Court refuses to enforce ‘all-but-inaccessible’ arbitration agreement for crypto trading platform

The Ontario Superior Court’s decision in Lochan v. Binance Holdings Limited^[1] demonstrates that Canadian courts will refuse to enforce an arbitration agreement where such an agreement is contrary to public policy and unconscionable. In this case, the arbitration agreement had particularly extreme circumstances including being cost prohibitive and all but inaccessible to potential claimants and allowing for multiple unilateral changes to the agreement by the company.

Factual background

Binance Holdings Limited (Binance) is the world’s largest crypto trading platform. The Ontario Superior Court previously confirmed that from 2019 until early 2022, Binance sold crypto derivatives products to Canadians without filing a prospectus.^[2] In June 2022, the plaintiffs commenced a proposed class action pursuant to section 133 of the Ontario Securities Act (OSA), which provides purchasers with a right of action for recission or damages against a company selling securities for failure to file or deliver a prospectus. The proposed class includes everyone in Canada who, from September 2019 to the date of certification, purchased crypto derivatives contracts from Binance.

In the present proceedings, Binance sought a motion to stay the action in favour of arbitration, in accordance with an arbitration agreement that every potential class member signed digitally. This arbitration agreement allows Binance to make changes unilaterally and states that users agree to any subsequent amendments. Binance made the following changes to the arbitration agreement during the proposed class period:

• From August 2019 to April 2020, it directed users to arbitration in Singapore, under Singapore law, administration and rules.
• From April 2020 to January 2021, it directed users to arbitration in an unspecified location, under unspecified law, administration and rules.
• From January 2021 to March 2021, it directed users to arbitration in Switzerland, under International Chamber of Commerce law, administration and rules.
• From March 2021 to present, it directed users to arbitration in Hong Kong, under Hong Kong law, administration and rules.

For the smallest monetary class of disputes arbitrated in Hong Kong, the median cost of arbitration is C$36,719. This figure does not include other costs such as travel expenses and legal fees. A previous Ontario Securities Commission (OSC) report found that the average crypto investor would likely have a $5,000 claim.

Arguments of the parties

Binance argued that the Superior Court should adhere to the general practice of giving effect to the terms of a commercial contract freely entered into, including an arbitration clause. They further stated that their product is designed for sophisticated investors with substantial investments.

Counsel for the plaintiffs responded that since this is a commercial relationship between parties in different countries, the relationship should be governed by the International Commercial Arbitration Act and the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). They submitted that article 8(1) of the Model Law recognizes an exception to the general enforceability of arbitration agreements where the agreement is “void, inoperative or incapable of being performed”. Plaintiffs’ counsel argued that the arbitration agreement was void and inoperative on two grounds: that (1) it is contrary to public policy and (2) it is unconscionable.

The Superior Cout’s decision

The motion was heard before Justice E.M. Morgan on November 29, 2023. Justice Morgan acknowledged that although Binance was the moving party seeking a stay, it was the plaintiffs who would face an uphill battle, given that parties should be generally held to their contractual agreements to arbitrate. Accordingly, the plaintiffs bore the burden to prove that an exception applied.

Despite this increased burden, Justice Morgan ultimately agreed with the plaintiffs that the arbitration agreement was contrary to public policy and unconscionable and therefore void and inoperable.

Jurisdiction

Justice Morgan quickly dismissed Binance’s jurisdictional arguments, finding that the Ontario Superior Court was the proper forum to hear submissions on public policy and unconscionability. He stated that when considering whether arbitration in Hong Kong contravenes public policy or is unconscionable, it is Canadian public policy and unconscionability doctrines that are at issue.

Public policy

Justice Morgan then turned to the substantive public policy arguments, finding that the arbitration agreement was contrary to Canadian public policy because it was cost prohibitive to the claimants, lacked nuance and was a standard form contract for which the claimants had no bargaining power.

In particular, Justice Morgan stated that the cost of arbitration in Hong Kong ($36,000 plus legal fees, travel expenses and potential security for costs obligations) was not viable for the consumer-type class of investors, especially given that the OSC report had found that the average crypto investor would likely have a $5,000 claim.

The arbitration agreement was a standard form “click” contract with no negotiation, contributing to a finding that the agreement was contrary to public policy. This was compounded by the fact that Binance promoted its sign-up process as taking only 30 seconds — the unspoken premise being that “agreeing” to approximately 50 pages of terms takes almost no comprehension.

Further, Justice Morgan stated that “the choice of Hong Kong as an arbitral forum — a forum with no other connection to either the potential claimants or to Binance itself as a Cayman Islands company — could effectively amount to a grant of immunity to Binance.” He found that requiring adherence to an expensive and all-but-inaccessible arbitration procedure for resolving any and all disputes, without proper disclosure of the procedure’s difficulties, offends the public policy of Ontario and that such an arbitration agreement is void.

Unconscionability

Justice Morgan held that the arbitration agreement was also unconscionable, as it was engineered by Binance to take advantage of the complexity that was hidden behind the superficially benign appearance of an arbitration clause.

Justice Morgan took issue with the fact that prospective class members signed an unnegotiable “click” contract wherein the details, including the changeable location, of the arbitration clause were buried out of sight, and the logistical complexity and expense of arbitration were not revealed anywhere.

Further, Justice Morgan stated that giving the contractually stipulated foreign law primacy over Ontario’s regulatory regime pits the policy objectives of arbitration statutes and securities legislation against each other and would turn arbitration into a vehicle for circumventing the consumer protection provisions of Ontario’s securities legislation.

In finding that the agreement was unconscionable, Justice Morgan stated that staying the action in favour of arbitration may be tantamount to denying relief for the claim, in part because of the cost concerns and inaccessibility of accessing this forum. For example, in order to apply Ontario law in a Hong Kong arbitration, the claimant would have to bring expert witnesses to testify as to the OSA, adding further expenses.

Key takeaways

To withstand arguments concerning public policy and unconscionability, an arbitration agreement should be drafted with the principles of fairness and transparency in mind and with a view to the underlying contractual context. Where an arbitration agreement is embedded in a standard form “click” contract involving a potentially unsophisticated consumer, the drafter should consider how an arbitration agreement may minimize potential barriers faced by the consumer. Ultimately, an arbitration agreement must not lead to no meaningful chance of a dispute being heard by arbitration, as this would trump the general public policy principle that agreements to arbitration are enforceable.