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The Canadian Bar Association
Bulletin – CBA National International Law Section Newsletter 

Message from the Chair
By Charlotte M. Janssen, Janssen Law Professional Corporation, Toronto
I wanted to take this opportunity to share with our members decisions which have been made regarding the management and publication of our Section's academic journal, the Canadian International Lawyer, from this date forward.

Quebec’s highest court’s last word on restrictive covenants: Less is more!
By Theodore Goloff, Robinson Sheppard Shapiro LLP, Montreal
In law, as in life, (1) timing is everything and (2) more is not always better. These truths have been brought home by the Quebec Court of Appeal’s judgment in Jean v. Omegachem Inc. [2012 QCCA 232], which should serve as a primer to employers on when and how not to insist on overly ambitious restrictive covenants in employment contracts!

2011 sanctions review: Observations and how to stay abreast of fast–changing developments
By Andrew Lanouette, Cassidy Levy Kent (Canada) LLP, Ottawa
In 2011, Canada demonstrated that it will use economic sanctions as one of its main tools of foreign policy. Over the course of the year, Canada implemented sanctions against 6 countries and passed 15 regulations in the process of implementing those sanctions. This article will provide some observations regarding sanctions activities in 2011 and the implications of Canada's 2011 sanctions activities. More importantly it will conclude with some advice on how to ensure that you have the most up–to–date information regarding Canada’s sanctions activities.

Canada withdraws from Kyoto Protocol to avoid non–compliance penalties
By Oliver K. Jull, Borden Ladner Gervais LLP, Calgary
Immediately following the conclusion of the 17th U.N. Climate Change Conference of the Parties in Durban, South Africa, on December 12, 2011, Canada announced its withdrawal from the first implementation period of the U.N. Framework Convention on Climate Change known as the Kyoto Protocol. This article considers the international and domestic legal consequences of the Government of Canada’s decision to withdraw from the Kyoto Protocol, and, in particular, the potential for liability.

The postman always rings twice: New York Appeals Court validates service of process by mail on Canadian defendants
By Antonin I. Pribetic, Steinberg Morton Hope & Israel LLP, Toronto
The recent decision of the New York Appeals Division in New York State Thruway Auth. v. Fenech dated February 16, 2012, represents an American revolution in conflict of laws with fundamental implications to cross-border litigation. If the Fenech decision stands, it will put many process servers out of work and render service through the official diplomatic channels of the Central Authority moot.

The new emergency arbitration rules of the ICC
By Sonia Bjorkquist and Eric Morgan, Osler, Hoskin & Harcourt LLP, Toronto
Parties to international agreements are increasingly turning to arbitration as a preferred way to resolve their disputes. However, many proponents of arbitration have nonetheless lamented one of its practical limitations — namely, that arbitration can be ill–suited to deal with urgent preliminary issues because of the time it takes to constitute an arbitral tribunal.

International investment arbitration gets more scrutiny in Ontario
By Leslie Milton and Alexandra Logvin, Fasken Martineau DuMoulin LLP, Ottawa
In Ontario, the highest level of judicial scrutiny has recently been held to apply to international commercial arbitral awards. Overturning the superior court’s decision that the reasonableness standard applies to review of jurisdictional decisions of an international arbitration panel, a unanimous bench of the Ontario Court of Appeal clarified in October 2011 that the appropriate standard of review is correctness.

Is a reviewing court estopped from “properly interpreting” an international investment treaty?
By John Siwiec, Perley-Robertson, Hill & McDougall LLP, Ottawa
In Mexico v. Cargill, Incorporated, 2011 ONCA 622, the Ontario Court of Appeal determined that the appropriate standard of review for a challenge to an arbitral tribunal’s jurisdiction under the UNCITRAL Model Law on International Commercial Arbitration (Model Law) is that of correctness...

 

Message from the Chair

By Charlotte M. Janssen

I wanted to take this opportunity to share with our members decisions which have been made regarding the management and publication of our Section's academic journal, the Canadian International Lawyer (CIL), from this date forward.

As most of you are aware the CIL has been published once or twice annually in hard copy format since the early 1990s. This publication has been possible through the efforts of our editorial board, comprised of Elo Tulving-Blais, Reuben East, H. Scott Fairley, Sharon Druker, Heather Innes, Scott Lamb and Michael Nesbitt as well as our marketing team led by Bernard Colas.

Initially the CIL was a joint project of the Ontario Bar Association (the OBA) and the Canadian Bar Association’s National Section on International Law, with all aspects of production being handled by the OBA. Hard costs of publication (not staff support) were apportioned between the National Section and the OBA on a pro-rata basis according to the number of lawyers in Ontario and elsewhere.

In 2010, there was an acknowledgement that the CIL is an initiative that is national in focus. Accordingly, there was a transfer of CIL responsibilities and costs from the OBA to the CBA. This resulted in the National Section requiring additional funds to maintain the CIL in hardcopy format. It also resulted in two unforeseen challenges regarding the ongoing publication of the CIL in hardcopy format.

  1. Some publication tasks previously handled internally at the OBA (ie. staff support) are now outsourced with the result that total hard costs for the CIL have increased considerably.
  2. CBA’s general policy is to have all Section publications circulated in electronic format only.

To reduce costs and to fit within the CBA policy, the CBA approached our Section a couple of years ago with a request that we publish the CIL online only. Unfortunately this approach was not seen as desirable or workable for our Section. Specifically, our CIL editorial board maintained that printed hard copy issues of the CIL are a requirement to the board’s ongoing involvement with the CIL, the willingness of authors to write and submit the longer feature articles for publication, and the ability to secure advertising funds to offset publication costs.

As a result, since the fall of 2010, the Section executive and CIL editorial board have been working with the CBA to find a solution that meets the needs of the Section, the CIL editorial board, and the CBA. At the Mid-Winter Meeting in Mexico a plan for the 2012/2013 budget year was finally developed and agreed upon. This plan will be implemented on a pilot or trial basis and reassessed in spring 2013. As long as there are no unforeseen adverse budgetary costs with this plan, we hope that it will be used as a basis for ongoing publication of the CIL on the same or substantially similar terms.

Under the pilot project, 2 to 3 editions of the CIL will be published in electronic format (online) only until the spring/summer 2013. At that time a hard copy version of all of the online editions will be printed and made available free of charge to Section members requesting a hard copy of the CIL and non- Section subscribers (such as libraries).

If you would like to become active with the CIL in any capacity please send an email to either me, Charlotte M. Janssen or to the CIL editor, Elo Tulving-Blais. Volunteers are always welcome.

I especially wish to extend my personal thanks to the CIL editor, Elo Tulving-Blais, whom I believe we all agree has done an excellent job with the CIL, and who volunteers in excess of 400 hours of her personal time for each issue published. I would also like to thank Bernard Colas, whose passion and dedication to the survival of CIL has been unbridled.

Thank you all in advance for your support.

Charlotte M. Janssen practices at Janssen Law Professional Corporation in Toronto.

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Quebec’s highest court’s last word on restrictive covenants: Less is more!

By Theodore Goloff

In law, as in life, (1) timing is everything and (2) more is not always better. These truths have been brought home by the Quebec Court of Appeal’s judgment in Jean vs. Omegachem Inc. [2012 QCCA 232], which should serve as a primer to employers on when and how not to insist on overly ambitious restrictive covenants in employment contracts.

In this case, the Appellant, a chemist, was hired on the basis of an offer of employment letter (“term sheet”), which specified that he would eventually be required to sign an undisclosed non-compete undertaking. The Respondent employer took the position that the Appellant employee had bound himself “in principle” to execute a non-compete. The non-compete issue was left dormant for several years after the date of hire. Indeed, the employment contract was amended at least once, when Appellant was promoted, without the signature of such a clause becoming an issue.

Three years later the matter surfaced for the first time, Appellant becoming the only one of Respondent’s executives who refused to execute the non-compete, which, although restricted to the very specialized industrial areas in which the employer was involved, was worldwide in scope.

In the face of Appellant’s continued refusal to execute the non-compete unless a compensating severance indemnity proportional to the length (12 months) of the non-compete was provided, his employment was severed, ostensibly for “cause”, namely his refusal to put into effect that condition contemplated in the term sheet. The employer alleged that Appellant’s refusal to execute the non-compete made it lose confidence in his loyalty and probity. Appellant challenged the alleged just cause and his dismissal.

The Quebec Court of Appeal overturned previous decisions of the Superior Court (rendered in judicial review) and of the Quebec Labour Relations Commission (on the merits), which had held that an employee’s refusal constituted just cause where the employee had accepted, in the original offer letter, the obligation to sign a restrictive covenant.

The Appeal Court held that the combination of Articles 2089 and 1373 of the Civil Code of Québec (“CCQ”) made the reliance upon the original term sheet as the basis for imposing the non-compete wrong in law.

Looking first at Article 2089 CCQ, the Court noted that a valid non-compete must be stipulated “in writing” and “in express terms”. When read together with Article 1373 CCQ, which requires that the debtor’s obligations must be either determined or at least determinable, unless an employee could validly undertake to observe an obligation “at large” without knowing its contours, Appellant’s acceptance of the original undertaking, in the term sheet, was highly problematic.

In fact, Bouchard J.A. noted that to admit its legality would be “…equivalent to holding that Respondent could, for example, force the Appellant to sign a covenant that is clearly illegal without the latter being able to raise any objection thereto simply because he has subscribed to the principle that he would not compete with his employer. To my mind, it is a position that is unacceptable in law” (this author’s translation).

The first lesson to be learned is that hiring an individual based on a “term sheet” which contains the acceptance of certain “principles”, to be fleshed out in a full blown covenant at some future date, may prove problematic. Certainly, if the “principle” is to be fleshed out, it must be done within a reasonably short period of time after the original hire. Waiting any significant period of time before trying to enforce subscription to the covenant runs the risk of estoppel or time-bar type objections.

Insisting on the principle may also raise issues of “constructive dismissal” through unilateral change of status quo if a significant period of time is allowed to elapse. The employer certainly did itself no favour by waiting over three (3) years to seek implementation. On this score, the Latin adage vigilantibus non dormientibus lex subvenit - “the law does not help those who sleep on their rights” - is certainly one to be remembered and observed.

Are the Court’s comments cause for concern regarding other engagements to execute or adhere to things in the future which are not detailed in the term sheet (e.g., a generally worded undertaking by new hires in a “term sheet”/letter of offer to abide by and respect all rules and regulations that may, from time to time, be adopted)?

One fundamental difference between such an undertaking, and one respecting undefined restrictive covenants, is that the obligation to abide by rules as they are promulgated by management is simply the corollary of the subordination of the employee to the employer. This is the very hallmark and essence of an employment relationship and the recognition that the employee must carry out the work “according to the direction of the employer” (Article 2085 CCQ). Bouchard J.A.’s comments may nonetheless have opened Pandora’s box for a host of other matters, perhaps in an unintended manner.

“Term sheets” as originating employment contracts have the advantage of brevity, and may legitimately, provide for more delicate issues to be “ironed out,” because of time delays to get the employee “on board” after hire. This case, on the other hand, puts into question the point when an undertaking to flesh out a “principle”, duly adopted in the term sheet or letter of engagement, becomes stale dated and, hence, not easily enforced.

Other parts of the Court’s analysis also raise certain thorny issues. Bouchard J.A. noted that the covenant required the prospective signatory not to compete in respect of any activities associated with the development, manufacture and sale of products described as being: 1. Monofluoride derivatives or proline diflourides; 2. Proline derivatives; and/or 3. Pyrollidine derivatives. While the term of the non-compete was clear – twelve (12) months after termination - the footprint was to be worldwide, according to its terms “in view of the extent of the activities of the company”. Bouchard, J.A. noted “…I do not see how one can affirm that a clause is limited with respect to its place if it claims to apply “everywhere in the world” (this author’s translation).

In light of his note that such clauses may, in the past, have been seen by the Superior Court as valid, even though they had no territorial limit1, does this signal an intent on the part of the Court to revisit the issue, and substantively revise the principles that govern at some point in the near future? Bouchard, J.A. underlined his difficulty reconciling the employer’s position with the clear and unequivocal terms of Article 2089 CCQ.

As the question had not been argued by the parties, he stated that he would abstain from commenting on such jurisprudence. He added, however: “…it is for the employer to prove that the stipulation is valid. On the other hand, I cannot accept that the Commission considered Appellant’s refusal to subscribe to a restrictive covenant not to compete whose validity is à priori doubtful as just and sufficient cause for termination” (emphasis added). While not deciding the issue conclusively, it is this last underlined statement by this panel of the Court of Appeal that that has sounded alarm bells which make this management labour attorney take heed!

In certain industries, competition is worldwide and the number of competitors extremely small. How does one provide adequate geographic coverage while not running afoul of this “à priori” doubt? Effectively, restricting the ex-employee from competing unfairly for a limited period in a very circumscribed and specialised area, even worldwide, does not per se impede a professional employee from earning his living in some other area.

The requirements of Article 2089 CCQ are formal and of public order, but apply specifically to “employment contracts”. Can the appropriate covenant be stipulated in some ancillary contract which is not part of the “employment contract” per se and in doing so avoid the restrictions of Article 2089 CCQ? Was it the form, rather than the substance, of the clause that troubled the Court of Appeal? If so – what to do?
All of these are pregnant questions for which there are as yet no definite answers. This latest judgment may require review of all widely contoured restrictive covenants when servicing international clients - in the interim, carefully considered and not overly ambitious drafting should be the rule.

Might the clause have been saved by marginally excluding some geographic areas or by additionally listing the named competitors? The records before the Court of Appeal, the Superior Court and the Quebec Labour Relations Commission do not indicate what proof was offered in support of the legitimacy of a worldwide footprint for the non-compete.

The Civil Code, while recognising the validity of non-compete in employment contracts or in contracts adjunct thereto, provides at Article 2089: “Nevertheless, the stipulation must be limited, with respect to time, place and type of work, to what is necessary to protect the legitimate interest of the employer. It lies with the employer to prove that the stipulation is valid.” Since the geographic and temporal restrictions are linked to what is “necessary to protect the legitimate interests of the employer”, such proof, made and considered, would have gone a fair distance to moderate the judgment. One is left to wonder whether a less ambitious footprint for the restrictive covenant and/or cogent proof showing the necessity of its worldwide sweep might have led to a somewhat different result.

Regrettably, some employers are overly ambitious in both the temporal and geographic footprints of their restrictive covenants, forgetting that at some point in time, they must make proof of their necessity and in that sense pay the piper! At the least, this most recent judgment of the Court of Appeal will require some anxious reconsideration among the management labour bar. Certainly, it proves the dual rules that (a) more is not necessarily better and (b) that procrastination in doing what is necessary is rarely the most efficient business model. À suivre - to be continued!


1Central Dynamics Ltd. v. Tremblay, C.S.M. 500-05-005232-903; Tessier J., p. 18;

Theodore Goloff practices at Robinson Sheppard Shapiro LLP in Montreal.

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2011 sanctions review: Observations and how to stay abreast of fast–changing developments

By Andrew Lanouette

In 2011, Canada demonstrated that it will use economic sanctions as one of its main tools of foreign policy. Over the course of the year, Canada implemented sanctions against 6 countries and passed 15 regulations in the process of implementing those sanctions. This article will provide some observations regarding sanctions activities in 2011 and the implications of Canada's 2011 sanctions activities. More importantly it will conclude with some advice on how to ensure that you have the most up–to–date information regarding Canada’s sanctions activities.

Canada used three of four of its sanctions policy tools to implement Canada sanctions in 2011. Canada passed regulations pursuant to the Special Economic Measures Act, the United Nations Act and the Freezing Assets of Corrupt Foreign Officials Act. The one tool that was not used was the Export and Import Permits Act and its underlying Regulations. In particular Canada:

  • Expanded its sanctions twice for Iran under the Special Economic Measures (Iran) Regulations;
  • Passed sanctions against Libya pursuant to the Regulations Implementing the United Nations Resolution on Libya and Taking Special Economic Measures and modified those regulations twice (including repealing the Special Economic Measures Act sanctions);
  • Passed sanctions against North Korea pursuant to the Special Economic Measures (DPRK) Regulations to implement sanctions against North Korea;
  • Passed sanctions against Syria pursuant to the Special Economic Measures (Syria) Regulations and expanded them three times; and,
  • Passed the first regulations under the Freezing Assets of Corrupt Foreign Officials Act, the Freezing Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations, to implement sanctions against Tunisia and Egypt.

As well, it is important to note that although Canada did not have to pass any legislation, the United Nations Côte d’Ivoire Regulations were expanded through a Security Council Resolution.

A number of observations can be made about Canada’s 2011 sanctions activity. First, 2011 was a far more active year for sanctions than in previous years. For example, in 2010, Canada only passed four legislative instruments to implement sanctions (one against North Korea, one against Eritrea, and two against Iran). In 2009, Canada passed only five legislative instruments (against North Korea, Guinea, Lebanon, Liberia and Somalia).

Another observation is regarding the frequency of changes to Canada’s sanctions against particular countries. For example, the Syria regulations were implemented on May 24 then amended three times, on August 11, October 3 and December 23. Similarly, the Libya regulations were implemented on February 27 and amended 2 more times on August 31 and September 22. Lastly, the Iran sanctions were amended twice in 2011, on October 17 and November 21. Sanctions were therefore modified sometimes less than one month between one another and in most cases around two to three months from one another.

What are the implications of Canada’s 2011 activity and the above observations? First, the increase in sanctions, especially using unilateral sanctions powers through the Special Economic Measures Act and the Freezing Assets of Corrupt Foreign Officials Act and not pursuant to UN action using the United Nations Act suggests that Canada believes economic sanctions to be an effective policy tool to achieve its foreign policy goals. In fact, as of writing this article, Canada already expanded sanctions against Syria on January 25, 2012 and against Iran on January 31, 2012. Second, the frequency of the changes suggests that counsel need to pay close attention to the government’s activities so as to stay on top of legal requirements. When the sanctions regulations are implemented, they are implemented immediately, coming into force upon registration and even before they appear in the Canada Gazette. Lastly, some of the changes to Canada’s sanctions regime appear outside the Canadian legislative framework. The changes to the Côte d’Ivoire were merely incorporations by reference of the Security Council’s resolution adding designated persons or entities. This means that some changes to Canada's sanctions regime may not even occur as a result of Canadian government sanctions legislation.

How can counsel stay on top of the fast-changing Canadian sanctions regime, particularly given that they are typically in force on the same day they are announced? Monitoring the Canada Gazette for enacted regulations is not enough. There can be a delay of two to three weeks between registration and publication of the sanctions laws. There are two ways that counsel can ensure that they have the most up to date information on Canada’s sanctions. The first is to subscribe to the Department of Foreign Affairs and International Trade’s (“DFAIT”) news releases through e-mail. The only issue with using this service is that you will receive all DFAIT media advisories, news releases, statements and speeches rather than just sanctions information.

If you want sanctions updates only, the most reliable way to receive immediate and up to date information is to use a webpage change notification service. A webpage change notification service, such as ChangeDetection.com, is a free web-based service that provides page change monitoring and notifications. You can set particular web pages for monitoring and will be notified via e-mail immediately when a change to that webpage occurs. You can set up notifications for the Department of Foreign Affairs and International Trade’s Sanctions page and for each of the countries featured on that webpage. By doing so, you will automatically receive a notification via e-mail anytime the webpage is updated. This means you will have an up–to–the–minute notification when DFAIT posts new sanctions regulations or indicates any changes to the sanctions because of Security Council activity.

2011 was a very active year for sanctions and 2012 appears to be following a similar pattern. Counsel need to be aware of the changes made to Canada’s sanctions the minute new regulations are published since they are typically proclaimed in force the day they are registered, even before they appear in the Canada Gazette in order to ensure that clients are always in compliance. This article has hopefully provided you with a number of tools to ensure that you can ensure constant compliance with Canada’s export laws.

Andrew Lanouette is an international trade counsel at Cassidy Levy Kent (Canada) LLP in Ottawa.

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Canada withdraws from Kyoto Protocol to avoid non–compliance penalties

By Oliver K. Jull

Immediately following the conclusion of the 17th U.N. Climate Change Conference of the Parties in Durban, South Africa, on December 12, 2011 Canada announced its withdrawal from the first implementation period of the U.N. Framework Convention on Climate Change (UNFCCC), known as the Kyoto Protocol. Environment Minister Peter Kent stated:

. . . Kyoto — for Canada — is in the past. As such, we are invoking our legal right to formally withdraw from Kyoto. This decision formalizes what we have said since 2006 that we will not implement the Kyoto Protocol.

This article considers the international and domestic legal consequences of the Government of Canada’s decision to withdraw from the Kyoto Protocol, and, in particular, the potential for liability.

Continue reading the full article. .pdf

Oliver K. Jull practices at Borden Ladner Gervais LLP in Calgary.

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The postman always rings twice: New York Appeals Court validates service of process by mail on Canadian defendants

By Antonin I. Pribetic

The recent decision of the New York Appeals Division in New York State Thruway Auth. v Fenech (2012 NY Slip Op 01167) dated February 16, 2012  (NY App.Div., 3rd Dept) per Mercure, J. ("Fenech") represents an American revolution in conflict of laws with fundamental implications to cross-border litigation. If the Fenech decision stands, it will put many process servers out of work and render service through the official diplomatic channels of the Central Authority moot. The Fenech decision overturns the New York appeal court's prior precedent and holds that service by mail is valid under Article 10(a) of Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (20 UST 361, TIAS No 6638 [1969]) (the "Hague Service Convention").Description: https://thetrialwarrior.wordpress.com/wp-includes/js/tinymce/plugins/wordpress/img/trans.gif

In Fenech, the plaintiff/appellant, New York State Thruway Authority appealed the order of the Supreme Court (Platkin, J.), entered August 27, 2010 in Albany County, granting a motion by the defendants Nathan C. Fenech ("Fenech"), an Ontario resident, and Silver Creek Transport, Ltd. ("Silver Creek"), an Ontario company, to dismiss the complaint against them.

The defendant, Fenech, was driving a tractor-trailer owned by Silver Creek that allegedly exceeded statutory height limitations, damaging the underside of a bridge in the Town of Batavia, Genesee County. The plaintiff sued Fenech and Silver Creek, as well as defendant Graham Corporation, which owned the cargo of the truck. The Ontario defendants (which the New York appeal court generically refers to as “Canadian”), were served by mail pursuant to Vehicle and Traffic Law § 253 (albeit the New York appeal judge footnotes that the affidavit of service specifies Business Corporation Law § 307).

The Ontario defendants then moved to dismiss the complaint, contending that service by mail upon them was not permitted by the Hague Service Convention. The New York Supreme Court granted the motion on that basis, noting that "it was bound to do so by virtue of this Court's decision in Reynolds v Woosup Koh (109 AD2d 97 [1985]) and cogently suggesting that Reynolds be revisited in light of subsequent developments in the law." In Reynolds, the plaintiff was severely injured in a car accident and sued the manufacturer Japan-based Nissan, which successfully argued that the Hague Service Convention did not permit service by mail.

Continue reading the full article. .pdf

Antonin I. Pribetic is litigation counsel at Steinberg Morton Hope & Israel LLP in Toronto and Co-Vice-Chair of the OBA International Law Section.

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The new emergency arbitration rules of the ICC

By Sonia Bjorkquist and Eric Morgan

Parties to international agreements are increasingly turning to arbitration as a preferred way to resolve their disputes. However, many proponents of arbitration have nonetheless lamented one of its practical limitations — namely, that arbitration can be ill–suited to deal with urgent preliminary issues because of the time it takes to constitute an arbitral tribunal.

The International Chamber of Commerce (“ICC”), which administers arbitrations through its independent International Court of Arbitration, has recently gone some way toward addressing this traditional criticism of arbitration. At the start of this year, the ICC released a new version of its Rules of Arbitration. Among the changes, the Rules now contain an emergency procedure for parties to quickly obtain an interim ruling or conservatory measure from an arbitrator, usually within 15 days.

Continue reading the full article. .pdf

Sonia Bjorkquist and Eric Morgan practice at Osler, Hoskin & Harcourt LLP in Toronto.

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International investment arbitration gets more scrutiny in Ontario

By Leslie Milton and Alexandra Logvin

In Ontario, the highest level of judicial scrutiny has recently been held to apply to international commercial arbitral awards. Overturning the superior court’s decision that the reasonableness standard applies to review of jurisdictional decisions of an international arbitration panel, a unanimous bench of the Ontario Court of Appeal clarified in October 2011 that the appropriate standard of review is correctness.

The case under appellate review was Cargill v. Mexico, 2011 ONCA 622. An American investor in the Mexican sugar industry submitted a claim to a NAFTA investment arbitration panel for damages on the grounds that the Mexican government had breached its NAFTA Chapter 11 obligations by implementing barriers to high-fructose corn syrup (HFCS) imports which ultimately forced the company to shut down its distribution centre in Mexico and some of its production and distribution facilities in the US. The claim was successful. The panel awarded over US$ 77 million to Cargill largely for lost sales to (upstream) and by (downstream) its subsidiary in Mexico.

In the Ontario Superior Court, Mexico challenged the “upstream” portion of damages claiming that these losses were sustained by Cargill as a US producer and exporter of HFCS and not as an investor in its Mexican investment. Mexico argued that the panel overstepped its jurisdiction by awarding damages not contemplated in NAFTA, and thereby reached “beyond the scope of the [parties’] submission to arbitration.”

The Superior Court determined that the panel decision should be reviewed on a standard of reasonableness. The Court concluded that the tribunal had not exceeded its jurisdiction in awarding damages for upstream losses, finding that Mexico was effectively seeking to challenge the merits and factual findings of the panel rather than jurisdiction. The Court also rejected Mexico’s argument that the panel decision was unreasonable. Accordingly, the Superior Court dismissed the application.

Mexico appealed to the Ontario Court of Appeal. While agreeing that reviewing courts should only interfere with arbitral decisions sparingly and in exceptional cases, the Court rejected the reasonableness standard of review for “true questions of jurisdiction.” Instead, the Court adopted a correctness standard of review stating that an international tribunal must be correct in determining that it has jurisdiction to adjudicate a particular dispute. The Court also delineated three questions that should be considered by a reviewing court: 1) What was the issue that the tribunal decided?; 2) Was that issue within the submission to arbitration?; and, 3) Was there anything in the NAFTA that precluded the tribunal from making the award it made?

Applying the correctness standard, the Court of Appeal found that the tribunal correctly identified the jurisdictional limits on its ability to award damages. In making this determination, the Court interpreted the applicable NAFTA provisions and considered the nature of the inquiry conducted by the tribunal in assessing compensable damages. The Court also assessed and dismissed the proposition that the parties had agreed to an interpretation of NAFTA that precluded an award of upstream damages. Having concluded that the tribunal had made no jurisdictional error, the Court stated that there was no basis for reviewing the merits of the panel decision and assessing its reasonableness.

While the decision affirms a higher degree of judicial scrutiny of international arbitration decisions, it also makes it clear that jurisdictional review should not be taken as an invitation to assess the underlying merits of the decision. Moreover, any assessment of the ultimate impact of the decision may be premature given that Mexico has filed leave to appeal the decision to Canada’s highest court. The application for leave is pending. Should the Supreme Court decline to hear the appeal, the decision of the appellate court may receive greater weight across the country. Conversely, if leave is granted, the Supreme Court may provide more guidance on these issues.

Leslie Milton is a partner and Alexandra Logvin is an associate at Fasken Martineau DuMoulin LLP, Ottawa, http://www.fasken.com/ottawa/.

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Is a reviewing court estopped from “properly interpreting” an international investment treaty?

By John Siwiec

Background

In Mexico v. Cargill, Incorporated, 2011 ONCA 622, the Ontario Court of Appeal determined that the appropriate standard of review for a challenge to an arbitral tribunal’s jurisdiction under the UNCITRAL Model Law on International Commercial Arbitration (Model Law) is that of correctness.

Mexico has sought leave to appeal to the Supreme Court of Canada where, if granted, the Court will have to address a novel issue regarding treaty interpretation: whether the Vienna Convention on the Law of Treaties (Vienna Convention) requires a court sitting in review of an international arbitral award to abide by the common agreement or practice of the treaty parties as expressed in their submissions made to the court at the time of review.

Although the Supreme Court has never directly addressed this issue, in Reference re Secession of Quebec, [1998] 2 SCR 217, it recognized that it does not have absolute jurisdiction to consider issues of international law. If leave is granted, the Court should find that considering the contemporaneous submissions of the North American Free Trade Agreement (NAFTA) Parties regarding the proper interpretation of NAFTA Chapter 11 would amount to an excess of jurisdiction.

The Dispute

The dispute arose out of Mexico’s challenge to an international tribunal’s award granting Cargill Incorporated over US$ 77 million in damages for Mexico’s breaches of its obligations under NAFTA Chapter 11.

Central to Mexico’s challenge to the Tribunal’s Award was that the Tribunal exceeded the scope of the submission to arbitration by awarding damages to Cargill for losses suffered by its operations in the United States. According to Mexico, Cargill’s losses suffered in the United States represented losses suffered as a producer and not investor. Under NAFTA Chapter 11, a NAFTA Party investor can only claim for damages in its capacity as an investor in another NAFTA Party.

On appeal, Mexico argued its interpretation of NAFTA is correct given the support by Canada and United States in their submissions to the court. According to Mexico, this common position regarding the substantive limitations to NAFTA represents a subsequent agreement or practice of the treaty parties under Article 31(3)(b) and (c) of the Vienna Convention to which the court must give effect.

A unanimous Court of Appeal found that the correctness standard should apply to jurisdictional issues, in that an international tribunal has to be correct in its determination that it had the ability to make the decision it made. In order for the tribunal to be correct in its determination it has to properly interpret the NAFTA. According to the Vienna Convention, a proper interpretation of the NAFTA must take into account the subsequent agreement and practice of the treaty parties.

In her reasons for judgment, Justice Feldman of the Court of Appeal only examined submissions of the NAFTA Parties to previous NAFTA tribunals and not their contemporaneous submissions to the court. Justice Feldman did not find a “clear, well-understood, agreed common position” [para. 84] of the NAFTA Parties, and dismissed Mexico’s claim.

In its application for leave to appeal to the Supreme Court, Mexico has argued that the Court of Appeal should have given effect to the contemporaneous submissions of the NAFTA Parties in determining the jurisdiction of the Tribunal.

Legal Framework: excess of jurisdiction

The Tribunal’s Award was initially challenged under Article 34(2)(a)(iii) of the Model Law as adopted by Ontario’s International Commercial Arbitration Act, RSO 1990, c I.9. That article states that an arbitral award may be set aside only if, in relevant part, the award contains decisions on matters beyond the scope of the submission to arbitration.

In private commercial arbitration, the submission to arbitration is the arbitration agreement between the parties. While the parties may always modify their arbitration agreement, generally an arbitration agreement is fixed in order to ensure certainty, stability, and predictability amongst the parties.

In investor-state arbitration, however, the arbitration agreement is the investment treaty itself, which represents a standing offer of a state that is triggered once an investor from a treaty partner submits its notice of intent to submit a claim to arbitration. This standing offer is susceptible to change not only by formal amendment by the treaty parties, but also by any subsequent agreement or practice in the application of the treaty or any relevant rules of international law applicable in the relations between the parties (Vienna Convention Art. 31(3)).

Furthermore, the large majority of international investment agreements, including the NAFTA, provide for mechanisms in the event that there is a dispute between the treaty parties in relation to the interpretation of the agreement. The NAFTA, in fact, has two such mechanisms: the Free Trade Commission (FTC), which has been invoked in the past, and State-to-State dispute settlement under Chapter 20 if the FTC cannot come to an agreed position. According to Article 1131(2) an interpretation by the FTC is binding on a Chapter 11 tribunal.

Whereas the FTC has the ability to issue a binding interpretation, in Reference re Secession of Quebec, the Supreme Court noted that it would exceed its jurisdiction if it (i) acted or substituted itself as an international tribunal, and, (ii) purported to bind any other state or international tribunal that might subsequently consider a similar question [para. 20].

An investor-state tribunal, such as a NAFTA Chapter 11 tribunal, can only determine its jurisdiction based on its interpretation of the language of the treaty, which can be impacted by the treaty parties’ subsequent agreement or practice.

While a reviewing court can check whether a tribunal was correct in determining the contours of its jurisdiction, it would be an excess of jurisdiction for a reviewing court to consider the contemporaneous submissions of the treaty parties that were not originally provided to the tribunal. In effect, the Court would be substituting itself for the NAFTA Chapter 11 tribunal, and, although the Court’s decision would not be binding in the formal sense of stare decisis with regard to subsequent tribunals or reviewing courts in the United States and Mexico, it would offer some very strong guidance. Moreover, the Court would be approaching the role of the FTC or a NAFTA Chapter 20 tribunal.

The possibility that a reviewing court can exceed its jurisdiction may be a necessary corollary of reviewing investor-state arbitral awards under the Model Law. The Model Law was intended to cover commercial disputes. As noted above, there is less room for “evolving interpretations” of arbitration agreements between commercial parties. The Model Law does not account for the rules of interpretation under public international law. In order to ensure that a treaty is interpreted properly regardless of the timing of when the treaty is interpreted, it may be necessary to implement a separate regime for the review of investor-state arbitral awards.

John Siwiec is an associate at Perley-Robertson, Hill & McDougall LLP in Ottawa.

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APRIL 2012

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Eric Morgan
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Published by the Canadian Bar Association's National Section on International Law.

The views expressed in the articles contained herein are solely the views of the authors, and do not necessarily represent the views of the Canadian Bar Association.

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