International arbitrations get deference on merits but not jurisdiction
November 15th, 2011
The Ontario Court of Appeal shed new light on the standard of review for international arbitrations in United Mexican States v. Cargill, Inc. Courts must review an arbitral tribunal’s assumption of jurisdiction on a correctness standard. But the merits of the tribunal’s decision attract the utmost deference. The Court found that the NAFTA Chapter 11 Arbitral Tribunal under review correctly assumed its jurisdiction, upholding the Tribunal’s $77.3 million award against Mexico.
Cargill, Inc., a US multinational, won the award for damages caused by Mexico’s measures to protect its sugar industry by limiting imports of high fructose corn syrup (HFCS). In 2002, Mexico imposed a 20% excise tax on a range of products containing any sweetener except cane sugar. Companies won constitutional challenges against the tax, but Mexico also required HFCS importers to get a government permit to avoid tariffs ranging from 156% to 210%. According to Cargill, its applications for an import permit were always denied, and Mexico did not disclose the criteria for obtaining one.
Cargill brought a NAFTA Chapter 11 arbitration claim based on its losses as a foreign investor, stemming from its Mexican subsidiary’s diminished sales of imported HFCS. The hearing took place in Washington, D.C., but the parties designated Toronto as “the place of arbitration”. Thus the arbitration was subject to the UNCITRAL Model Law of International Commercial Arbitration as adopted by Ontario’s International Commercial Arbitration Act. The Model Law gives the Ontario Superior Court of Justice limited powers to review arbitral awards. One provision allows the Court to set aside an award if it falls outside the scope of the matters submitted to arbitration (the “jurisdictional review provision”). The other grounds for review under the Model Law include:
- an invalid arbitration agreement,
- a lack of procedural fairness,
- an illegality in the tribunal’s composition or procedure,
- a subject matter that is legally incapable of settlement by arbitration, and
- a conflict with Canadian public policy.
Mexico applied to the Ontario Superior Court to set aside the Tribunal’s award, contending that the Tribunal lacked jurisdiction to order damages for Cargill’s lost sales from its US operations to its Mexican subsidiary. In dismissing the application, the Court reviewed the Tribunal’s assessment of jurisdiction on a reasonableness standard and found that the standard was met. The Court ruled that the Tribunal based the damages awarded on factual findings that were exempt from judicial review.
Mexico appealed, arguing that the Superior Court applied the wrong standard of review and reached the wrong conclusion on whether the Tribunal made a jurisdictional error.
Feldman J.A., writing for the Court of Appeal, agreed that reasonableness was not the proper standard of review. The Model Law provides no grounds for reviewing the merits of an arbitral award, but a tribunal’s ruling cannot exceed its jurisdiction, even if the ruling has a reasonable basis.
To support this conclusion, Feldman J.A. employed principles of Canadian administrative law, particularly those expressed in Dunsmuir v. New Brunswick, decided by the Supreme Court in 2008. Dunsmuir established that courts reviewing domestic administrative decisions must determine whether to apply a standard of reasonableness or correctness. When reviewing the way an administrative tribunal exercised jurisdiction, the normal standard is correctness. Feldman J.A. wrote that under the Model Law’s jurisdictional review provision, “there is nothing that detracts from the normal rule that on questions of jurisdiction, the tribunal could not act beyond its jurisdiction.”
However, courts must narrowly define questions of jurisdiction when reviewing international arbitrations, Feldman J.A. held. This reflects a general principle of administrative law, but it applies more strongly to international arbitrations, where courts must limit their interventions “in the strictest terms”. Feldman J.A. explained:
…courts are to be circumspect in their approach to determining whether an error alleged under [the jurisdictional review provision] properly falls within that provision and is a true question of jurisdiction. They are obliged to take a narrow view of the extent of any such question. And when they do identify such an issue, they are to carefully limit the issue they address to ensure that they do not, advertently or inadvertently, stray into the merits of the question that was decided by the tribunal.
Therefore, courts reviewing arbitral awards for jurisdictional error under the Model Law should:
- identify a true question of jurisdiction,
- narrowly define it,
- review the assumption of jurisdiction on a standard of correctness, and
- avoid consideration of the merits.
Feldman J.A. then ruled that the Tribunal correctly identified and assumed its jurisdiction to assess Cargill’s losses as an investor within the meaning of Chapter 11. She explained that NAFTA imposed no territorial limits precluding recovery for Cargill’s losses in the US. The Court dismissed the appeal and left the Tribunal’s decision undisturbed.
Cargill helps show what deference to international arbitrations really means. Tribunals are not free from scrutiny. If they exceed their jurisdiction, their awards may be set aside. But Cargill makes it clear that jurisdiction is a very specific question that should not involve a tribunal’s reasoning on the merits. Although the Court of Appeal ruled in the context of a NAFTA Chapter 11 arbitration, the Court’s analysis is based in the Model Law and applies to all international arbitrations taking place in Ontario. Correctness is the standard for reviewing those arbitrations on jurisdictional questions. Those questions do not extend to the merits. The Model Law does not permit courts to review the merits of arbitral awards.