Court of Appeal Confirms Limited Scope of Judicial Oversight of Arbitral Awards

In Clayton v. Canada (Attorney General), the Ontario Court of Appeal dismissed an attempt to set aside an arbitral award on jurisdictional and public policy grounds, confirming that the grounds on which arbitral awards may be set aside are narrow. 

Background

The appellants sought to develop a quarry in Nova Scotia, which required the approval of the federal and provincial Ministers of the Environment. A joint review panel of the federal and provincial governments conducted an environmental assessment and recommended that the project not be approved because it would have adverse effects on the community’s core values. The federal and provincial ministers subsequently denied approval for the project.

The appellants commenced an arbitration under the North American Free Trade Agreement (NAFTA). At the first stage of the arbitration, the tribunal found that Canada had breached its obligations under NAFTA by conducting a flawed environmental assessment. At the second stage of the arbitration concerning damages, the appellants claimed US$440 million in profits they asserted they would have earned had the project proceeded. However, the tribunal held that the appellants failed to establish a causal link between the NAFTA breach and the injury alleged; they failed to prove that but for the breach, they would have received approval to develop and operate the quarry. Instead, the tribunal awarded the appellants US$7 million in damages for the loss of a fair and non-arbitrary environmental assessment.

Set-Aside Application

The appellants applied to the Ontario Superior Court of Justice to set aside the damages award under section 34 of the Commercial Arbitration Code, Schedule I to the federal Commercial Arbitration Act, R.S.C., 1985, c. 17 (2nd Supp.) (Code). The Code is based on the UNCITRAL Model Law. Among other things, the appellants argued that the tribunal exceeded its jurisdiction by failing to properly apply the applicable standard of proof under international law, and that the award conflicted with Canadian public policy.

The application judge dismissed the application, holding that there was not a true question of jurisdiction, and that there were not sufficient public policy concerns. The appellants appealed the decision to the Ontario Court of Appeal. 

Court of Appeal’s Decision

The Court of Appeal began by confirming that there is no right of appeal from a tribunal’s award. An application to set aside an award under section 34 of the Code is the only recourse, and it provides very limited grounds for courts to interfere. The arguments on appeal related to clause 34(2)(a)(iii), under which a court may set aside an award if the applicant establishes that the tribunal determined matters beyond those that were submitted to it for arbitration, and clause 34(2)(b)(ii), which provides that an award may be set aside if it conflicts with the public policy of Canada.

The Court characterized the appellants’ first argument as being that a misapplication of the law – an error within the tribunal’s jurisdiction – could at some point become so substantial that it constitutes a failure to apply the law at all, and results in the tribunal acting outside of its jurisdiction. The Court rejected this argument, stating that it would lead to courts routinely reviewing the merits of arbitral awards. It concluded that on a fair reading of the arbitral award the tribunal did what it was asked to do: determine the quantum of damages, applying the international law standard.

The Court then turned to the public policy argument, which it characterized as a repackaging of the jurisdictional error argument: the tribunal had failed to act judiciously, ignored the expert evidence and required the appellants to prove that outcomes other than approval of the quarry were not possible. The Court rejected this argument too, stating that the authority to set aside an arbitration award on public policy grounds is “narrow and exceptional,” and not a backdoor to conduct a reasonableness review. The Court held that nothing in this case “comes close to offending Canadians’ sense of morality.” The appellants failed to establish that they were entitled to the damages they sought, and this was the tribunal’s decision to make. 

Takeaway

As the Court of Appeal stated, Canadian public policy respects resolution of disputes by final and binding arbitration, and judicial restraint is consistent with this policy. Courts are mindful of the narrow scope to set aside arbitral awards and wary of litigants attempting to use the set-aside provisions of the Model Law to appeal the merits of an arbitral award. Parties seeking to set aside arbitral awards must carefully assess the grounds available and avoid turning a set-aside application into a substantive review or appeal of an award. 

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