In Grace et al v United Mexican States, 2026 ONSC 2104, the Court set aside an arbitral award issued under the NAFTA on the basis that: (i) the tribunal wrongly declined jurisdiction; and (ii) one of the arbitrators had failed to disclose his involvement as counsel for a state in an arbitration involving similar issues, which gave rise to a reasonable apprehension of bias. This case focused, among other things, on the continuing duty of arbitrators to make disclosure.
Background – The Applicants were investors in a group of Mexican companies known as Oro Negro. Oro Negro leased five offshore oil rigs to Mexico’s state-owned oil company. The Applicants alleged that Mexico had unilaterally and improperly amended, and then terminated, the relevant contracts without providing compensation, thereby driving Oro Negro out of business. The Applicants then commenced arbitration pursuant to Chapter 11 of the NAFTA, seated in Toronto under the UNCITRAL Arbitration Rules. Canada and the United States participated as non-disputing parties, as was their right under the NAFTA.
The Tribunal consisted of three arbitrators: one appointed by the Applicants; one appointed by Mexico; and one appointed as President.
The Tribunal ultimately issued an award (“the Award”) ruling that it lacked jurisdiction: (i) over two of the Applicants because their dominant and effective nationality was Mexican, making them ineligible to claim against Mexico under NAFTA; and (ii) over the remaining Applicants under article 1116 of NAFTA because the Applicants’ losses were indirect losses, whereas article 1116 only contemplates claims for direct losses.
Following the arbitration, the Applicants became aware that their appointed arbitrator had previously accepted an appointment as counsel for the state of Honduras in an arbitration under a different trade agreement where the indirect versus direct loss issue was in dispute (the “Arguello Arbitration”).
The Court’s Decision – The Applicants sought to set aside the Award on the basis that the Tribunal had incorrectly determined both jurisdictional issues and also on the basis that there were justifiable doubts as to their appointee’s impartiality arising from his failure to disclose his involvement in the Arguello Arbitration.
The Court ruled in the Applicants’ favour and set aside the Award on all three grounds.
(i) The Jurisdictional Issues – Beginning with the standard of review, the Court cited the decision of the Ontario Court of Appeal of Mexico v Cargill, 2011 ONCA 622 for the proposition that an arbitral tribunal’s jurisdictional decision is reviewed for correctness. The Court also referenced the Court of Appeal’s more recent decision of Russian Federation v Luxtona Limited, 2023 ONCA 393, in which that Court clarified that an application to set aside an arbitral award on jurisdictional grounds is a hearing de novo and not merely a review of the tribunal’s decision. In either case, the Court was not to defer to the Tribunal’s assessment of its own jurisdiction.
The dual nationality issue centered on the language of articles 1116 and 1117 of NAFTA, which do not allow nationals of a NAFTA state to make claims against their own state. However, as the Court noted, the application of these principles to dual nationals has been inconsistent. The Court pointed to conflicting decisions in which various tribunals have ruled that: (i) dual nationals may bring claims against either state in respect of which they are a national; (ii) dual nationals may not bring claims against either state in respect of which they are a national; and (iii) dual nationals are only prohibited from bringing claims against the state of their “dominant and effective nationality.”
The Court acknowledged that, under the Vienna Convention on the Law of Treaties, one of the factors a court shall consider in interpreting a treaty is whether there is a “subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation”.
Mexico’s primary argument was that no claims by dual nationals were permitted against either of their nationalities. In the alternative, Mexico argued that Canada, Mexico, and the United States had, through legal submissions, established a clear, well-understood and agreed common practice that the “dominant and effective nationality” test should be applied such that it amounted to “subsequent practice” that ought to decide the issue. The Court rejected both arguments.
First, the Court found that the language of articles 1116 and 1117 does not prohibit claims by dual nationals against either of their nationalities and that the UNCITRAL Rules similarly do not prohibit such claims.
Second, the Court found that the NAFTA states had not established a subsequent practice of applying the dominant and effective nationality test. Amongst other things, Mexico’s primary argument undermined its alternative argument, as Mexico was arguing something different than the alleged “subsequent practice”. Indeed, all three NAFTA states took inconsistent positions on the ability of dual nationals to claim against one of the states in which they are a national.
Accordingly, the Court found that the Tribunal applied an incorrect test (the dominant and effective nationality test) and, consequently, erred in declining jurisdiction.
On the second jurisdictional question—whether the Applicants could claim for indirect losses under NAFTA article 1116, or whether indirect loss claims fell exclusively within article 1117, which did not apply to several of the Applicants—the Court rejected Mexico’s position, finding that article 1116 covered losses relating to investments incurred “by reason of, or arising out of” the relevant breach. The Court held that the direct or indirect nature of a loss was not determinative.
The Court again noted that the three NAFTA parties articulated aligned, yet different, positions on this issue in their respective briefs. As such, there was no common position upon which the Tribunal could rely to interpret the scope of Art. 1116 as barring indirect loss claims.
The Court favoured the tribunal’s reasoning in Kappes v. Guatemala, (13 March 2020) ICSID Case No. ARB/18/43, a decision interpreting a different treaty with functionally identical provisions to NAFTA articles 1116 and 1117. That tribunal found that nothing in the two provisions’ text limited the equivalent to article 1116 to direct losses, and that reading that provision broadly did not render the equivalent to article 1117 redundant. The Court therefore concluded that the Applicants’ claims for indirect losses fell within the Tribunal’s jurisdiction.
(ii) Justifiable doubts as to the Applicants’ appointee’s impartiality – The Court then turned to the Applicants’ allegation that there were reasonable doubts as to their appointee’s impartiality. The Court referenced the Court of Appeal’s decision of Aroma Franchise Company v Aroma Espresso Bar Canada, 2024 ONCA 839, which confirmed that the objective bystander test applied to assess reasonable apprehension of bias in international cases under domestic Canadian law. The Court then explained that the duty to disclose potential conflicts is broader than what may amount to justifiable doubts as to impartiality. Failing to adequately disclose certain circumstances may create justifiable doubts, even if those circumstances would not have been sufficient to disqualify an arbitrator had they been disclosed.
The Court also referenced the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), which provides examples of situations where potential conflicts ought to be disclosed. One example on the “orange list” (where conflicts may have to be disclosed depending on the circumstances) arises where an arbitrator is “acting as counsel in an unrelated case with similar issues”. This was the case here since, after accepting his appointment to the Tribunal, the Applicants’ appointee took on the mandate as counsel to act for Honduras in defending indirect loss claims that the Court found were materially similar to those before the Tribunal.
The Court found that this gave rise to a reasonable apprehension of bias (i.e., justifiable doubts) in respect of the Applicants’ appointee. It found a significant risk that the Arguello Arbitration would raise similar issues to those before the Tribunal and therefore ought to have been disclosed. The Court further explained that, had the Applicants’ appointee disclosed his appointment in the Arguello Arbitration, the Applicants could have had the opportunity to ask him questions about the matter, including the position Honduras would take in that dispute. By failing to disclose, he hampered the Applicants’ ability to investigate, which resulted in a reasonable apprehension of bias.
Commentary
First, one interesting aspect of the decision arises from the Court’s discussion of the standard of review. The Court referenced both Cargill, in which the Court of Appeal held that the arbitral tribunal’s jurisdictional determination is reviewed for correctness, and Luxtona, in which the same Court held that challenges to jurisdictional decisions under Ontario’s enactment of the UNCITRAL Model Law are hearings de novo. In Luxtona, the Court reconciled these statements by stating that “[t]he nature of a proceeding to set aside an arbitral award is a separate question from the standard to be applied in that proceeding.”
However, by its nature, a de novo hearing is not a “review”; it is a fresh consideration in which the court may hear evidence that the parties did not put before the arbitral tribunal, and without meeting the usual exacting test for admitting fresh evidence on appeal. As Lord Mance stated in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46 (cited with approval in Luxtona): “The 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” (para 30). Lord Saville put an even finer point on it. Though acknowledging that it may be “useful to see how the arbitrators dealt with the question”, the proceeding before the Court is not in the nature of a review:
“In my judgment therefore, the starting point cannot be a review of the decision of the arbitrators that there was an arbitration agreement between the parties. Indeed no question of a review arises at any stage. The starting point in this case must be an independent investigation by the court of the question whether the person challenging the enforcement of the award can prove that he was not a party to the arbitration agreement under which the award was made.” (para 160).
It remains to be seen whether the Court of Appeal (or another Canadian appellate court) takes the issue up in the future to clarify this technical point.
Second, with respect to the impartiality issue, Grace is the latest in a line of Ontario cases, following Aroma and Vento Motorcycles, showing that courts will carefully guard arbitrator impartiality in Ontario-seated arbitrations. In particular, Grace reinforces the fact that arbitrators must be mindful of their continuing duty to disclose and failing to do so when appropriate could imperil an arbitrator’s appointment or, as in this case, a tribunal’s award. The issue that arose in this case also brings into focus the added level of complexity visited upon arbitrators who still act as counsel, which is especially pronounced in the investor-state arbitration context where arbitrators are typically stratified into those appointed by investors and those appointed by states.