Ontario Court Upholds NAFTA Tribunal’s Jurisdiction

Emily Sherkey, Torys LLP, Toronto

 

In a recent decision, The United Mexican States v Burr, 2020 ONSC 2376, the Ontario Superior Court of Justice upheld the jurisdictional award of a NAFTA investor-state arbitral tribunal. The decision confirms that technical non-compliance with a treaty’s formal requirements, which causes no prejudice, will not defeat arbitral jurisdiction in the absence of clear language in the treaty requiring that harsh result. In other words, arbitral tribunals and courts interpreting the NAFTA will not elevate form over substance.

 

Background

The claimants in the arbitration are a mix of 38 individuals and companies that are American investors in Mexican gaming companies. The claimants allege that various measures taken by Mexico culminated in the closure of their casino business in Mexico.[1]

Mexico challenged the Tribunal’s jurisdiction and the case was bifurcated. On July 19, 2019, the Tribunal issued a partial award confirming its jurisdiction. Mexico alleged that the Tribunal lacked jurisdiction because of noncompliance with formal (not substantive) NAFTA requirements. Mexico unsuccessfully argued that the preconditions to trigger its consent to arbitration had not been met, because (1) the notice of intent failed to include the names and addresses of the some of the claimants, and (2) defects in the form and timing of the claimants’ written consent to arbitration. Mexico also challenged the claimants’ standing to bring claims on behalf of their Mexican enterprises. That last challenge was not raised in the Ontario application and is not further discussed in this blog.

As the seat of the arbitration was Toronto, Mexico applied to the Ontario Superior Court of Justice to set aside the partial award. Both Canada and the US intervened on Mexico’s behalf. All three NAFTA parties put forward an aligned view on the interpretation of the NAFTA, namely whether the defects as to consent alleged in this case negatived the state party’s consent to arbitration and thus the NAFTA tribunal’s jurisdiction.

 

The Decision

Justice Dietrich dismissed Mexico’s application. In so doing, she addressed the role of the Court in deciding on set-aside applications from international arbitrations, and also ruled on Mexico’s three jurisdictional objections (the two mentioned above and a third relating to the weight to be given to the three NAFTA Parties’ legal submissions).

Standard of Review. Justice Dietrich confirmed that, in stark contrast to tribunal decisions on the merits, which are not reviewable by the courts, no deference is owed to the Tribunal on jurisdictional issues. The court “must consider the jurisdictional matter anew” and ensure the tribunal correctly determined that it had the ability to make the decision it made.[2]

NAFTA Article 1119. Article 1119 requires that an investor, at least 90 days prior to commencing arbitration, provide the NAFTA Party with notice of its intention to submit a claim to arbitration. Article 1119(a) provides further that the names and addresses of the investor(s) must be included in this notice. There was no dispute that the names and addresses of only 8 of the 38 investors were included in the original notice, so the remaining claimants had not complied with Article 1119’s formal requirements.

Mexico argued that compliance with Article 1119 was a precondition to triggering its consent to arbitration. Article 1122 provides that the NAFTA Party consents “to the submission of a claim to arbitration in accordance with the procedures set out in the Agreement.” The issue for Justice Dietrich was whether the procedures referenced in Article 1122 include Article 1119, as the Majority of the Tribunal concluded (there was a partial dissent on this issue).

Justice Dietrich found that the Majority correctly found that Article 1119 is a pre-arbitration step that falls outside the scope of Article 1122.[3] Applying the Vienna Convention on the Law of Treaties, she agreed with the Majority that the ordinary meaning, the context, and the object and purpose of the NAFTA provisions do not support Mexico’s formalistic and technical interpretation.[4] Justice Dietrich also reviewed the jurisprudence and concluded that “NAFTA tribunals have confirmed that they will not elevate form over substance.”[5]

NAFTA Article 1121. As part of the submission of a claim to arbitration, Article 1121(1) requires that an investor provide its consent to arbitration and waive the right to certain other dispute resolution procedures. Both the consent and waiver must be expressly provided by the investor to the disputing NAFTA Party (i.e., the respondent State). Article 1121(3) provides the manner in which this consent and waiver are to be delivered, namely that they must be stated in writing, delivered to the disputing Party, and included in the submission to arbitration.

The claimants provided their consent in the Request for Arbitration. The Request was signed by their counsel pursuant to powers of attorney provided to Mexico. Mexico argued this did not meet the requirements of Article 1121, and in any event, the consents and waivers were provided late.

With respect to Article 1121(1), Justice Dietrich reviewed the evidentiary record and agreed with the Tribunal’s conclusion that “the record permits no other conclusion that than that the [claimants] did in fact consent.” There is nothing in the language of Article 1121 that requires a particular formulation for giving consent.[6]

With respect to Article 1121(3), relying upon NAFTA jurisprudence, Justice Dietrich agreed with the Tribunal that these were admissibility requirements, and did not go to jurisdiction. Justice Dietrich drew an important distinction between jurisdictional requirements (which relate to the authority of a tribunal over the dispute as a whole) and admissibility requirements (which relate to nature of individual claims and whether they are fit to be resolved by the tribunal). As the Court has no authority to review findings relating to admissibility, she did not consider further the Tribunal’s findings on the issues relating to the manner in which the consent and waiver were conveyed, including their timing.[7]

NAFTA Article 1128 Submissions. Article 1128 permits NAFTA Parties to make submissions regarding the interpretation of the NAFTA. Canada and the US provided such submissions. Although the Majority stated that it had carefully reviewed all submissions of all parties, it did not otherwise mention these submissions. Mexico argued that the Majority made a jurisdictional error in failing to accord sufficient weight to these submissions.

This issue turned on whether legal submissions by the three state parties to the NAFTA constituted “subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.” If so, under Article 31(3)(b) of the Vienna Convention, the Tribunal was required to take them into account.

Whether legal submissions by state parties are capable of constituting “subsequent practice” is often disputed in investor-state arbitrations. As there is no stare decisis in international arbitration, the precedents are inconsistent. Justice Dietrich agreed with Mexico that, as a matter of principle, such submissions can constitute subsequent practice. In making this finding, she relied upon the NAFTA jurisprudence that has considered this issue and distinguished the non-NAFTA authority the claimants relied upon.[8]

However, Justice Dietrich disagreed with Mexico that the standard for recognizing subsequent practice was met in this case. In so finding, she did not apply the definition of “subsequent practice” often applied by international tribunals (established by the WTO Appellate Body), which requires “a concordant, common and consistent sequence of acts or pronouncements which is sufficient to establish a discernable pattern implying the agreement of the parties regarding [a treaty’s] interpretation.” Rather, she held she was bound to apply the less stringent definition put forth by the Ontario Court of Appeal in Cargill v Mexico, which requires “a clear, well-understood, agreed common position.” This broader definition can be met wherever a common position among the state parties can be substantiated, and does not necessarily require repetition of a position or a pattern of statements or conduct before subsequent practice can be established.[9]

However, Justice Dietrich confirmed that while the Cargill definition may not require the same level of repetition as the WTO Appellate Body definition, some repetition by the state parties’ in communicating their aligned view is required. She held that the NAFTA Parties’ submissions did not meet the Cargill standard for subsequent practice, as this was the first case where all three NAFTA Parties offered unanimous submissions on the interdependency of Articles 1119 and 1121. Furthermore, while the NAFTA Parties long argued, generally, that the NAFTA should be interpreted to demand strict adherence to its formal and procedural requirements, NAFTA tribunals have consistently rejected those arguments.[10]

 

Comment

There are two important aspects of Justice Dietrich’s decision.

First, this decision is distinct from past applications to set aside awards rendered by NAFTA tribunals, such as in Mobil v Canada,[11] as it did not involve a party seeking to dress up merits-based issues (which are not reviewable) as jurisdictional issues (which the court must decide de novo). As this case indisputably involved issues of jurisdiction and, as such, no deference was owed to the Tribunal, the Court provided a detailed analysis of the issues, the interpretation of the NAFTA, and the NAFTA jurisprudence (except for issues relating to the admissibility of the claim, on which the Court deferred to the Tribunal).

Second, Justice Dietrich’s decision provides a precedent on the treatment of legal submissions by the state parties to a treaty in future Ontario set-aside applications. It is not clear how much impact the decision will have outside of Ontario, and in future investor-state arbitrations, as Justice Dietrich applied the broader Cargill definition of “subsequent practice” and not the more restrictive definition that is often applied by international tribunals. Given her finding that the NAFTA Parties must show some history of sharing an aligned interpretation of the specific treaty provision at issue, it is not clear that the two definitions will yield different outcomes in practice.  Nevertheless, for future Ontario applications at least, she has provided clear guidance on the standard that must be met to establish “subsequent practice.”

 

[2] The United Mexican States v. Burr, 2020 ONSC 2376, para 41.

[3] Ibid at para 117

[4] Ibid at para. 62-78, 97-99

[5] Ibid at para 113

[6] Ibid at paras 130-139

[7] Ibid at paras 44, 140-145

[8] Ibid at paras 176-186

[9] Ibid at paras 167-175, citing Mexico v Cargill Inc., 2011 ONCA 622.

[10] Ibid at paras 215-217

[11] Attorney General of Canada v Mobil et al, 2016 ONSC 790.