In Consolidated Contractors Group v. Ambatovy,[i] the Court of Appeal for Ontario concluded that the arbitral award in an international construction case should not be set aside due to alleged defects in jurisdiction, procedural fairness, or for violation of public policy. The Court held that courts must defer to arbitral awards unless the applicant can meet the exacting standards to set aside an award contained in the Ontario International Commercial Arbitration Act, 2017.[ii]
Consolidated Contractors thus reinforces the principle of deference to international arbitral awards adopted by courts in Canada.
Background and Procedural History
CCC submits a dispute over construction delay to arbitration
The respondent, Ambatovy Minerals (“AM”), entered into a contract with the appellant, Consolidated Contractors Group (“CCG”), to construct a US$258 million slurry pipeline in a nickel mine in Madagascar. AM tendered the project and CCG was the contractor.
The contract contained a three stage dispute resolution clause. The first stage required disputes to be submitted to AM’s supervising engineer. If that did not resolve the dispute, it would be referred to adjudication by a sole adjudicator. A party who did not accept the adjudication could refer the dispute to arbitration.
CCG claimed that AM breached the contract by causing delay and additional costs. In accordance with the contract, CCG initiated a claim with the respondent’s supervising engineer but was dissatisfied with the engineer’s decision. After CCG proposed to proceed to adjudication, the parties agreed to by-pass that second step and proceed directly to arbitration. The seat of the arbitration was Ontario and Ontario law applied. The ICC Rules governed the procedural aspects of the arbitration.
The arbitral tribunal awards a larger amount to AM
In the arbitration, AM asserted a series of counterclaims against CCG alleging, amongst other things, failure to complete the work on time. CCG agreed this issue could be arbitrated.
In its final award, the Arbitration Tribunal awarded only $7 million to CCG for its $91 million claim, and awarded $25 million to AM for its counterclaims.
Ontario Superior Court refuses to set aside the award
CCG brought an application in the Ontario Superior Court of Justice[iii] to set aside the award on four alleged grounds:
1. The Tribunal had no jurisdiction to deal with some of AM’s counterclaims;
2. The Tribunal failed to exercise its jurisdiction in not compensating CCG for costs due to delays caused by AM;
3. The Tribunal denied CCG procedural fairness; and
4. The award was partially in violation of Ontario public policy.
The Superior Court dismissed these attacks in their entirety and upheld the Tribunal’s award. CCG appealed to the Ontario Court of Appeal, relying on the same grounds.
Ontario Court of Appeal Dismisses Appeal
The Court of Appeal applied section 34 of the 1985 UNCITRAL Model Law on International Commercial Arbitration with 2006 amendments (the “Model Law”). The Model Law is adopted by the Ontario International Commercial Arbitration Act, 2017.
Under Article 34(2)(a)(iii) of the Model Law, the court may set aside an arbitral award, or part thereof, where the tribunal acts outside the scope of its jurisdiction.
CCG raised two jurisdictional arguments. First, the appellant argued that the Tribunal wrongly assumed jurisdiction over certain of AM’s counterclaims when they had not proceeded through the stages required by the dispute resolution clause in the contract. The Tribunal had found that the parties could not have intended for the dispute resolution steps to be conditions precedent to arbitration since the parties’ intention in the contract was to resolve disputes efficiently. Since AM’s counterclaim was intimately connected to CCG’s claim, the Tribunal decided they should be decided at the same time, effectively dispensing with the procedure required in the dispute resolution clause.
The Court of Appeal held that the courts should not intervene on questions of jurisdiction except in rare circumstances:
The standard of review on questions related to a tribunal’s jurisdiction under Article 34(2)(a)(iii) is one of correctness: Cargill, at para. 42. However, while endorsing a correctness standard in Cargill, Feldman J.A. was careful to limit the application of this standard to what she described as a “true question of jurisdiction”, at para. 44:
It is important, however, to remember that the fact that the standard of review on jurisdictional questions is correctness does not give the courts a broad scope for intervention in the decisions of international arbitral tribunals. To the contrary, courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction. […]
This latter approach is magnified in the international arbitration context. Courts are warned to limit themselves in the strictest terms to intervene only rarely in decisions made by consensual, expert, international arbitration tribunals, including on issues of jurisdiction. In my view, the principle underlying the concept of a "powerful presumption" is that courts will intervene rarely because their intervention is limited to true jurisdictional errors…[iv]
The Court of Appeal held here there was no “true question of jurisdiction” since, as the Tribunal found, the parties’ intention in the dispute resolution clause was to resolve disputes efficiently. The Court of Appeal agreed with the application judge’s assessment that it was only a matter of time when the counterclaims would be arbitrated and not a matter of whether they were to be arbitrated at all:
The application judge rejected the appellant’s submission that the Tribunal exceeded its jurisdiction in considering the counterclaims. In so doing, he noted that the appellant had full knowledge of the substance of those claims, had exercised a right to make a full and comprehensive defence to those claims and there was no evidence to suggest that the result would have been different had the claims gone through the pre-arbitration process.
The issue before the Tribunal was not a “true question of jurisdiction” in the sense used by Feldman J.A. in Cargill. The respondent’s counterclaims were clearly the proper subject of arbitration under the contract. The only question, as noted by the application judge, was when they would be arbitrated. It was open to the Tribunal to find that the pre-arbitration dispute resolution process did not apply to claims of one party that were closely connected to the claims already submitted to arbitration by the other party. [v]
The Court of Appeal dismissed CCG’s second argument that the Tribunal’s failure to give specific reasons for awarding CCG “nil” for its delay claim was a jurisdictional error. Neither the Court of Appeal nor the application judge saw this as a “true question of jurisdiction”, especially since it could be reasonably inferred that the Tribunal’s reason for finding against CCG was that it had failed to prove its claim.
Article 34(2)(a)(ii) of the Model Law permits a challenge to an arbitral award based on lack of procedural fairness if a party has not received proper notice of the proceedings “or was otherwise unable to present his case.” CCG made arguments with respect to the latter.
The Court of Appeal applied a similarly high standard under this ground of the Model Law:
There are few cases in Canada addressing the standard of review under Article 34(2)(a)(ii). However, in Corporacion Transnacional de Inversiones S.A. de C.V. v. STET International S.p.A., Lax J. interpreted Article 34(2)(a)(ii) as including procedural as well as substantive fairness. She held, at p. 194, that to justify setting aside an award for reasons of fairness or natural justice, the conduct of the Tribunal “must be sufficiently serious to offend our most basic notions of morality and justice.” Thus, she concluded, at p. 194, that “judicial intervention for alleged violations of the due process requirements of the Model Law will be warranted only when the Tribunal's conduct is so serious that it cannot be condoned under the law of the enforcing State.” [vi]
CCG alleged it was denied procedural fairness on three grounds. First, CCG was not able to respond to AM’s reply submissions, which were in breach of a Procedural Order prohibiting new arguments in reply. Second, CCG claimed that it was not given the opportunity to respond to a “novel theory” the Tribunal developed. And third, the Tribunal’s allocation of costs violated procedural fairness because it was ultimately inconsistent with the parties’ success on the merits. The Court of Appeal rejected these arguments, finding that none of CCG’s complaints prevented it from presenting its case.
Under Article 34(2)(b)(ii) of the Model Law, the court may set aside an arbitral award if it conflicts with domestic public policy.
CCG alleged that a portion of the Tribunal’s award was a penalty and therefore breached Ontario public policy. CCG argued that under the award AM recovered twice for CCG’s delay, which was thus double recovery. The Court of Appeal agreed with the application judge and the Tribunal that the two payments performed different functions and were not capable of constituting double recovery even if they were both triggered by similar events or facts. The Court of Appeal held the “Tribunal’s award does not come close to meeting the test” outlined in Schreter v. Gasmac Inc:
The concept of imposing our public policy on foreign awards is to guard against enforcement of an award which offends our local principles of justice and fairness in a fundamental way, and in a way which the parties could attribute to the fact that the award was made in another jurisdiction where the procedural or substantive rules diverge markedly from our own, or where there was ignorance or corruption on the part of the tribunal which could not be seen to be tolerated or condoned by our courts. [vii]
Consolidated Contractors reinforces the pro-arbitration attitude of Canadian courts, particularly in international arbitration. The courts will only set aside international arbitral awards in exceptional circumstances, and will not interfere in the Tribunal’s award unless there was an error with respect to a “true question of jurisdiction”. Moreover, a party seeking to set aside an award for breach of procedural fairness or Ontario public policy must meet the same high standard. Ontario courts will not permit the case to be re-argued before it.