Marc J. Goldstein Arbitrator & Mediator NYC
October 07, 2011

What We Learn from Canada’s Cargill Case: Judicial Review and the Core Competence of Investment Tribunals

It is the first day of the new hockey season in North America, a suitable occasion for Arbitration Commentaries to bring you content inspired by our neighbors in the Great White North.

By now the news will probably have reached you that the highest appellate court of the province of Ontario, the Ontario Court of Appeal, earlier this week affirmed a first instance court’s ruling that denied a motion to vacate in part a NAFTA arbitral tribunal’s award against the Government of Mexico and in favor of the US multinational Cargill, Inc. (Mexico v. Cargill, Inc., 2011 ONCA 622 (Oct. 3, 2011)). In case you are learning about the case for this first time here, I report very briefly: Mexico established trade barriers to protect its cane sugar industry from competition from Cargill and other US suppliers of high fructose corn syrup. In Cargill’s NAFTA arbitration case under the UNCITRAL Rules, Cargill claimed and was awarded damages in two categories: lost profits of its Mexican affiliate, and lost profits on trans-border sales from Cargill in the US to the Cargill Mexican affiliate. The Tribunal rejected Mexico’s position that the second category of damages were not sustained by Cargill as an investor in relation to its investment; the Ontario Supreme Court (first instance) agreed with the Tribunal, and in this decision the Ontario Court of Appeal also agreed. Because the arbitration took place in Toronto under the UNCITRAL Rules, rather than under the ICSID Convention as NAFTA also permits, there was the opportunity for a motion to vacate under Ontario’s version of the UNCTIRAL Model Law on International Commercial Arbitration. Mexico took the position that the award of damages for Cargill’s lost US sales from the US to its Mexico affiliate were “beyond the scope of the submission to arbitration” (Model Law Article 34(2)(a)(iii)).

The issue to which the Court of Appeal devotes the most time and energy, and which will be of greatest transnational interest, is: what is the scope of review in a national court, applying the Model Law, when presented with a motion to vacate the award on jurisdiction of an UNCITRAL Rules investment treaty arbitral tribunal? The Ontario Court of Appeal held that the scope of review is “correctness” but precisely what this means and what it transnational implications are is open to debate and is the subject of this commentary.

Under American arbitration law, an arbitral tribunal’s decision concerning its own jurisdiction is reviewed de novo, without deference, unless the parties clearly and unmistakably agreed to submit the jurisdiction issues to arbitration. These American law rules are grounded in the notion that arbitration agreements are simple bilateral contracts between commercial parties, and that their existence and validity are suitable for courts to decide independently (without deference) because the decisions involve ordinary state law contract principles that courts apply every day. Equally, issues of the scope of disputes that are arbitrable fall normally within the province of courts to resolve independently, albeit with the benefit of a presumption based on the “pro-arbitration policy” that the US Supreme Court has engrafted on the FAA. But one reason for permitting courts to decide scope issues independently, even on review of an award, is that construing an arbitration clause normally should not be that different from construing other contract language, and with the benefit of contract interpretation jurisprudence this exercise usually will be well within the judicial “wheelhouse.”

But how would or should these rules apply when and if the Government of Mexico comes before a US court to vacate the award of a NAFTA arbitral tribunal in favor of a Canadian investor, on the ground that the damages awarded did not involve the investor’s investment in Mexico, and therefore were outside the jurisdiction of the tribunal?

What is immediately apparent — but the Ontario Court of Appeal does not confront directly — is that the NAFTA arbitral tribunal has an enormous comparative advantage over a national court in regard to the skills and knowledge applicable to deciding this “jurisdiction” question. The question is not remotely comparable to what passes for an arbitral jurisdiction issue in commercial arbitration. It involves fundamental issues of investment law, as to which depth of knowledge is presumably a main criterion for selection of the arbitrators (both in the treaty partners’ fashioning of their rosters, and in the parties’ case-specific choices). The Ontario decision reflects that the Tribunal’s decision on the jurisdiction issue brought into play NAFTA’s text, drafting history, and subsequent practice and understanding among the treaty parties; the Vienna Convention on the Law of Treaties; NAFTA arbitral case law dealing with similar issues of the territoriality vel non of claimed investor losses; principles of international law; and fact-intensive consideration of how Cargill structured its operations to sell high fructose corn syrup to food and beverage producers in Mexico. As appears often to be the case in investment arbitration, what is called jurisdiction is actually the heart of the matter — “the merits” — because the main issue is not what happened, nor whether the investor was harmed, but whether there is redress under the investment treaty for the harm that occurred as a result of the measures taken by the host State.

Why, then, would the Ontario court opt for a standard of review (“correctness”) that treats the NAFTA tribunal’s decision of a jurisdiction issue with any less deference than it would treat that tribunal’s award “on the merits”? The Ontario court’s opinion devotes considerable space to quotation of the UK Supreme Court’s decision in Dallah v Ministry of  Religious Affairs of the Government of Pakistan, wherein that Court maintained that an international arbitral tribunal (at least when it is a private tribunal in a commercial case) is normally entitled to no deference in its own determination of its own jurisdiction to adjudicate.  But Dallah was a commercial arbitration case, and the jurisdiction issue was a relatively straightforward one of whether the Pakistani ministry as a non-signatory of the agreement was bound to arbitrate. That is the kind of contract-agency law issue on which parties normally would expect judicial control of arbitral jurisdiction.

The Ontario Court of Appeal holds that the proper standard of review of the tribunal’s determination is “correctness,” and not (as proposed by Cargill) “reasonableness.” But to this reader/writer — a Canadian in spirit but not in Bar admission — there is less than satisfying clarity on what “correctness” means. The Court says that a court hearing a motion to vacate under the Model Law must be careful to determine if it is reviewing “a true question of jurisdiction,” because “courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction.” But that does not seem to meaningfully limit the kinds of complicated questions involved in jurisdiction decisions of investment tribunals.

The Court gives as a hypothetical example of a jurisdiction ruling in a NAFTA case that could be vacated as incorrect a purported award to a Brazilian citizen, one who is manifestly not eligible to arbitrate as she is not a citizen of any of the treaty parties. But whereas the tribunal’s decision that Cargill’s lost US sales to its Mexican affiliate were within the tribunal’s jurisdiction to award was upheld as “correct,” does this not perhaps imply that an opposite decision by the tribunal would have been incorrect? The Ontario court does not appear to intend that we should understand its decision in this way. It rejects “reasonableness” as a standard of review, but one gets the clear sense that if the tribunal had ruled that Cargill’s distribution arrangements did not suffice to bring its lost US sales to its Mexican affiliate within NAFTA’s coverage, that outcome also would not have been set aside.

Rather, what “correctness” appears to mean is that the award will only be set aside if the error is plain on the face of the award in relation to the plain meaning of the NAFTA. It is akin to the “clerical or computational error” correction rules of most international arbitral institutions and national statutes: If the award adds two and two and gets to five not four, that outcome is entitled to no deference and may be changed by a competent court.

The reason such a rule makes sense is that it makes vacatur for jurisdictional error depend on criteria that a national court is no less competent than a NAFTA tribunal to apply. And so we may, without taking too much liberty, conclude that the transnational lesson of the Cargill decision from Ontario is that jurisdiction determinations of investment treaty tribunals, when they are subject to vacatur under an arbitration statute based on the UNCITRAL Model Law, shall not be vacated if the jurisdiction decision was based on criteria within the core competence of an investment treaty tribunal. The Ontario court says that the question whether lost capacity in Cargill’s US plants constituted damages by reason of Mexico’s breaches of treaty obligations “is a quintessential question for the expertise of the tribunal, rather than an issue of jurisdiction.” But one could equally say that the question was whether the damage was sustained by an investor in relation to its investment and so it was indeed an issue of jurisdiction. The key element is that this issue was in the tribunal’s “wheelhouse”! It is unhelpful to tack on an ill-defined dichotomy between jurisdiction and the merits in the context of investment arbitration.

In the US, perhaps happily, such a “core competence” principle would not be needed, because we have the First Options-derived rule that when parties agree to arbitrate according to rules that permit arbitrators to decide upon their own jurisdiction, then judicial review in the context of a vacatur motion of the award on jurisdiction is as limited as review of any other issue decided in an award. The UNCITRAL arbitration rules of course give arbitrators such power and US courts (notably the Second Circuit in the Chevron-Ecuador saga) have treated BIT-based arbitration under those rules as an agreement to “arbitrate arbitrability.”  The ICSID Additional Facility Arbitration Rules confer similar power. So any investment treaty arbitration award on jurisdiction that one could reasonably imagine being the subject of a motion to vacate in a US court would fall within the limited scope of review rule of First Options and its progeny.  Nevertheless, it is helpful to US practitioners, as well as those abroad, to take away from the Cargill case the useful lesson that jurisdiction determinations of investment treaty tribunals that involve issues within the core competency of the tribunal shall be vacated only where it can be said that the error is one that the reviewing court has equivalent competency to detect and correct.



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