Attorney General of Canada v Mobil, 2016 ONSC 790 (Feb. 16, 2016) [click for opinion]

On February 16, 2016, the Ontario Superior Court dismissed an application by the Government of Canada to set aside a $19 million arbitration award, issued in favor of Exxon Mobil Corp. and Murphy Oil Corp (the "Investors") under the North American Free Trade Agreement (the "NAFTA").

The underlying dispute stemmed from Newfoundland and Labrador's 2004 Provincial Guidelines (the "Guidelines") issued under the Canada-Newfoundland Atlantic Accord Implementation Act (the "Accord Act"). The Guidelines required offshore petroleum drilling companies to allocate fixed amounts of money toward research and development, and education and training in the Province. The Investors claimed that the Guidelines had a significant negative financial impact on them.

Article 1106(1)(c) of the NAFTA prohibits a Trading Party from requiring an investor "to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or service from persons in its territory." However, Article 1108(1)(a) of the NAFTA allows a Trading Party to "reserve" existing non-conforming measures from certain of the protections afforded to investors in Chapter 11 of the NAFTA. Canada had made such a reservation in respect of the Accord Act, and argued that the Guidelines were also exempt.

The tribunal ruled 2-1 in favor of the Investors, finding the Guidelines were not exempt because they significantly altered the legal obligations of the Investors, beyond the scope of Canada's reservation. Even though the Guidelines were a subordinate measure, the tribunal found that they were not adopted or maintained under the authority of, or consistent with, that measure.

Canada sought to have the award set aside under Article 34(2)(a)(iii) of the Commercial Arbitration Code (the "Code"), which is part of the Federal Commercial Arbitration Act, and based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (1985). Canada relied on Article 34(2)(a)(iii) to argue that the tribunal exceeded its jurisdiction by using the wrong criteria to conclude that the Guidelines were not a reserved subordinate measure.

The court rejected Canada's argument. Following the Ontario Court of Appeal in United Mexican States v Cargill, Inc., the court confirmed that it is only in "rare circumstances" where there is a true question of jurisdiction under Article 34(2)(a)(iii) of the Code. The court found that the determination of the NAFTA breach and the "scope of the reservation" issues were merits issues and not issues of jurisdiction because (1) they were issues clearly within the terms of the submission to the tribunal; (2) the tribunal was required to interpret provisions of the NAFTA; (3) the application was a challenge to the conclusion reached by the majority on the test to determine whether the Guidelines were consistent with the measure; and (4) a jurisdictional issue must be narrowly cast. The court found that Canada failed to establish that there was anything in the NAFTA that precluded the tribunal from making the award, and dismissed Canada's application to set aside the award.