ONTARIO – Arbitration – Scope of Court review under s. 34 of the Commercial Arbitration Code, Schedule I to the Commercial Arbitration Act, R.S.C. 1985, c. 17 – Review is not an appeal and is expressly limited to “true jurisdictional questions” and does not include court review of the reasonableness or correctness of the arbitral award.

ONTARIO – Arbitration–Scope of Court review under s. 34 of the Commercial Arbitration Code, Schedule I to the Commercial Arbitration Act, R.S.C. 1985, c. 17 – Review of an arbitral award on public policy grounds is available only where the award offends Canadians’ sense of morality and is profoundly at odds with Canadian conceptions of justice, such that its enforcement cannot be countenanced.

Clayton v. Canada (Attorney General)
2024 ONCA 581 (CanLII), (July 24, 2024)
Ontario Court of Appeal (Huscroft, George and Favreau JJ.A.)

The Court of Appeal heard an appeal from the judgment of Akbarali J. (2022 ONSC 6583), dismissing an application to set aside an arbitration award made pursuant to Chapter 11 of the NAFTA. The appellants argued that the tribunal exceeded its jurisdiction and that its award violated public policy. (para. 1)

Background and Facts

The Appellants were developing a quarry in Nova Scotia, a project that required approval from both provincial and federal ministers of the Environment. Approval was denied by review panels and by the ministers after a joint review panel stated that the project would cause significant and irreversible changes that would have adverse effects on the “community’s core values”.

The appellants invoked the NAFTA arbitration process. At the first hearing, the NAFTA Tribunal held that the environmental assessment was flawed. An appeal from the Tribunal’s decision was dismissed by the Federal Court: Canada (Attorney General) v. Clayton, 2018 FC 436 (paras. 5-6)

As a result of the NAFTA Tribunal’s first award, the Appellant sought damages in the second phase for their alleged loss of profits if the project had proceeded, $440 million over 50 years. The Tribunal did not find a causal link between the NAFTA breach and the injury alleged by the appellants. It held that although the appellants were deprived of an opportunity to have the environmental impact of their proposed project assessed in a fair and non-arbitrary manner, a recommendation of the project was not inevitable even if the assessment had been conducted properly. (paras. 7-8)

The NAFTA Tribunal held that the appellants failed to establish injury beyond deprivation of the opportunity to have a fair and non-arbitrary environmental assessment, and the Tribunal awarded the appellants US$7 million in damages for this loss. (paras. 9-10)

Application Judge’s Decision

There was no right of appeal from the NAFTA Tribunal’s award. An application to set aside the award is the exclusive recourse and is governed by s. 34 of the Commercial Arbitration Code, Schedule I to the Commercial Arbitration Act, R.S.C. 1985, c. 17. This provision is nearly identical to the Ontario Arbitration Act, 1991 s. 46(1)(3). (“the AA”)

Section 34 of Commercial Arbitration Act imposes strict limits on the ability of courts to interfere with arbitration awards. Subsection 34(2)(a)(iii) makes clear that a court may set aside the tribunal’s award only if the appellants establish that it determined matters beyond those that were submitted to the tribunal for arbitration. “True jurisdictional questions” is a term that has been used to describe the limited nature of a reviewable error under s. 34(2)(a)(iii), and the standard of review for such errors is correctness. An award may also be set aside if it conflicts with the public policy of Canada under s.134(2)(b)(ii). This is a mixed question of law and fact and is subject to review on the deferential palpable and overriding error standard. (paras. 13-14)

The Appellants applied to set aside the NAFTA Tribunal’s decision to the Superior Court. In dismissing the application, Akbarali J. held (2022 ONSC 6583) that the NAFTA Tribunal identified the proper international law standard in determining causation and concluded that the correct application of that standard did not raise a “true question of jurisdiction”, as set out in Mexico v. Cargill, Incorporated, 2011 ONCA 622.

The application judge further concluded that if the question was jurisdictional in nature, the NAFTA Tribunal applied the correct standard of proof and did not exceed its jurisdiction, and that the award was not contrary to public policy, in that it was not morally repugnant and was not arrived at in a manner contrary to Canadian notions of morality and justice. (para. 11)

Court of Appeal decision

Two issues were raised on appeal: 1) Whether the NAFTA Tribunal “exceeded its jurisdiction” by failing to determine causation on the balance of probabilities standard required by international law; and 2) whether the NAFTA Tribunal’s decision conflicts with the principles of adjudicative fairness and fundamental justice and therefore conflicts with Canadian public policy. (para. 15)

Referring to Alectra Utilities Corporation v. Solar Power Network Inc., 2019 ONCA 254 and by analogy to AA s. 46(1), Huscroft J.A., writing the unanimous decision of the ONCA, noted that review under s. 34(2)(a)(iii) of the federal Commercial Arbitration Code is not an appeal and is not an occasion for courts to review final and binding arbitration awards for either correctness or reasonableness. The Court may intervene only where there is a “true jurisdictional question”. The word “true” is intended to emphasize the limited scope of judicial oversight. Courts must not permit final and binding arbitration awards to be undermined by spurious jurisdictional arguments. (paras. 18-19)

The scope of Court review does not include the Court’s scrutiny of the Tribunal’s award for an error of law that is otherwise immune from appeal or review and, if it finds one, to elevate it into a jurisdictional error – an error that permits the court to set the award aside – if the court considers the error sufficiently serious on some unknown standard. (para. 23-24)

The Court of Appeal noted that the issue before the NAFTA Tribunal was determining the quantum of damages caused by Canada’s NAFTA breaches. The Tribunal referred to international law, which made it clear that it understood the issue before it. The “bone of contention”, as the Tribunal put it, was whether but for the NAFTA breaches, the appellants would have obtained the regulatory approval they required to run the quarry. (paras. 25-27)

The Court of Appeal concluded that the NAFTA Tribunal’s award makes plain that the Tribunal did what it was asked to do. It decided the damages matter submitted to it, and in doing so applied the international law standard. The appellants did not accept the Tribunal’s analysis, but they offered the application judge and the Court of Appeal no basis that would permit the Court to intervene. (paras. 28-30)

No violation of public policy

Referring to Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, the Court of Appeal noted that in the context of an arbitration under the Commercial Arbitration Code, final and binding arbitration decisions are not to be reviewed for reasonableness to determine whether they can be said to be so unreasonable as to be unenforceable on public policy grounds. Review under s. 34(2)(b) of the Code is for the limited purpose of determining whether an award conflicts with public policy. (paras. 31-33)

Referring to Beals v. Saldhana, 2003 SCC 72 , the Court of Appeal noted that the public policy concept is well understood in the context of the enforcement of foreign judgments, where it also has a limited scope. In Beals, at para. 75, the SCC stated:

The Court of Appeal held that an award would conflict with Canadian public policy where it offends Canadians’ sense of morality. For example, an award may be profoundly at odds with Canadian conceptions of justice, such that its enforcement cannot be countenanced. Corruption is an example in this regard. Canadian courts cannot be associated with the enforcement of corrupt awards. The Court held that nothing in the present case came close to offending Canadians’ sense of morality. (paras. 35-38)

The Court of Appeal dismissed the appeal.