Ontario – No unfairness despite Browne v Dunn violation and arbitrator reasonable apprehension of bias – #796

In Vento Motorcycles, Inc. v. United Mexican States, 2023 ONSC 5964, the Court dismissed an application to set aside an investor-state arbitration award on the grounds that the arbitral tribunal denied procedural fairness, and that one of the tribunal members was biased. Although the Court found no unfairness, it acknowledged a reasonable apprehension of bias in respect of the impugned arbitrator. The Court nonetheless exercised its discretion under art. 34 of the Model Law to dismiss the set–aside application.

Background – The Applicant, Vento, entered into a joint venture agreement with a Mexican company to sell and market motorcycles in Mexico. Vento assembled the motorcycles in the United States and then exported them to Mexico. When Mexican authorities refused to apply preferential ad valorem import tariffs to the motorcycles, Vento brought a claim under Chapter 11 of the North American Free Trade Agreement (“NAFTA”). The International Centre for Settlement of Investment Disputes (“ICSID”) administered the arbitration.

In accordance with NAFTA Art. 1123, the arbitral tribunal consisted of three arbitrators. Each party appointed one arbitrator, and selected the tribunal president through an agreed-upon process. Pursuant to the ICSID Rules, each arbitrator provided a statement of independence and impartiality. Specifically, each arbitrator’s statement outlined: (a) the arbitrator’s past and present professional, business and other relationships (if any) with the parties; and (b) any other circumstance that might cause the arbitrator’s reliability for independent judgment to be questioned by a party.

Mexico’s appointee disclosed that, due to past positions, he knew officials in Mexico’s Ministry of Economy. He also disclosed that he had a friendly relationship with one of Vento’s counsel and one of the other arbitrators. He indicated that he ceased working for the Mexican government more than seven years before accepting the arbitral appointment. Vento did not challenge Mexico’s appointee on this basis.

The arbitration – One of Vento’s arguments was that the Mexican taxation authority targeted Vento. It argued that, under express “marching orders”, the taxation authority treated Vento differently from its competitors. Vento supported this argument, in part, with evidence from one Mr. Ortúzar, a former official with the Mexican taxation authority. His witness statement spoke to pressure placed on him and his team to deny Vento the preferential tariffs due to competing political concerns. 

Mexico led rejoinder evidence from a witness, Ms. Martinez. Her witness statement included a surreptitious recording and transcript of a conversation between herself, Mr. Ortúzar and others. Mexico argued that the content of that conversation contradicted and undermined Mr. Ortúzar’s evidence tendered on Vento’s behalf. 

Vento moved to strike the recording and related evidence. In the alternative, Vento asked that Mr. Ortúzar be permitted to give further evidence before the arbitral tribunal to address the recording. In a procedural order, the tribunal dismissed Vento’s motion to strike out the evidence. Without directly addressing Vento’s alternative request for relief, the tribunal did not permit Mr. Ortúzar to appear and give evidence. It also refused Mr. Ortúzar the opportunity to file an additional witness statement. 

Award – The arbitral tribunal found for Mexico and denied Vento’s claim in its entirety. Among other things, it rejected Vento’s “marching orders” argument.

Following the arbitration, the three members of the arbitral tribunal issued their statements of costs. Interestingly, Mexico’s appointee’s bill of costs exceeded those of the president and Vento’s appointee combined, suggesting he undertook the lion’s share of the tribunal’s work.

Post-award evidence of bias – After the arbitral tribunal rendered the award, Vento learned that Mexico’s appointee had had a series of undisclosed communications with members of the Mexican government, including Mexico’s lead counsel in the arbitration. Those communications, which occurred during the arbitration, included discussions about the appointee’s potential inclusion in Mexico’s roster of tribunal chairpersons under the Comprehensive and Progressive Agreement on Trans-Pacific Partnership and another trade agreement.

Court Application – Vento applied to set the award aside on two grounds: (a) it was denied procedural fairness since it lacked a full opportunity to present its case; and (b)) there were justifiable doubts as to Mexico’s appointee’s impartiality and independence.

With respect to its procedural fairness ground, Vento advanced three arguments. First, Vento argued the arbitral tribunal denied it an opportunity to respond to Mexico’s arguments based on the recording that impugned Mr. Ortúzar’s credibility. Second, and relatedly, the tribunal acted unfairly in denying Mr. Ortúzar a chance to respond directly to the attacks on his credibility. Third, it was unfair for the tribunal to deny Vento the opportunity to lead evidence going to a key issue, namely whether the Mexican taxation authority implemented “marching orders” prejudicial to Vento.

The Court disagreed that Vento was denied procedural fairness. Before addressing Vento’s substantive arguments, the Court considered the standard of review applicable to a challenge based on procedural fairness violations under Model Law Article 34(2)(a)(ii). The Court relied on previous Ontario jurisprudence to conclude that: “[t]o justify setting aside an award under that provision for reasons of fairness or natural justice, the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice”. 

The Court acknowledged Vento’s reliance on a recent UK Privy Counsel decision, Gol Linhas Aereas SA v. MatlinPatterson Global Opportunities Partners (Cayman) II LP, [2002] UKPC 21 [Gol Linhas]. That case addressed the standard of review for denying recognition and enforcement of an award under the New York Convention on the basis that a party was unable to present its case –language identical to the Model Law’s language in Article 34(2)(a)(ii). According to the Court, the standard enunciated under Gol Linhas was “consistent with the principles set out by the Court of Appeal for Ontario”.

Turning to Vento’s arguments, the Court summarily considered and rejected the second and third arguments. 

On the second argument—that the tribunal acted unfairly in denying Mr. Ortúzar a chance to respond directly to the attacks on his credibility—the Court found this was in fact subsumed into Vento’s first argument (that Vento was denied an opportunity to respond to Mexico’s case). Mr. Ortúzar, a non-party witness, had no independent rights in the arbitration; he was called as a witness for Vento. Accordingly, it was Vento’s procedural rights in issue, not those of Mr. Ortúzar. 

On the third argument—that it was unfair for the tribunal to deny Vento the opportunity to lead evidence on the “marching orders” issue—the Court found Vento had ample opportunity to lead evidence on that point. 

Turning to Vento’s main submission–that the arbitral tribunal denied it an opportunity to respond to Mexico’s arguments – the Court observed that Vento’s argument was rooted it in the well-known “rule” in Browne v. Dunn. The Court explained this rule goes to the need to afford a witness the opportunity to confront in cross-examination evidence the opposing party intends to lead in order to impeach the witness’s credibility. However, the Court noted the rule in Browne v. Dunn is not absolute: 

[70] The rule in Browne v. Dunn is rooted in considerations of fairness. However, as a rule of fairness, it is not a fixed rule. The extent of its application lies within the sound discretion of the trial judge and depends on the circumstances of each case. Compliance with the rule in Browne v. Dunn does not require that every scrap of evidence on which a party desires to contradict the witness for the opposite party be put to that witness in cross-examination. The cross-examination should confront the witness with matters of substance on which the party seeks to impeach the witness’ credibility and on which the witness has not had an opportunity of giving an explanation because there has been no suggestion whatever that the witness’ story is not accepted. See Quansah at paras. 77, 80-81.

[71] Whether the rule in Browne v. Dunn is offended by failure to cross-examine on a specific matter in a particular case cannot be determined in the abstract: see Quansah at para. 101. Where the subjects not touched in cross-examination but later contradicted are of little significance in the conduct of the case and the resolution of critical issues of fact, the failure to cross-examine is likely to be of little significance. The confrontation principle is not violated where it is clear, in all the circumstances, that the cross-examiner intends to impeach the witness’ story. See Quansah at paras. 85-86.”

After confirming the discretionary nature of the rule in Browne v. Dunn, the Court concluded that: “Vento has failed to establish that it was unable to present its case and that the Tribunal’s conduct was so serious that it cannot be condoned under Ontario law”. The Court further held that the arbitral tribunal had not transgressed Vento’s right to “the basic requirements that would generally be regarded throughout the international legal order as essential to a fair hearing”. It found that the aspect of the evidence Vento wanted to challenge (the recording) was immaterial to the tribunal’s ultimate decision.

The Court pointed out that, far from finding him not credible, the arbitral tribunal accepted Mr. Ortúzar’s evidence on other points. In contrast, the tribunal was apparently critical of Vento’s main witness, against whom it made adverse credibility findings on the “marching orders” issue. Further, Mr. Ortúzar did not himself use the term “marching orders”, and neither did other former Mexican taxation authority employees who produced witness statements for Vento.

Turning to Vento’s second set-aside ground—reasonable apprehension of bias on the part of Mexico’s nominee—the Court agreed that there was in fact a reasonable apprehension of bias. Vento’s argument was two-pronged. First, it submitted that Mexico’s appointee was offered “prestigious and potentially lucrative opportunities to be listed on panels of arbitrators under two different trade agreements”, all while the arbitration was ongoing. This, Vento argued, gave rise to a reasonable apprehension of bias. Further, Vento relied on the UK Supreme Court’s decision in Halliburton Company v. Chubb Bermuda Insurance Ltd., [2020] UKSC 48 [Halliburton] to argue that Mexico’s appointee’s failure to disclose the impugned communications in and of itself gave rise to justifiable doubts as to his independence and impartiality. 

The Court considered the IBA Guidelines on Conflicts of Interest in International Arbitration, calling them a “widely recognized as an authoritative source of information as to how the international arbitration community may regard particular fact situations in reasonable apprehension of bias cases”. The Court stated that the particular circumstances in this case are not listed in the IBA Guidelines, so it had to conduct a “case-specific assessment”. The Court also referenced Haliburton for authority that a failure to disclose can inform the assessment as to whether justifiable doubts as to an arbitrator’s impartiality arise.

The Court agreed with Vento that Mexico offering its appointee prestigious and valuable opportunities generated a reasonable apprehension of bias. The Court found that he had a duty to disclose Mexico’s offers, since those offers would reasonably give rise to justifiable doubts as to his impartiality and independence.

However, and despite this finding, the Court refused to set the award aside. It relied on Popack v. Lipszyc, 2016 ONCA 135 for the proposition that a court hearing a set-aside application under Art. 34 retains discretion to deny relief, even where one of Art. 34(2)’s grounds are made out. 

For the Court, the Mexican appointee’s lack of impartiality and independence did not necessarily spill over to the other two arbitrators. It found that those two arbitrators still benefitted from a strong presumption of independence and impartiality. Since the award was unanimous, the Court concluded that, “[t]he reasonable apprehension of bias in relation to [Mexico’s appointee] did not undermine the reliability of the result and did not produce real unfairness or real practical injustice.” The Court balanced this against the prejudice that would result if the parties had to redo the arbitration, which took some five years and involved considerable expense.

In the result, the Court declined to set aside the award.

Contributor’s Notes 

First, query whether the standard the Court applied to the procedural fairness ground was appropriate. The Court cited the Court of Appeal’s decision in Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939, para. 65, in which that Court said: “to justify setting aside an award for reasons of fairness or natural justice, the conduct of the Tribunal ‘must be sufficiently serious to offend our most basic notions of morality and justice’”. The Court of Appeal derived that standard from an earlier Superior Court decision: Corporacion Transnacional de Inversiones, S.A. de C.V. v. STET International, S.p.A., 1999 CanLII 14819 (ON SC) [STET]. 

Unfortunately, STET deliberately conflates two grounds for setting aside an arbitral award: procedural fairness/inability to present one’s case [Art. 34(2)(a)(ii)] and conflict with public policy [Art. 34(2)(b)(ii)]. The Court in STET cites authority saying that in order to deny setting an arbitral award aside on public policy grounds, enforcing the award would have to violate our “most basic notions or morality and justice” [Waterside Ocean Navigation Co. v. International Navigation Ltd., 737 F.2d 150 (1984) at p. 152 (2nd Cir)]. However, the Court apparently went on to subsume the procedural fairness ground into public policy: 

Under the Model Law, the concepts of fairness and natural justice enunciated in Article 18 [of the Model Law] significantly overlap the issues of inability to present one’s case and conflict with public policy set out in Articles 34(2)(a)(ii) and (b)(ii). Since Article 34(2)(b)(ii) is to be interpreted to include procedural as well as substantive justice and is not to exclude the manner in which an award is arrived at, it seems to me that the grounds for challenging an award under Article 18 are the same as they are under Article 34(2)(b)(ii). Accordingly, in order to justify setting aside an award for a violation of Article 18, the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice.”

With respect, this conclusion is flawed for several reasons. In the interest of brevity, I focus on one. 

The Court’s conclusion offends a well-accepted tenet of statutory interpretation, the presumption against tautology. The court should resist an interpretation that renders a provision entirely redundant [see for example: British Columbia v. Philip Morris International, Inc., 2018 SCC 36, para. 29, citing R. v. Proulx, 2000 SCC 5, para. 28].

Although it is true that the set-aside grounds in Art. 34 of the Model Law are not watertight compartments, an interpretation that completely subsumes one ground into another is suspect. STET effectively does just that by equivocating between “procedural” public policy, and due process protections in Arts. 18 and 34(2)(a)(ii) of the Model Law. The presumption against tautology is rebuttable, for instance where the legislature wishes to avoid a misunderstanding; “for greater certainty” clauses are an obvious example of this. However, there appears to be no basis for displacing the presumption here. 

Most authorities construe the public policy ground narrowly. For example, in Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17, the Supreme Court held that it did not contravene public order to have an arbitral award determine copyright ownership [see also: PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA, [2006] SGCA 41, para. 59]. 

But Art. 18 of the Model Law (the substantive provision guaranteeing equal and fair treatment) does not connote the same narrow scope. It simply says, “[t]he parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”. Nothing about this suggests a violation of this standard must be so serious as to shock the Court’s conscience. The “full opportunity of presenting his case” language in fact suggests the opposite. Indeed, Art. 18 is said to encompass such things as full access to evidence, the right to be present at hearings and the ability to cross-examine adverse witnesses [see: Matti S. Kurkela, Santtu Turunen, Due Process in International Commercial Arbitration, 2nd ed., pp. 187-188]. 

Do these procedural entitlements rise to the level of public policy? Unclear. Denying a party a full opportunity to present its case, though improper, does not necessarily “offend our most basic notions of morality and justice” in the same way as fraud, bribery or other corruption. (These have all been identified as falling within the notion of public policy [Report of the United Nations Commission on International Trade Law on the work of its eighteenth session, A/40/17, para. 297] PDF download.) For this reason, among others, one could argue that the Court in Vento, like the cases before it, should not have imposed such a high threshold for establishing a breach of procedural fairness under the Model Law.

Before moving on, it is worth noting that some courts see the public policy ground as including procedural fairness elements. For example, some German courts have considered the right to be heard to fall within the notion of procedural public policy. [See: Bayerisches Oberstes Landesgericht (Bavarian Supreme State Court), Germany, 4Z Sch 23/99, 15 December 1999; Hanseatisches Oberlandesgericht (Higher Regional Court) Hamburg, Germany, 11 Sch 01/01, 8 June 2001.] The same is probably true in Canada [AMBC Ventures Inc. c. Awanda, 2021 QCCS 543, para. 93, citing Jan Paulsson, The Idea of Arbitration, p. 132]. Again, this does not mean that procedural fairness, as encoded in Art. 18 of the Model Law, invites the same narrow scope as public policy.

Second, the Court’s decision not to set the award aside despite finding a reasonable apprehension of bias in respect of Mexico’s appointee is surprising. In Szilard v. Szasz, 1954 CanLII 4 (SCC), [1955] SCR 3, a benchmark Canadian case on arbitrator impartiality and independence, the Supreme Court stated: “It is the probability or the reasoned suspicion of biased appraisal and judgment, unintended though it may be, that defeats the adjudication at its threshold. Each party, acting reasonably, is entitled to sustained confidence in the independence of mind of those who are to sit in judgment on him and his affairs.” Importantly, in both Szilard itself and cases cited therein, tribunals were successfully challenged upon establishing a lack of impartiality in only one member of a multi-member tribunal [e.g., Sumner v. Barnhill, (1879) 12 N.S.R. 501 (NS CA)].

There is also authority, albeit in the administrative law context, that where one member of a multi-member tribunal is biased (or there exists a reasonable apprehension of bias), the whole tribunal is tainted [Sparvier v. Cowessess Indian Band (T.D.), 1993 CanLII 2958 (FC)]. In the words of Rothstein J. (as he then was): “The evidence was clear that one of the Appeal Tribunal members was actually biased with respect to the applicant. That that member did not vote did not resolve the matter. A reasonable apprehension of bias in one member is sufficient to disqualify the whole tribunal, even though that member merely sat at the hearing without taking an active role in either it or subsequent deliberations.” [See also: Surrey Knights Junior Hockey v. The Pacific Junior Hockey League, 2020 BCCA 348.]

These authorities show that the mere presence of a person lacking impartiality in a tribunal can, in some cases, merit setting an award aside. But Mexico’s appointee was not a mere bystander. On the contrary, based on the arbitrators’ statements of costs, Mexico’s appointee appeared to have played a fairly substantial part in crafting the arbitral tribunal’s award. This arguably heightens natural justice concerns.

In addition to these authorities, there is a very pragmatic reason for finding that one arbitrator’s lack of impartiality or independence taints the whole tribunal: because it is practically impossible to confirm one way or the other. That lack of certainty in and of itself calls into question the integrity of the arbitral process. 

Like courts and administrative tribunals, arbitrators benefit from deliberative secrecy [Noble China Inc. v. Lei, 42 O.R. (3d) 69, 1998 CanLII 14708 (ON SC); CZT v. CZU, [2023] SGHC(I) 11 [CZT]]. In CZT, it was suggested that the tribunal’s right to deliberative secrecy will only give way in the “rarest of cases”, such as allegations of corruption, but only where, “the allegations have a real prospect of succeeding”. In most cases involving a bias allegation, this threshold will not be met. So, assuming one could theoretically look to records of the arbitral tribunal’s deliberations to see whether an arbitrator lacking impartiality tainted the others, courts will almost never allow such an inquiry. Even then, deliberation records may not reveal probative evidence one way or the other. 

For these reasons, justifiable doubts as to one arbitrator’s impartiality or independence should generally be enough to set aside an award.