No do-over for NAFTA arbitration: Ontario court refuses to set aside award for procedural unfairness or bias
The Ontario Superior Court recently released a lengthy decision in Vento Motorcycles, Inc. v. United Mexican States, 2023 ONSC 5964, where the applicant Vento sought to set aside an arbitral award rendered under the International Centre for Settlement of Investment Disputes Arbitration (Additional Facility) Rules (ICSID Rules).
In the decision, the Court affirmed that in exercising its discretion to set aside an arbitral award under Article 34 of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law, which under Ontario’s International Commercial Arbitration Act, 2017 has force of law in Ontario), the burden on the party asserting procedural unfairness is high; indeed, where an award is issued by a unanimous three-member panel, that award may stand even if a party successfully establishes a reasonable apprehension of bias by an arbitrator.
Background to motion
Motorcycle manufacturer Vento had entered into a joint venture with a Mexican company for the sale and marketing of motorcycles in Mexico. Vento brought an arbitration claim against Mexico in relation to certain import tariffs, pursuant to Chapter 11 of the North American Free Trade Agreement (NAFTA). A three-member panel of arbitrators (the Tribunal) unanimously held [PDF] that Mexico did not breach its obligations under NAFTA and dismissed Vento’s claims (the Award).
Vento brought an application in Ontario pursuant to Article 34 of the Model Law to set aside the Award on reasons of (a) fairness or natural justice in relation to certain evidence; and (b) on reasonable apprehension of bias on the part of one of the arbitrators.
The issue regarding fairness and natural justice related to certain evidence submitted by Mexico. During the proceedings, Mexico sought to adduce a recording of a phone call involving, among others, a Vento witness and a witness for Mexico, which Mexico said was relevant because it undermined the Vento witness’s credibility. Vento was unsuccessful in striking evidence related to that telephone call, because it was legally recorded under Mexican law. The Tribunal also disallowed the alternative request for the Vento witness to file a statement and testify further on Mexico’s allegations related to the recording.
The separate issue regarding bias related to Mexico’s party appointee to the Tribunal, Hugo Perezcano. After the Award was released, Vento discovered through access to information requests and the arbitration proceeding that Mexican officials, under instruction of Mexico’s lead counsel, had undisclosed communications with Perezcano. During the arbitration, the Mexican officials had invited Perezcano to join two rosters of trade agreement arbitration panels.
The Superior Court’s decision
a) Vento failed to prove breach of procedural fairness
The Model Law stipulates that an arbitral award may be set aside if the party making the application (i.e., Vento) was unable to present its case. Judicial intervention for procedural unfairness under the Model Law is warranted only if the arbitration tribunal’s conduct is so serious as to offend the most basic notions of morality and justice that it cannot be condoned under Ontario law — which Vento failed to establish.
First, Vento’s request that their witness be allowed to testify, based on Mexico’s allegations of the recording, was denied by the Tribunal to be consistent with the original procedural order governing the arbitration (which specified that neither party was permitted to submit additional or responsive documents after filing its respective last written submission, except in exceptional circumstances that Vento did not establish).
Next, Vento alleged unfairness under the rule in Browne v. Dunn for the position that the Tribunal failed to provide Vento with an opportunity to respond to Mexico’s arguments regarding the recording. However, the Court held that it was unnecessary to decide if there was a breach of the rule because any such breach was remedied by virtue of the Tribunal having afforded significant weight to the evidence of that Vento witness, and given that the Tribunal did not make adverse credibility findings against him.
Relying on the Supreme Court of Canada’s decision in Université du Québec à Trois-Rivières v. Larocque in support of the argument that the threshold for unfairness was low, Vento argued that it did not need to show that the alleged breach of procedural fairness had a decisive impact on the Award, only that there had been a sufficiently serious violation of due process. The Superior Court’s response to this submission was that it is impossible to determine a breach of procedural fairness without considering the Award itself and thus the impact (if any) of the alleged unfairness on the Award.
b) Reasonable apprehension of bias was present, but did not affect the arbitral award
The Court held that Mexico’s arbitral appointee, Perezcano, had a duty to disclose Mexico’s offers to appoint or nominate him to the arbitration rosters, as the offers were valuable professional opportunities that gave rise to justifiable doubts as to his impartiality or independence under the authoritative IBA Guidelines on Conflicts of Interest in International Arbitration. Perezcano had incentive to please Mexico after being notified of the appointments, and confirmation of his appointment to one of the panelist lists occurred the day the Award was issued. The failure of Mexico and Perezcano to disclose the communications and offers during the arbitration compounded the finding of a reasonable apprehension of bias.
However, exercising its discretion not to set aside the Award under Article 34(2) of the Model Law, the Court found that this reasonable apprehension of bias did not undermine the reliability of the result and did not produce real unfairness or real practical injustice. Although it appeared that Perezcano spent significantly more time on the case than his co-arbitrators on the Tribunal, evidence did not show that the other two arbitrators passively accepted Perezcano’s views in drafting the Award or in deliberating — the presumption of impartiality and independence therefore prevailed. All three arbitrators signed the Award and shared the same view as to the disposition of the arbitration. Further, the potential prejudice flowing from redoing the arbitration would have been significant: wasted time, resources, fees, and witnesses’ recollections for events which took place approximately 20 years ago.
- Procedural orders issued by arbitral tribunals will, absent extraordinary circumstances, be followed.
- In respect of judicial intervention in arbitral awards, the party seeking to set aside an award based on grounds of procedural unfairness faces a high burden, and any breach of procedural fairness may be considered in light of its impact on the arbitral award, as procedural fairness is inextricable from its context.
- The manner in which an arbitral tribunal is chosen, proceeds, and makes its decisions may affect how reasonable apprehension of bias is assessed and found in arbitration proceedings. Importantly, a strong presumption of impartiality and/or significant prejudice in restarting the arbitration may counter findings of a reasonable apprehension of bias.
- One of the distinguishing features of arbitration is that the parties may have the opportunity to influence the make-up and nature of the tribunal (and subsequently, the award) based on the pre-existing agreements, contractual clauses, or other arbitral legislation or rules.
- Importantly, in respect of both alleged procedural unfairness and findings regarding whether an arbitrator is impartial and/or independent, outcome matters and an arbitral award will not automatically be seen as compromised — and where those factors did not affect the outcome, the award will likely be allowed to stand.
 Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939 at para 65; All Communications Network of Canada v. Planet Energy Corp., 2023 ONCA 319 at paras 42, 48.
 A strong presumption of impartiality and independence applies to arbitrators: Wewaykum Indian Band v. Canada, 2003 SCC 45 at para 76.