A Reasonable Apprehension: Ontario Court of Appeal Sets Aside Arbitral Award Due to Bias

In Vento Motorcycles, Inc. v. Mexico, the Court of Appeal for Ontario set aside the award of an arbitral panel due to a reasonable apprehension of bias on the part of one panel member. In coming to its decision, the Court of Appeal overturned the decision of the lower court, which declined to set aside the award despite a finding of reasonable apprehension of bias. A Blakes Bulletin explaining the lower court decision in more detail can be found here.

Background

The appeal arose from an arbitration proceeding commenced by the appellant, Vento Motorcycles, Inc. (Vento), pursuant to Chapter 11 of the North American Free Trade Agreement (NAFTA). Vento, a United States-based manufacturer of motorcycles, alleged that Mexico attempted to drive it out of the Mexican market by denying preferential tariffs on motorcycles Vento assembled in the U.S. Vento alleged that this destroyed its business for the sale and marketing of motorcycles in Mexico.

Each of Vento and Mexico appointed a member to the arbitral tribunal, with the third member appointed by the International Centre for Settlement of Investment Disputes. The tribunal ultimately issued an award dismissing the claim, unanimously holding that Mexico did not breach its NAFTA obligations.

After the award was released, Vento learned that the arbitrator appointed by Mexico, Hugo Perezcano, had been communicating with lead counsel for Mexico about a future appointment to Mexico’s rosters of arbitrators eligible to hear trade disputes. Mr. Perezcano’s appointment to these rosters was confirmed following the hearing of the arbitration and prior to the granting of the award. There was no disclosure of any of these communications to the parties.

Application Decision

Vento brought an application to set aside the award in the Ontario Superior Court pursuant to Article 34(2) of the UNCITRAL Model Law on International Arbitration. The Model Law has been adopted in jurisdictions throughout Canada, including in Alberta, British Columbia and Ontario through the International Commercial Arbitration Act in each province.

The application judge found that Mr. Perezcano’s conduct gave rise to a reasonable apprehension of bias as the Mexican government had offered him a valuable professional opportunity. This reasonable apprehension of bias was compounded by the failure of both Mr. Perezcano and Mexico to disclose the offers and related communications during the arbitration. Despite this, the application judge exercised her discretion not to set aside the award, finding that the other two panel members, who also ruled in favour of Mexico, had not been tainted and that the overall reliability of the Tribunal’s award had not been undermined.

Court of Appeal Decision

On appeal, Mexico did not challenge the finding of a reasonable apprehension of bias on the part of Mr. Perezcano. Accordingly, the sole question on appeal was whether the finding of a reasonable apprehension of bias required the application judge to set aside the award.

The role of the courts in overseeing international commercial arbitration is restricted by Article 34(2) of the Model Law to matters not concerned with the substance of the award. All parties and the Court of Appeal accepted that the court could set aside an award on the basis of a reasonable apprehension of bias pursuant to Article 34(2)(a)(iv), which states that an award may be set aside if “the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.” The Court commented that an arbitral procedure tainted by bias fails to treat parties equally, so the arbitration was not in accordance with their agreement.

The Court of Appeal also acknowledged that fair hearing errors in the context of arbitration “do not necessarily raise the same concerns as they do in the exercise of public authority,” such that “courts will interfere only where a fair hearing breach can be shown to have affected the substantive fairness of the hearing.”

The Court of Appeal nonetheless held that the award in this case must be set aside, even though it was the result of a unanimous decision of the arbitral panel. According to the Court, the bias of one member taints the whole panel: where there is a finding of a reasonable apprehension of bias, “the adjudicator is disqualified and the substantive decision is void.” In coming to this conclusion, the Court of Appeal held that there is a clear principle in Canadian law that “the participation of a biased member requires the decision to be set aside regardless of the unanimity of the panel.”

Key Takeaways

1. The Court of Appeal’s decision in Vento provides a clear and detailed summary of the law of procedural fairness that is useful for any disputes lawyer in Canada.
2. The decision clearly confirms the consequences of a finding of reasonable apprehension of bias on the part of one member of an arbitral tribunal. In that case, the adjudicator is disqualified, and the substantive decision is void.
3. The decision highlights the importance of ongoing disclosure of potential conflicts. It is not unusual for arbitrators to be canvassed by parties for possible appointments, even while arbitration proceedings may be ongoing. It is important for both parties and arbitrators to clearly and carefully disclose any such approaches to avoid a potential finding later of a reasonable apprehension of bias. In some circumstances, disclosure alone will not be sufficient to neutralize any potential finding of reasonable apprehension of bias.

For more information, please contact the authors or any other member of our Arbitration group.