Archive for February, 2019

What’s the current state of the law in Canada on internet contracts?

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E-commerce Legal Review (Part 1): Uber’s Arbitration Clause Struck Down

By Richard Stobbe

Today we start a three-part series reviewing e-commerce agreements, click-through agreements, and online ‘terms of service’ or ‘terms of use’. Users agree to these terms every day.  What’s the current state of the law in Canada on internet contracts?  

 

Almost a year ago, we wrote about a case where Uber drivers challenged Uber’s user online terms.  (See: Uber vs. Drivers: Canadian Court Upholds App Terms). Uber drivers claimed that they should have the benefit of local laws which protect employees. This case was at the centre of the debate about whether Uber’s drivers are customers, independent contractors, or employees. Uber’s counter argument was that the drivers’ claim should not proceed because, under the terms of use, all of the drivers agreed to settle disputes by arbitration in the Netherlands.

So the court had to wrestle with this question:  Should the arbitration clause in the terms of use be upheld? Or should the drivers be entitled to have their day in court in Canada? 

The original class-action case was decided in favour of Uber. The court upheld the app terms of service, and deferred this dispute to an arbitrator in the Netherlands. The court applied the Supreme Court of Canada reasoning in Seidel v. TELUS Communications Inc. (applying the competence-competence analysis). The first Heller decision was appealed.

In the second Heller decision ( Heller v. Uber Technologies Inc., 2019 ONCA 1 (CanLII)), the Ontario Court of Appeal struck down Uber’s mandatory arbitration clause for several reasons:

  1. The arbitration clause was found to be invalid on the basis of unconscionability. On this point, the court noted that the cost to initiate the mandatory arbitration process under Uber’s terms would cost a driver more than USD$14,000 (noting that the average Uber driver might earn $400 – $600 per week ).
  2. The court agreed that if the arbitration clause was valid, then the claim would fall within that clause. However, the court said this case fell one step prior to that: the validity of the arbitration clause itself was in issue. In that light, the competence-competence principle had no application to this case. The arbitration clause was not valid, the court decided, therefore the jurisdiction issue did not even arise.
  3. The court reasoned that employers (with Uber standing in the position of employer for these purposes) should not be entitled to contract out of the Employment Standards Act  (ESA) on behalf of their employees. The choice to proceed by way of arbitration should be in the hands of the employee. “It is [the employee’s] choice whether to take that route,” said the Court, “and he is only barred from making a complaint if he chooses to take it. The Arbitration Clause essentially transfers that choice to Uber who then forces the appellant (and all other drivers) out of the complaints process.”
  4. The court raised a number of public policy considerations – including the problems regarding the result that would come out of the arbitration process in the Netherlands, the problems associated with an arbitration ruling that would not benefit others for a determination of the underlying issues. In other words, other drivers in the class would be deprived of a remedy if each driver was forced through arbitration, whereas a complaint under the Ontario Employment Standards Act would set a precedent that others could rely on. “The issue of whether persons, in the position of the appellant, are properly considered independent contractors or employees is an important issue for all persons in Ontario,” said the Court. “The issue of whether such persons are entitled to the protections of the ESA is equally important. Like the privacy issue raised in Douez, the characterization of these persons as independent contractors or employees for the purposes of Ontario law is an issue that ought to be determined by a court in Ontario.”

In the final result, the Court concluded that the mandatory arbitration clause amounted to an illegal contracting out of an employment standard, contrary to the Employment Standards Act (Ontario), assuming the drivers are indeed employees. Separately, the Court decided the arbitration clause was unconscionable at common law, and therefore invalid under the (Ontario) Arbitration Act.

Lessons for business?

  • The court of appeal sent a clear message that expensive and unwieldy mandatory arbitration clauses such as the one used by Uber will risk being struck down for unconcsionability.
  • Aside from the issue of unconscionability, such clauses are at risk on other public policy  grounds, where local courts wish to assert local laws. In this case, it was the ESA. Courts have shown themselves to be wary of permitting platform providers (such as Uber and Facebook) to use the terms of service to contract out of local laws. See Douez v. Facebook, Inc., [2017] 1 SCR 751, 2017 SCC 33 (CanLII), where the SCC found that Facebook’s forum selection clause was unenforceable, although for a set of confusing reasons (the majority in Douez did not address the issue of unconscionability). In Douez, it was a local privacy law that was at issue (British Columbia’s Privacy Act).

 

Get advice on your online contracts to ensure that they will not be at risk of being struck down based on this latest guidance from the Court.

Calgary – 07:00 MST

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Smart Contracts (Part 4): Ricardian Contracts and the Internet of Agreements

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By Richard Stobbe

As we’ve reviewed before, the term “smart contract” is a misnomer. (For background, see Smart Contracts (Part 3): Opportunities & Limits of Smart Contracts.) The so-called smart contract isn’t really a “contract” at all : it’s the portion of the transaction that can be automated and executed through software code. Hence, we prefer the term “programmatically executed transactions” — not as catchy, but maybe more accurate.

The written legal prose, or what we might think of as a ‘traditional contract’, sets out a bunch of contract terms, usually in arcane legalese, that describe certain elements of the relationship. Parts of that ‘traditional contract’ can be automated and delegated to software. However, once concluded, the traditional legal contract usually sits in one silo, and the software code is developed and sits in another silo, completely divorced one from the other.

The evolution of research and software tools has permitted the so-called Ricardian contract to function as a bridge between these silos. Based on the work of Ian Grigg, a Ricardian contract is conceived as a single document that has a number of elements that permit it (1) to function as a “contract” in the way the law would recognize a contract, so the thing has legal integrity, (2) to be readable by humans, in legal prose, (3) to be readable by software, like software reads a database or a input fields, (4) to be signed digitally, and (5) to be integrated with cryptographic identifiers that imbue the transaction process with technical integrity and verifiability. This is where blockchain or distributed ledger technology comes in handy.

The document should be readable by both humans and machines. It integrates the ‘traditional contract’ with the ‘smart contract’, since the elements or parameters that can be automated and implemented by software are read into the code straight from the contract terms.

Can this form the basis for software developers and lawyers to play in the same sandbox?

There are a number of developments in this arena where “legal” and “software” overlap, and Ricardian contracts are merely one iteration of this concept: for more background, Meng Wong’s presentation on Computable Contracts is a must-see.  His Legalese contracts are intended to allow legal terms and conditions to be represented in machine-understandable way, with or without a blockchain deployment. OpenLaw is another version of this approach : blockchain-enabled contracts that delegate certain functions to software. There are a whole range of options and variations of this.

In theory, this sets up an “Internet of Agreements” system that is designed to execute deals and transactions automatically with distributed ledger ecommerce technology through interwoven contracts and software across disparate platforms.

How far away is this legal-techno-dream?

For some applications, particularly in financial services, it’s much closer. Versions of these technologies are being beta-tested and implemented by global banks.  Since many of these implementations will be between entities in back rooms of the financial services industry, they will be invisible to the average consumer.  For many sectors – let’s say for example, the development of a full-stack land transfer technology – where smart contracts have to interface with existing immovable legal or institutional structures, this is a long way off.

 

Calgary – 07:00

 

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QuadrigaCX and the Missing Millions: A Crypto Cautionary Tale

By Richard Stobbe

For those who want blockchain-enabled cryptocurrencies to be deployed in mature, mainstream industry sectors (energy, insurance, financial services), it doesn’t help to have headlines like “How crypto exchange QuadrigaCX lost access to $190 million of customers’ money” (from Global News), or “Crypto CEO Dies Holding Only Passwords That Can Unlock Millions in Customer Coins” (that one from Bloomberg).

But let’s face it: those headlines appear to capture the essence of the current cloud of uncertainty that shrouds QuadrigaCX, a well-known Vancouver-based cryptocurrency exchange.

The company recently filed for creditor protection in a Nova Scotia court, after the reported sudden death of founder and CEO Gerald Cotten.  From reports of the company’s court filings, Mr. Cotten died with the recovery codes to the offline “cold storage” vaults containing access to customers’ cryptocurrency assets.

On February 5, 2019, the Nova Scotia court granted bankruptcy protection under the CCAA (Companies’ Creditors Arrangement Act) and appointed Ernst & Young as monitors to investigate the accessibility of any funds to reimburse the approximately 115,000 customers. A 30-day stay of proceedings was ordered, effectively shielding the company from further lawsuits as this investigation continues.

If no-one knows the access codes aside from the deceased founder, then the offline accounts, which reportedly hold millions of dollars worth of crypto assets, may be irretrievably lost.

What does this mean for the adoption of cryptocurrencies or other tokens that are powered by the same blockchain technologies that underpin BitCoin?

Cryptocurrency had a spotty reputation to begin with, and the current speculation and various internet-fuelled conspiracy theories surrounding QuadrigaCX do not give a person confidence.  You mean, I can take a risk by buying cryptocurrency hoping it’s going to rise in value, and then face the added risk that even if the value does increase, the multimillion dollar asset might suddenly disappear because one person held all the passwords? Apparently, yes.

Can one also lose millions in highly regulated industries by buying stocks or investing with Ponzi schemes?  Undoubtedly, yes. Somehow, the loss of traditional dollars does not shake investor confidence the way the collapse of QuadrigaCX might shake consumer confidence in BitCoin.

Maybe that’s because the history of crypto is a blip when compared to fiat currency. And maybe it’s because banks and others who handle consumer investments are subject to complex regulation, insurance requirements, registration requirements, securities commissions, financial superintendents, regulatory reporting and compliance obligations, and a system of censure in the case of a breach of those regulations.  After all, the QuadrigaCX exchange was not so much an investment vehicle; it was more akin to a bank.  When banks fail, confidence is understandably shaken.

The real cautionary tale may be that a mature and measured approach to cryptocurrency regulation may help instill confidence in the sector, and this may help pave the way for the strategic use of distributed-ledger technologies that are associated with cryptocurrency coins and tokens.

 

Calgary – 07:00 MST

 

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