Cargill Incorporated (“Cargill”) is a United States based manufacturer of high fructose corn syrup (“HFCS”).  HFCS is a low-cost substitute for cane sugar that is used as a sweetener in a wide variety of products including soft drinks.  Mexico is per capita, one of the world’s largest consumers of soft drinks.   In anticipation of the North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can. T.S. 1994 No. 2  (“NAFTA”) coming into force, Cargill built a new HFCS production plant in Nebraska, expanded its plants in Iowa and Tennessee and built a new distribution centre along the Mexican border in Texas for the purpose of having its Mexican based subsidiary, Cargill de Mexico S.A. (“CDM”), import HFCS from United States for distribution in Mexico.

One of the first impacts of NAFTA in Mexico was that the Mexican soft drink industry began using imported HFCS in its products instead of domestic sugar.  In an effort to protect its domestic sugar industry, Mexico enacted a number of trade barriers that impacted the import of HFCS and damaged the business of Cargill and CDM.  Cargill and CDM initiated arbitration under NAFTA challenging those measures, all of which were found to be breaches of Chapter 11 of NAFTA.

In the NAFTA arbitration, Cargill and CDM were awarded just over US$77,000,000 in damages for both CDM’s lost sales and associated damages suffered in Mexico  (characterized as “down-stream” losses) and Cargill’s lost sales to CDM for products it manufactured in the United States (characterized as “up-stream” losses).  The up-stream losses accounted for 53% of the total damage award.  

During the arbitration, Mexico challenged the jurisdiction of the panel to award damages for up-stream losses on the basis that damages under Chapter 11 of the NAFTA must relate to investments in the territory of the State Party enacting the measures (in this case, Mexico).  Mexico argued that damages could only be awarded for CDM’s losses and that Cargill’s lost sales to CDM were losses incurred in the United States and did not relate to the “investment” in Mexico.

The panel disagreed with Mexico’s submissions and found the up-stream losses were compensable under Chapter 11 of the NAFTA.  The panel found that the supply of HFCS from Cargill to CDM was an “inextricable part” of the investment in Mexico and, “the losses resulting from the inability of Cargill to supply its investment [CDM] with HFCS are just as much losses to Cargill in respect of its investment in Mexico as losses resulting from the inability of [CDM] to sell HFCS in Mexico.”

As a result of the parties having designated Toronto, Ontario as the place of arbitration, the Ontario Superior Court of Justice had jurisdiction to review the arbitration award under the International Commercial Arbitration Act, R.S.O. 1990, c. I.9 which enacted the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on June 21, 1985 (the “Model Law”).  The Model Law permits an arbitration award to be set aside by a domestic court if the party making the application furnishes proof that:

… the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, provided that, if the decision on matters submitted to the arbitration can be separated from those matters not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside …

Mexico brought an application seeking to set aside the portion of the arbitration award that compensated Cargill for its up-stream losses on the basis that the arbitration panel had exceeded its jurisdiction in awarding those damages.

The application judge concluded that the proper standard of review for questions of jurisdiction decided by international arbitral panels was one of reasonableness.  Based on a number of Canadian and American authorities she found there was a ‘powerful presumption’ that international arbitral tribunals act within their jurisdiction and that, as a matter of international comity, courts should avoid interfering and should use their review authority sparingly.  The application judge then went on to review the arbitration panel’s decision on a reasonableness standard and found that it was reasonable.

Mexico appealed that decision to the Ontario Court of Appeal.  The Ontario Court of Appeal upheld the result but overturned the application judge’s finding on the standard of review.

The Issue:

What standard of review should a domestic court apply when reviewing a decision of jurisdiction made by an international arbitral panel?

The determination:

The Ontario Court of Appeal found that, while international arbitration panels are entitled to deference for decisions made within their jurisdiction, the proper standard of review for true questions of jurisdiction is correctness.  The Court noted that, to find otherwise, would effectively nullify the purpose and intent of the review authority in the Model Law.

The Ontario Court of Appeal reconciled the ‘powerful presumption’ case law by finding that the powerful presumption, is not a presumption that international arbitral panels are always correct when determining their own jurisdiction; it is a presumption that domestic courts will rarely interfere with the decisions of international arbitral panels because their intervention is limited to circumstances where true errors of jurisdiction have occurred.  The Ontario Court of Appeal went on to say that, “[t]o the extent that the phrase ‘powerful presumption’ may suggest that a reviewing court should presume that the tribunal was correct in determining the scope of its jurisdiction, the phrase is misleading.”

In its reasons for decision, The Ontario Court of Appeal repeatedly states  that questions of jurisdiction should be narrowly construed and it cautions domestic courts to guard against advertently or inadvertently straying into the merits of an international arbitral panel’s decision.

The Court went on to explain that reasonableness cannot be the appropriate standard of review because adopting that standard would effectively require domestic courts to delve into the merits to determine if there was an error of jurisdiction:

“… a reasonableness standard inevitably leads to a review of the merits of the decision.  Any time the court reviews on the reasonableness standard, it undertakes an in-depth analysis of the reasoning and decision of the tribunal in order to decide whether the result was a reasonable one.  That may include a review in the form of an exercise determining whether findings of fact made by the tribunal were reasonable.  Once a court enters into a reasonableness review, it is effectively considering the merits of the tribunal’s decision and deciding whether that decision is acceptable because it is reasonable, nor because it was made within the jurisdiction of the tribunal.”

In the end result, Cargill was entitled to keep the $77 million in damages awarded to it by the NAFTA panel, the standard of review to be applied by domestic courts was clarified, and the claimants in a nearly identical proceeding where the NAFTA panel decided it did not have jurisdiction to award damages for up-stream losses (Archer Daniels Midland v. The United Mexican States) were left wishing they had drawn a different   arbitral panel.