In Clayton v. Canada (Attorney General), 2024 ONCA 581, the Court dismissed an appeal from an order dismissing an application to set aside an arbitral award made under Chapter 11 of NAFTA (“the Award”). The appellants sought to set aside the award on the grounds that the tribunal exceeded its jurisdiction and that the award violated public policy. The Court rejected both arguments. In the underlying arbitration, which was bifurcated into liability and damages hearings, the tribunal found that the respondent had breached the relevant NAFTA provisions, but that the appellants did not establish that the breach caused the damages sought. The appellants applied to the Ontario Superior Court to set aside the Award, arguing that the tribunal exceeded its jurisdiction by not properly applying the law, and that the Award violated public policy because it was “so unreasonable as to be unenforceable”. The Superior Court dismissed the application. The Court of Appeal dismissed the appeal. Challenges to arbitral awards on jurisdictional grounds are restricted to “true jurisdictional questions”, and there is a very high burden to set aside an award for public policy reasons.
Background to dispute: The appellants (“Clayton”) sought to develop a quarry in Nova Scotia. The proposed project required approval from both the Federal and Provincial Ministers of the Environment. A joint review panel conducted an environmental assessment and the Ministers ultimately denied approval of the project (para 5).
Clayton commenced an arbitration under Chapter 11 of the North American Free Trade Agreement (NAFTA) and claimed damages in the amount of US$440 million for lost profits (para 7).
There proceedings were bifurcated.
First, the tribunal dealt with liability, finding that the respondent, Canada, had breached its NAFTA obligations by conducting a flawed environmental assessment. Canada’s application to set aside this decision was dismissed by the Federal Court of Canada, 2018 FC 436 (para 6). (S. 6 of the Commercial Arbitration Act, R.S.C 1986, c.17 (‘the Code”) confers concurrent supervisory jurisdiction on the Federal Court and provincial courts: “The functions referred to in articles 11(3), 11(4), 13(3), 14, 16(3) and 34(2) shall be performed by the Federal Court or any superior, county or district court.” The somewhat odd result is that the set aside applications were brought in two different courts.)
Second, at the damages hearing, the tribunal considered Clayton’s claim for damages resulting from Canada’s alleged NAFTA breaches. The tribunal found that Clayton had not established a causal link between the NAFTA breach and the alleged injuries. The tribunal concluded that Clayton had failed to establish “in all probability” or “with a sufficient degree of certainty” that they would have obtained the necessary approval for the project, and that the project would be operating profitably if the environmental assessment process had operated properly. Accordingly, the tribunal awarded only US$7 million for deprivation of the opportunity to have a fair and non-arbitrary environmental assessment (paras 8 and 10).
The set-aside application – Clayton applied to the Ontario Superior Court to set aside the Award under Article 34(2) of the Code, which is based on the UNCITRAL Model Law (“the Model Law”). Clayton argued that the tribunal had exceeded its jurisdiction by failing to apply the law relating to the standard of proof correctly and that the award was contrary to public policy. The Superior Court dismissed the application to set aside the Award.
The appeal– The issues on appeal to the Court of Appeal for Ontario were whether:
a. the tribunal had, “exceeded its jurisdiction” by failing to determine causation on the balance of probabilities standard required by international law; and
b. the tribunal’s decision conflicted with the principles of adjudicative fairness and fundamental justice and so conflicted with the public policy of Canada.
Issue (a) jurisdiction – Clayton argued that the tribunal failed to determine causation on the balance of probabilities standard of proof which it was required to apply. Instead, it applied a standard of proof unknown to international law, and accordingly, the tribunal decided a matter beyond the scope of submission to arbitration. Clayton argued that in failing to apply the correct standard of proof, the tribunal failed to apply the law at all, and that this went to jurisdiction.
The standard of review for a “true jurisdictional question” under s. 34(2)(a)(iii) is correctness (para 13).
The Court held that Clayton’s jurisdictional argument was “a transparent attempt to circumvent clear limits on the ability of courts to interfere with the decisions of arbitration boards” (para 2).The Court held that s. 34 imposes strict limits on the ability of courts to interfere with arbitration awards. Relying on its previous decisions in Mexico v. Cargill, Incorporated, 2011 ONCA 622 [Cargill] and Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 [Alectra], the Court held that proceedings under s. 34 of the Code are neither appeals, nor an opportunity to review final and binding arbitration awards for either correctness or reasonableness (para 16-17).
To intervene under s. 34(2)(a)(iii), the Court must identify a ‘true jurisdictional question”. Clayton was required to establish that the Award, “contains decisions on matters beyond the scope of the submission to arbitration”. The modifier “true” “is intended to emphasize the limited scope of judicial oversight (para 18).
The Court held that the tribunal did identify the correct standard of proof (para 22), but that in any event, Clayton had not raised a true jurisdictional issue. The Court expressed concern that Clayton’s, “argument invites the court to scrutinize the tribunal’s award for an error of law that is otherwise immune from appeal” and that on this approach, “the court would find itself involved in reviewing the merits of final and binding arbitration awards routinely” (para 24).
Issue (b) public policy – Claytons argued that the Award conflicted with Canadian public policy because it was, ““irrational, illogical, arbitrary, and perverse” and that awards that are, “patently unreasonable, clearly irrational, totally lacking in reality, or a flagrant denial of justice” conflict with public policy (para 31).
Set-aside proceedings under s.34(2)(b)(ii) of the Code raise questions of law mixed and fact, such that an award is subject to review on the deferential palpable and overriding error standard (para 14).
The Court held that review under s. 34(2)(b)(ii) of the Code is for the limited purpose of determining whether an award is in conflict with public policy. Final and binding awards are not to be reviewed for reasonableness on public policy grounds. This section is not a “backdoor means” of permitting a reasonableness review. The public policy ground is narrow and exceptional (para 33). However, this was, “not an appropriate case to set out the parameters of the public policy concept” as “[n]othing in this case comes close to offending Canadians’ sense of morality” (paras 37-38).
The Award did not conflict with Canadian public policy.
Contributor’s Notes:
First, Arbitration Matters covered the decision of the application judge in a previous case note: Ontario – High threshold to set aside international award for damages not met – #694. Like the lower court decision, the appeal decision reiterates the well-established principle that both the jurisdictional and public policy grounds for setting aside an award are narrow.
Second, for there to be a “true” question of jurisdiction, the question must be whether the tribunal decided a matter that it was asked to decide – not whether it decided that matter correctly, or even if applied the proper law. The fact that a party takes exception to the manner in which the decision was made does not constitute a basis for the Court’s intervention under s.34 of the Code. The Court was concerned about a slippery slope – that if an jurisdictional grounds for set-aside applications were to include issues of whether the tribunal applied the proper law, it would need to review the substance of all awards.
However, I think that there is something to Clayton’s argument that at least in an extreme example (and perhaps this case was not one), the manner in which the tribunal decided an issue would indeed result in the tribunal exceeding its authority. For example, if a tribunal were to apply the law of another jurisdiction in deciding a matter that it was indeed asked to decide – in other words, the tribunal did something completely different than what it was asked to do. Perhaps it is too narrow a view to confine a jurisdictional challenge solely to whether the tribunal was deciding one of the questions posed to it, and that there is some room to extend a jurisdictional review to look at whether the tribunal determined that issue within the framework that the parties provided for doing so.
Indeed the Court has previously identified that this is a very fine line: in Alectra, the Court, citing Lord Denning’s dictum in Pearlman v. Keepers and Governors of Harrow School, [1978] EWCA Civ 5, [1979] Q.B. 56, stated “the distinction between an error that is jurisdictional in nature — which justifies judicial intervention — and an error made within jurisdiction — which does not — is so fine as to be manipulable.” [Alectra at para 30].
Third, this decision also reinforces that public policy as a ground for judicial intervention is limited to a narrow set of circumstances and is not a “backdoor” to a reasonableness review of the award. A court analyzing an arbitral award on public policy grounds cannot undertake a reasonableness review to determine whether the award is in conflict with public policy.
However, there still is some room for clarification and elaboration since the Court specifically declined to set out the parameters of the public policy concept except to say that an award would violate public policy if it conflicted with Canadians’ sense of morality. This leaves room for interpretation in cases that may be more borderline – this case, however, was clear cut.