Public policy has been conventionally used - with some success - as a ground to set aside international commercial arbitration awards. Under the Ontario International Arbitration Act,[1] which incorporates the current United Nations Commission on International Trade Law (UNCITRAL) Model Law on international commercial arbitration,[2] an international award can be set aside if it is in conflict with the public policy of Ontario.

The success will likely decline after the decision of JAG Worldwide v. Lakeside Produce,[3] in which the Ontario court rejected the suitability of the ground in the private commercial context, except where the award was "fundamentally unjust" reaching "beyond" the parties’ commercial interests.

The decision is also an important precedent confirming Ontario courts’ approach to international commercial arbitration.

Practical implications of the judgment

The judgment of the Honourable Gregory J. Verbeem, made on September 14, 2017, in JAG Worldwide v. Lakeside Produce, 2017 ONSC 4933, affirms that Ontario is a jurisdiction in which domestic courts respect parties’ decisions to arbitrate their disputes.

The decision confirms the following principles applicable in Ontario in the international commercial arbitration context:

  1. There are “very limited grounds” for court intervention with international commercial arbitral awards in Ontario. Ontario courts will not interfere, except in clear cases that meet a limited number of enumerated grounds;
  2. Public policy is not a credible ground to set aside an international commercial arbitration award in the private contractual context, unless the circumstances reveal that “the moral fabric of society” is stricken “at large”; and
  3. Grounds for setting aside the award must be expressly pleaded in the party’s originating document initiating recourse to the court. Furthermore, Ontario courts will not extend the time for bringing an application to set aside an international arbitral award.

Background of the case

The underlying dispute was a breach of contract matter, in which the respondent, Lakeside Produce Inc. (“Lakeside”), an Ontario company with operations in the United States, agreed to purchase fresh tomatoes from the claimant, JAG Worldwide Imports Inc. (“JAG”), also an Ontario company, over the period of one year. The parties’ agreement was verbal.

Lakeside refused to pay for the tomatoes supplied by JAG and terminated the agreement. Lakeside stated that it took these actions because the tomatoes that JAG delivered consistently failed to meet the grading requirements agreed to by the parties. JAG initiated arbitration as a result.

As members of the Fruit and Vegetable Dispute Resolution Corporation (“FVDRC”), the parties were required to arbitrate their dispute under the FVDRC’s Operating Rules. The parties agreed that JAG would deliver the tomatoes to Lakeside in the United States; hence, the statute applicable to the parties’ transaction, and the arbitration as a whole, was the Ontario International Commercial Arbitration Act (“ICAA”).

At issue in the arbitration were the terms of the parties’ verbal one year supply contract. The viva voce and written evidence with respect to the terms was conflicting. After weighing the evidence before him, the Arbitrator made a number of findings about the terms of the agreement, including that certain third party specifications with respect to the grading of the tomatoes were important and an implied term of the parties’ agreement. It was known to and contemplated by the parties that if the third party specifications were not met by JAG, Lakeside would lose a contract with its customer for the tomato supply.

The Arbitrator ruled that Lakeside was to pay JAG for the few shipments that met the standards agreed upon by the parties, but denied the balance of JAG’s claim. In reaching this conclusion, the Arbitrator found that JAG’s repeated breaches “substantially impaired the value of the parties’ contract,” which legitimately triggered Lakeside’s right to terminate its agreement with JAG.

Issues before the Court

In competing applications, Lakeside sought an order recognizing and enforcing the award and JAG sought an order setting aside the award.

However, JAG did not expressly claim relief under the ICAA and UNCITRAL Model Law (Model Law) in its initial notice of application. Rather, its application sought leave to appeal the award and an order setting it aside under the provisions of Ontario’s domestic arbitration statute (the Arbitration Act, 1991).[4]

At the hearing, JAG argued that its initial “basket clause” pleading for “such further and other relief” was sufficient to provide notice of its newly asserted claim under the ICAA that the award was in conflict with the public policy of Ontario. JAG also commenced a fresh application seeking relief pursuant to the ICAA, although this fresh application was not filed within the three month period for seeking to set aside an arbitral award pursuant to Article 34 of the Model Law.

JAG argued that the Arbitrator committed an error of law in failing to find that a specific industry standard was applicable to the parties’ contract. JAG further challenged the award on the ground that the failure, and the mistake that the Arbitrator made were contrary to the public policy of Ontario.

Decision

The Court dismissed JAG’s application to set aside the award and allowed Lakeside’s application for recognition of the award pursuant to Article 34 of the Model Law.

a. Remedy

Verbeem J. found that JAG’s initial application was restricted to its remedial request pursuant to the Arbitration Act, 1991 (which JAG conceded at the hearing did not apply to the award at issue). JAG was required to articulate a plea as to an enumerated ground to support an application to set aside the arbitral award pursuant to the provisions of the ICAA and Article 34 of the Model Law. It had not done so within the three month period provided for in the statute or at all.

In the circumstances, the Court found that it would not be “just” to permit JAG to advance an ad hoc claim to set aside the arbitral award pursuant to the provisions of the ICAA and Article 34 of the Model Law. The Court lacked jurisdiction to award relief pursuant to the domestic Arbitration Act, 1991 in relation to an international commercial arbitration that is subject to the ICAA and, as a result, the Court dismissed JAG’s application.

b. Public Policy and Reviewable Error

Notwithstanding this finding which disposed of JAG’s application, the Court went on to consider the substance of JAG’s submission that the award conflicted with the public policy of Ontario.

The Court concluded that a private commercial dispute in which the arbitrator made findings with respect to the parties’ intent and the resulting contractual terms did not rise to a public policy challenge.

JAG’s public policy case could be made out, the Court noted, if the circumstances revealed errors that were incompatible with “our local principles of justice and fairness in a fundamental way,” such as where the arbitrator were found to have acted “with mala fides” or “motivated by corruption or some other improper purpose” as specified in the governing statute. These circumstances were neither argued nor present in this case.

The judge concluded that while the subject matter of the alleged errors may have been important to the parties, it was not at the level that would “strike at the moral fabric of society at large.”

The Court went on to say that, even if the arbitrator made any error in the finding that a specific term was or was not part of the parties’ agreement, this finding was is not “in conflict with the public policy of Ontario, as that concept is recognized in the decided cases,” because it was not and could not be incompatible “with the most basic notions of morality and justice in Ontario.” Absent these circumstances, the error—even if it was made—was not reviewable, as it did not meet the statutory grounds for setting aside an international commercial arbitration award.

In the Court’s view, JAG’s challenge of the award “under the guise of public policy” was, in effect, an attempt to re-argue the matter. This was an improper invitation to have the Court encroach on the Arbitrator’s jurisdiction.

In reaching these conclusions, the judge devoted a considerable portion in his reasons to restating fundamental principles of arbitration, such as the autonomy of arbitration and “very limited grounds” on which international commercial arbitration awards could be set aside. In this context, His Honour made a specific reference to judicial deference with respect to international commercial arbitration awards. He pointed out that “the limited grounds upon which an international commercial arbitral award may be set aside pursuant to the ICAA and Model Law are not primarily focused on the substance, correctness or reasonableness of the award or the arbitrator's reasoning process,” and further, that “[t]he limited role played by domestic courts in the review of international commercial arbitral awards under the Model Law accords with the objectives of facilitating predictability in the resolution of international commercial disputes and fostering consistency between jurisdictions in the resolution of such disputes.” Relying on numerous prior cases, Verbeem J. restated that “the grounds for refusing recognition or enforcement of an arbitral award or challenging an arbitral award under the Model Law are to be construed narrowly.”

Conclusion

The decision in JAG Worldwide v. Lakeside Produce demonstrates that Ontario courts continue to reaffirm the importance of respecting parties’ decisions to arbitrate their disputes, and adhere to the strict limitations of their ability to review international arbitration awards.

A reviewable error is only that specified in the international commercial arbitration statute, narrowly construed.

The judge’s refusal in JAG Worldwide v. Lakeside Produce to expand the parameters of the public policy ground for setting aside an international arbitration decision confirms that courts may intervene only in the cases of clear injustice.

This tendency demonstrates that Ontario continues to be a reliable and predictable forum for the resolution of disputes through international commercial arbitration.