one where the party has “been unduly disadvantaged by the terms that they did not understand or appreciate” (para. 77). The terms are unfair when, given the context, they flout the ‘reasonable expectation’ of the weaker party (para.77). This can happen when the “fine print” tends to transform the true nature of the bargain in favour of the party who drafted those terms (at para. 89).

Why we should care?

As Brown J. noted, the majority appears to have significantly broadened the scope of the doctrine of unconscionability. Brown J. argued that the majority “readily” accepted that a standard form contract itself may be an indicator of inequality of bargaining power. Since there is no requirement that the party who drafted the terms intended to take advantage of the other party, the question ultimately becomes whether the terms are sufficiently unfair as to be contrary to the reasonable expectations of the other party.

On the issue of whether there was inequality of bargaining power between the Uber driver and Uber, the majority singled out these factors (at para 93):

  • The contract as a standard form contract of adhesion
  • There was a “gulf in sophistication” between the driver and Uber, “a large multinational corporation”
  • The agreement failed to provide information about the cots of mediation and arbitration in the Netherlands and a person in the river’s position “could not be expected to appreciate the financial and legal implications of agreeing to arbitrate under ICC Rules or under Dutch laws
  • The rules were not attached to the agreement, so he “would have had to search them out himself

Of course, inequality of bargaining power is not enough. The bargain itself must be improvident. Here, the court found that the arbitration clause, “in effect modifies every other substantive right in the contract” due to the onerous arbitration provision that would be necessary to exercise in order to enforce those rights (at para. 94). However, the court also said that improvidence is inherently contextual:

Because improvidence can take so many forms, this exercise cannot be reduced to an exact science. When judges apply equitable concepts, they are trusted to “mete out situationally and doctrinally appropriate justice” […]. Fairness, the foundational premise and goal of equity, is inherently contextual, not easily framed by formulae or enhanced by adjectives, and necessarily dependent on the circumstances.

Uber Technologies Inc. v. Heller, at para. 78.

What can SaaS providers do?

Despite Brown J.’s alarm-ringing, there is no suggestion that that the test for improvidence is so low that a company cannot insert terms to protect itself in a standard form contract, even if these terms materially disadvantage the other party. The test remains high.

I suppose a SaaS provider might rationally employ a “take our chances” approach. The SaaS provider could seek to rely on severance to preserve the balance of a contract from a term found to be conscionable.

However, the Uber case still provides useful fodder for thinking about how to draft standard form contracts such as online terms of service. Here are some initial thoughts:

  • Consider reasonable expectations in context. If the contract is for terms of service that would generally be entered into between sophisticated businesses, the risk of unconscionability is low. However, if there is likely to be a significant gap in legal sophistication, the terms of service should be reviewed through the eyes of a reasonable, but legally naïve, person. Anything that would be “surprising” should be brought to the attention of the contracting party up-front.
  • Spend the time to draft in plain language. A critical defence to a claim of unconscionability is that the meaning and significance of important terms was brought to the attention of the other party. Where the contract will be “clicked-through” by legally unsophisticated parties, those parties should not have to understand the legal context or search for documents incorporated by reference.
  • Avoid onerous dispute resolution procedures. Dispute resolution procedures must be proportional to the value of the contract. If the dispute resolution procedure essentially negates the ability of the other party to enforce the terms, then that will be a marker of an improvident bargain.
  • Consider whether limitations of liability and exclusions are unfair. Courts have been willing to enforce limitations and exclusions of liability provided that they are clearly drafted. However, a limitation of liability or exclusion that essentially negates any meaningful remedy may well be vulnerable to attack on the basis of unconscionability if the contract is entered into with a legally unsophisticated party or in circumstances where there was no real market choice. Context is relevant here. The nature of the services are likely to be highly relevant, as is their cost.
  • Consider reasonable expectations when granting yourself rights. Companies may need to consider just how far they can really go in granting themselves rights to transfer intellectual property (e.g. in user-generated content) and to monitor behaviour and appropriate data in some contexts where the stakes are higher for the other party because of the potential practical impact on their interests. The further these stray from what a reasonable, naïve person would expect, the more vulnerable the provision.

Categories: Cloud Computing, Consumer Contracts, Litigation

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