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<xTITLE>Canada – States’ Submissions Qualify as “Subsequent Practice” in Investor-State Arbitration</xTITLE>

Canada – States’ Submissions Qualify as “Subsequent Practice” in Investor-State Arbitration

by Daniel Urbas
August 2020 Daniel Urbas

In The United Mexican States v. Burr, 2020 ONSC 2376, Madam Justice Bernadette Dietrich accepted that legal submissions by parties to the North America Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can TS 1994 No 2 can qualify as “subsequent practice” under article 31(3) of the Vienna Convention on the Law of Treaties Can TS 1980 No 37 but that the facts fell short of meeting the standard in Mexico v. Cargill, Incorporated, 2011 ONCA 622 of a “clear, well-understood, agreed common position”.  Dietrich J. also distinguished between an objection to jurisdiction which relates to the authority of a tribunal to hear a dispute and an objection to admissibility which refers to the characteristics of the claim, determining that she had jurisdiction to review the former but not the latter.  She dismissed a challenge to an award on jurisdiction in which the tribunal found that investors had properly given notice of their intention to arbitrate by filing powers of attorneys authorizing legal counsel to initiate arbitration and to act on their behalf.  Dietrich J. held that non-compliance with the formal requirements of Articles 1119 did not vitiate the state’s consent to arbitrate under Article 1122(1).

The United Mexican States (“Mexico” and “Applicant”) applied for a declaration that an arbitral tribunal (“Tribunal”) had no or limited jurisdiction over all claims made by thirty-nine (39) United States of America (“U.S.A.”) nationals (“Respondents”) on Respondents’ own behalf and all claims, save one, Respondents made on behalf of seven (7) Mexican companies against Mexico under Chapter 11 of the North America Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can TS 1994 No 2 (“NAFTA”).

Entered into between Canada, U.S.A. and Mexico as Contracting States, NAFTA included Chapter 11 which sets out an investor-state mechanism providing for consensual arbitration proceedings to resolve legal disputes between a Contracting State and a national (“investor”) of another Contracting State arising directly out of an investment by that national in the Contracting State.

Mexico’s application required Dietrich J. to consider the provisions of Articles 1119 “Notice of Intent to Submit a Claim to Arbitration” and 1121 “Conditions Precedent to Submission of a Claim to Arbitration”.  Each of the Articles sets out the manner in which an investor brings its claim.

Article 1119 – an investor intending to submit a claim to arbitration “shall” deliver written notice of its intention at least ninety (90) days before its claim is submitted and specify: the name and address of the disputing investor and, where a claim is made under Article 1117, the name and address of the enterprise; the provisions of NAFTA alleged to have been breached and any other relevant provisions; the issues and the factual basis for the claim; and(d) the relief sought and the approximate amount of damages claimed.

Article 1121 – an investor may submit a claim “only if” it and the enterprise on which it acts consents to arbitration in accordance with the procedures set out in NAFTA and waives their rights to initiate or continue court or administrative tribunal procedures regarding the claim, except injunctive or declaratory relief.

Arbitration – Dietrich J. at paras 14-25 of her reasons sets out the key milestones in the NAFTA Chapter 11 arbitration between Respondents and Mexico.  Those milestones start with a May 23, 2014 notice by some Respondents (“Original Claimants”) of a notice of intent to submit a claim to arbitration under Chapter 11 and include the constitution of the Tribunal on February 14, 2017.

The Original Claimants, disclosed in May 2014, comprised eight (8) investors: three (3) U.S.A. nationals and five (5) U.S.A. enterprises.  The Original Claimants alleged that they, through their interest in five (5) Mexican enterprises (“Juegos Companies”) were investors in casinos in Mexico and that the Juegos Companies were operated through another Mexican enterprise the Original Claimants alleged they controlled.

Two (2) years after filing their May 2014 notice of intention, and following failed attempts at resolution, the Original Claimants filed a June 15, 2016 request for arbitration (“Request”) with the International Centre for the Settlement of Investment Disputes (“ICSID”).  In doing so, Original Claimants added thirty-one (31) new, previously unidentified U.S.A. investors (“Additional Claimants”), sixteen (16) of which were minority shareholders in certain of the Mexican enterprises controlled by the Original Claimants.  Combined, the Original Claimants and Additional Claimants (“Respondents”) totalled thirty-nine (39).  Respondents also delivered powers of attorney authorizing their legal counsel to initiate arbitration and to act on their behalf.

Applicant objected to their claims being registered with ICSID arguing that (i) Additional Claimants had failed to provide a notice of intent at least ninety (90) days prior to the submission of the Request as required by Article 1119; and, (ii) Respondents had failed to consent to arbitration and to provide waivers in accordance with Article 1121.

Despite an initial refusal to register the claim due to the lack of requisite Article 1121 consents and waivers, ICSID received the consents by way of powers of attorney and, on August 11, 2016 registered the claim but without prejudice to the Tribunal regarding jurisdiction.

Following its appointment in February 2017, on April 4, 2017 the Tribunal bifurcated the proceedings into an initial jurisdiction phase and, if necessary, a merits and damages phase. It also determined that the seat of the arbitration would be Toronto, Ontario.  As permitted by Article 1128, Canada and the U.S.A. made submissions regarding interpretation of the NAFTA.

For the jurisdiction phase, Applicant reiterated its two (2) objections regarding non-compliance with Articles 1119 and 1121 and added a third regarding the Original Claimants’ standing to bring claims on behalf of Mexican enterprises which they did not own or control.

After a five (5) day hearing in May 2018, followed by August 2018 post-hearing submissions and responses to Tribunal questions in November 2018, the Tribunal released a July 19, 2019 Partial Award signed by a majority of the Tribunal (“Majority”) dismissing all three (3) of Applicant’s jurisdictional objections. The Majority held that the Tribunal had jurisdiction over all the claims made by Respondents and over those submitted on behalf of all but one of the Mexican enterprises.  The dissenting arbitrator(“Dissenting Arbitrator”), appointed by Applicant, issued a Partial Dissenting Opinion, in which he held that the Tribunal lacked jurisdiction over all the claims made by the Additional Claimants and on behalf of certain Mexican enterprises for failure to comply with Article 1119.

Application – With the seat of the Tribunal being Toronto, Applicant applied for an order under section 11(1) of Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5 which provides that if, pursuant to article 16(2) of the Model Law, an arbitral tribunal rules on a plea that it does not have jurisdiction, any party may apply to Ontario’s Superior Court to decide the matter.

In support of its application, Applicant reiterated its objections regarding non-compliance with mandatory requirements set out in Articles 1119 and 1121.  It argued that only the Original Claimants had given compliant notice of their intention to submit a claim at least ninety (90) days before filing a request and the Additional Claimants’ failure to deliver their notice rendered their submission to arbitration void ab initio.  Applicant argued that, by relying on a general power of attorney, all Respondents had failed to deliver a compliant written consent to arbitrate.  Respondents’ non-compliance meant that Applicant’s consent to arbitrate had never been engaged and the Tribunal had no jurisdiction. 

Applicant also argued that the Tribunal made a jurisdictional error by failing to adequately consider the submissions of the three (3) Contracting States to NAFTA – Canada, U.S.A. and Mexico – regarding their “subsequent agreement” or “subsequent practice” regarding strict adherence to the procedural requirements of Article 1119 “conditions” any consent given by Canada, U.S.A. and Mexico under Article 1121.  Canada and the U.S.A. intervened in the application.  Their respective submissions, supporting the Applicant’s arguments on procedural requirements, at paras 35 and 34 respectively.

Dietrich J. applied the standard of correctness on an application to challenge jurisdiction under the Model Law, referring to Mexico v. Cargill, Incorporated, 2011 ONCA 622 para. 42 (leave to appeal ref’d United Mexican States v. Cargill, Incorporated, 2012 CanLII 25159 (SCC)).  The court in The Russia Federation v. Luxtona Limited, 2019 ONSC 7558 referred to the “four clarifying principles” set out in Mexico v. Cargill, Incorporated:

[32] The Court of Appeal found that, in a challenge to jurisdiction under the Model Law, the standard of review is correctness: the tribunal had to be correct in its determination that it had the ability to make the decision it made.  The court’s reasons establish four clarifying principles:

(1) in hearing an application to set aside an arbitral decision for lack of jurisdiction the court is performing a review of the decision;

(2) the onus is on the party challenging the award;

(3) the court must be satisfied that the challenge raises a “true question of jurisdiction”; but once that criterion is satisfied,

(4) the tribunal has to be correct in its assumption of jurisdiction and it is up to the reviewing court to determine, without deference, whether it was”.

Dietrich J. distinguished between an objection to jurisdiction and an objection to admissibility.  The former relates to the authority of a tribunal to hear a dispute, the latter refers to the characteristics of the claim. See Hochtief AG v. The Argentine Republic, ICSID Case No. ARB/07/31, Decision on Jurisdiction, 24 October 2011 para. 90:

[90] The Tribunal observes that this approach to distinguishing between what is a new, independent, right to arbitrate and what is simply a manner in which an existing right to arbitrate must be exercised reflects the distinction between questions of jurisdiction and questions of admissibility. Jurisdiction is an attribute of a tribunal and not of a claim, whereas admissibility is an attribute of a claim but not of a tribunal. A distinction may also be drawn between questions of admissibility and questions of receivability. A tribunal might decide that a claim of which it is seised (sic) and which is within its jurisdiction is inadmissible (for example, on the ground of lis alibi pendens or forum non conveniens); or it might refuse even to receive and become seised (sic) of a claim that is within its jurisdiction because of some fundamental defect in the manner in which the claim is put forward”.

Dietrich J. summarized the Majority’s reasons at paras 46-50 and the Dissenting Arbitrator’s Partial Dissenting Opinion at paras 51-52.

Dietrich J. identified the key issues and addressed each at length, leading to her disposition, at para. 220 of her reasons dismissing Applicant’s application.  Her analysis of those issues lead her to conclude that: (i) Applicant had not shown that the Tribunal was incorrect in its interpretation of Articles 1119 and 1121 or in the Tribunal’s conclusion that it had jurisdiction over all of Respondents, including the Additional Claimants, and the claims they advanced (with the exception of the claim by one enterprise); and, (ii) the Tribunal made no jurisdictional error in its treatment of the submissions of the Canada and the U.S.A. pursuant to Article 1128.

Dietrich J. identified the three (3) issues raised by Applicant’s application and grouped her analysis of each in lengthy sections addressing each issue in turn: issue 1 – paras 52-118; issue 2 – paras 119-145; and, issue 3 – paras 146-219.

(a) issue 1 – Did the Tribunal correctly conclude it had jurisdiction over the Additional Claimants and the claims they advanced despite their non-compliance with the terms of Article 1119 – paras 53-118 of her reasons

Dietrich J. found no error in the Majority’s consideration of the ordinary meaning of the words used in Articles 1119, 1121 and 1122, its contextual review or its review of the object and purpose of NAFTA respecting Applicant’s consent to arbitration.  The Majority’s review was aimed at giving effect to the words used to achieve the intended objectives.

Dietrich J. flagged the Tribunal’s own starting point on the consensual nature of arbitration and agreed that its jurisdiction “is founded upon the party’s consent”.

[54] The Tribunal focused its analysis by stating a fundamental principle: “Arbitration being a creature of consent, lack of consent equates a lack of jurisdiction.” Because the Tribunal’s jurisdiction is founded on the parties’ consent to arbitrate, if the Applicant imposed conditions on its consent to arbitration, those conditions must be satisfied. If there is no consent, there is no jurisdiction”. 

She also agreed with a key distinction made by the Tribunal.

[59] The Tribunal set out to examine the issue of jurisdiction by considering whether it had the power to adjudicate the dispute (jurisdiction), and if so, whether it should exercise that power over a particular claim (admissibility). The distinction is important in this case as this court may review and set aside findings relating to jurisdiction, but not findings relating to admissibility”.

The parties agreed that the Tribunal had correctly asked itself whether Applicant’s consent under Article 1122(1) was made conditional on satisfying Article 1119(a).  If not, then a defect would not vitiate Applicant’s consent and the Tribunal would have jurisdiction.

The Majority concluded that Article 1119 did not condition Applicant’s consent to arbitrate in Article 1121 and that Additional Claimants’ failure to issue a notice of intent compliant with Article 1119 therefore did not deprive the Tribunal of jurisdiction.

As directed by Article 1131(1), the tribunals are to decide the issues in a dispute in accordance with the NAFTA and applicable rules of international law including the 1969 Vienna Convention on the Law of Treaties Can TS 1980 No 37 (“Vienna Convention”).  Article 31.1 of the Vienna Convention stipulates that a treaty “shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose”.  Dietrich J. observed that this approach has been confirmed in Febles v. Canada (Citizenship and Immigration), 2014 SCC 68, [2014] 3 SCR 431.

Dietrich J. then canvassed the Majority’s determination of “ordinary meaning” at paras 64-72, and accepted the Majority’s determination that the terms in NAFTA, given their ordinary meaning, did not support an interpretation that failure to satisfy Article 1119(a) vitiated Applicant’s consent.  The Majority’s further considerations of “context” and “object and purpose” were also canvassed by Dietrich J. at paras 73-76 and 77-78 respectively of her reasons.

Regarding “object and purpose”, the Majority concluded that NAFTA’s inclusion of a mechanism for settlement of investment disputes would not be furthered by barring access to that mechanism on the basis that name had been omitted from the notice of intent.

[78] The Tribunal reasoned that: a) the procedures set out in Article 1119 were procedures to be followed prior to an arbitration, and not procedures, by contrast to those set out in Articles 1123 to 1136, with which the subsequent arbitration itself, if any, must accord; b) unlike Article 1121, Article 1119 was not expressly identified as a condition precedent to submission of a claim that does not comply with its requirements; and c) the NAFTA’s objectives would not be “furthered” by a strict application of Article 1119”.

Dietrich J. dismissed Applicant’s reliance on other jurisprudence which held that a disputing investor must satisfy all of Articles 1118 and 1119’s preconditions and formalities in order to engage consent under Article 1122. She cited three (3) reasons, the first of which refused to accept the jurisprudence as binding.

First, there is no stare decisis: the tribunal is to find the terms of the treaty as they are and in accordance with the Vienna Convention regardless of whether other tribunals have arrived at a different interpretation of the same mandate”.

For the other two (2) reasons, Dietrich J. either distinguished the decisions’ facts or reasoning or disputed whether the decisions construed Article 1119 as containing a condition precedent as opposed to reviewing other NAFTA procedural provisions.

Applicant argued that the Majority erred by concluding that Article 1119 did not require a sanction of dismissal if all of Article 1119’s requirements were not met.  Dietrich J. acknowledged the challenge but held that the Majority’s decision on admissibility was not reviewable by her.

In a lengthy section, paras 86-118, Dietrich J. then analyzed whether the terms of Article 1119 were mandatory. Among many points considered, Dietrich J. observed that Applicant had not provided any NAFTA decision in which a tribunal dismissed, on jurisdictional grounds, an investor’s claim simply because of technical non-compliance with Article 1119.

[117] In reviewing the decision of the Majority with respect to the engagement of the Applicant’s consent, the role of this court is to review the Majority’s consideration of the text of the treaty and their interpretation of it in accordance with the principles set out in the Vienna Convention. In conducting this review, I note that the Majority made several findings on the Applicant’s engagement to arbitration. These findings were made following a rigorous review of all the relevant Articles. It concluded, based on its comprehensive review, that the requirements of Article 1119 occur prior to an arbitration and therefore cannot fall within the scope of Article 1122, which relates to procedures relating to the arbitration. The Majority noted that the drafters of the NAFTA did not include language stating that submission to arbitration is conditioned on the satisfaction of the requirements of Article 1119, whereas the contextual review of the relevant Articles revealed to the Majority that in Articles 1116, 1117, 1120 and 1121(a), the drafters of the NAFTA did employ language expressly setting out conditions”.

(b) issue 2 – Did the Tribunal correctly conclude it had jurisdiction over all Respondents and the claims they advanced, or had Respondents failed to provide the required consent in accordance with Article 1121, thus depriving the Tribunal of jurisdiction – paras 119-145 of her reasons

Dietrich J. held that Respondents had given the required consent through the powers of attorneys provided.  She noted that, even though the powers of attorney were submitted after the Request, the Tribunal held that they were prospective in nature and ratified all steps previously taken by the legal counsel on their behalf in the arbitration.  Dietrich J. carefully reviewed the determinations made by the Tribunal regarding the timing and content of the powers of attorney and rejected Applicant’s argument that the powers of attorney did not constitute express consent required by NAFTA.

[145] This court is limited to a review only of the Tribunal’s finding that the consent requirement under Article 1121(1) and Article 1121(2) was met. The manner in which the consent was provided is not reviewable by this court”.

(c) issue 3 – Did the Tribunal make a jurisdictional error in its treatment of Canada’s and the U.S.A.’s submissions pursuant to Article 1128 – paras 146-219 of her reasons.

The Majority included no explicit mention of Canada’s and the U.S.A.’s Article 1128 submissions, mentioning only that it had “carefully reviewed the submissions of all parties”.

Dietrich J. agreed with Applicant that persuasive authority existed that legal submissions can constitute subsequent practice and that the Contracting Parties’ submissions are well-understood and present a “united front”.  See Article 31(3) of the Vienna Convention regarding “subsequent agreement” and “subsequent practice”.

She noted that she was not bound by other decisions beyond those issued in Ontario (see para. 154) and that there was a “powerful presumption” that international arbitration tribunals have acted within their authority (see para. 155). Dietrich J. did acknowledge that the decisions of such tribunals should attract a high degree of deference from the courts and that courts should confine their interventions to “true jurisdictional errors”.

Dietrich J. did explore the meaning of “subsequent agreement” and “subsequent practice” and began her analysis by acknowledging being bound by the definition of “subsequent practice” set out in United Mexican States v. Cargill.  She noted that Respondents ‘seemed to accept’ that a jurisdictional error would have been committed had the NAFTA Contracting Parties shown a subsequent practice but sought application of a more stringent test set out in other decisions.

Dietrich J. disagreed with Respondents that legal submissions cannot constitute subsequent practice in the application of a treaty.  Rather, she found persuasive authority to the contrary: Canadian Cattlemen for Fair Trade v. United States of America, Award on Jurisdiction, 28 January 2008Mobil Investments Canada Inc. v. Government of Canada, NAFTA/ICSID Case No. ARB/15/6, Decision on Jurisdiction and Admissibility, 13 July 2018; and, Bilcon of Delaware et al. v. Government of Canada, UNCITRAL PCA Case No. 2009-04, Award on Damages, 10 January 2019.

Despite her acceptance that legal submissions can constitute subsequent practice, Dietrich J. remined that the standard for subsequent practice that is binding on her comes from United Mexican States v. Cargill Inc. and required that the subsequent practice under Article 31(3)(b) of the Vienna Convention be “a clear, well-understood, agreed common position”.

Dietrich J. held that, on the record before her, the NAFTA Contracting Parties “have never argued at any length that the fulfilment of Article 1121 is contingent upon strict adherence to the requirements of Article 1119, except for Canada’s Article 1128 submissions in [Mondev Int’l Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Second Submission of Canada (July 7, 2001)]”.  She also noted that in Mondev International Ltd. v. United States of America the tribunal had not given effect to Canada’s submissions. She also noted that the Contracting Parties have “often been unsuccessful in persuading NAFTA tribunals that strict construction of procedural provisions is necessary to support consent to arbitration given under Articles 1121 and 1122”.

Based on her review of the jurisprudence, the NAFTA Contracting Parties’ submissions on Article 1128 do not meet the standard set in Ontario by United Mexican States v. Cargill Inc. “While Cargill does not emphasize repeat submissions before other tribunals, I nevertheless find that the submissions made by the NAFTA parties are insufficient to constitute a subsequent practice”.

Dietrich J. dismissed the application, concluding her reasons by remarking that she was “grateful to all counsel for their thoughtful submissions in this matter and their able assistance to the court”.

urbitral note – First, NAFTA has been replaced by the Agreement between Canada, the United States of America and the United Mexican States (“CUSMA”), effective July 1, 2020.  For investment, see Chapter 14 of the CUSMA and, in particular, Annex 14-D to Chapter 14.

Second, at para. 21, Dietrich J. wrote that Tribunal determined that Toronto was the seat but also at para. 38 wrote that ICSID chose Toronto as the seat.

 

Biography


Daniel Urbas is an experienced litigator, arbitrator and mediator with over 25 years of dispute resolution experience. He has earned a variety of repeat, annual peer recognitions including “Leading Lawyer” in “Commercial Arbitration” in the 2019 edition of the Lexpert ® / American Lawyer Guide to the Leading 500 Lawyers in Canada, “Most Frequently Recommended” in the 2019 edition of The Canadian Legal Lexpert® Directory for Commercial Arbitration, “Thought Leader” in 2019 edition of Who’s Who Legal – Litigation and AV® Preeminent™ by Martindale-Hubbell®.
 

Daniel focuses exclusively on serving as an arbitrator and mediator.  As arbitrator, Daniel serves as a sole arbitrator, as chair or as party-nominated member of three (3) member arbitration tribunals. His appointments have been made by individual parties, by the parties jointly on consent, by court orders and by various administering institutions including ICC, CCAC and IATA.
 

A Fellow of the Chartered Institute of Arbitrators (“CIArb”) based in London, UK, as well as a founding Director of the CIArb’s Canada Branch, Daniel is listed on various rosters including general commercial rosters organized by the ICDR, CIETAC and BCICAC and on more specialized, industry/activity specific rosters such as the Canada Transport Agency’s roster.

 

Daniel’s dispute resolution experience spans a variety of commercial and civil matters, intellectual property (including anti-piracy and anti-counterfeiting litigation) and information technologies, energy (wind, bio), natural resources (mining, forestry, fishing), shareholder disputes, real estate and lease disputes, product liability, construction, distribution and franchise, Aboriginal law matters including treaty and land claims litigation and dispute resolution of agreements relating to governance and natural resource development on native peoples’ territories.

 

He handled trial and appellate advocacy, as well as urgent and extraordinary applications. He has appeared before the provincial and federal courts, including the Supreme Court of Canada, as well as before arbitration tribunals and various administrative tribunals. Fluently bilingual in both English and French with degrees in both Common Law and Civil Law, Daniel is an active member of the Barreau du Québec, the Law Society of Ontario and the Law Society of British Columbia.  At his former national law firm, up until June 2017, Daniel served as Regional Leader of the International Trade Litigation and Arbitration group and Regional Leader of the Intellectual Property Litigation group. Formerly, Daniel was also Regional Leader of the Commercial Litigation group and National Leader of the Intellectual Property Litigation group.



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