Canadian Appellate Decision Highlights Class Action and Mass Arbitration Risks for Companies in Operating in Multiple Jurisdictions

The Court of Appeal for Ontario dismissed Binance's appeal after a lower court declined to stay a proposed class action and enforce an arbitration agreement contained in Binance's terms and conditions. The decision carries implications for companies who do retail business or distribute products in multiple jurisdictions, including in Canada.

Background

As a Cayman Islands company, Binance Holdings Limited ("Binance"), together with associated companies, marketed and sold cryptocurrency derivative contracts to Canadian retail investors though the Binance website. In the wake of Binance's exit from the Ontario market, in June 2022 a proposed class filed an action against Binance in the Superior Court of Justice of Ontario. The proposed class of retail investors argued that Binance distributed securities and investment contracts under Canada's securities laws, but failed to file or deliver a prospectus required by law.

Binance sought to stay this proposed class action in favor of arbitration, relying on the terms and conditions posted to the Binance website. These terms require that any dispute between Binance and investors be submitted to arbitration administered by the Hong Kong International Arbitration Centre ("HKIAC") under Hong Kong law and HKIAC rules.

Plaintiffs challenged the application of the arbitration agreement on public policy grounds, arguing that the arbitration agreement would effectively immunize Binance from suit. The court agreed. The record showed the average cost of an HKIAC arbitration was USD 36,000, and the court found that this likely would exceed the average value of claims that may be brought by Binance crypto investors, around USD 5,000. The court noted further that the terms and conditions in the "click contract" failed to disclose fees or other arbitration costs, such as the security for costs that a claimant must post under HKIAC rules.

Plaintiffs further argued that the terms and conditions were unconscionable, in part because the agreement was governed by the law of Hong Kong, rather than the securities law of Canada. The court stated the potential choice of Hong Kong law "pits the policy objectives of arbitration statutes directly against the policy objectives of securities legislation," and its decision weighed in favor of the securities policy. Emphasizing that unconscionability and public policy are "doctrinal cousins," the court further noted an inequality of bargaining power between Binance and consumers supports its conclusion that the arbitration agreement was unconscionable.

Ontario Court of Appeal Decision

The Binance appeal centered on whether the plaintiffs' challenge to the arbitration agreement in the terms and conditions should be resolved by the Canadian court or the tribunal constituted under the HKIAC rules. In general, Ontario's International Commercial Arbitration Act requires that challenges seeking to void an arbitration agreement be decided by the arbitral tribunal unless the party challenging the agreement can demonstrate grounds for an exception.

Though the Ontario Court of Appeal recognized exceptions to an arbitral tribunal's authority are limited, it affirmed the lower court's authority to consider plaintiffs' public policy and unconscionability arguments. Discussing Supreme Court of Canada precedent, the court identified two relevant exceptions. First, a court may consider a challenge to an arbitral tribunal's jurisdiction for issues of law or for mixed issues of law and fact that require only superficial review of the record. Second, a court may examine the validity of an arbitration agreement when there is a "real prospect" that a challenge would never be resolved by the arbitral tribunal.

The Ontario Court of Appeal held that both of these circumstances applied, stating that the Binance terms and conditions were a standard form contract, thus raising only issues of law which the lower court was authorized to review. The court further held that particular fact-finding for plaintiffs' case was not necessary because it was clear from the record that arbitration would be inaccessible due to the cost, distance, and choice of law in an HKIAC arbitration.

Implications

The potential advantages of arbitration are well-known to companies entering into cross-border transactions with customers across numerous jurisdictions.

However, the Binance decision underscores the importance of considering whether an arbitration agreement complies with statutory regulations (including securities or consumer protection laws, as applicable) and public policy considerations in the jurisdictions in which a company's customers are located. In particular, the Binance decision shows that Canadian courts are willing to hear public policy and unconscionability challenges on the basis of access to arbitration. The Binance court was willing to make findings on the size of an "average" crypto claim based on a limited record of potential class claims.

These risks apply beyond the securities sector to any company that may face high-volume, low-value claims such as in a class action or mass arbitration, but a well-drafted arbitration clause can mitigate these risks. For example, depending on the circumstances, a company may tailor its terms and conditions to the law of a particular jurisdiction, choose arbitral institutions with reduced fees for consumer claims or mass arbitration rules, and / or include limited carve-outs for disputes falling within the jurisdiction of small claims court or claims arising under certain areas of law.

Our team at Covington can assist in this process, assessing key vulnerabilities, ensuring compliance with the law of various jurisdictions, and identifying opportunities to reduce litigation risks.

If you have any questions concerning the material discussed in this client alert, please contact the members of our disputes group.