Ontario – High threshold to set aside international award for damages not met – #694

In Clayton v. Attorney General of Canada, 2022 ONSC 6583, Justice Akbarali rejected an attempt to set aside a damages award made by a three-member tribunal (the “Tribunal”) originally constituted under Chapter 11 of the North American Free Trade Agreement (“NAFTA”).  The applicants argued that the Tribunal had exceeded its jurisdiction in respect of the legal standard to be applied, breached procedural fairness by refusing to admit certain expert evidence, and rendered an award that was contrary to public policy. Citing previous jurisprudence on the high thresholds to be met for each of these grounds to succeed – thresholds consistent with deference to arbitral tribunals, – Justice Akbarali found no errors had be committed. She dismissed the application.

The applicants, suppliers of aggregate in New Jersey, had planned to develop a quarry in Nova Scotia, in conjunction with a marine terminal where large ships could be loaded with product for delivery to New York City.  A federal-provincial Joint Review Panel (“JRP”) reviewed the project as part of the approval process, and recommended that the quarry not be approved.  The JRP  found that the imposition of a major long-term industrial site would change “community core values” in this area of Nova Scotia and expressed concern about environmental impacts. The federal and provincial Ministries of the Environment denied the approval of the quarry.

The applicants commenced an arbitration under Chapter 11 of NAFTA, which was bifurcated.  At the liability stage, the majority of the Tribunal found that Canada had breached the obligations it owed under NAFTA.  In particular, the Tribunal found that Canada had failed to provide for a fair environmental assessment process and that the focus on “community core values” was flawed. It found that terminology to be unclear and there was insufficient notice to the applicants that the approach of community core values would be utilized. Further, the finding of liability was grounded in a failure to provide for a fair environmental assessment process that was important at the damages phase and, in particular, when measuring the scope of damages.  

An attempt by Canada to set aside the liability award in the Federal Court was unsuccessful.

Having succeeded on liability, the applicants sought damages equal to the profits they would have earned from the quarry over a 50-year lifespan, capped at in excess of $440 million.  The Tribunal, however, noted that damages must compensate for the breach which, here, was the loss of a chance to have a fair environmental assessment process.  The Tribunal went on to find that the applicants had not discharged their burden to prove that they would have probably obtained the permissions to proceed with the quarry project after that environmental assessment was complete. Absent that proof, their claim for damages was exaggerated.  The Tribunal awarded USD $7 million to compensate for the lost opportunity.

The arbitration had been commenced under the Federal Commercial Arbitration Code (the “Code”), Schedule I to the Commercial Arbitration Act, R.S.C. 1985, c. 17, which is based on the Model Law.  While grounds for court intervention are limited, Article 34(2)(a) of the Code provides for a court to set aside an award where, inter alia, (ii) a party is not given an opportunity to present its case or (iii) where the tribunal exceeds the scope of submission to arbitration. Article 34(2)(b) further provides for a set aside where the award conflicts with the public policy of Canada. 

Here, the applicants advanced three grounds to set aside the damages award:

a. The Tribunal exceeded its jurisdiction in rendering its damage award by failing to apply the standard of proof known to international law;

b. The Tribunal breached principles of natural justice and procedural fairness by failing to allow the applicants to file additional expert reports; and

c. The Tribunal rendered an award that was perverse, irrational and contrary to public policy.  

Jurisdictional error – In rejecting the first ground, Justice Akbarali noted the importance of the Ontario Court of Appeal’s decision in the United Mexican States v. Cargill, 2011 ONCA 622, the leading case on the standard of review for setting aside international arbitration awards.  There (and a number of times since), the Court of Appeal emphasized that decisions of international arbitration tribunals ought to be given a high degree of deference.  The review must be limited to true questions of jurisdiction, with the standard review being one of correctness. The onus falls on the applicants.  

True questions of jurisdiction are to be narrowly defined.  Judicial intervention can only be justified where there is an error that is jurisdictional in nature, not an error made within jurisdiction. As observed by Justice Huscroft in Alectra Utilities Corporation v. Solar Power Network, 2019 ONCA 254 (See CaseNote – Once court finds arbitrator acted within jurisdiction, it cannot consider merits in exercise of that jurisdiction #184), it can be very difficult to distinguish between alleged jurisdictional and non-jurisdictional error.   

The alleged error in this case was in not applying the standard of proof known to international law in respect of the damages award. However, Justice Akbarali found that the Tribunal understood that it was bound to apply international law and had directed itself to the relevant principles from the jurisprudence.  The Tribunal understood it was to determine causation on a standard to which the Tribunal itself referred and articulated on a number of occasions, namely that, “reparation must, as far as possible, wipe-out the consequences of the illegal act and reestablish the situation which would, in all probability have existed if that act had not been committed” (para 39, citing Case Concerning the Factor of Chorzow (Germany v. Poland), 1928 P.C.I.J (ser.A.) No. 17 (13 September 1928)).  While the applicants agreed that the Tribunal articulated the correct standard, they claimed that the one actually applied by the Tribunal was not correct and was so high that it was impossible for the applicants to meet.  

Justice Akbarali disagreed that this gave rise to a true jurisdictional error.  She noted that the Tribunal had correctly articulated the standard of proof and made repeated reference to the need for the applicants to demonstrate that it was probable that they would have received permission to develop and operate the quarry, in order to obtain the damages they sought.  The Tribunal had found that the applicants had not met their onus. Justice Akbarali found that an allegation relating to the Tribunal’s finding in this regard was not a true question of jurisdiction but rather an alleged error within jurisdiction, holding at para 44 that the “incorrect application of a correctly identified legal principle” is not a jurisdictional question. As such, the set aside provisions did not apply. 

Even if she had agreed with the applicants that this was a true question of jurisdiction, she still would have found that the Tribunal had not exceeded its jurisdiction based on her review of its decision and analysis.

Breach of procedural fairness – Justice Akbarali went on to also dismiss the second ground which was premised on an alleged breach of procedural fairness.  The applicants argued that the Tribunal had erred in not permitting the filing of two of its expert reports, which they said ought to have been accepted despite the strict schedule set out in the Procedural Order because Canada had improperly split its case when delivering its expert evidence. The Tribunal had noted that it had been open to the applicants to bring the situation to its attention and to have sought leave to obtain, deliver and introduce late expert reports.  It had not done so, instead proceeding to deliver the reports one month before the commencement date of the hearing without advance notice to Canada or the Tribunal.  The Tribunal also noted that it was open for the applicants to file an application, seeking that the Tribunal exclude any specific statements in the expert reports delivered by Canada that were not responsive to the applicants reply memorial, i.e. to ask the Tribunal to ignore Canada’s expert evidence to the extent it was improper.  The applicants did not do that either.  

Justice Akbarali found that there was no breach of procedural fairness in these circumstances.  The test to set aside on the basis of a breach of procedural fairness under Article 34(2)(a)(ii) of the Code is high: ..”the conduct of the tribunal must be sufficiently serious to offend our most basic notions of morality and justice” (para 57, citing Consolidated v. Ambatovy, 2016 ONSC 7171 at para 57, aff’d 2017 ONCA 939).  Here, the applicants had possible solutions available to them to address their concerns but did not take advantage of them.  Justice Akbarali found that the applicants had made a strategic choice and, having done so, they could not claim a breach of procedural fairness when that choice did not yield the outcome they sought.

Public policy – Finally, Justice Akbarali found the Tribunal had not rendered an award that was contrary to public policy.  To the extent that these allegations were premised on the first two grounds of appeal, they were readily dismissed.  

The applicants further argued, however, that the award was “patently unreasonably, clearly irrational, totally lacking in reality, and a flagrant denial of justice” (para 82). Having reviewed the Tribunal’s decision, Justice Akbarali found that there was nothing perverse or contrary to morality in the causation findings.  The damages analysis flowed from the Tribunal’s findings on causation. She also rejected that Vavilov had any application, noting that, “[i]n the face of the jurisprudence directing courts to accord broad respect and deference to decisions made by arbitral tribunals, and to refrain from reviewing the merits of the awards, conducting a reasonableness review of an arbitration decision is entirely inappropriate.”  Here, there was nothing morally repugnant or that would otherwise meet the test for offending public policy in Canada arising from the Tribunal’s decision. The appeal was dismissed.

Contributor’s Notes:

First, Justice Akbarali’s decision contains a thorough summary of the leading cases and key paragraphs that have guided the law of set asides, including the very high threshold to be met to be successful.  As many cases have of late, it also serves as a good reminder to practitioners that the courts in Ontario recognize that arbitral tribunals are legitimate, separate means of dispute resolution and will give arbitration tribunals a considerable amount of deference.

Second, the issue of jurisdiction remains a difficult one.  Citing the Ontario Court of Appeal, Justice Akbarali notes that the line between jurisdictional and non-jurisdictional errors is a fine one.  To make that assessment, a review of the decision and the tribunal’s analysis is necessary. Where the distinction is hard to draw, parties to an arbitration may be concerned that, if the court disagrees with the outcome, it could articulate a basis for finding an error of jurisdiction where another judge may find that there is no true question of jurisdiction. The fact that courts generally are deferential to tribunals mitigates against the risk of this means-to-an-end analysis. Finally, the brief reference to Vavilov at the conclusion of the decision is curious. There is very little discussion on the point, and it is not clear as to the degree to which the applicability of Vavilov to international arbitration decisions was argued before the court. That issue, however, remains alive and open to debate at least in academic circles, and Justice Akbarali’s decision rejection of its applicability here does little to advance that discussion.