Doctrine of unconscionability of arbitration clause

SYLLABUS

Contractual stipulations that foreclose access to legally determined dispute resolution — that is, to dispute resolution according to law are unenforceable not because they are unconscionable, but because they undermine the rule of law by denying access to justice, and are therefore contrary to public policy. An arbitration agreement “constitutes a self-contained contract collateral or ancillary to the [main] agreement”. Respect for arbitration is based on it being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all.

The International Commercial Arbitration Act, 2017, states that the Model Law applies to “international commercial arbitration agreements and awards made in international commercial arbitrations”. The meaning of “commercial” in this section of the ICAA must be the same as the meaning of “commercial” under the Model Law, as the latter states that it “applies to international commercial arbitration” The term “commercial” should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.

Draft Text of a Model Law on International Commercial Arbitration: Report of the Secretary-General further explains that “labour or employment disputes” are not covered by the term “commercial”, “despite their relation to business”

The majority of the Court held that, when an arbitration clause exists, any challenges to the jurisdiction of the arbitrator must first be referred to the arbitrator. Courts should derogate from this general rule and decide the question first only where the challenge to the arbitrator’s jurisdiction concerns a question of law alone. Where a question concerning jurisdiction of an arbitrator requires the admission and examination of factual proof, normally courts must refer such questions to arbitration. For questions of mixed law and fact, courts must also favour referral to arbitration, and the only exception occurs where answering questions of fact entails a superficial examination of the documentary proof in the record and where the court is convinced that the challenge is not a delaying tactic or will not prejudice the recourse to arbitration.

Unconscionability is an equitable doctrine that is used to set aside “unfair agreements [that] resulted from an inequality of bargaining power” (John D. McCamus, The Law of Contracts (2nd ed. 2012), at p. 424). Initially applied to protect young heirs and the “poor and ignorant” from one-sided agreements, unconscionability evolved to cover any contract with the combination of inequality of bargaining power and improvidence (Mitchell McInnes, The Law of Unjust Enrichment and Restitution (2014),  Bradley E. Crawford, “Restitution — Unconscionable Transaction — Undue Advantage Taken of Inequality Between Parties” (1966). This development has been described as “one of the signal accomplishments of modern contract law, representing a renaissance in the doctrinal treatment of contractual fairness” (Peter Benson, Justice in Transactions: A Theory of Contract Law (2019). Courts, as a result, do not ignore serious flaws in the contracting process that challenge the traditional paradigms of the common law of contract, such as faith in the capacity of the contracting parties to protect their own interests. The elderly person with cognitive impairment who sells assets for a fraction of their value,  the ship captain stranded at sea who pays an extortionate price for rescue, etc example. In these kinds of circumstances, where the traditional assumptions underlying contract enforcement lose their justificatory authority, the doctrine of unconscionability provides relief from improvident contracts. When unfair bargains cannot be linked to fair bargaining — when they cannot be attributed to one party’s “donative intent or assumed risk”,  — courts can avoid the inequitable effects of enforcement without endangering the core values on which freedom of contract is based. This explains how unconscionability lines up with traditional accounts of contract theory while recognizing the doctrine’s historical roots in equity, which has long operated as a “corrective to the harshness of the common law”. Unconscionability, in our view, is meant to protect those who are vulnerable in the contracting process from loss or improvidence to that party in the bargain that was made. Openly recognizing a doctrine of unconscionability also promotes fairness and transparency in contract law. Scholars appear to agree that the doctrine of unconscionability has two elements: “an inequality of bargaining power, stemming from some weakness or vulnerability affecting the claimant and . . . an improvident transaction” . Inequality of bargaining power exists when one party cannot adequately protect their interests in the contracting process. Equity is prepared to act on a wide variety of transactional weaknesses. Those weaknesses may be personal (i.e., characteristics of the claimant generally) or circumstantial (i.e., vulnerabilities peculiar to certain situations). The relevant disability may stem from the claimant’s “purely cognitive, deliberative or informational capabilities and opportunities”, so as to preclude “a worthwhile judgment as to what is in his best interest”. Alternatively, the disability may consist of the fact that, in the circumstances, the claimant was “a seriously volitionally impaired or desperately needy person”, and therefore was specially disadvantaged because of “the contingencies of the moment”.

One common example of inequality of bargaining power comes in the “necessity” cases, where the weaker party is so dependent on the stronger that serious consequences would flow from not agreeing to a contract. This imbalance can impair the weaker party’s ability to contract freely and autonomously. When the weaker party would accept almost any terms, because the consequences of failing to agree are so dire, equity intervenes to prevent a contracting party from gaining too great an advantage from the weaker party’s unfortunate situation. As the Privy Council has said, “as a matter of common fairness, ‘it is not right that the strong should be allowed to push the weak to the wall”.A bargain is improvident if it unduly advantages the stronger party or unduly disadvantages the more vulnerable. The weaker party did not understand or appreciate the meaning and significance of important contractual terms, the focus is on whether they have been unduly disadvantaged by the terms they did not understand or appreciate. These terms are unfair when, given the context, they flout the “reasonable expectation” of the weaker party (see Swan Adamski and Na, at pp. 993-94) or cause an “unfair surprise”. One party knowingly or deliberately taking advantage of another’s vulnerability may provide strong evidence of inequality of bargaining power, but it is not essential for a finding of unconscionability. Such a requirement improperly emphasizes the state of mind of the stronger party, rather than the protection of the more vulnerable.  Unconscionability focuses on the latter purpose. Parties cannot expect courts to enforce improvident bargains formed in situations of inequality of bargaining power; a weaker party, after all, is as disadvantaged by inadvertent exploitation as by deliberate exploitation. A rigid requirement based on the stronger party’s state of mind would also erode the modern relevance of the unconscionability doctrine, effectively shielding from its reach improvident contracts of adhesion where the parties did not interact or negotiate.

Applying the unconscionability doctrine to standard form contracts also encourages those drafting such contracts to make them more accessible to the other party or to ensure that they are not so lopsided as to be improvident, or both. The virtues of fair dealing were explained as follows:

“Businesses are driven to behave competitively in their framing of market situations or otherwise they lose to those who do. Only if there are meaningful checks on what might be considered immoral behavior will persons in business have the freedom to act on their moral impulses. An implication of this point is that, absent regulation, business culture will become ever more ruthless, so that the distinctions between “reputable businesses” and fringe marketers gradually wither away”

The unconscionability of the arbitration clause can be considered separately from that of the contract as a whole. Respect for arbitration is based on it being a cost-effective and efficient method of resolving disputes. When arbitration is realistically unattainable, it amounts to no dispute resolution mechanism at all. Given the conclusion that the arbitration agreement is invalid because it is unconscionable.

Access to civil justice is a precondition not only to a functioning democracy but also to a vibrant economy, in part because access to justice allows contracting parties to enforce their agreements. A contract that denies one party the right to enforce its terms undermines both the rule of law and commercial certainty. That such an agreement is contrary to public policy is not a manifestation of judicial idiosyncrasies, but rather an instance of the self‑evident proposition that there is no value in a contract that cannot be enforced. Thus, the harm to the public that would result from holding contracting parties to a bargain they cannot enforce is “substantially incontestable”. It really is this simple: unless everyone has reasonable access to the law and its processes where necessary to vindicate legal rights, we will live in a society where the strong and well‑resourced will always prevail over the weak. The citizen is entitled to have recourse to the court for an adjudication on his legal rights. A contractual agreement to deny a person that “inalienable right” contravenes this public policy and is void. A disincentive to a person to exercise this right of recourse to the court can, depending upon how powerfully it operates to discourage litigation, amount to a denial of this right just as complete as an express contractual prohibition against litigation. But the public policy does require access to justice, and access to justice is not merely access to a resolution. After all, many resolutions are unjust. Where a party seeks a rights‑based resolution to a dispute, such resolution is just only when it is determined according to law, as discerned and applied by an independent arbiter.

The law’s historical view was that arbitration could not yield dispute resolution according to law. Any arbitration agreement that removed contractual disputes from the purview of the courts was unenforceable as a matter of public policy. Courts, in essence, took the view that an agreement to arbitrate had the effect of precluding any legitimate form of dispute resolution. Contracting parties were seen as being unable to access justice without access to the ordinary courts. Given this hostile judicial posture, legislators intervened by enacting modern arbitration legislation, prompting courts to accord due respect to the use of arbitration as a dispute resolution mechanism, particularly in a commercial setting. Our conception of access to justice has been modified accordingly, to account for “the other important objectives pursued by the Arbitration Act”. It is now accepted that courts are not the only bodies capable of providing dispute resolution according to law. Indeed, arbitration is endorsed and encouraged as a means for resolving disputes.

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