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Court of Appeal Rejects Challenge to International Commercial Arbitral Award

Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939

On December 4, 2017 the Ontario Court of Appeal dismissed an appeal from the judgment of Justice Penny, 2016 ONSC 7171, upholding an international commercial arbitral award. The decision affirms given the relatively narrow grounds for judicial intervention provided for in the UNCITRAL Model Law. This decision is of interest for the Court’s thorough analysis of the grounds for judicial intervention under the Model Law, and in particular for its examination of the issue of compliance with contractual pre-arbitration dispute resolution steps. The latter issue is a common problem as many construction contracts provide for staged or escalated dispute resolution processes as a precursor to arbitration, often expressed in mandatory terms.. The case also affirms the principle expressed by the Court of Appeal in Popack v Lipszyc, 2016 ONCA 135 that “the parties' selection of their forum implies both a preference for the outcome arrived at in that forum and a limited role for judicial oversight of the award made in the arbitral forum”.

The dispute concerned the construction of a 220 km slurry pipeline from an inland mine site to a coastal refinery in Madagascar. The prime contract provided for an escalating dispute resolution procedure culminating in arbitration under the ICC Rules and Ontario law. Strathy C.J.O., writing for a unanimous Court, described the tribunal conducting the arbitration as “blue chip…. with expertise in both commercial arbitration and mega-project construction disputes.” After a three week hearing conducted in Toronto in mid-2014, the tribunal issued its award on September 30, 2015. The contractor was awarded only 18 days extension against 294 days of incurred delay  and, as a result of the application of liquidated damages for delay in favour of the owner, the net award substantially favoured the owner.

The contractor argued the following grounds in seeking to set aside the Award, both in the lower court and in the Court of Appeal:

  1. (a) alleged errors of jurisdiction in proceeding to hear the owner’s environmental counterclaims without compliance with pre-arbitration dispute resolution conditions, and other grounds;
  2. (b) alleged denial of procedural fairness; and,
  3. (c) alleged breach of Ontario public policy.

The Court of Appeal began its analysis by noting that under the Model Law the tribunal is accorded a high degree of deference. Courts in Ontario will not substitute their judgment for the tribunal’s.

With respect to the jurisdictional challenge, the court found that at various points leading up to the arbitration hearing the two sides had taken contrary positions on whether the counterclaims should proceed directly to arbitration without having gone through all of the contractual pre-arbitration dispute resolution steps. The contractor argued, on the other hand, that the tribunal’s jurisdiction was purely consensual and that there absent actual consent, there could be no jurisdiction.

This challenge was dismissed on the basis that the environmental counterclaims had been fully pleaded and defended in the arbitration. Evidence was adduced by both parties and there was full argument on the merits of the counterclaims. The counterclaims arose out of the same project delay asserted by the contractor in support of its own claims. It would not have made any sense, and thus could not have been reasonably contemplated by the parties, to have conducted a second arbitration of the counterclaims which arose out of the same issues of project delay.  Essentially the tribunal and both levels of court all characterized the process of arbitrating the counterclaims as thorough and fair.

The Court of Appeal also applied the “close connection” principle. Under Canadian common law, an arbitral tribunal’s mandate includes everything “closely connected” to the matters subject to arbitration: Desputeaux c. Éditions Chouette (1987) Inc., 2003 SCC 17.

Finally, and in line with the the U.S. Supreme Court decision in BG Group plc v. Republic of Argentina 134 S.Ct. 1198 (2014), the court held that the issue of pre-arbitral steps was one of timing of arbitration, not entitlement to arbitration and, as such, was a procedural matter properly decided by the tribunal and entitled to deference by courts.

Had the contractor’s error of jurisdiction argument been accepted by the Court of Appeal, this decision would have raised the stakes considerably for parties hoping to embark on arbitration where imperfect compliance has been observed of contractually prescribed pre-arbitration steps. Indeed, parties are nevertheless well advised to be very cautious in dispensing with or declining to follow contractually mandated pre-arbitration steps given that an arbitrator’s decision to accept jurisdiction is discretionary and each case will be reviewed on its own facts. Nevertheless, this decision is helpful in dealing with circumstances where the claims being asserted by one party are closely connected to the claims submitted to arbitration by the other party.

The issues of procedural fairness and violation of public policy were analyzed using a similar deferential standard. To interfere with the award on either basis, the reviewing court must find conduct by the tribunal that offends “basic notions of morality and justice”. The application judge rejected the contractor’s arguments under these headings, including the argument that in depriving it of “tranche payments” for failing to meet contractual milestones and in awarding the owner liquidated damages for delay, the tribunal’s award constituted double recovery for the owner. The tribunal found that the tranche payments and liquidated damages were distinct and served different purposes.

Nevertheless, in dismissing the application, Justice Penny commented that had there been double recovery he may have been inclined to find a violation of public policy. The Court of Appeal was more terse, finding that the Tribunal’s award did not “come close to meeting the test” for violation of public policy which requires a finding of conduct by a tribunal “which offends our local principles of justice in a fundamental way”. The Court of Appeal found that the application judge had applied the right test and reached the right result, and therefore declined to comment further on whether a finding of double recovery would have violated public policy.

The application judge had also considered whether he would have upheld the tribunal’s decision anyway, even if public policy was violated by awarding damages on the counterclaim that amounted to double recovery. He answered this question affirmatively. However, his finding on this “ultimate discretion” may be of limited precedential value; the Court of Appeal characterized this part of the judgment as obiter dicta and stated that it need not deal with the argument.  The Court of Appeal confirmed, however, that its decision in Popack v. Lipszyc is the governing authority in Ontario in determining whether a reviewing court should exercise its discretion under section 34(2) of the Model Law by declining to set aside an international arbitral award even where grounds exist to do so.

CCG v. Ambatovy confirms that under the Model Law, an appellate court is to approach the tribunal’s reasons with considerable deference. Nothing in this decision will provide future unsuccessful parties with much hope that an appeal in Ontario from an international arbitral tribunal constituted under the Model Law will be likely to succeed. However, the decision is recent enough that the time to seek leave to appeal to the Supreme Court of Canada is not yet expired. As of press time it is unknown whether an application for leave will be pursued.