The Ontario trial court has once again emphasized that an application to set aside an arbitral award under Article 34 of the Model Law is not to be used as an opportunity to reargue the merits of the claim. Under Article 34(2)(a)(ii), where the issue before the court is whether a party could not present its case, the court’s analysis will focus on whether the arbitral tribunal’s conduct was “sufficiently serious to offend [Ontario’s] most basic notions of morality and justice.”
In Nelson v Mexico, a U.S. investor’s investment treaty claim under the NAFTA was rejected by a tribunal on the basis that there was no underlying agreement that granted interconnection rights to the investor’s local enterprise. As the arbitration’s “seat” was in Toronto, the U.S. investor applied to the Ontario Superior Court of Justice to set aside the award. The applicant alleged that the tribunal: (a) decided the issue on a novel theory not advanced or argued by either party, which violated his right to present his case and to be heard; and (b) disregarded his expert evidence and submissions on the core issue in the arbitration, offending his procedural and substantive fairness rights.
The Ontario Court found that there was no failure of fairness or natural justice by the tribunal and, as such, the application was dismissed.
The outcome in Nelson follows a series of Ontario cases in which the Ontario Court has repeatedly stated that it cannot engage in a review of the arbitral award on its merits on a set-aside application under Article 34. In Vento Motorcycles v Mexico, the Court held that the reviewing court must accord a high degree of deference to arbitral tribunals under the Model Law. The award cannot be set aside simply because the court believes that the tribunal wrongly decided a point of fact or law. Like Nelson, the issue before the Court in Vento Motorcycles related to procedural fairness raised under Article 34(2)(a)(ii).
The applicant was an investor in a Mexican corporation, Tele Fácil México, S.A. de C.V., that sought interconnection rights from Mexico’s largest telecom providers, who are referred to jointly as Telmex.
Tele Fácil and Telmex negotiated but did not conclude an agreement. During negotiations and exchanges of proposals, and after a change in Telmex’s status and rate regime, Tele Fácil initiated disagreement proceedings before the Federal Telecommunications Institute (or IFT) to resolve the “divergences” between Tele Fácil and Telmex about certain indirect interconnection and portability charges. The IFT issued Resolution 381 concluding that Telmex had accepted changes to its draft agreement requested by Tele Fácil and that the relevant rates were defined by the draft agreement of August 2013.
Further negotiations led to other disputes. To avoid further prolonged and costly challenges before the IFT and the local courts, the applicant started arbitration proceedings under NAFTA, alleging expropriation of Tele Fácil’s interconnection rights based on the alleged repudiation and non-enforcement of Resolution 381.
One of the threshold questions before the tribunal was whether the applicant had interconnection rights based on the August 2013 draft agreement and the IFT’s Resolution 381, which he claimed he lost as a result of the respondent’s actions.
The tribunal found that nothing in the circumstances or in the text of the letter suggested that Tele Fácil accepted the draft interconnection agreement, conditionally or unconditionally. The tribunal also found that Tele Fácil, rather than trying to conclude an agreement with Telmex in 2013/2014, saw an opportunity to get an advantage when Telmex’s status and rate regime was changed by regulation in March 2014.
As a result, the tribunal concluded that Tele Fácil had no rights under the draft interconnection agreement and even if there were an agreement, Resolution 381 only resolved the indirect interconnection and portability charges. The other domestic proceedings undertaken also did not take away rights that Tele Fácil never had.
Model Law Article 34(2)(ii) embodies principles of fairness and natural justice and, as such, the standard of review for setting aside an award under Article 34(2)(a)(ii) is whether the tribunal’s conduct is “sufficiently serious to offend our most basic notions of morality and justice” and “that it cannot be condoned under the law of the enforcing State.” When a party merely disagrees with the outcome of the arbitration, the court should not permit a re-argument of the merits of the claim.
The Court held that a party is said to have been unable to present its case when: (a) the award is based on a theory of liability that either or both parties did not have opportunity to address or based on a theory of the case not argued by either party; (b) the party was not given an opportunity to respond to arguments made by an opposing party; or (c) the tribunal ignored or failed to take evidence or submissions of the party into account (citing Consolidated Contractors Group S.A.L. (Offshore) v Ambatovy Minerals S.A., 2017 ONCA 939).
The application was based on two of these criteria—the tribunal decided the issue on a novel theory that was not advanced or argued by either party and that the tribunal did not consider the applicant’s expert evidence and submissions.
The Court rejected both arguments. First, the applicant’s position that he could not have expected that the tribunal would decide the case based on the form and content of Tele Fácil’s July 2014 letter was not tenable as both parties’ experts had testified on the issue of consent of the parties about the rates based on that letter. Further, the tribunal specifically asked the parties to address the meaning and effect of the letter in oral submissions and in their post-hearing briefs.
Secondly, on the tribunal’s alleged failure to consider the applicant’s expert’s evidence, the Court found that although the tribunal did not refer to the expert’s evidence verbatim in its award, it referred extensively to the applicant’s pleadings that had the experts’ reports appended as exhibits. The tribunal also set out in great detail its analysis and reasoning for why it rejected the applicant’s arguments on the issues.
Though an unsuccessful party in an arbitration may be keen to apply to set aside an award and, in doing so, reargue the case’s merits, the Ontario Court is very reluctant to allow Article 34 of the Model Law to be used that way. The court’s analysis will focus on whether the tribunal’s conduct amounted to “basic notions of morality and justice.” Here, the unsuccessful party was also ordered to pay $100,000 in costs to Mexico.
If you have any questions about the effect of this decision or on our arbitration or enforcement practices, please contact the authors or other members of our Arbitration practice group.