Lisa’s 2021 Top Pick: Ontario – Russian Federation v Luxtona Limited (Part 1) – #564

A review of the 2021 case law shows that the appropriate standard of review of an arbitral award remains uncertain. Russian Federation v Luxtona Limited is interesting because it did not involve an appeal of an arbitral award or a set-aside application, in respect of which there are many court decisions. It considered the standard of review by a court where a tribunal has ruled “as a preliminary question” that it has jurisdiction pursuant to Article 16(3) of the Model Law. It provides that following such a determination by the tribunal, any party may apply to the court to “decide the matter”, which decision shall not be subject to appeal. Comparable provisions also appear in domestic legislation. The question is the role of the reviewing court asked to “decide the matter”. Confusion exists as to whether such a hearing is a “review” or hearing de novo and whether that determination has any bearing upon the standard of review of the arbitral tribunal’s preliminary jurisdiction determination.

In Russian Federation v Luxtona Limited, the issue arose in the context of an application by Russia to adduce fresh evidence on its application under Model Law Article 16(3) to the court to “decide the matter” of jurisdiction and Article 34(2) to set aside the tribunal’s award on jurisdiction. The tribunal had decided as a “preliminary question” that it had jurisdiction. Two judges of the Ontario Superior Court of Justice came to contradictory conclusions on that issue: 2018 ONSC 2419 and 2019 ONSC 7558. Later, a three-justice panel of the Ontario Divisional Court affirmed the first judge’s ruling, but for different reasons: 2021 ONSC 4604.

At first instance, Justice Dunphy found that a hearing Article 16(3) was not an appeal and, relying upon United Mexican States v Cargill, 2011 ONCA 622 as to the standard of review on a question of jurisdiction  (although that case did not apply Article 16(3)), held that the standard of review was correctness. As a consequence, the court is not bound to the record adduced before the tribunal: “whether or not described as a hearing ‘de novo’, such a hearing cannot be confined in advance to the record before the tribunal…The court is well able to control its own process to ensure that evidence is strictly confined to the narrow question of jurisdiction….” (para. 4). He found that the language of the Model Law, which allows a court to “decide the matter”, did not involve a mere review of the tribunal’s decision. Therefore, he permitted Russia to file new evidence.

Thereafter, Justice Penny became seized of the application. He considered the issue afresh when Luxtona objected to the new evidence filed by Russia. He found that he had the jurisdiction to re-visit Justice Dunphy’s decision and reversed it.

First, he considered the standard of review of the tribunal’s preliminary jurisdiction award. He too relied upon United Mexican States v Cargill to apply a correctness standard of review; when deciding its own jurisdiction, the tribunal must be correct.

Second, he noted that what constituted the “record” for the purposes of the court’s review was a separate issue that had never before been decided in Canada. In his view, the language of the Model Law made it clear that the court was undertaking a “review” of the preliminary jurisdiction decision, which he found is not the same as a hearing de novo. Further, allowing new evidence would undermine the competence-competence principle, by encouraging a losing party to routinely search for new evidence and seek court intervention after a tribunal has determined it has jurisdiction as a preliminary matter. Russia therefore could not adduce additional evidence as of right in support of its set aside application.

On appeal of that decision, the Ontario Divisional Court disagreed. It found that the language of Article 16(3) of the Model Law required the court “to decide the matter”, not to “review the tribunal’s decision”. This, the Divisional Court reasoned, conferred original jurisdiction upon the Ontario Superior Court of Justice to decide jurisdiction. The Divisional Court also held that United Mexican States v Cargill was distinguishable because it dealt with a different provision of the Model Law, which provided for a different test to be applied by the court; Cargill involved a set-aside application on jurisdictional grounds under Article 34(2)(a)(iii), not a preliminary decision as to jurisdiction, so Art. 16(3) of the Model Law was not engaged. The Divisional Court found that the text of the Model Law and the weight of international authority prescribed a de novo hearing in a court application “to decide the matter”. Because the court was hearing the jurisdictional issue de novo, the parties could adduce fresh evidence as of right.

This decision was later applied to s 17(8) of the Ontario Arbitration Act,1991, SO 1991, c 17 in Hornepayne First Nation v. Ontario First Nations (2008) Limited Partnership, 2021 ONSC 5534. Justice Fitzpatrick found that a court asked to “decide the matter” must decide the question de novo. It is not clear from the decision, but it appears that the parties adduced new evidence on the application.

In Saskatchewan v Capitol Steel Corporation, 2021 SKQB 224, Saskatchewan alleged that Capitol Steel had repudiated their arbitration agreement. It challenged the arbitrator’s preliminary determination that he had jurisdiction by way of an “appeal” to the court “to decide the matter” under s. 18(9) of the Saskatchewan Arbitration Act, 1992, SS 1992, c A-24.1. Justice Clarkson found that there were no cases in Saskatchewan dealing with this provision and apparently he was not alerted to the Ontario jurisprudence. He considered the case law from Alberta, which has a similar provision at s. 17(9) of its Arbitration Act, RSA 2000, c A-43 and determined that Alberta law required the court to make a decision regarding jurisdiction, not just to “review” the arbitrator’s jurisdiction and that this language demonstrated a legislative choice to engage in a form of judicial review, not an appeal, in which the court is to make a final decision on the issue. Therefore, appellate standards of review did not apply.

Justice Clarkson also considered the application of Vavilov to the standard of review analysis. He noted that the wording of s. 18(9) came into effect before Vavilov, which “reformulated the approach courts are to take when reviewing the decisions of administrative tribunals” and that, prior to Vavilov, “questions going to the jurisdiction of an administrative tribunal were reviewed on a correctness standard” (para. 29). He reasoned that that was the state of the law when s. 18(9) was enacted and, moreover, the wording of the provision “strongly suggests that the Legislature intended a correctness standard to be applied to preliminary rulings on jurisdiction” (para. 29). Justice Clarkson stated that Vavilov “establishes reasonableness as the default standard…” and that the standard applied by the court “must reflect the legislature’s intent with respect to the role of the reviewing court” (para. 29). Therefore, the process contemplated by s. 18(9) of the Act is an application for judicial review; it does not contemplate a hearing de novo, but rather a decision by the court as to whether the arbitration’s decision was correct based upon the record before the arbitrator. The standard of review was correctness and the arbitrator was correct.

The correctness standard of review in jurisdiction cases is a natural extension of the competence-competence principle. Where there is a dispute as to whether a party is bound by an arbitration clause, the arbitral tribunal must decide the issue in the first instance, subject always to the court having the last word. It remains to be seen whether Vavilov’s elimination of “true questions of jurisdiction” as a separate category that requires a correctness standard has any impact on these cases and on United Mexican States v Cargill.

However, the different characterization by the Ontario and Saskatchewan courts as to the process causes confusion as to whether such court proceedings are “reviews” or hearings de novo. The words “de novo” in the case law suggest the court may consider the jurisdiction issue afresh, with new evidence, and that the standard of review is correctness. The statutory language that provides that the court is to “decide the matter” of jurisdiction also suggests that the court has original jurisdiction and that the standard of review is correctness. However, Justice Penny held the view that the standard of review and the nature of the proceeding are to be considered separately from the record that is to be put before the court. Other courts, particularly in the U.K., seem to interpret the language “to decide the matter” as allowing the court to hear the matter de novo, which includes the right to adduce new evidence. In other words, it does not separate the questions of standard of review and procedure as was done in this case.

This case raises another interesting issue, which I will address in Part 2.

For earlier Case Notes on the cases referred to in this summary see: