Superior Court Finds Arbitration Agreement for Crypto Trading Platform Unenforceable

In the recent decision, Lochan v. Binance Holdings Limited, 2023 ONSC 6714, the Ontario Superior Court of Justice has demonstrated that the courts will find an arbitration agreement unenforceable when such an agreement is contrary to public policy and unconscionable.

Background

Binance Holdings Limited (“Binance”) is the world’s largest cryptocurrency trading platform. Previously, the Ontario Superior Court held that Binance sold crypto derivatives products to Canadians without filing a prospectus. As a result, the plaintiffs commenced a proposed class action against Binance.

The class action was brought pursuant to s. 133 of the Ontario Securities Act, 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.[1] Binance brought a motion to stay the plaintiff’s action in favour of arbitration. The motion for a stay was based on the arbitration agreement embedded in Binance’s website terms and conditions. The agreement was digitally signed by the plaintiff and the class members.

This arbitration agreement allowed Binance to make changes to any part of the agreement and stated that by agreeing to the terms, users agreed to any subsequent amendments.[2] During the proposed class period, Binance made the following changes to the arbitration agreement:

(a) From August 2019 to April 2020, the arbitration agreement directed users to arbitration in Singapore, under Singapore law.

(b) From April 2020 to January 2021, the arbitration agreement directed users to arbitration in an unspecified location, under unspecified law, administration and rules.

(c) From January 2021 to March 2021, the arbitration agreement directed users to arbitration in Switzerland, under law to be determined in accordance with

International Chamber of Commerce rules.

(d) From March 2021 to present, the arbitration agreement has directed users to arbitration in Hong Kong, under Hong Kong law.

Grounds for the stay

Binance argued that the courts will generally give effect to the terms of a commercial contract freely entered into, including an arbitration clause. Binance sought to stay the action pursuant to the arbitration clause, which set Hong Kong as the arbitral forum, relying on the International Commercial Arbitration Act and the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). The plaintiff submitted that article 8(1) of the Model Law recognized an exception to the enforceability of arbitration agreements where the agreement is void, inoperative or incapable of being performed. The plaintiffs argued that the arbitration agreement was void because it is contrary to public policy and unconscionable.

Binance maintained that the choice of law clause designated Hong Kong law as the law governing the contract and arbitration. Binance took the position that the question of jurisdiction is to be determined under Hong Kong law. The court disagreed, stating it is for Ontario law to decide whether the matter at hand is arbitrable.

In considering whether the arbitration agreement was contrary to public policy, the court first assessed the cost of arbitration in Hong Kong – finding that the cost of legal fees and travel expenses was not viable for a consumer-type class of investors, especially given that an Ontario Securities Commission Report disclosed that the average crypto investor would likely have a claim of only $5,000. The court highlighted 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 – could amount to a grant of immunity to Binance.

Another aspect of the public policy analysis related to the bargaining power of the parties. The arbitration agreement was part of a standard form contract, which meant that investors could not negotiate any of its terms. The court found adherence to an expensive and all-but-inaccessible arbitration procedure for resolving disputes, without proper disclosure of the procedure’s difficulties, offended public policy.

Further, the contractually stipulated foreign law primacy over Ontario’s regulatory regime pitted the policy objectives of arbitration statutes against the securities legislation. This would turn arbitration into a vehicle for circumventing the consumer protection provisions of Ontario’s securities law.

In terms of unconscionability, the court made it clear that unconscionability may be triggered when arbitration is fundamentally too costly or otherwise inaccessible. The plaintiff and class members signed an unnegotiable click contract where the changeable location and details were out of sight. In addition, the logistical complexity and expense of arbitration was not mentioned anywhere. The arbitration agreement was engineered by Binance to take advantage of the complexity that was hidden behind the superficially benign appearance of an arbitration clause, which the court found to be unconscionable. Therefore, the arbitration agreement was unenforceable and the motion for a stay of proceedings was dismissed.

Takeaway

Generally, parties are held to their contractual agreements to arbitrate and judicial intervention in disputes governed by a valid arbitration clause is the exception. However, a party may be successful in opposing a stay in favour of arbitration if they can prove one of the exceptions applies based on unconscionability or public policy. This case demonstrates the importance of drafting an arbitration agreement with consideration of the cost and accessibility a party may face. Withstanding arguments concerning unconscionability or public policy involve ensuring equality of information and equality of power in the bargaining relationship.

[1] Lochan. v. Binance Holdings Limited, 2023 ONSC 6714, at para. 12.

[2] Ibid at para. 14.

[3] Ibid at paras. 18-19.

[4] Ibid at para. 28.

[5] Ibid at para. 51.