Ontario – Court application under Model Law Art. 16(3) to “decide the matter” of the tribunal’s jurisdiction is a hearing de novo and not a “review” of the tribunal’s decision – #513

In Russian Federation v. Luxtona Limited, 2021 ONSC 4604, the Divisional Court heard an appeal by Russia of an interlocutory decision of Justice Penny of the Ontario Superior Court of Justice, Russia Federation v. Luxtona Limited, 2019 ONSC 7558. Justice Penny had declined to allow Russia to adduce fresh evidence on an application brought under Model Law Art. 16(3) to set aside an interim arbitral award finding that Russia had consented to arbitrate Luxtona’s claims and that the tribunal therefore had jurisdiction.  The proposed fresh evidence related to the jurisdictional issue and had not been before the tribunal. The appeal turned on whether the application before Justice Penny was a “review” of the tribunal award on jurisdiction or a hearing de novo. The Divisional Court, in a decision written by Justice D.L. Corbett, held that Russia was entitled to adduce fresh evidence as of right because the application was a hearing de novo. The court relied upon two key decisions raised by the parties. Mexico v Cargill, 2011 ONCA 622 held that a set aside application brought in the Superior Court of Justice under Art. 34 of the Model Law is a “review” and not a hearing de novo, but in that case there was no challenge to the tribunal’s jurisdiction to hear and decide the dispute. Therefore, the Divisional Court was not bound by it. The English Supreme Court decision of Dallah v Pakistan, [2011] AC 763, held that the court’s role where one party took the position that it had not consented to the arbitration was “to reassess the issue [of jurisdiction] itself” and not to “review” the tribunal’s decision. The Divisional Court found that this approach is supported by the language in the Model Law and the weight of international authority and Art. 2A of the Model Law, which promotes the uniformity of the application of the Model Law internationally.

Luxtona was a former shareholder of Yukos (an energy company based in Russia) and commenced an arbitration seeking damages of US $701 million, alleging that Russia had violated the provisions of the Energy Charter Treaty relating to protection of assets, including its investment in Yukos. Russia is a signatory to the Treaty, but never ratified it.  Luxtona argued that Russia agreed to provisionally apply the Treaty, including its arbitration provisions, to the extent that such application was not inconsistent with Russian law.   Russia disagreed and said that it did not agree to apply the Treaty provisionally and that the arbitration provisions of the Treaty were inconsistent with Russian law. The parties appointed a tribunal, seated in Toronto,  which heard evidence and argument on the jurisdiction issue, and made an interim award that it had jurisdiction to arbitrate Luxtona’s claims.

Russia applied to the Ontario Superior Court of Justice for an order setting aside the tribunal’s interim award.  Justice Dunphy made an interlocutory evidentiary ruling that Russia was entitled as of right to adduce fresh evidence on the jurisdiction issue that had not been before the tribunal, Russian Federation v. Luxtona Limited, 2018 ONSC 2419. Justice Penny then became seized of the application. He found that he was not bound by the interlocutory decision of Justice Dunphy and concluded that Russia was not entitled to file the fresh evidence as of right. The Divisional Court found that an application judge is not bound by the interlocutory, evidentiary rulings of a prior application judge and therefore that Justice Penny did not err in revisiting Justice Dunphy’s order, but he erred in disallowing the fresh evidence.

In reaching this conclusion, the Divisional Court reviewed the statutory framework:

Article 16 of the Model Law provides:

Competence of arbitral tribunal to rule on its jurisdiction
(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement….
(3) …. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award. (emphasis added)
Subsection 11(1) of the Ontario International Commercial Arbitration Act, 2017 , provides:

If, pursuant to article 16(2) of the Model Law, an arbitral tribunal rules on a plea that it does not have jurisdiction, any party may apply to the Superior Court of Justice to decide the matter.  (emphasis added)
It concluded, therefore, that the court is “to decide the matter”; it is not “to review the tribunal’s decision”.  “The matter”, referred to in both Art. 16(1) of the Model Law and s. 11(1) of the Act is the issue of the tribunal’s jurisdiction.  This is clear language conferring original jurisdiction on the court to adjudicate the question of the tribunal’s jurisdiction.  This language is not qualified by a privative clause or terms of reference for the application.  The court’s task is entirely described by the phrase “decide the matter”.

Further, the Divisional Court found it was not bound by Mexico v Cargill, 2011 ONCA 622, which concerned a set aside application, in respect of which the party objecting to jurisdiction must meet a different test – to prove one of the “enumerated deficiencies” listed in Art. 34.  In that case Mexico argued that the award fell outside the terms of submission to arbitration. There was no challenge to the tribunal’s jurisdiction to hear and decide the dispute, but Mexico did challenge the tribunal’s jurisdiction to award certain damages and the issue was whether the award went beyond the submission to arbitration. Therefore, this was a review of the tribunal’s final award.

Rather, the Divisional Court relied upon the English Supreme Court decision of Dallah v Pakistan, [2011] AC 763, which the Ontario Court of Appeal cited with approval in Mexico v. Cargill. It held that the court’s role where one party took the position that it had not consented to the arbitration was “to reassess the issue [of jurisdiction] itself” and not to review the tribunal’s decision. This is because the tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue was whether the tribunal had any legitimate authority at all.

Therefore, the Divisional Court found that Mexico v. Cargill does not rule on the relevant issue and that Dallah is the leading international authority. Even though the UK is not a Model Law jurisdiction, its legislation is comparable and the strong consensus in Model Law jurisdictions supports the Dallah approach.  This view is supported by Art. 2A of the Model Law, which states:

International origin and general principles
(1) In the interpretation of this Law, regard is to be had to its international origin and to the need to promote uniformity in its application and the observance of good faith.
(2) Questions concerning matters governed by this Law which are not expressly settled in it are to be settled in conformity with the general principles on which this Law is based.

The Divisional Court concluded that:

The “uniformity” principle in Article 2A(1) does not make international decisions binding in Ontario, but it makes them strongly persuasive.  The legal regime on which Dallah is based is part of the “international origin” of the Model Law.  There is an international consensus on the nature of the hearing before the application judge, and in my view that consensus ought to be followed in Ontario.

Editor’s Notes:

First, for a summary of the decisions of Justices Dunphy and Penny referred to in this decision, see the previous Arbitration Matters Notes: Ontario – arbitral tribunal’s evidentiary record on jurisdiction challenge is not ignored but also does not confine court – #060; and Ontario – court revisits/reverses prior decision which allowed new evidence on post-award jurisdictional challenge – #272.

Second, the Divisional Court relied upon Canada Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, at para. 37, and Housen v. Nikolaisen, [2002] SCR 235, at paras. 8, 10, 19, 26-37, on the question of the appropriate standard of review by the Divisional Court of the application judge’s interlocutory decision. The standard of review was correctness on questions of law and palpable and overriding error on questions of fact.  Mixed questions of fact and law are reviewable by the court on a deferential standard, expect that any “extricable errors of law” are reviewable on a correctness standard. For the most recent word by the Supreme Court of Canada on the Vavilov case, see previous Arbitration Matters Note: Supreme Court – for those SCC justices willing to consider it, Vavilov applies to private commercial arbitration where legislation provides for appeal – #420.