B.C. – “Neutral nationality principle” not limited to nationality in Court’s arbitral appointment – #773

In Fotmer v Tilray, 2023 BCSC 1323, the Court held that in an international arbitration, an American company’s multiple connections to British Columbia (including a place of business) precluded court appointment of a Canadian arbitrator over the objection of the opposing party. After considering the neutral nationality principle, the Court found that although the respondent was incorporated in Delaware, its close and obvious connections to British Columbia could give rise to a perception of bias if a Canadian arbitrator were appointed. Such an appointment would risk undermining the integrity of the arbitral process. 

The underlying dispute – A dispute arose between Fotmer, a Uruguayan company, and Tilray, an American company, with respect to a Raw Material Purchase Agreement (“RMPA”) and subsequent Quality Agreements regarding the supply of medical cannabis. 

The arbitration agreement in the RMPA provided for an expedited 30-day arbitration process under BC law. The parties could not agree on an arbitrator or the nationality of the arbitrator and, as the arbitration was ad hoc, an application to the British Columbia Supreme Court was made to appoint the arbitrator under British Columbia’s International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 (“ICAA”).

Fotmer argued that Tilray’s connections to British Columbia (particularly at the time of contract formation) precluded the appointment of a Canadian arbitrator in accordance with the neutral nationality principle and the objective of appointing an independent and impartial arbitrator. Fotmer relied on s. 11(8) of the ICAA and a party’s relevant place of business pursuant to section 1(3) and 1(4) of the ICAA, which provide in relevant part that: an arbitration is international if the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different states; and that if a party has more than one place of business, the relevant place of business is that which has the closest relationship to the arbitration agreement. Fotmer noted that the RMPA underlined Tilray’s strong connections to British Columbia, including that Tilray’s address for notice was in British Columbia and several key Tilray personnel were listed in British Columbia.

Tilray argued for a strict interpretation of nationality; because it was incorporated in Delaware, the neutral nationality principle would only exclude arbitrators from the United States. Tilray also emphasized that other factors (i.e. that its headquarters were in Seattle and transactions between the parties were largely carried out between Uruguay and Portugal) suggested that Tilray’s connections to Portugal and the United States were stronger than its connections to British Columbia. Finally, Tilray took the position that a British Columbia based arbitrator was necessary for fair and efficient proceedings, particularly in light of the “practical realities of the arbitration” and the expedited timeframe.

The Court’s decision – The Court began with a review of section 11(8) of the ICAA, Article 11(5) of the Model Law, and relevant secondary sources, noting that nationality is only one consideration in the overarching objective of avoiding perceived impartiality and bias. 

(a) Codification of the principle of neutral nationality – Section 11(8) of the ICAA provides relevant considerations for the Court in its determination of an appropriate arbitrator. It states that in appointing an arbitrator, the Court must have due regard for two factors: 

(i) any qualifications required of the arbitrator by the agreement of the parties; and 

(ii) other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

The Court noted that although section 11(1) of the ICAA provides that a person of any nationality may be an arbitrator, pursuant to section 11(9), the Court must not appoint a sole arbitrator who is the same nationality as any of the parties. 

It found that Article 11(5) of the Model Law (on which the ICAA is based) provides guidance. It states that, “the court or other authority, in appointing an arbitrator, shall have due regard to any qualifications required of the arbitrator by the agreement of the parties and to such considerations as are likely to secure the appointment of an independent and impartial arbitrator and, in the case of a sole or third arbitrator, shall take into account as well the advisability of appointing an arbitrator of a nationality other than those of the parties.”

The Court noted as a general principle that “it is a maxim of international commercial arbitration that an arbitrator must be independent and impartial” and quoted from Ilhyung Lee’s article “Practice and Predicament: the Nationality of the International Arbitrator” as follows at para. 20:

“Given the prevalence and reality of national identification and suspicion of national favouritism, Professor Lalive notes, neutral nationality of the arbitrator is necessary, for without it, ‘an unhealthy atmosphere of doubt and fear is likely to appear’. The doubt and fear is of arbitrator bias towards the party with the same nationality, notwithstanding his obligation to be independent and impartial. Perhaps the ‘requirement’ of a neutral national is best understood not by the presence of actual partiality or bias, but, rather, the ‘appearance’ of it. In brief, there is a ‘greater degree of confidence . . . on all sides if there is no chance that one party will get a better hearing because of some cultural or national identification between the party and the arbitrator.” 

The Court noted at para. 21 that the more general requirement of independence and impartiality is not limited to the concept of nationality. Shared nationality with one of the parties is one potential indicator of perceived bias:. “However, given the more general language contained in the Model Law and s.11(8) of the ICAA, I am satisfied that nationality is not the only hallmark of an arbitrator’s perceived independence and impartiality or bias. Other considerations will bear on that analysis.” She then went on to examine those considerations.

(b) Factors to be considered in neutral nationality analysis – The Court had no hesitation in finding that Tilray was an American and not a Canadian national, but that was not the end of the analysis. Citing Canadian Reinsurance Co. V. Lloyd’s Syndicate PUM 91, 6 B.L.R. (3d) 102, 1995 CarswellOnt 2356, the Court held that the place where Tilray carried on business was also relevant to determining perceived impartiality or bias. 

The Court noted that since Tilray had places of business in several locations, sections 1(3) and 1(4) of the ICAA were relevant. Those sections of the ICAA set out the test for determining if an arbitration is “international” and include as a factor the location of a party’s place of business with the closest relationship to the arbitration agreement. Referring to the decision in Alberta Motor Association Insurance Company v. Aspen Insurance UK Limited, 2018 ABQB 207, the Court held that the relevant time for determining the place of business with the closest relationship to the arbitration agreement is contract formation rather than contract performance. 

Applying these considerations to the case before it, the Court found that the relevant agreements clearly showed Tilray’s connection to British Columbia. Although subsequently Tilray’s operations moved to Portugal, and services pursuant to the RMPA largely related to Uruguay and Portugal (and not Canada), such changes came during contract performance which was after the relevant time for determining the parties’ places of business. 

The Court rejected Tilray’s argument that a British Columbian arbitrator was required because of the governing law. It noted that applying the law of different jurisdictions was an ordinary occurrence for international arbitrators and that requiring an arbitrator to be based in the jurisdiction of the governing law would effectively render the national neutrality principle inoperative any time the governing law emanates from the same jurisdiction as one of the parties. The Court stated that, “I do not accept that a qualification that would require the arbitrator to be qualified in British Columbia can or should override the crucial principle of independence and impartiality” (para. 56).

The Court also rejected Tilray’s argument that an arbitrator from British Columbia was preferable because of the “practical realities of the arbitration”, noting that international arbitrators are often required to travel and sit in different jurisdictions and that the advent of technology diminishes many of these impracticalities. 

Ultimately, the Court held at para. 60 that “having due regard to securing the appointment of an independent and impartial arbitrator, the arbitrator must be non-Canadian” and appointed an arbitrator and an alternate both from jurisdictions other than Uruguay, the United States, or Canada. 

Contributor’s Notes:

First, in keeping with Article 11(5) of the Model Law, this case underlines the importance of perceived neutrality of the arbitrator in international arbitration and sets a useful precedent for what factors the Court will take into consideration in appointing an arbitrator. 

Second, this decision is particularly welcome in British Columbia where the last published decision of the Court appointing an arbitrator is the 1988 decision of Quintette Coal Ltd. v Nippon Steel Corp., [1988] BCJ No. 492 [“Quintette Coal”]. In that case, the Court was asked to appoint an arbitrator in a dispute between a Japanese entity and a British Columbian entity. Despite the Japanese party’s concerns about national neutrality, the Court appointed a retiring justice of the British Columbia Court of Appeal as arbitrator, citing in part the convenience of appointing a local arbitrator. As a result of the criticism from the international arbitration community of the Quintette Coal decision, the Legislature of British Columbia ultimately amended the ICAA to add s. 11(9), which prohibits the court from appointing an arbitrator with the same nationality as one of the parties (unless the parties agree). 

Although the Court’s decision in Fotmer does not mention Quintette Coal, this decision brings British Columbia jurisprudence in line with internationally recognized principles with respect to perceptions of neutrality in arbitrator appointment. 

Third, the Court’s decision in Fotmer is also important for underscoring that the perception of bias or impartiality is the relevant consideration in arbitrator appointment by a Court. A party need not prove that bias is present to have grounds for requesting the preclusion of certain arbitrators, provided that a party can demonstrate that the appointment of a specific arbitrator would likely give rise to perceptions of bias and impartiality. 

Fourth, from a practical point of view, this case also illustrates a more mundane point for drafters of arbitration clauses, which is that having an effective arbitral appointment process in place prior to a dispute arising can save parties time and money. Applying to Court to have an arbitrator appointed is not an efficient process, particularly when navigating busy court dockets. Barring exceptional cases where a novel issue arises, arbitral institutions and/or list methods of appointment should be preferred over applying to Court to appoint an arbitrator. 

The author wishes to thank Les Honywill for his assistance.