Arbitral decision and judicial review
Appeal decision

On October 4 2011 the Ontario Court of Appeal released its decision in Mexico v Cargill, Incorporated,(1) in which it addressed the appropriate standard of review for jurisdictional challenges to North American Free Trade Agreement (NAFTA) Chapter 11 arbitral decisions. The court held that when determining whether a NAFTA arbitration tribunal has exceeded its jurisdiction, the standard to apply is correctness.(2)


The case involved a dispute over the import of high-fructose corn syrup into Mexico from the United States. With the introduction of NAFTA in 1994, Cargill, a US producer of high-fructose corn syrup, implemented plans to sell its product in Mexico through a wholly owned Mexican subsidiary, CdM. Cargill expanded its facilities in the United States, while CdM built a new distribution centre in Tula.

In the years after NAFTA came into effect, Mexico's soft drink industry increasingly replaced sugar in its products with high-fructose corn syrup. To protect the country's sizeable sugar industry, Mexico enacted a number of trade barriers, which adversely affected Cargill's import business. As a result, Cargill shut down several of its US production plants, while CdM closed its Tula distribution centre. Consequently, Cargill and CdM commenced arbitration proceedings against Mexico for alleged breaches of NAFTA Chapter 11.

Arbitral decision and judicial review

The arbitration tribunal found that Mexico had breached a number of the provisions of Chapter 11. It awarded damages to Cargill and CdM for both "downstream losses" (CdM's lost sales in Mexico and the associated costs) and "upstream losses" (Cargill's lost sales of US high-fructose corn syrup to CdM). The total amount of damages was US$77.33 million.

Mexico challenged the tribunal's jurisdiction to award upstream losses on the basis that under Chapter 11 the tribunal could award losses that Cargill suffered only as an investor "by reason of, or arising out of"(3) Mexico's breach. Mexico argued that Cargill's upstream losses were not losses that it had suffered as an investor in CdM; instead, they were losses that it had suffered as a producer and exporter in the United States. The panel, however, reasoned that Cargill's sales of high-fructose corn syrup to CdM were an inextricable part of its investment in exporting high-fructose corn syrup to Mexico, and so the upstream losses were investment losses.

Mexico brought an application for a judicial review of the award before the Ontario Superior Court of Justice, pursuant to the International Commercial Arbitration Act,(4) which incorporates as a schedule the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The application judge held that issues relating to an international arbitration tribunal's jurisdiction should be reviewed on the standard of reasonableness,(5) due to a "powerful presumption" that international arbitration tribunals act within their jurisdiction. The judge then found that the tribunal's conclusion that it could award Cargill's upstream losses as investment losses was reasonable, and dismissed the application.(6) Mexico appealed.

Appeal decision

The main issue before the appeal court was the appropriate standard of review for a jurisdictional challenge to a Chapter 11 arbitral decision. Writing for the court, Justice Feldman held that the standard was not reasonableness, but correctness.

The appeal court first observed that any review of a NAFTA arbitral decision must start with Article 34 of the UNCITRAL Model Law, which sets out an exhaustive list of grounds for setting aside an arbitral award; none of the grounds allows the reviewing court to assess the merits of a tribunal's decision. The ground for judicial review invoked in the case at bar was Article 34(2)(a)(iii), which provides that:

"An arbitral award may be set aside by the court... only if... the award deals with a dispute not contemplated by or not falling within the 'terms of the submission to arbitration', or contains decisions on matters beyond the scope of the 'submission to arbitration'."(7)

Thus, the question before the court was whether the tribunal's award complied with the terms of submission.

The appeal court rejected the view – accepted in the lower court – that an international arbitration tribunal's interpretation of its own jurisdiction should be given deference. There is only a so-called 'powerful presumption' of the validity of the tribunal's decision in that the court's ability to intervene is limited to true jurisdictional errors. However, a tribunal cannot expand its jurisdiction by incorrectly interpreting NAFTA or the terms of submission, even if that interpretation could be viewed as reasonable. There is nothing in Article 34 that modifies the general rule that a tribunal must act within its jurisdiction. Thus, when determining whether a tribunal made an ultra vires award, the court must apply a correctness standard.

The appeal court stressed that a reviewing court should not review the actual merits of an arbitral decision (a problem that would be precipitated if a reasonableness standard were applied). The appeal court offered the following framework questions for reviewing jurisdictional issues under Article 34(2)(a)(iii):

  • What was the issue decided by the tribunal?
  • Was the issue decided by the tribunal within the submission to arbitration made under Chapter 11?
  • Is there anything in NAFTA, properly interpreted, that precluded the tribunal from making the award it made?

Applying the correctness standard to the case at hand, the appeal court held that the tribunal had correctly interpreted its jurisdiction. Under Chapter 11, the tribunal could award Cargill only losses that it suffered as an investor "by reason of, or arising out of" Mexico's breaches. There is no language in Chapter 11 that:

  • limits investment losses to those suffered only in the country of the investment; or
  • excludes investment losses suffered by the investor in its home business operation.

Given that the tribunal was limited only insofar that it had to identify Cargill's losses as those of an investor, whether Cargill's lost sales to CdM constituted investment losses was not a question of jurisdiction but a question for the tribunal's expertise. Further, the parties never agreed to an interpretation of Chapter 11 that prohibited the tribunal from ordering upstream losses if it found that they were investment losses in nature. In framing the issue of damages for upstream losses as a jurisdictional question, Mexico was attempting to have the court review the merits of the case, which the court was not permitted to do under Article 34. Mexico's appeal was thus dismissed.


The appeal court's decision affirms that there is a uniform standard of review (ie, correctness) for all jurisdictional questions arising from an arbitral award, whether domestic or international. The Ontario Superior Court's opinion (ie, that an international arbitration tribunal's determination of its jurisdiction is reviewable on a reasonableness standard) implies that different panels interpreting the same jurisdictional clauses could validly come to different interpretations as to the scope of their powers. This approach is contrary to how jurisdictional questions are reviewed in respect of a domestic tribunal – a domestic tribunal is afforded no deference regarding the interpretation of its jurisdiction. The appeal court's decision corrects this inconsistency.

At the same time, however, the appeal court was careful to note that domestic standards of review are not readily transferable to the international arbitration context because of the constraints of Article 34 of the UNCITRAL Model Law. A correctness standard would typically suggest that the party seeking to reverse an arbitral award has a lower threshold to meet. Indeed, in this case, both Mexico and the intervener Canada were in favour of a correctness standard. Specifically, Mexico argued that Chapter 11 was never meant to award damages for upstream losses, and so the tribunal was incorrect in deciding that it could award them. However, Article 34(2)(a)(iii) constrained the jurisdictional question to being about whether the tribunal decided a dispute "not contemplated by or not falling within the terms of the submission to arbitration".(8) Since the terms of submission required the tribunal to determine the investor's extent of losses, and since neither NAFTA nor the terms of submission defined the scope of investment losses, it was difficult for Mexico to argue that the tribunal had exceeded its jurisdiction by determining that investment losses could include upstream losses.

For further information on this topic please contact Michael D Schafler or Soloman Lam at Fraser Milner Casgrain LLP by telephone (+1 416 863 4511), fax (+1 416 863 4592) or email ([email protected] or [email protected]).


(1) 2011 ONCA 622.

(2) In Canada, under a correctness standard of review, the reviewing court shows no deference to the tribunal's reasoning process; rather, the court will undertake its own analysis of what the tribunal's jurisdiction is and determine whether the tribunal exceeded that jurisdiction. See Dunsmuir v New Brunswick, [2008] 1 SCR 190 at para 50.

(3) North American Free Trade Agreement between the Government of Canada, the Government of Mexico and the Government of the United States, December 17 1992, Can TS 1994 No 2 (NAFTA), Article 1116.

(4) RSO 1990, c I9.

(5) In Canada, reasonableness is a deferential standard of review. The reviewing court must determine whether the tribunal's decision as to its jurisdiction falls within a range of possible and defensible interpretations of its jurisdictional clauses. See Dunsmuir v New Brunswick at para 47.

(6) United Mexican States v Cargill, Incorporated, 2010 ONSC 4656.

(7) Emphasis added.

(8) Emphasis added.