June 01, 2018

Importing Arbitration Law from Canada Without Tariffs

Significant foreign judgments concerning arbitration statutes based upon the UNCITRAL Model Law capture limited attention in the US, because the US is not at the federal level or under the laws of 44 of the 50 states a “Model Law jurisdiction.” But in some of the six states that have adopted international arbitration statutes based on the Model Law (California, Connecticut, Florida, Georgia, Illinois, Texas), the number of locally-seated international arbitrations is said to be on the rise (and there is at least anecdotal evidence that this is so; see, for example, last month’s post: “International Arbitration in the California Style”). Courts and arbitral panels functioning on international arbitrations seated in those states will perhaps have occasions to become more aware of a body of quasi-precedent found in the judicial decisions of foreign States where iterations of the Model Law are in force.

A decision of the Ontario Superior Court in Toronto (a first instance court of the Ontario province) dated April 13, in connection with a Toronto-seated, Yukos-related, Energy Charter Treaty (ECT) arbitration, is a useful case in point. (The Russian Federation v. Luxtona  Ltd., 2018 ONSC 1419, accessible on www.italaw.com). This decision concerns what American litigators would classify as a motion in limine, seeking to limit the evidence presentable to the Court concerning several critical issues of arbitral jurisdiction. Indeed one of those jurisdiction issues under the ECT figured prominently in the more celebrated Yukos arbitration conducted in the Netherlands:  whether the ECT’s clause for “provisional application” of the ECT to Russia, which signed but has not ratified the ECT, permits the Arbitral Tribunal to hear the case at all, or limits the claims that might be heard, based on considerations of Russian law. In this Luxtona arbitration, the Tribunal in March 2017 made a preliminary-issue ruling in the form of a partial award that it does have jurisdiction – the text of which is not to my knowledge available publicly — and this has triggered Russia’s resort to the Toronto court to hear that issue under the Ontario version of Art. 16(3) of the Model Law.  (Russia’s application asks the Court to vacate the partial award containing the Tribunal’s ruling, and thus invokes Art. 34 of the Model Law. Art. 34 adopts the New York Convention’s grounds for refusal of recognition and enforcement as the grounds upon which a court at the arbitral seat in a Model Law State may annul an award. Our focus here, however, is upon Art. 16(3), as we are concerned with the contributions made by its text toward answering the question of what deference is due to the Tribunal’s decision on an issue of Tribunal jurisdiction. Faithful Toronto readers will consider me remiss if I fail to observe that Ontario, as part of its International Commercial Arbitration Act, 2017, not only incorporated the 2006 version of the Model Law, but also for the first time formally incorporated the New York Convention into the statute. The incorporation of the latter, however, is not implicated in the instant Luxtona matter, as potential annulment of an award in a Toronto-seated arbitration is addressed in the Model Law).

Model Law Art. 16(3) provides:

“The arbitral tribunal may rule on a plea [that the Arbitral tribunal does not have jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral Tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in Article 6 to decide the matter, which decision shall be subject to no appeal.”

The six US state versions of the Model Law contain essentially this formulation, and in addition specify that failure to make the request within the 30-day period shall be a waiver.

In its essence, the Ontario court’s decision on this motion to limit evidence turned on the question on what degree of deference is to be accorded to the Tribunal’s preliminary-issue partial award ruling that it has jurisdiction to adjudicate ECT claims against Russia. We are well-advised to avoid framing this issue as “scope of review” because, at least upon the view taken by the Ontario first instance court, the hearing specified by Art. 16(3) of the Model Law “is not an appeal.” Instead according to the court it is what American lawyers would regard as a de novo proceeding — although the Ontario court is somewhat reluctant in using that phrase: “Whether or not described as a hearing ‘de novo’, such a hearing cannot be confined in advance to the record before the tribunal whose ruling in jurisdiction has been challenged.

On a “true question of jurisdiction,” the Ontario court tells us, the ruling of the Arbitral Tribunal is to be assessed for its “correctness.” The Court draws our attention back to the Ontario Court of Appeal decision in Mexico v. Cargill, Inc. (2011 ONCA 622, available on www.italaw.com), a case that involved an application under Art. 34 of the Model Law to annul a final award in a Toronto-seated NAFTA Chapter 11 case. In Cargill the Tribunal had awarded lost profits damages in two categories held to have resulted from Mexico’s unfair and inequitable treatment of Cargill’s investment in Mexico: lost profits on corn syrup sales of a Cargill Mexican subsidiary to customers in Mexico, and lost profits of Cargill in the US on corn syrup sales to the Cargill Mexican subsidiary.

Whether the latter category of damages was properly awarded based on NAFTA Chapter 11 provisions that permitted an investor to recover only for injury to the investor’s investment caused by actions taken by the State in regard to the investment was not “a true question of jurisdiction”, but an integral element of the merits, held the Ontario appeal court in Cargill. On that question, said the court,  the Tribunal’s award was entitled to deference, but had the question been, for example, whether an investor admitting to UK nationality could bring a claim under NAFTA Chapter 11, that would have presented a “true question of jurisdiction” on which the Tribunal’s decision would have had to be assessed for its correctness. The Cargill court in this regard had invoked the much-discussed and then rather recent decision of the UK Supreme Court in the Dallah v Pakistan case (Dallah Real Estate and Tourism Holding Co. v. Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46], available at www.supremecouurt.uk] where it had been held that whether an arbitration agreement engaged by the religious affairs ministry of the Pakistani State bound the sovereign to arbitrate was indeed a question of jurisdiction to be determined by the Court without deference — “de novo” in US scope of review terms — even in the posture of deciding whether the UK should recognize and enforce the award made in a Paris-seated arbitration.

The Ontario court in Luxtona, invoking Cargill, Dallah, and similar authorities in such Model Law States as New Zealand, Australia, Ireland, and Hong Kong, held that whether and to what extent Russia was bound to arbitrate ECT claims under the Treaty’s “provisional application” clause is such as “true question of jurisdiction,” and, no deference being due on this question to the Tribunal’s determination, it followed that the factual record (in terms of expert opinion evidence) pertinent to the issue should not be limited to the materials the parties had presented to the Tribunal. Model Law Article 16(3), said the court, “can[not] be construed as constraining the court to the four corners of the evidentiary record before the Tribunal still less the findings of fact regarding foreign law made by the Tribunal. The court is directed [by Art. 16(3)] to ‘decide the matter’ and not merely to review the decision of a tribunal whose very existence may or may not have been authorized.” (emphasis supplied).

Commentators have lamented that US arbitration case law has produced a version of the doctrine of compétence-compétence that, in regard to ultimate judicial control over the exercise of jurisdiction by arbitrators, is quite excessive in comparison to foreign counterparts. Our jurisprudence accepts that the delegation of jurisdiction-deciding power to arbitrators, resulting from the parties’ contractual adoption of arbitration rules conferring such power, is — at least where countervailing considerations are absent— permanent and absolute, putting arbitral decisions on arbitral jurisdiction on the same footing as other arbitral decisions of fact and law that are accorded only limited and deferential judicial review. The lamentation may be said to have two essential components: first, that US courts in their overbroad use of the phrase “arbitrability” have obscured important distinctions that ought to be made among discrete jurisdiction issues that might or might not warrant deference to arbitral determinations (distinctions that are to some extent captured by the Canadian concept of a “true question of jurisdiction”), and, second, that parties’ intentions to delegate essentially final authority over jurisdiction issues to arbitrators are rather tenuously and debatably inferred from the mere incorporation into an arbitration agreement  — especially one whose existence or validity is at issue – of provider rules giving arbitrators power to rule on objections to their jurisdiction.  (See, e.g., G.A. Bermann, Arbitrability Trouble, 23 Am. Rev. Int’l Arb. 367, 374-78 (2012), and for a recent example of the persistence of such “arbitrability trouble” in US case law, see Sygenta Crop Protection LLC v. Insurance Co. of North America, 2018 WL 1587601 at *5 (S.D.N.Y. Mar. 29, 2018) (incorporation into arbitration agreement of AAA Commercial Arbitration Rules “provide[s] an unmistakable delegation to the arbitrator to decide arbitrability”)).

Until now, this problematic US case law does not include (to my knowledge) any instances where the contracting parties’ delegation of jurisdiction-deciding power to international arbitrators was made in an agreement that provided for international arbitration seated in one of our six Model Law-adopting states. And more generally speaking, the US case law on delegation of jurisdiction issues to arbitrators appears not to have had to address what inferences about the parties’ delegation intentions are inferable from the provisions of state arbitration law – such as the six state versions of the Model Law — that apply by virtue of the designation in the arbitration agreement of the seat of arbitration. Perhaps in the Toronto court’s current encounter with Russia’s position on the ECT we are witnessing the precursor of an eventual development in US law, whereby in an international arbitration seated for example in California or Texas or Florida the courts’ conclusions about what the parties intended will be that they delegated jurisdiction issues to the arbitrators as an initial matter — as a matter of facilitating an effective arbitral process — but reserved the right to have non-deferential de novo judicial consideration of arbitral rulings on certain “true questions of jurisdiction” in the framework of a motion to vacate the award.  Further, such decisions might be a sort of first wave of a broader reconsideration of the question of how the parties’ delegation of jurisdiction issues to the arbitrator affects the judicial deference due to the arbitrator’s decision of those issues.

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