A recent decision allowed a home construction company to stay proceedings against it in favour of arbitration after being sued by 30 individuals in a purchase and sale of pre-construction homes project.
In February and March 2017, around 30 individuals (the “buyers”) entered into agreements with a home builder company (the “seller”) for the purchase and sale of pre-construction homes scheduled to close in April 2018.
Most of the buyers did not close and in May 2018 they commenced an action against the seller claiming rescission of the agreements or damages in the alternative. They alleged that the seller exercised undue influence over them through unfair sales methods and other tactics to induce them to enter into the agreements. They also argued that there was an inequality of bargaining power between them and the seller and that the seller took advantage of its position of dominance, resulting in the buyers entering into grossly improvident and unfair agreements of purchase and sale, which they alleged were unconscionable.
The buyers argued that the arbitration agreement was invalid as unconscionable and obtained as a result of undue influence and that the court should therefore exercise its discretion to refuse the stay pursuant to subsection 7(2) of the Act.
The relevant sections of the Act :
7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.
7(2) However, the court may refuse to stay the proceeding in any of the following cases:
The arbitration agreement is invalid.
The court explained that in order to prove that a standard form arbitration agreement is unconscionable and therefore invalid, the court must examine whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded. Though the existence of a standard form contract and inequality of bargaining power are not uncommon, they do not, by themselves, render an arbitration provision contained in the standard form agreement unconscionable.
The court set out thefour-part test must be met to prove unconscionability:
- A grossly unfair and improvident transaction;
- A victim’s lack of independent legal advice or other suitable advice;
- An overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other similar disability; and
- The other party’s knowingly taking advantage of this vulnerability.
After reviewing the facts and evidence in the case, the court resolved the four-part test by finding that:
- The arbitration agreement did not represent a grossly unfair or improvident transaction;
- Some of the buyers did obtain legal advice, and those who didn’t could have;
- There was no overwhelming imbalance of bargaining power caused by the buyers’ ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility or other similar disability; and
- There was no evidence that the buyers were vulnerable in relation to their signing the arbitration agreement and no evidence that the seller took advantage of any vulnerability.
The buyers did not therefore meet the four-part test for a finding of unconscionability.
Regarding the buyers’ claim of undue influence, the court explained that the buyers must demonstrate that they were coerced by the seller or that the seller abused its power to compel them to sign the arbitration agreement. Additionally, they must show they had “no realistic alternative” but to submit to this coercion.
The court concluded that the buyers had not demonstrated that they were dominated by the will of the seller and that the arbitration agreement worked an undue disadvantage on them.
As a result, the court found that the seller was presumptively entitled to a stay. It found that the buyers had not demonstrated that the arbitration agreement was invalid, either as a result of unconscionability or undue influence; having not come within the exception set out in subsection 7(2) of the Act, the court found that there was no discretion to refuse the stay.
There are significant legal and financial risks in entering into a residential real estate transaction. Such large purchases should not be made without proper guidance from an experienced lawyer. Without sound legal advice, you could end up paying more than you should for your home, or accept an offer that is too low, or worse yet, end up with a transaction that falls through due to missed paperwork, or details and technicalities that go unnoticed.
At DBH Law in Calgary, our real estate lawyers have more than 25 years of combined experience acting for purchasers, lenders, and developers through all stages of residential real estate transactions.
We help our clients avoid huge areas of risk, including poorly drafted or incomplete agreements of purchase and sale, hidden fees, encroachment or easement issues, complex concerns like properties held in trust, and similar pitfalls. We also look for contract language which may impose unfavourable duties or obligations. To learn more about how we can help, contact us online or by phone at 403.252.9937.