Crypto, competence-competence, and the courts: analyzing the Ontario Court of Appeal’s decision in Lochan v. Binance

When the world’s largest crypto exchange faces a class action over allegedly illegal securities sales, the stakes aren’t just financial — they are also about how the dispute will be resolved.

In Lochan v. Binance Holdings Limited,^[1] Binance sought a stay of proceedings in favour of arbitration on the basis of an arbitration clause buried in its user agreement. The Ontario Court of Appeal confirmed that in exceptional circumstances, courts may displace the general rule that an arbitrator or tribunal decides on its own competence to hear a case — known as the competence-competence principle. This case sheds light on how courts balance the competence-competence principle, arbitration and access to justice.

Overview

Binance, the world’s largest crypto asset trading platform, sold crypto derivatives products to Canadians from 2019 to early 2022 through its website. These instruments have been held to be securities by the Capital Markets Tribunal, therefore requiring issuers of such instruments to file a prospectus and deliver it to investors. Binance did not register with the Ontario Securities Commission (OSC) or seek an exemption from registration. Binance did not file a prospectus with respect to any of its securities offerings.

In June 2022, the plaintiffs commenced a proposed class action pursuant to section 133 of the Ontario Securities Act,^[2] which provides purchasers with a right of action for rescission or damages against a company selling securities for failure to file or deliver a prospectus. The plaintiffs claim that Binance’s sales of crypto derivatives contracts were illegal and void for failure of the Defendants to register with the OSC or to file a prospectus.

In November 2023, Binance brought a motion to stay the plaintiffs’ action on the basis that the Terms of Use agreed to by users of Binance’s website required that all disputes be resolved by arbitration.

The motion judge refused to stay the plaintiffs’ proposed class action in favour of arbitration and certified the class action. Binance subsequently appealed the motion judge’s stay decision.

The Court of Appeal affirmed that the competence-competence principle is “not lightly displaced.”^[3] The Court held that the motion judge was correct in finding that an exception to the competence-competence principle applied, giving the court jurisdiction to determine the validity of Binance’s arbitration clause.

Motion Judge’s decision

The motion judge found that an exception to the competence-competence principle applied because the standard-form nature of Binance’s arbitration agreement raised a legal issue, and any consideration of the factual record would not require fact-finding specific to the representative Plaintiffs.^[4]  Accordingly, the court held that it had the jurisdiction to determine the validity of the arbitration clause.

The motion judge held that the arbitration clause was void because it was contrary to public policy and was unconscionable on the basis that:

• Binance’s website prompted users to open accounts in “under 30 seconds”, during which the users purportedly agree to roughly 50 pages of terms, including a choice of law clause and an arbitration agreement.
• The arbitration clause provided that Binance could change any part of the arbitration agreement, and that by agreeing to the Terms of Use for the website, users agreed to any amendment to the terms.
• During the proposed class period, Binance changed the forum of the arbitration and the governing law four times, to various destinations outside of Canada, including for the period of April 2020 to January 2021 to an “unspecified location, under unspecified law, under unspecified administration and rules”.
• Binance most recently set the forum for arbitration as Hong Kong, under Hong Kong law, administered by the Hong Kong International Arbitration Centre. The motion judge found that this choice of forum imposed prohibitive costs that would render arbitration inaccessible for the average crypto user.
• Binance website users signed an “unnegotiable ‘click’ contract” where the details of the arbitration agreement were “buried out of sight”, such that “Binance, as the party that designed and whose professionals drafted the contract, engineered the arrangement to take advantage of the complexity that was hidden behind that superficially benign appearance of an arbitration clause.”^[5]

Based on his finding that the arbitration clause was void, the motion judge refused to stay the proceedings in favour of arbitration.

Court of Appeal’s ruling

On appeal, the appellant, Binance, argued that the motion judge erred

1. in holding that an arbitration clause being contrary to public policy is an independent ground for an Ontario court to take jurisdiction and refuse a stay in favour of arbitration, and by going straight to considering whether the arbitration clause was void as contrary to public policy without first determining whether an exception to the competence-competence principle applied to justify an Ontario court deciding whether the arbitration clause was void for public policy reasons
2. in holding that the circumstances fell within an exception to the competence-competence principle
3. by engaging in more than a superficial analysis of the evidence on the threshold issue: whether, if the dispute was referred for arbitration, the validity of the arbitration clause would likely never be decided

The Court of Appeal rejected all three grounds of appeal finding that

1. the motion judge did not go straight to considering whether the arbitration clause was void as contrary to public policy. The motion judge’s analysis was consistent with the Supreme Court of Canada’s decisions in Dell Computer Corp. v. Union des consommateurs^[6] and Uber Technologies Inc. v. Heller^[7], in that he considered the threshold question of whether an exception to the competence-competence principle applied to justify an Ontario court’s intervention in deciding whether Binance’s arbitration clause was void as contrary to public policy or on the basis of unconscionability.
2. the motion judge correctly found that the ‘question of law’ exception to the competence-competence principle applied. The Court of Appeal rejected the appellant’s submission that the motion judge made findings of fact in determining the arbitration clause was void. The motion judge relied on the record before him and displaced the competence-competence principle based on the exceptions identified by the Supreme Court in both Dell and Uber. The standard-form nature of the arbitration agreement raised a legal issue, and to the extent that the motion judge considered the factual record in his analysis, he did not undertake any “fact-finding specific to the representative plaintiffs”. Rather, he considered the documentary record before him and the types of disputes likely to arise under the arbitration clause at issue.^[8] 
3. the motion judge’s review of the factual record was limited to a superficial review of the documentary record consistent with Uber. It was permissible for the motion judge to consider whether the average cryptocurrency buyer could access the arbitral tribunal to raise the issue of validity of the arbitration clause. Moreover, the Court of Appeal agreed that the arbitration clause was not nuanced — all disputes, regardless of the specific subject-matter raised, are required by the clause to be arbitrated.  

Key takeaways

While the competence-competence principle is not easily displaced, the Court of Appeal’s decision in Lochan clarifies that an exception can apply when an arbitration clause raises a pure question of law, or a question of mixed fact and law that does not require specific fact-finding related to the plaintiffs. In such cases, Ontario courts may assert jurisdiction to assess the enforceability of the arbitration clause.

The decision also highlights that standard-form ‘click’ contracts, which require users to agree to a swath of terms — including an arbitration clause that imposes prohibitive costs for resolving disputes — can render the arbitration clause void on grounds of public policy or unconscionability. Businesses should be mindful in structuring arbitration clauses in standard-form agreements, particularly with respect to forum and cost.

Lastly, Lochan reinforces the notion that class actions may proceed even where the subject matter of the dispute is governed by an arbitration agreement where public policy weighs in favour of the action proceeding through the courts.

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[1] 2024 ONCA 784.

[2] RSO 1990, c S.5.

[3] 2024 ONCA 784 at para 22.

[4] 2024 ONCA 784 at para 23.

[5] 2023 ONSC 6714 at para 51.

[6] 2007 SCC 34.

[7] 2020 SCC 16.

[8] 2024 ONCA 784 para 23.