The Court of Appeal for Ontario refused to stay a proposed class action against the cryptocurrency platform Binance in favour of arbitration. The arbitration clause at issue was buried within Binance’s 50-page terms prompted to be accepted in 30 seconds, and changed within the relevant period to require arbitration in Singapore, Switzerland, and then Hong Kong. The Court’s reasons followed recent authorities from the Supreme Court of Canada which consider such agreements unconscionable and a violation of public policy.

The Court of Appeal for Ontario (the “ONCA”) heard and dismissed the appeal of a motion judge’s order denying a stay of proceedings in favour of arbitration in Lochan v. Binance Holdings Limited, 2024 ONCA 784. The ONCA’s decision upheld the motion judge’s finding that the arbitration clause in question is unenforceable on grounds of public policy and unconscionability.

Binance Holdings Limited (“Binance”), the world’s largest crypto trading platform, is the defendant in a class action by Canadians who purchased crypto derivatives contracts on Binance’s website. Crypto derivatives contracts are novel and complex securities that are inherently risky. Because of the nature of these contracts, a prospectus is required to be filed and delivered to investors, and the class action members are claiming rescission or damages for Binance’s failure to deliver such a prospectus. Binance originally brought a motion at the Ontario Superior Court of Justice seeking a stay of the action on the grounds that Binance’s terms include a clause that requires any dispute between Binance and its users to be resolved by arbitration.  

The motion judge found that the arbitration clause was embedded in approximately 50 pages of the website’s terms, which users were prompted to agree to in under 30 seconds. The arbitration clause also gave Binance the opportunity to change any part of the arbitration agreement, and by agreeing to the terms of use, users agreed to subsequent amendments. The record showed that Binance changed the law applicable to disputes, as well as the rules and seat of arbitration, four times between 2019 and 2022:

• From August 2019 to April 2020, the agreement directed users to arbitration in Singapore, under Singapore law, and administered by the Singapore International Arbitration Centre under its rules.
• From April 2020 to January 2021, arbitration was to be in an unspecified location, under unspecified law, and under unspecified administration and rules.
• From January 2021 to March 2021, the agreement directed users to arbitration in Switzerland, under law to be determined in accordance with International Chamber of Commerce (“ICC”) rules, and administered by the ICC under its rules.

Finally, at the time the class action proceeding began, the clause stated that any disputes were to be arbitrated in Hong Kong, under Hong Kong law, and administered by the Hong Kong International Arbitration Centre (“HKIAC”). The Court found that a dispute administered by the HKIAC would cost approximately $36,000 CAD, excluding legal fees, expert advice, and travel.

At issue was whether the arbitration clause was enforceable, in which case the action would be stayed while the dispute is arbitrated under the HKIAC rules. Below, we provide a summary of the legal analysis carried out by the two levels of court in Ontario.

Ontario Superior Court Decision

For a domestic court to find an arbitration clause invalid, the party claiming its invalidity must first establish that the clause falls within an exception to the competence-competence principle. This fundamental principle in the law of arbitration means that a tribunal or arbitrator generally decides on its own competence to hear a case.[1] The competence-competence principle establishes an intention that parties who agree to arbitrate be encouraged to do so, such that “judicial intervention in commercial disputes governed by a valid arbitration clause should be the exception, not the rule”.[2]

When an exception to the competence-competence principle applies, a domestic court may decide the validity of an arbitration clause. The exceptions found by the motion judge in this case were that the arbitration clause was “void both as contrary to public policy and because it was unconscionable.”[3]

With respect to public policy, the court considered the cost of arbitration in Hong Kong creating undue hardship on the class members, the lack of connection to Hong Kong by Binance (a Cayman Islands company), and the unequal bargaining power of the parties to a standard form contract.[4] It would be unreasonable for Canadian users of the website to attend arbitration in Hong Kong when there is not a sufficient connection between Binance and the chosen jurisdiction, and when the dispute can reasonably be resolved in a domestic court. For these reasons, the arbitration clause offended Ontario’s public policy.

The Court relied on the landmark decision of the Supreme Court of Canada in Uber Technologies Inc v Heller, 2020 SCC 16 (“Uber”) for the unconscionability analysis. In that case, the Supreme Court of Canada had made it clear that unconscionability is potentially triggered when arbitration is too costly or otherwise inaccessible. With Binance, users signed an unnegotiable “click” contract where the details of dispute resolution were buried out of sight. Binance, who had access to legal professionals, engineered the agreement to take advantage of the complexity hidden behind the arbitration clause. The arbitration clause was therefore unconscionable, as well.

Ontario Court of Appeal Decision

On appeal, Binance submitted that the motion judge erred in three ways: 1) holding that a violation of public policy is sufficient for a domestic court’s jurisdiction; 2) holding that an exception to the competence-competence principle applied; and 3) analyzing the evidence beyond the threshold issue. The ONCA dismissed all three of these arguments and upheld the motion judge’s decision to refuse a stay in favour of arbitration.

On Binance’s first argument, the ONCA held that the motion judge’s decision was consistent with Uber and Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, both leading Supreme Court of Canada decisions on the law of arbitration. In those cases, it was held that before a domestic court can decide on the validity of an arbitration clause, the party resisting the arbitration must establish that the circumstances fit within an exception to the competence-competence principle. Justifying an exception to the principle was the threshold issue that, once met, allowed a domestic court to consider whether the arbitration clause was void.

Binance argued that the motion judge went directly into the public policy analysis, without first considering the threshold issue, but the ONCA highlighted that the motion judge correctly considered the application of an exception before his public policy analysis. Because the commercial relationship at issue is between parties in different countries, the UNCITRAL Model Law on International Commercial Arbitration, 1985 (the “Model Law”) is applicable. Article 8 of the Model Law establishes that a dispute cannot be referred to arbitration if the arbitration clause itself is “void, inoperative or incapable of being performed.”[5] This inoperability creates an exception to the competence-competence principle, meaning the motion judge’s analysis of public policy served both purposes, to meet the threshold question and to prove the invalidity of the clause.

Binance’s second argument was that the motion judge was incorrect in his finding that exceptions to the competence-competence principle were applicable and that the matter could be decided by a domestic court. The ONCA dismissed this argument, stating that the motion judge made no errors of law and no palpable and overriding error of fact, and upheld the decision that, based on a superficial review of the documentary record, the competence-competence principle was displaced.

Finally, the ONCA dismissed Binance’s third argument on the basis that there was no palpable and overriding error in the motion judge’s analysis of the evidence.   

Practical Implications

This decision is the most recent in a developing line of case law around the implications of standard form agreements that require users to agree to arbitration before they can access a website’s product or service. Without an appropriate opportunity to review the terms, users find themselves agreeing to clauses whose substance they are not familiar with and often face significant barriers to resolving disputes under the contract.

Given the average crypto investor will have a claim worth approximately $5,000 CAD[6], arbitrating such a claim in Hong Kong, with the cost of access being $36,000 CAD plus legal fees and travel expenses, effectively grants immunity to Binance. Arbitrating in Singapore or Switzerland administered by institutions would have had a similar effect.

Another barrier highlighted by the Court of Appeal was the lack of opportunity for users to inform themselves of the dispute resolution mechanism. Details of arbitration, such as the changeable location, were buried out of sight, and the logistical complexity and expense of arbitration were not revealed anywhere. Despite having had access to legal professionals in drafting the user agreement, Binance “engineered” the agreement to take advantage of the complexity of the arbitration clause.

In both drafting and reviewing these arbitration clauses, parties will need to consider the public policy perspective and whether courts would allow the resolution of disputes by arbitration. Canadian courts are unlikely to enforce “click” arbitration agreements that make dispute resolution unrealistic and inaccessible to the everyday consumer. Drafters of such agreements would be best served by providing users with cost-effective options for dispute resolution, and drafting plain language dispute resolution clauses that provide some explanation of, or at least do not hide the complexities of, the mechanism.

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[1] Lochan v Binance Holdings Limited, 2023 ONSC 6714 (“Binance ONSC”) at para. 21.

[2] Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41 at para. 50.

[3] Lochan v Binance Holdings Limited, 2024 ONCA 784 (“Binance ONCA”) at para. 6.

[4] Binance ONSC supra note 1 at paras. 27-32.

[5] Ibid at para. 20.

[6] Binance ONCA supra note 3 at para. 8.