Ontario – court enforces Model Law prohibition of appeals where arbitral tribunal decides jurisdiction as preliminary question – #427

On application by Respondents, Ontario’s Court of Appeal in United Mexican States v. Burr, 2021 ONCA 64 quashed the appeal of a decision in first instance dismissing a challenge to a tribunal’s preliminary decision on jurisdiction.  Despite counsel’s agreement that a party could “ride both horses” and rely on both articles 16 and 34 of the UNCITRAL Model Law on International Commercial Arbitration, adopted by the United Nations Commission on International Trade Law on June 21, 1985, as amended on July 7, 2006  when challenging an arbitral tribunal’s decision on jurisdiction, the Court limited its decision to prohibiting those appeals wherein a party’s jurisdictional decision was determined as a preliminary question under article 16(3) and not in the award on the merits.

Constituted February 14, 2017 under chapter 11 of North America Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can TS 1994 No 2 (“NAFTA”), the arbitral tribunal (“Tribunal”) on April 4, 2017 bifurcated the proceedings into two (2) phases: a jurisdictional phase and a merits and damages phase.

The Tribunal addressed Mexico’s jurisdictional challenge as a preliminary question under section 16(3) and not as part of the award on the merits.  It held a hearing on jurisdiction, and, following argument, a majority of the Tribunal issued a July 19, 2019 decision entitled “Partial Award” (“Partial Award”) in which the majority determined that the Tribunal had jurisdiction.  Mexico applied to the Ontario Superior Court to set aside that decision under section 11 of the International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“ICAA”). Subject to the other provisions in the ICAA, section 5 provides that the Model Law, attached as Schedule 2 to ICAA, has force of law in Ontario.

In The United Mexican States v. Burr, 2020 ONSC 2376, Madam Justice Bernadette Dietrich dismissed Mexico’s challenge to an award on jurisdiction in which the Tribunal found that investors (“Respondents”) had properly given notice of their intention to arbitrate by filing powers of attorneys authorizing legal counsel to initiate arbitration and to act on their behalf.  Dietrich J. held that non-compliance with the formal requirements of Articles 1119 did not vitiate the state’s consent to arbitrate under Article 1122(1). Dietrich J. also distinguished between an objection to jurisdiction which relates to the authority of a tribunal to hear a dispute and an objection to admissibility which refers to the characteristics of the claim, determining that she had jurisdiction to review the former but not the latter. For the earlier Arbitration Matters note on the decision in first instance, see “Ontario – states’ legal submissions can qualify as “subsequent practice” in investor-state arbitration – #360”.

Mexico appealed that decision.  Respondents applied to quash the appeal.  The Court of Appeal did not address the merits of the decision rendered in first instance, limiting its involvement to determining whether it itself had jurisdiction to hear the appeal. 

[7] Whether the appeal should be quashed depends upon whether Mexico’s application is governed only by art. 16(3) of the Model Law, which would prohibit an appeal of the application judge’s decision, or if it is also governed by art. 34 of the Model Law, which would permit an appeal”.

The Court identified article 16 of the Model Law as the “focal point”.  Article 16(2) stipulates when a party must raise “a plea” that an arbitral tribunal does not have jurisdiction. 

16(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified”.

Article 16(3) stipulates how the tribunal may proceed in light of a jurisdictional challenge.

16(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. 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”.

The Court at para. 13 excerpted briefly from the Tribunal’s Partial Award to outline, as captioned the Tribunal’s “view of what it was doing” and at para. 14 recorded that the merits phase of the arbitration was underway.

The Court acknowledged that Mexico did cite article 34 of the Model Law in its materials to the court in first instance but noted that it did so “only in the title” and “in the introductory paragraph of its factum”. See para. 15.

The Court found it “difficult to reconcile” those mentions with the affirmation in Mexico’s factum that the Partial Award “issued pursuant to Article 16(2) of the Model Law is a final decision by the Tribunal in respect of its jurisdiction”.  The Court promptly offset that statement with the observation that “a “final” decision on jurisdiction may still be dealt with as a “preliminary question” within the meaning of art. 16”.

At paras 17 and 18, the Court focused in on the oral submissions made in first instance by counsel for both parties.  While counsel for Mexico “did not address the substance” of article 34 in oral argument, counsel for Respondents did and “speaking for himself and counsel for Mexico” asserted agreement between the parties that “there is no appeal from your decision”.  See para. 17 for a more fulsome excerpt of the oral submission on that point.

The Court did recognize that Mexico did refer to article 34 but qualified it as “scant” and that submissions focused on section 11(1) of the ICAA and article 16 of the Model Law.  Despite noting Mexico’s counsel’s mention of article 34 when reading from Mexico v. Cargill, Incorporated, 2011 ONCA 622, the Court limited the mention to their inclusion in excerpts dealing with the standard of review applicable to arbitral decisions.  The Court drew the same observations of any mention of article 34 in readings from The Russia Federation v. Luxtona Limited, 2019 ONSC 7558.  Notwithstanding the mention of article 34 in Mexico v. Cargill, Incorporated and The Russia Federation v. Luxtona Limited Court distinguished both on the basis of the issues addressed by the courts contrasted with the one before it.

At paras 22-25, the Court turned to focus on the reasoning in first instance but only to comment that the reasoning “did not turn on the substance” of article 34. The Court observed that this result was “consistent with the arguments she heard”.  Despite an early mention of article 34, Dietrich J. “did not refer to it again until” later in her reasons, leading the Court to conclude that the “substance of art. 34 played no role in her decision, just as it did not in the argument of the parties before her”.

[24] Perhaps Mexico’s occasional references to art. 34 were intended to assist the application judge in understanding her function under art. 16. Perhaps Mexico was seeking to preserve plausible arguability under art. 34 in the event that the application did not go well for it. Regardless, it is clear that there was no substantive argument on how art. 34 applied on the facts of this case before the application judge. Mexico’s argument that art. 34 of the Model Law applies to this appeal, along with art. 16(3), does not bear scrutiny”.

The Court also dismissed the role the title “Partial Award” played.

[25] There is also no basis for concluding, as Mexico argues, that the label of “Partial Award,” which the arbitral tribunal attached to its ruling, is a sufficient hook with which to snag art. 34(1). I would reject this argument. This was not an award on the merits, as the tribunal itself noted”.

Additional Observations – The Court offered some “Additional Observations” at paras 26-28 on whether a party can rely on both articles 16 and 34 to challenge the ruling of an arbitral tribunal. 

(i) Both parties agreed that “there is no right of appeal from the decision of an application judge under art. 16 and that there is a right of appeal from the decision of an application judge under art. 34”.  The Court agreed but added that it did so “on a more nuanced basis”.

The text of art. 16(3) prohibits an appeal from the ruling of a Superior Court judge on the correctness of an arbitral tribunal’s ruling on a jurisdictional plea that is pursued “as a preliminary question”. The text of art. 34(1) provides that a party may seek “[r]ecourse to a court against an arbitral award only by an application for setting aside,” where the tribunal’s ruling on a jurisdictional plea was contained “in an award on the merits”, in the words of art. 16(3)”.

(ii) Counsel urged the court that a party can rely on both articles 16 and 34 and “ride both horses”. The Court declined to saddle up, limiting its ruling and reasoning to the narrower debate before it on the record.

[27] Counsel for both parties asserted that it is possible for a party to rely on both art. 16 and art. 34 in challenging the ruling of an arbitral tribunal, in other words, to “ride both horses”, which was the metaphor put to counsel and adopted by them in argument. However, I would observe that the position that an appeal is prohibited where a ruling is pursued “as a preliminary question” under art. 16(3) has the benefits of clarity, simplicity and expediency for which international commercial arbitration is touted.

[28] This question of whether both horses can be ridden might need to be resolved but it would be unwise for this court to undertake an interpretation of art. 34 and its interaction with art. 16 beyond what is required to dispose of this motion in the absence of full argument by parties committed to opposite perspectives in the court below. Mexico argues that it proceeded under both articles before the application judge but, as I have explained, it did not”.

urbitral notes – First, in quashing the appeal, the Court of Appeal provided no comment on whether the decision in first instance was correct or reasonable, in either result or reasoning.  The decision in first instance withstood appeal if only because no appeal lay.  The Court of Appeal might have given additional insights or guidance into the issues presented in first instance had the Tribunal not bifurcated and had included its jurisdictional decision in an award on the merits.

Second, see the earlier Arbitration Matters notes “Ontario – court revisits/reverses prior decision which allowed new evidence on post-award jurisdictional challenge – #272” regarding The Russia Federation v. Luxtona Limited, 2019 ONSC 7558 and “Ontario – arbitral tribunal’s evidentiary record on jurisdiction challenge is not ignored but also does not confine court – #060” regarding The Russian Federation v. Luxtona Limited, 2018 ONSC 2419.

In The Russia Federation v. Luxtona Limited, 2019 ONSC 7558, Mr. Justice Michael A. Penny held that a party to a challenge of an arbitral tribunal’s jurisdiction under articles 16 and 34 of the Model Law may not file fresh evidence as of right.  A party must obtain leave to do so by providing a “reasonable explanation” for why new evidence is necessary, including why that evidence was not, or could not have been, put before the tribunal in the first place.  Abiding by the Mexico v. Cargill, Incorporated approach restricting courts to a “review” and not a trial de novo, Penny J. held that competence-competence was best served by requiring parties to put their “best foot forward” before the arbitral tribunal and not re-try the jurisdictional issue with additional evidence informed by hindsight.

In The Russian Federation v. Luxtona Limited, 2018 ONSC 2419,  Mr. Justice Sean F. Dunphy asserted the court’s autonomy vis-à-vis the arbitral tribunal’s evidentiary record when hearing a challenge to that tribunal’s preliminary award on jurisdiction.  In the context of a dispute over the admissibility of evidence which had not been before the arbitral tribunal, Dunphy J. determined that a court was neither limited to the tribunal’s findings of fact nor confined by the record relied on by the tribunal to reach its conclusions.