Ontario – Courts must decide arbitral jurisdiction de novo  – #748

In Russian Federation v. Luxtona Limited, 2023 ONCA 393, the Ontario Court of Appeal held that in an application to Ontario courts under the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), being Schedule 2 to the International Commercial Arbitration Act, 2017, c. 2, Sched. 5, for the court to decide whether an arbitral tribunal had jurisdiction, the court must decide the jurisdictional question de novo. In other words, there is no deference owed to the arbitral tribunal on the question of that tribunal’s jurisdiction. The Court reached this conclusion after considering the strong international consensus to that effect, and reaffirmed the “uniformity principle”, which holds that it is “strongly desirable” for Ontario’s international arbitration regime to be interpreted coherently with that of other countries. 

Underlying dispute – The underlying dispute is closely related to the arbitral proceedings brought by former shareholders of Yukos Oil Company under the Energy Charter Treaty arising from the bankruptcy and taxation of Yukos, which resulted in awards against the Russian Federation of over USD 50 billion, in arbitrations seated in The Hague. 

Luxtona – a Cyprus company later redomiciled to California – was another shareholder of Yukos which brought a separate, USD 700 million claim against the Russian Federation under the Energy Charter Treaty alleging largely the same facts. 

Toronto chosen as the seat – The arbitral tribunal selected Toronto as the seat of the arbitration, despite there being no connection to Canada, and in doing so rejected The Hague, London, New York, Singapore, Vienna, Frankfurt, Paris and Geneva. It stated: 

“Each Party has vigorously set out understandable concerns – safe passage, the prior decisions of national courts – regarding places of arbitration proposed by the other Party. Toronto does not raise these concerns, and in the Tribunal’s view offers significant advantages. Ontario has a modern arbitration law and an experienced judiciary. Toronto is a world city with good facilities, professional services, and transportation links. And, any judicial proceedings would be conducted in English, eliminating any need for translations and the possible hazards of court proceedings in an unfamiliar tongue.” 

Jurisdictional questions at issue – A major jurisdictional question arose in all Yukos-related cases brought pursuant to the Energy Charter Treaty. The arbitration agreement invoked by Luxtona, and by the other claimants in the Yukos-related cases, had its source in the treaty itself. As with other investor-state arbitration provisions, the Energy Charter Treaty includes an open-ended offer by the state to arbitrate claims that meet certain criteria. The arbitration agreement crystallizes once a claimant who meets those criteria accepts the offer in respect of a claim that also meets the criteria. 

The problem? While the Russian Federation had signed the Energy Charter Treaty, its legislative bodies never ratified it. The Russian Federation applied it only provisionally (that is, on a temporary basis), subject to the limits to provisional application set out in the Treaty. 

The arbitral tribunals’ jurisdiction (under this argument; there were several others) thus turned on whether the provision that contained the open-ended offer to arbitrate was subject to provisional application or not. That question, in turn, involved complex questions of Russian law, including Russian constitutional law. 

Over in the Netherlands, the “main” Yukos case (the one seated in The Hague) became subject to decisional ping-pong on the jurisdiction issue. The arbitral tribunal found that the clause containing the offer to arbitrate was being provisionally applied. The Hague District Court disagreed, and reversed the awards. The Hague Court of Appeal reinstated the awards. The Netherlands Supreme Court quashed the Court of Appeal’s decision on different grounds and referred the matter back to The Hague District Court. 

Meanwhile, the jurisdictional question in the Luxtona case made its way through Ontario courts on procedural grounds. The arbitral tribunal issued an interim award finding that the offer to arbitrate in the Energy Charter Treaty was being provisionally applied. 

Proceedings before Ontario courts – The Russian Federation brought an application under Articles 16(3) and 34(2)(a)(i) of the Model Law for an order setting aside the interim jurisdictional decision. Article 16(3) provides that: 

[i]f the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days of having received notice of that ruling, the court [at the seat] to decide the matter, which decision shall be subject to no appeal.” 

Article 34(2)(a)(i) provides that an award may be set aside where, “the [arbitration] agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, the law of this State.” 

In its application record, the Russian Federation filed evidence that was not before the arbitral tribunal, including expert reports on Russian constitutional law and additional preparatory work documents obtained from the Energy Charter Secretariat. 

Luxtona brought a motion to strike the evidence that was not before the arbitral tribunal. Justice Dunphy, the initial case management judge, dismissed the motion, finding that the court on an Article 16(3) application must decide the jurisdictional question de novo. Therefore, the court could hear evidence that was not before the tribunal.

Justice Dunphy was then reassigned, and Justice Penny took over as case management judge. In the context of an unrelated motion, he stated that he wanted to revisit Justice Dunphy’s ruling regarding the new evidence. The question was reargued before Justice Penny, who found that new evidence was not admissible on such an application unless it met the test for fresh evidence on appeal set out in Palmer v. The Queen, [1989] 1 SCR 759.

The Divisional Court reversed Justice Penny’s decision. And that is how the matter ended up before the Ontario Court of Appeal. 

The competence-competence principle was followed – The Court first rejected Luxtona’s argument that the Divisional Court erred in not referring to the competence-competence principle. Noting that the principle, “is fundamental to international commercial arbitration”, the Court  cited the Supreme Court of Canada’s decision in Dell Computers Corp. v. Union des Consommateurs, 2007 SCC 34, which sets out a “general rule that … a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator.” That was “precisely what happened in this case: the tribunal was provided with the first opportunity to resolve Russia’s challenge to its jurisdiction.” 

The Court found that this was as far as the principle went. Indeed, competence-competence, does not require [that] any special deference be paid to an arbitral tribunal’s determination of its own jurisdiction.” Citing the late Prof. Emmanuel Gaillard’s seminal work edited with John Savage, Fouchard, Gaillard, Goldman on International Commercial Arbitration (The Hague: Kluwer Law International, 1999), the Court recognized that, “competence-competence is best understood as ‘a rule of chronological priority’ rather than as empowering the arbitrators to be the sole judge of their jurisdiction.” 

The uniformity principle means that international jurisprudence is “strongly persuasive”. The Court agreed with the Divisional Court concerning the interpretation of Article 2A of the Model Law, which provides that, in interpreting the Model Law, “regard is to be had to its international origin and the need to promote uniformity in its application and the observance of good faith.” According to the Court: 

The very nature of international arbitration makes it highly desirable that Ontario’s regime should be coherent with those of other countries, especially (but not exclusively) those that have also adopted the Model Law.” 

Concluding on the application of the competence-competence principle, the Court found, based on the weight of international authority, that this principle does not limit the fact-finding powers of courts deciding jurisdictional issues. As Lord Collins wrote in the UK Supreme Court’s leading decision in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46, it does not follow from the competence-competence principle, “that the tribunal has the exclusive power to determine its own jurisdiction”, and “[n]or does it follow this question of jurisdiction may not be reexamined by the supervisory court of the seat in a challenge to the tribunal’s ruling on jurisdiction.” 

Citing authority from the Singapore Court of Appeal, the Court concluded that “an application to set aside an arbitral award for lack of jurisdiction is a proceeding de novo, not a review of or appeal from the tribunal’s decision.” 

Not an evidentiary free-for-all – All of the above being said, the Court agreed with English and Singapore decisions that the fact that the proceeding before the court is de novo does not mean that the parties should “seek two evidential bites of the cherry”. Thus, while the Palmer test for admitting new evidence on appeal does not apply strictly, “where a party has participated fully in the arbitration, its failure to raise a piece of evidence before the tribunal may be relevant as to the weight the court should assign that evidence.”

International consensus that the court must decide jurisdiction “de novo” – In affirming the Divisional Court’s conclusion that there is a “strong international consensus” that courts decide arbitral jurisdiction de novo, the Court cited three of the sets of reasons in the UK Supreme Court’s decision (not a Model Law jurisdiction) in Dallah, as well as decisions from Hong Kong, Singapore and Australia (Model Law jurisdictions). As the Court highlighted, Lord Mance in Dallah held that:

“[t]he tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue is whether the tribunal had any legitimate authority in relation to the government at all. This is so however full was the evidence before it and however carefully deliberated was its conclusion.” 

Similarly, Lord Saville stated: “[w]hether the arbitrators had jurisdiction is a matter that in enforcement proceedings the court must consider for itself.” 

Article 16 vs. Article 34 of the Model Law -. The Court found that nothing in the language of Articles 34(2)(a)(i) or (iii) of the Model Law suggests that the nature of the proceeding under those articles is any different than one under Article 16(3). Citing Prof. Gary Born’s text, International Commercial Arbitration, 3rd ed. (The Hague: Kluwer Law International, 2021), in support of this conclusion, the Court held that “the provisions should be interpreted harmoniously, since the grounds for setting aside a jurisdictional award under Article 34(2)(a)(i) also apply under Article 16(3).” 

Contributor’s Notes:

I open with a disclosure, lest I be accused of bias in writing this note. I was part of the counsel team who represented the Russian Federation before Justice Dunphy, Justice Penny and the Divisional Court. For reasons I need not explain here, I could not continue to act before the Court of Appeal. 

None of that changes the fact that I strongly believe in the strength of the arguments made, which were accepted by the Court of Appeal, and their fundamental importance for Canadian international arbitration law and the strength of Canadian cities as seats for international arbitration. Without meaning to delve into hyperbole, in my view, the principles at issue in this case are foundational bedrock ones – issues that, if the courts get them wrong, may well shake the international community’s confidence in Canadian cities as safe seats for international arbitration. 

So, I breathed a sigh of relief that the Court of Appeal got the principles right, despite the complex geopolitics that could otherwise easily have obfuscated the legal issues. 

Why do I say these principles are foundational, bedrock principles on which to build strong arbitral seats worthy of international confidence? For all the reasons I raised in my case note from last year on Elektek Power Services Inc. v. Greenfield Energy Centre Limited Partnership, 2022 ONSC 894 (Case Note No. 586, Ontario – Court overturns decision, “deciding the matter” of jurisdiction de novo), in which the award of a well-respected tribunal was set aside by the court. In my commentary on that decision, I observed: 

“[I]t might come as a shock to many in the arbitration community that the decision of the tribunal would be set aside in this manner, given that the community is so accustomed to arbitral awards being immune from substantive court review, at least when it comes to international arbitration. I share the sentiment. But it’s important to recognize that near-total immunity from substantive review is only possible if there is a corresponding near-total absence of immunity from jurisdictional review. In other words, if arbitral tribunals are to have the last word on matters of substance, it is important that they only be given that power if the parties truly agreed to give it to them. And the last word as to whether the parties agreed to do that has to lie with the courts of inherent jurisdiction. As a matter of access to justice, that decision can’t lie with the arbitral tribunal in circumstances in which one party says it did not agree to arbitrate.”

I continue to firmly believe that this is the case, and welcome the Ontario Court of Appeal’s strong precedent in this regard. 

The Court of Appeal’s recognition of Dallah as the leading precedent on these issues also provides welcome clarity, though it’s too bad that the Court didn’t cite this gem from later down in paragraph 30 of Lord Mance’s judgment (the beginning of which the Court does cite): 

“The scheme of the New York Convention […] may give prima facie credit to apparently valid and applicable arbitration agreements, by throwing on the person resisting enforcement the onus of proving one of the matters set out in Article V(1) […] But that is as far as it goes in law. Dallah starts with the advantage of service, it does not also start fifteen or thirty love up.” 

For earlier case notes on this saga, see: 

Case Note No. 568: Lisa’s 2021 Top Pick: Ontario – Russian Federation v. Luxtona Limited (Part 2) 

Case Note No. 564: Lisa’s 2021 Top Pick: Ontario – Russian Federation v. Luxtona Limited (Part 1) 

Case Note No. 513: 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 

Case Note No. 272: Ontario – Court revisits/reverses prior decision which allowed new evidence on post-award jurisdictional challenge 

Case Note No. 60: Ontario – Arbitral tribunal’s evidentiary record on jurisdiction challenge is not ignored but also does not confine court