Federal – Independence/impartiality not essential criteria for arbitrator appointment? – #770

In Export Development Canada v. Suncor Energy Inc., 2023 FC 1050, the Federal Court heard an application for an order appointing an arbitrator pursuant to an arbitration clause in a political risk insurance policy (the “Policy”). The Court made several findings on the five issues before it. Two of those findings are highlighted here, with the others addressed below. First, subsidiaries of one of the parties claimed they were improperly included in the arbitration – as they were not parties to the arbitration agreement – and therefore claimed the Court had no jurisdiction to appoint an arbitrator in a manner that would bind them. The Court rejected this and refused to preliminarily determine that jurisdictional issue, which was a matter for the arbitrator pursuant to the competence-competence principle. Second, the Court determined what criteria should apply to the selection of the sole arbitrator. The Court held that the criteria of independence and impartiality, among others, are not “threshold criteria” and would not necessarily disqualify a proposed arbitrator if not met. Rather, they are part of what the Court considers in exercising its discretion. 

Background – Export Development Canada (EDC), a federal Crown corporation, and Suncor Energy Inc. (Suncor) were parties to the Policy. The Policy insured against certain losses caused by expropriation or political violence (as those terms were defined in the Policy) in respect of oil assets in countries outside of Canada. Suncor was the insured under the Policy issued by EDC.

Suncor had previously claimed indemnity under the Policy for losses related to Libyan oil assets. The parties had a first arbitration to determine the value of those losses, which EDC paid. EDC commenced a second arbitration to determine its rights to recover payment of that amount from Suncor and its subsidiaries. EDC claimed the Libyan assets continued to have significant value and generate revenue for Suncor and a number of Suncor’s subsidiaries. It is implied in the decision that EDC’s argument is that this was contrary to the Policy and the prior payment should not have been made in such circumstances.

EDC and Suncor could not reach agreement on the sole arbitrator to be appointed under the terms of the arbitration clause under the Policy. EDC commenced an application to have the Federal Court act as the appointing authority and appoint the arbitrator. In the application, the court addressed five issues:

Issue 1 – The first issue was whether the Federal Court had jurisdiction to appoint a sole arbitrator for the second arbitration. 

The parties agreed it did. However, since this was the first case where the Federal Court has acted as appointing authority, the Court wished to set out the source of its jurisdiction. First, the parties’ arbitration clause specifically stated that if the parties cannot agree on the appointment of an arbitrator, then either party “may request [that] the Federal Court of Canada” do so. Second, the Federal Court’s jurisdiction was conferred by statute. The Court’s jurisdiction to act as appointing arbitrator derived from the Federal Courts Act, R.S.C., 1985, c. F-7 (s. 26) and the Canada Commercial Arbitration Act, R.S.C. 1985, c. 17 (2nd Supp), which adopts the UNCITRAL Model Law (ss. 2, 5(2) and (6) of the Act and Articles 1, 5, 6, 10 and 11 of the Model Law).

Issue 2 – The second issue was whether the Court’s jurisdiction extended to Suncor’s subsidiaries to appoint an arbitrator in a manner that would bind them. The Court answered the question in the affirmative.

The Court recognized that the subsidiaries contested whether the arbitrator would have jurisdiction over them as they were not parties to the Policy. However, the Court held that a jurisdictional challenge in the arbitration is distinct from the issue of whether they are proper parties to the application. The Court held the subsidiaries were proper parties to the application, as they would be affected by the Court’s order. Whomever is appointed as arbitrator will, further the principle of competence-competence, determine the limits of jurisdiction and decide whether the subsidiaries are proper parties to the arbitration. The Court recognized that its order “should not encroach on the arbitrator’s role.” For that reason, the Court held that it would not be appropriate to restrict the scope of the order to one as solely between Suncor and EDC. The Court would not include language that could be seen as a pronouncement on the issues that werefor the arbitrator to decide.

The Court recognized that its determination that the subsidiaries were proper parties to the application had no bearing on the jurisdictional issue in the arbitration. The fact that a party participated in the appointment of an arbitrator does not preclude it from raising a plea that the arbitrator does not have jurisdiction, as set out in Article 16(2) of the Model Law, adopted in the Canada Commercial Arbitration Act, R.S.C. 1985, c. 17 (2nd Supp).

Issue 3 – Both parties suggested possible candidates and put forward affidavit evidence that, among other things, attached correspondence with the candidates and information about the candidates’ qualifications. Suncor raised a number of issues with respect to EDC’s evidence about its arbitrator candidates.

First, Suncor challenged EDC’s reliance on an affidavit from a member of its legal team, arguing it was contrary to Rule 82 of the Federal Court Rules, SOR/98-106 for members or employees of counsel’s firm to provide evidence on contentious matters. The Court disagreed as it was not an affidavit that gave evidence on contested issues. Rather, it set out the lawyer’s research about Suncor and its subsidiaries (principally, results from his corporate registry researches) and attached correspondence between counsel for the parties or between counsel for EDC and candidates, with Suncor’s counsel copied

Second, Suncor claimed that the evidence did not provide a complete picture. EDC had asked for disclosure from the candidate arbitrators in accordance with the International Bar Association Guidelines on Conflict of Interest (IBA Guidelines). Suncor argued that this was too narrow and that, on cross-examination, EDC had refused to answer Suncor’s questions about its relationships or interactions with the candidates. EDC had also terminated the cross-examination prematurely.

The Court rejected the argument that EDCF’s letters to the candidates were too narrow because they sought disclosure in line with the IBA Guidelines. It also rejected Suncor’s argument that it had been denied information about the candidates through EDC. It held that EDC was not required to act as intermediary between Suncor and EDC’s candidates. The candidates were proposed on the understanding that the arbitrator would be jointly retained. If Suncor needed more information, it should have asked them directly. The Court agreed that EDC’s counsel was not justified in terminating the cross-examination, but this did not prejudice Suncor’s ability to understand the qualifications, independence and impartiality of EDC’s proposed arbitrators.

Issue 4 – The Court then addressed what the appropriate criteria were for selecting the sole arbitrator for the second arbitration.

The Court held that an independent and impartial arbitrator who is qualified to apply the laws of Ontario to the interpretation of the Policy were not “threshold criteria.” In particular, the Court found at paragraph 80 that:

 “Article 11(5) of the [Model Law] requires the Court to ‘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. While qualifications agreed to by the parties and considerations of independence and impartiality are important, the language of article 11(5) provides flexibility. The failure to satisfy these criteria would not necessarily disqualify a proposed arbitrator or trump other considerations, and I do not consider them to be ‘threshold criteria’.” 

Rather, the Court said that it should conduct a holistic assessment in view of all of the circumstances of the case, including the nature of the dispute to be decided.

The Court assigned highest priority to the criteria of (i) qualifications and expertise in Canadian law, particularly Ontario law and (ii) independence and impartiality. The Court did not find experience as a judge was required (“[p]ast experience as a judge or even as an Ontario judge does not necessarily mean that a candidate is more suitable”) and found arbitration and dispute resolution experience – particularly as a sole arbitrator or tribunal president in complex arbitrations – to be of high importance. 

The Court then went on to rank a number of other criteria in terms of low to high importance: experience with international oil and gas disputes, commercial disputes and insurance disputes (medium priority); experience with political risk disputes specifically (medium priority); arbitrator’s accessibility (medium priority); qualifications or experience in civil law (low priority); differences in costs (low priority); a nationality that differs from the nationalities of the parties (not important consideration in this case); specific experience with disputes involving assets in North Africa or the Middle East (lowest priority); familiarity with the political, legal, cultural and historical context in Libya (lowest priority).

Issue 5 – The Court then addressed who should be appointed as sole arbitrator, applying the criteria identified and decided that one of the candidates on EDC’s list was the most suitable candidate to adjudicate this particular dispute.

Contributor’s Notes:

There are two key takeaways from this case.

First, as set out above, the Court determined that it would not pre-determine the jurisdictional issue and appointed an arbitrator in a manner that would bind all the parties, including the subsidiaries. Notably, this stands in contrast to other Canadian cases. For example, in Rampton v. Eyre, 2007 ONCA 331, the Court upheld the dismissal of an application for the appointment of an arbitrator on the basis that the appellant was not a party to the arbitration agreement and so could not invoke it. Following that authority, in Kanda Franchising Inc. et al. v. 1795517 Ontario Inc., 2017 ONSC 7064, the Court determined that the personal respondents were not parties to the arbitration agreement and could not be compelled to submit to arbitration. The Court appointed an arbitrator to arbitrate the dispute only as against the corporate respondent. Similarly, internationally, the cases on this issue are not consistent on this issue of whether the appointing authority will appoint an arbitrator where jurisdiction is contested without first assessing that jurisdictional issue (see UNCITRAL 2012 Digest of Case Law on the Model Law, p. 61).

The Federal Court does not mention this case law and there now appears to be inconsistent treatment on how this issue is handled. However, the other cases cited above were not decided under the Model Law. The Federal Court properly recognized that an application under Article 11 of the Model Law to appoint an arbitrator should not be resisted on the basis that the respondent has a jurisdictional challenge. Pursuant to the competence-competence principle, that challenge should be determined by the arbitrator, not the appointing authority. Article 16 of the Model Law (which sets out the competence-competence principle) specifies that a party that participated in the appointment of an arbitrator is not precluded from raising a jurisdictional issue. In light of that, it is hard to see how it is open to the appointing authority to predetermine the merits of that jurisdictional challenge. Such arguments should not delay or impact the appointment of the arbitrator. Second, I find puzzling the Court’s conclusion that, in selecting the arbitrator, independence and impartiality are not “threshold criteria” but part of the holistic assessment for the Court to consider. There can be no appointment of an arbitrator if he or she is not independent and impartial. Indeed, Article 12 of the Model Law provides that an arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to his or her impartiality or independence. Article 11 of the Model Law, which provide for the appointment of the arbitrators, does not suggest otherwise. The Court ultimately concluded that these are important criteria that will be given the highest priority. But, respectfully, they are necessary criteria.