Why this decision matters

In Vento Motorcycles, Inc. v. United Mexican States, the Ontario Superior Court of Justice (ONSC) upheld an arbitral award rejecting a claim for breach of obligations under the North American Free Trade Agreement ("NAFTA").

Notably, the court’s decision illustrates that even where a reasonable apprehension of bias exists for one arbitrator on a three person panel, that alone will not show that the decision resulted in real unfairness or practical injustice.

Factual Background

Vento, a US-based motorcycle manufacturer, entered into a joint venture with a Mexican company to sell and market motorcycles in Mexico. Vento brought an arbitral claim under Chapter 11 of NAFTA because Mexico refused to grant Vento's motorcycles assembled in the US and exported to Mexico a preferential ad valorem import tariff. This refusal resulted in the impairment and, ultimately, the destruction of Vento's business in Mexico.

A key issue was the claim that Mexican officials issued "marching orders" so that Vento was treated differently as a foreign business to drive out the company from the motorcycle market in Mexico.[1]

The tribunal's decision and the application to set it aside

Each of Vento and Mexico appointed an arbitrator. A third arbitrator, who was the presiding arbitrator – was appointed by agreement of the parties. Following the hearing of the arbitration, the tribunal unanimously found that Mexico did not breach its obligations under NAFTA, and dismissed Vento's claims on the merits.

Vento sought to set the Arbitral Award aside on two grounds, the first was that they could not present their case because the tribunal refused to allow one of its witnesses to testify in response to a recording that impeached their credibility.

The second was that there was a reasonable apprehension that one of the arbitrators was biased. Subsequent to the decision being released, Vento discovered that Mexican officials had undisclosed communications with Mr. Perezcano (the arbitrator appointed by Mexico) during the arbitration. These communications related to Mexico’s invitation for Mr. Perezcano to participate in a selection process with the Mexican Federal Government to be on the List of Chairpersons for arbitration panels in dispute settlement proceedings.

Inability To Present A Case

On the first issue of not being able to present their case, Vento argued that the tribunal permitted Mexico to use an unfinished phone recording—made without the witness's knowledge or agreement and entered into evidence without context—to cast doubt on the credibility of Vento's most significant and essential written testimony. Vento claimed that by doing so and by denying the witness the opportunity to offer rebuttal evidence, the tribunal hindered Vento from presenting its case by failing to give Vento a chance to respond to Mexico's argument about their key witness' credibility, failing to provide the witness with an opportunity to respond to attacks on their credibility and failing to admit important evidence that went to a key issue.

The court found that Vento had failed to prove that the tribunal's conduct was so serious that it could not be condoned under Ontario law. The tribunal's award illustrated that Vento had been able to adduce substantial evidence and make arguments supporting its position on all the issues on which the tribunal made rulings. Further, the court found that the refusal to strike or allow additional evidence by the tribunal did not offend principles of morality and justice since, at the time that Mr. Ortúzar's statement was submitted, Vento knew that Mexico disputed allegations about “marching orders”, and that Vento had opportunities to make a submission to the tribunal on the issue of alleged marching orders after the evidentiary record was complete. The court also noted that Vento had the opportunity to cross-examine Mexico’s witness on the recording but chose not to for strategic reasons.

Reasonable apprehension of bias

Vento argued that the arbitral award should be set aside due to a reasonable apprehension that Mr. Perezcano was biased. During the course of the arbitration, Mexico offered and awarded Mr. Perezcano prestigious and potentially lucrative opportunities to be listed on panels. Neither Mexico nor Mr. Perezcano disclosed these offers to Vento, and Vento only discovered these communications after the award.

Vento submitted that the failure to disclose these communications gave rise to justiciable doubts about the arbitrator's impartiality, particularly because these communications concerned prestigious and potentially lucrative appointments. Given these circumstances, a reasonable person informed of this state of affairs, viewing the matter realistically and practically, would have concluded that Mr. Perezcano would not decide the case fairly, whether consciously or unconsciously.

The court agreed with Vento's position on reasonable apprehension of bias and found that Mr. Perezcano's conduct gave rise to a reasonable apprehension of bias. The court noted that Mexico expressed their intention to put forward Mr. Perezcano's name for valuable opportunities but it was clear from the communications that Mexico had the discretion to change its decision. Therefore, an informed person would view Mr. Perezcano as having an incentive to please Mexico after being informed of his consideration for the appointments.

Importantly, the court found that the reasonable apprehension of bias for one panel member did not necessarily taint the award or the entire panel. In considering whether to exercise its discretion, the court can examine factors such as the seriousness of the breach, the potential impact of the breach on the result, and the potential prejudice flowing from the need to redo the arbitration were the award to be set aside.

The court relied on the fact that the three arbitrators had been selected separately and that there was no evidence they were regularly sitting together. Since the arbitrators were not sitting together, the court noted that the tasks during the arbitration could not have been rotated among the arbitrators. Additionally, the court found that it was unlikely that the tribunal had adopted a process where one arbitrator was assigned the task of going through the case to brief the other arbitrators. As a result, Mr. Perezcano’s apprehension of bias likely did not affect the other two arbitrators who independently reviewed the evidence and briefed the case for themselves. The Court noted that,

“[…] no reasonable person informed of the circumstances of this arbitration – including the rules under which it was proceeding and the manner in which the arbitrators were appointed – would, viewing the matter realistically, come to the conclusion that Professor Gantz and Dr. Sureda were biased or “tainted” by Mr. Perezcano. Given this, I conclude that the reasonable apprehension of bias in relation to Mr. Perezcano did not undermine the reliability of the result and did not produce real unfairness or real practical injustice.”[2]

Conclusion

The court’s approach on the issue of a reasonable apprehension of bias of a single member in an arbitral panel demonstrates that a finding of bias in one arbitrator may not be enough to set aside an award. The applicant must establish that the biased arbitrator tainted the panel in such a way that the award would have differed due to that arbitrator’s conduct. Obviously, this analysis would not be necessary where the panel consisted of a single arbitrator. Once again, this case is a stark reminder that issues around bias should be challenged early in the process whenever possible. The prejudice of having to redo the entire arbitration is not insignificant and will factor heavily in cases of this nature.