Ontario Court of Appeal upholds decision declining to enforce cryptocurrency exchange arbitration agreement as contrary to public policy

Introduction

In a recent decision in Lochan v Binance Holdings Limited, the Court of Appeal for Ontario upheld a Superior Court decision declining to stay a proposed class action in favour of arbitration, finding that the arbitration agreement effectively bars claims by imposing prohibitive costs on claimants. The Court further held that these clauses may also be void for being contrary to public policy and unconscionable.

Background

The defendant, Binance, is the world’s largest cryptocurrency exchange. It sold cryptocurrency derivatives to Canadians from 2019 through 2022 but failed to file a prospectus or register with the Ontario Securities Commission. In June 2022, the Plaintiffs brought a proposed class proceeding against Binance for its failure to file or deliver a prospectus contrary to s. 133 of the Ontario Securities Act. Binance brought a motion to stay the proceeding in favour of arbitration as required by the terms of use on Binance’s website.

Superior Court of Justice

Justice Morgan dismissed Binance’s motion to stay the proceeding in favour of arbitration. He held that the arbitration agreement was void as contrary to public policy and unconscionable.

Binance argued that the Superior Court did not have jurisdiction over the proceeding as arbitrators are generally empowered to decide whether they are competent to hear a dispute. This is known as the competence-competence principle. Justice Morgan rejected this argument on the basis that the dispute fell into the public policy exception to the competence-competence principle. The courts have jurisdiction in a dispute that an arbitration agreement is contrary to public policy where it involves a pure question of law or a question of mixed fact and law. The court held that the dispute involved a pure question of law as it concerned the enforceability of an arbitration agreement.

After holding that the dispute fell within a recognized exception to the competence-competence principle, the court found that the agreement was contrary to public policy and unconscionable. At the time of the hearing, the arbitration agreement directed purchasers to pursue arbitration in Hong Kong – something found to have a minimum cost of almost $37,000 exclusive of travel costs, accommodation, or legal fees. The record showed that nearly half of Canadian cryptocurrency asset owners have less than $5,000 in the market and the court t held that this could essentially bar purchasers from bringing their claims against Binance and was therefore contrary to public policy and unconscionable.

Court of Appeal

The Court of Appeal upheld the trial judge’s decision dismissing the motion and agreed that the arbitration agreement was void for being contrary to public policy and unconscionable.

The court held that where arbitration agreements, through high cost or other barriers to claimants, create a real risk that the issue of the arbitrator’s jurisdiction will never be resolved, Ontario courts have jurisdiction to refuse a stay of proceedings. In affirming the trial judge’s finding that the agreement was contrary to public policy and unconscionable, the court highlighted the following: purchasers were prompted to open accounts within 30 seconds despite the terms of use, which included the arbitration agreement, being over 50 pages long; the terms permitted Binance to change any part of the arbitration agreement which it did several times; and the cost of arbitration in Hong Kong was nearly $37,000 CAD without including travel costs, accommodation, or legal fees. The Court dismissed Binance’s appeal on the basis that the arbitration agreement was contrary to public policy and unconscionable.

Key Takeaway

Arbitration agreements can provide an efficient and cost-effective mechanism for resolving disputes. However, businesses must consider whether a particular arbitration scheme actually provides a legitimate avenue to resolve disputes or is instead a barrier to resolution and therefore liable not to be enforced.