Ontario – arbitral tribunal’s evidentiary record on jurisdiction challenge is not ignored but also does not confine court – #060

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.

Invoking its status as a former shareholder of Yukos Oil Company (“Yukos”), Luxtona Limited (“Luxtona”) initiated arbitration against the Russian Federation alleging that the latter’s violation of certain provisions of the Energy Charter Treaty (“ECT”) affected Luxtona’s investment in Yukos.  The parties disputed whether ECT had provisional application.  ECT’s article 45(1) “Provisional Application” stipulated that the ECT would apply pending its entry into force in a jurisdiction which is not yet a signatory “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”.

The Russian Federation raised three objections to jurisdiction: the provisional application of the ECT; the denial of benefit provisions under article 17 of the ECT; and, the nature of Luxtona’s investment in Yukos.  The parties filed extensive evidence and the arbitral tribunal conducted a hearing on the jurisdictional challenge which lasted several days.  In an interim award, the arbitral tribunal dismissed the first two of the Russian Federation’s three objections and deferred a decision on the third to a later date.

The Russian Federation applied to the Ontario Superior Court to challenge that interim award under articles 16(3) and 34(2) of the UNCITRAL Model Law on International Commercial Arbitration, incorporated into the law of Ontario as Schedule 2 to the International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 (“ICAA”).

In support of its application, the Russian Federation filed the record of proceedings before the arbitral tribunal as well as two expert opinions regarding Russian law and an affidavit attaching ECT preparatory work documents.  The two opinions and the affidavit had not been before the arbitral tribunal when it issued its jurisdictional award.

Luxtona did not contest the production of the record of proceedings but did apply to have the two expert opinions and the affidavit struck from the record. It argued that those elements were not before the arbitral tribunal and did not qualify as fresh evidence for which leave to file could be granted.

Dunphy J. began his analysis by identifying the nature of a proceeding under either article 16(3) or 34(2).  Neither proceeding is an appeal and neither is confined in advance to the record created before the arbitral tribunal whose jurisdictional award in under challenge.  “In deciding the matter of jurisdiction under the Model Law, it is neither necessary nor appropriate to engage upon the process having excluded in advance evidence that is otherwise relevant and probative – or may be.

Dunphy J. had been assigned to hear Luxtona’s motion to strike as well as the Russian Federation’s application under articles 16(3) and 34(2).   This double assignment eliminated any concern that a decision on Luxtona’s motion to strike might interfere with a decision on the merits.

Referring to Mexico v. Cargill, Incorporated, 2011 ONCA 622, he identified correctness as being the applicable standard.  Dunphy J. then narrowed in on the nature of the parties’ positions on the merits of the application filed by the Russian Federation.  Their submissions on the merits would in some significant measure focus on their competing views of the ECT’s provisional application:

(a) Luxtona advocated for an ‘all or nothing’ interpretation – the ECT applies in full unless the constitution, law or regulations prohibit provisional application;

(b) the Russian Federation argued for a limited provisional application – only those ECT provisions which do not violate its constitution, laws or regulations can be applied provisionally.

[10]  If Luxtona’s “all or nothing” interpretation of art. 45(1) holds, the main question at the hearing of the application will be whether Russian law permits provisional application of treaties generally or of this treaty in particular.  If the Russian view of art. 45(1) obtains, the main question will be whether subjecting to arbitral review decisions made by Russian courts and tribunals regarding Yukos’ tax liabilities and the enforcement of those tax claims in the absence of ratified treaty violates Russian law.

Dunphy J. observed that both interpretations would require him to determine which principles of the Russian Federation’s constitution, laws and regulations apply.  That determination was a factual one requiring expert opinion.

Luxtona objected to the court considering evidence not made available to the arbitral tribunal.  Doing so would disregard the arbitral tribunal’s findings of fact and allow for a challenge that would be “without boundaries”.  As well, with such an approach, parties would “be incented to withhold evidence from a jurisdiction hearing before arbitrators”.  The additional evidence would also not qualify as “new evidence” as those elements had been available to the Russian Federation prior to the jurisdictional hearing conducted by the arbitral tribunal.

The Russian Federation submitted that a de novo hearing was required and the court hearing would have to determine whether the arbitration agreement existed.  The Model Law provides the court the jurisdiction to “decide the matter” and is not limited to a review of the arbitral tribunal’s reasoning.  It argued that “the tribunal’s own view of its jurisdiction has no legal or evidentiary value when the issue is whether the tribunal has jurisdiction in the first place”.

Both parties provided extensive authorities to Dunphy J., many of which issued by foreign courts: England, Australia, New Zealand, Ireland, Hong Kong.  Dunphy J. observed that while he was not bound by them those cases were both persuasive in their own right and “indicative of the consensus international view of the interpretation of the Model Law”.  He also noted that, despite efforts to distinguish certain cases, Luxtona provided no cases with a competing position.

The authorities provided to Dunphy J. led him to observe that the jurisprudence is “quite unanimously in line” with “the application of a correctness standard by a court that is neither bound to defer to the decision of the tribunal on matters of jurisdiction nor explicitly confined to the record before such tribunal”.

In his analysis, Dunphy J. remarked on the perceived purpose behind Ontario’s adoption of the Model Law as part of its ICAA.

By enacting the Model Law essentially “as is” in the ICAA, the Legislature has expressed a desire that Ontario should be – and be perceived by others internationally as being – a “Model Law jurisdiction”.  An interpretation that enhances rather than undermines the confidence of the international community in Ontario as a venue for such arbitral proceedings is clearly one that is in keeping with the intentions of the Legislature providing the language of the statute itself does not require a contrary result.

Dunphy J. did note that Ontario’s own case law “is quite in keeping with the international consensus”.  That said, other than noting Mexico v. Cargill, the reasons cite no other Ontario cases.

Dunphy J. carefully examined the wording in articles 16(3) and 34(2) and identified wording which did not impose limits on the court’s review.

[33] Art. 34(2) of the Model Law permits the court to “set aside” an arbitral award where the applicant “furnishes proof that:…(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration”.  Art. 16(3) of the Model Law permits the court to “decide the matter” where an arbitral tribunal “rules as a preliminary question that it has jurisdiction”.  Neither of these provisions can be construed as constraining the court to the four corners of the evidentiary record before the tribunal still less to the findings of fact regarding foreign law made by the tribunal.  The court is directed to “decide the matter” and not merely to review the decision of a tribunal whose very existence may or may not have been authorized.

Dunphy J. resisted limiting his approach to a choice between the two options presented by the parties:  a review confined to the original record versus a full hearing de novo.  While Mexico v. Cargill may have likened a standard of correctness hearing to a hearing de novo, it did not find them to be the same thing.  Careful not to allow an article 16(3) or 34(2) application to “proceed like a runaway freight train”, he anticipated that jurisdictional issues would usually be narrow ones and that the courts should avoid delving into the merits of the underlying dispute.

Turning to the disagreement before him as to the role, if any, the additional expert evidence would play, Dunphy J. advised the parties that he could not at that point decide if that expertise would be persuasive or not, only that it was admissible and could not be excluded in advance.  He also cautioned Luxtona that the choice on how to respond rested with it:

The respondent must decide for itself whether it is confident to rest upon the expert evidence already filed before the tribunal or whether it wishes to supplement that evidence in light of the additional evidence filed by the applicant.   In making its decision, the respondent must take into account that I am not confined to the findings of fact made in regard to Russian law by the tribunal where these relate to the question of jurisdiction nor am I confined to the record consulted by the tribunal in reaching its own conclusions.

It can be anticipated that the choice highlighted for Luxtona as a respondent to an article 16(3) or 34(2) application will apply to other parties’ court applications on jurisdiction.

Addressing the Russian Federation, Dunphy J. also identified the burden faced by applicants challenging arbitral tribunal’s decisions on jurisdiction.

This does not mean that those conclusions are not to be examined by me or that they lack persuasive authority.  They shall be examined and respectfully so when this application is heard on the merits.  The applicant bears the burden of establishing lack of jurisdiction – a conclusion that implies at least prima facie authority is to be conferred upon the tribunal’s finding.

In his second to last paragraph, Dunphy J.’s earlier careful analysis of the case law on and the wording of the Model Law allowed him to plant blunt stake posts to delimit the approach he was persuaded to take:

[37] The application of the standard of correctness does not imply ignoring the work that has been done by the tribunal to date but it does not confine my task to that record either.

At the March 27, 2018 hearing, Dunphy J. dismissed Luxtona’s application from the bench with reasons to follow.  The reasons excerpted above were released April 13, 2018.