International commercial arbitration awards – No deference on questions of jurisdiction 

publication 

October 2011

Litigation Bulletin

If you are considering challenging an international commercial arbitration award made against you (or responding to such a challenge) you will want to know about the Ontario Court of Appeal's decision in Mexico v Cargill1 released in October, 2011.

There is generally no appeal from an international commercial arbitral award. However, under UNCITRAL's Model Law on International Commercial Arbitration (the "Model Law") (which is incorporated by reference in the international commercial arbitration legislation of each province), parties may bring an application to set aside an award on certain grounds. One of the more frequently invoked grounds is that the arbitral tribunal made a decision about something that is outside of its jurisdiction (Article 34(2)(a)(iii) of the Model Law).

In Mexico v Cargill, the Ontario Court of Appeal clarified the test for setting aside an international commercial arbitration award on jurisdictional grounds. In short, the standard of review on such challenges is correctness. A reviewing court will only set aside a tribunal's award where the tribunal has incorrectly decided a true question of jurisdiction. More on the case, and its implications, below.

the facts in Mexico v Cargill

Mexico, the second largest per capita consumer of soft drinks in the world, enacted certain trade barriers as an attempt to protect its sugar industry against competition from imported high fructose corn syrup ("HFCS") – a low-cost sugar substitute used in soft drinks. Cargill, Incorporated ("Cargill"), an American producer of HFCS, and its Mexican subsidiary and distributor, commenced an arbitration claiming Mexico's trade barriers breached the North American Free Trade Act ("NAFTA"). The arbitral tribunal agreed that Mexico's trade barriers breached NAFTA and awarded $77m in damages to Cargill. The damages awarded included both " downstream" losses (being direct lost sales suffered by Cargill's Mexican subsidiary) and "upstream" losses (being Cargill's cost of lost sales to its Mexican subsidiary).

Mexico challenged the jurisdiction of the tribunal to award the "upstream damages." Under NAFTA, the tribunal could only award damages to Cargill as an "investor" to compensate for losses suffered in connection with its "investment" in Mexico, which Mexico argued, was Cargill's Mexican subsidiary. Mexico argued that the tribunal did not have jurisdiction to award "upstream" damages, which it characterized as losses Cargill suffered in America as a producer and exporter and not losses suffered as an investor in Mexico.

Given that the arbitration was seated in Toronto, Mexico brought its application to set the award aside in Ontario under the International Commercial Arbitration Act, RSO 1990, c I.9, which incorporates the Model Law. Specifically, Mexico applied under Article 34(2)(a)(iii) of the Model Law, which permits a court to set aside an award that "…deals with a dispute not contemplated by or not falling within the terms of submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration . . . ."

At first instance, the Ontario Superior Court of Justice found that Mexico's objection did not go to the jurisdiction of the tribunal but rather was an attack on the merits of the decision, which was beyond the Court's scope of review under the Model Law, and dismissed its application. In doing so, the Court ruled that the standard of review when considering whether an arbitral tribunal exceeded its jurisdiction is reasonableness, citing numerous Canadian precedents which state that international arbitral tribunals are to be afforded a high degree of deference and that courts should interfere only sparingly or in exceptional cases.

Mexico then appealed to the Ontario Court of Appeal, and lost again. Although the Court of Appeal dismissed Mexico's appeal, it reached a different conclusion than the Superior Court on the proper test to apply when reviewing an arbitral tribunal's decision on its own jurisdiction.

the court of appeal's decision

The Court of Appeal began by observing that it is not helpful to directly apply often inconsistent and ill-defined standards of review from administrative law cases, or from appellate court reviews of trial decisions, when reviewing a jurisdictional challenge under Article 34 of the Model Law. After examining the language of the Model Law itself, several Canadian decisions and the decision of the UK Supreme Court in Dallah v Ministry of Religious Affairs of the Government of Pakistan, the Ontario Court of Appeal ruled that the proper standard of review on an application to set aside under Article 34(2)(a)(iii) of the Model Law is correctness. The arbitral tribunal must be correct in determining that a particular dispute falls within its jurisdiction. The tribunal has no authority to expand its jurisdiction, even if its interpretation of jurisdiction is a reasonable one.

The Court of Appeal recognized that one challenge for a reviewing court is navigating the tension between discouraging court intervention in the arbitral process, on the one hand, and the court's mandate to review awards for jurisdictional excess, on the other. The Court of Appeal also noted that another challenge for the court is to limit its review to determining whether the award exceeds the scope of the tribunal's jurisdiction and to refrain from examining the merits of the award itself.

To manage these challenges, the Court of Appeal provides the following road map for reviewing a jurisdictional attack:

  • The role of the reviewing court is to identify and narrowly define any "true" question of jurisdiction;
  • Where the court is satisfied that there is a true question of jurisdiction, the tribunal must be correct in its assumption of jurisdiction, and it is the reviewing court's job to determine whether the tribunal got it right; and
  • In assessing whether the tribunal exceeded its jurisdiction, the court is to avoid a review of the merits.

The Court of Appeal ultimately decided that the arbitral tribunal correctly identified the jurisdictional limits on its ability to award the "upstream" damages, and dismissed Mexico's appeal.

other lessons

The Mexico v Cargill case is also of interest for two additional reasons. First, the case will be helpful in investment arbitrations as the Court of Appeal distinctly separated the issues of jurisdiction and merits, which are often confused in investment treaty cases. The decision marks the fifth time that an investment treaty award has been reviewed by a Canadian Court (no other country boasts such a depth of jurisprudence in this area), and this is the fourth time that a challenge to such an award has been dismissed. Second, the Court also provides a helpful in-depth discussion of the Vienna Convention on the Law of Treaties and its application.

by W. Brad Hanna and Erin Cowling

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1
 2011 ONCA 622

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011