Canada: Ontario Court Confirms Narrow Grounds For Setting Aside NAFTA Award

Introduction

In a recent decision1 the Ontario Superior Court of Justice affirmed Canada's commitment to the arbitral process as a final, binding method of dispute resolution, and reiterated the limited ability of arbitral debtors to set aside an award under Section 34(2) of the Commercial Arbitration Code, which is incorporated into the federal Commercial Arbitration Act.

In dismissing the petition to set aside the award, the court relied on previous investor-state jurisprudence and confirmed that jurisdictional challenges to arbitral awards should be viewed with caution to prevent arbitral debtors from re-litigating the merits of their cases.

Facts

Mobil Investments Canada Inc and Murphy Oil Corporation are investors in two offshore petroleum drilling projects near Newfoundland, Canada.

Petroleum extraction in Newfoundland is governed by the Canada-Newfoundland Atlantic Accord Implementation Act, which requires all offshore projects to put in place a benefits plan before work proceeds. The benefit plan must provide for expenditures in research and development and education and training in Newfoundland ('benefit expenditures').

The act is an exception to Article 1106 of the North America Free Trade Agreement (NAFTA), by virtue of a reservation made by Canada when NAFTA was negotiated. Article 1106 prohibits a state from imposing "performance requirements" on an investor from a trading partner, including by requiring an investor to purchase goods or services provided in the state.

The benefit plan that applies to Mobil and Murphy Oil's projects provides generally for benefit expenditures, but requires any particular level of funding.

In 2004 the Canada-Newfoundland Offshore Petroleum Board issued guidelines under the act which established a fixed minimum threshold for benefit expenditures.

After unsuccessfully challenging the authority of the board to issue the guidelines in court, the investors commenced arbitration against Canada under Chapter 11 of NAFTA, alleging that the guidelines violated Articles 1105(1) and 1106(1)(c) of NAFTA.

The majority of the tribunal found that the guidelines violated Article 1106 of NAFTA and did not fall within the scope of Canada's reservation. An award on liability was issued on May 22, 2012, and an award of approximately $19 million in damages was issued on February 20, 2015.

Decision

Canada applied to set aside the award pursuant to Article 34(2)(a)(ii) of the Commercial Arbitration Code, which permits the court to set aside an award if, among other things, the award deals with a dispute not falling within the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration.

The nub of Canada's argument was that the tribunal had used the wrong criteria for determining whether the guidelines fell within the scope of the reservation. Specifically, Canada argued that the 'measure' being reserved was the act, and the guidelines were a "subordinate measure adopted or maintained under the authority of and consistent with the measure". Pursuant to Article 1108(1)(c) of NAFTA, this would bring the guidelines within Canada's reservation. Conversely, the tribunal had viewed the 'measure' as both the act and the existing benefit plans, which led to its decision that the guidelines were not consistent with the measure and therefore not within the scope of the reservation.

Canada argued that that this amounted to a jurisdictional error under Article 34(2)(a)(ii), because if a measure is reserved, Article 1106 does not apply, there can be no breach and any award of damages exceeds the tribunal's jurisdiction.

After reviewing the principles enunciated in United Mexican States v Cargill, Inc, the court held that there was no true jurisdictional question at issue. Instead, it viewed Canada's application as an attempt to challenge the merits of the decision.

In explaining why the tribunal's conclusion regarding the breach and scope of the reservation did not fall within Article 34(2)(a)(ii), the court noted as follows:

  • These were the exact issues that the tribunal was called upon to decide and that the parties argued in their submissions, so they were clearly within the terms of the submission;
  • The tribunal had to interpret the words 'the measure' in order to determine whether the guidelines were a reserved subordinate measure;
  • Canada did not dispute that the tribunal had applied the correct test in determining whether the guidelines fell within the reservation - only the manner in which the majority applied the test; and
  • Jurisdictional issues should be narrowly cast, particularly in the determination of damages.

In dismissing Canada's application, the court held that "casting this interpretive exercise as a jurisdictional issue goes far beyond the 'narrow view of what constitutes a question of jurisdiction' as required by Cargill", and concluded that:

"I do not regard this as one of the 'rare circumstances' where there is a true question of jurisdiction. The majority decided that the Guidelines breached Article 1106(1)(c) and did not fall within the scope of Canada's reservation. Those were merits issues. In my view, Canada is seeking to re-litigate the merits of the case."

Comment

Attorney General of Canada v Mobil  provides a good example of Canadian courts' deference to the jurisdiction of arbitrators and the finality of the arbitral process. Consistent with previous decisions, the court confirmed the need for vigilance in applications to set aside arbitral awards to ensure that the court's supervisory role, limited to jurisdictional questions, does not transform into an appeal on the merits. 

Footnote

Attorney General of Canada v Mobil, 2016 ONSC 790.

The above was originally published by BLG on  International Law Office.

About BLG

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