In Grace v The United Mexican States, 2026 ONSC 2104, the Ontario Superior Court of Justice (Commercial List) set aside an arbitral award for claims under the North American Free Trade Agreement (the “NAFTA”). In applying the correctness standard of review, Dietrich J found that the arbitral tribunal erred in determining that it lacked jurisdiction to hear claims submitted by Dual National applicants and hear claims for indirect loss. Justice Dietrich also concluded that there was a reasonable apprehension of bias with respect to one of the tribunal members.
Background
The applicants were a group of investors that owned approximately 43.2% of a Mexican holding company, referred to as “Oro Negro”. Between 2013 and 2015, Oro Negro leased its oil rigs to Mexico’s state-owned oil company, “Pemex”. The applicants alleged that Pemex drove Oro Negro out of business first by unilaterally making adverse amendments to the contracts, and later by terminating the contracts.
In 2018, the applicants commenced an arbitration, alleging that Mexico’s breach of the NAFTA caused them damages. The parties appointed a three-member tribunal, and the hearing was held in Toronto in April 2022. Both Canada and the U.S. also participated as non-disputing parties.
The tribunal issued an award in August 2024. It determined that it had no jurisdiction over two of the applicants who were Dual Nationals, and over the remaining applicants’ claims that were for indirect loss.
The applicants sought to have the award set aside, arguing that the tribunal erred in determining the jurisdiction issues and that there was a reasonable apprehension of bias for one of the tribunal members.
Issues
The issues decided by Dietrich J were:
- Whether the tribunal properly declined jurisdiction in respect of the Dual National applicants;
- Whether the tribunal properly declined jurisdiction on the basis that the remaining applicants’ claims were for indirect loss and therefore not covered by article 1116 of the NAFTA; and
- Whether one of the tribunal members, Mr. Andrés Jana Linetzky, suffered from a reasonable apprehension of bias.
The Standard of Review
As the arbitration was held in Toronto, the International Commercial Arbitration Act, 2017 (the “ICAA”) gave the Court supervisory jurisdiction over the arbitration. The ICAA provides that a court can determine jurisdictional issues decided by a tribunal and set aside awards.
The Court of Appeal in Mexico v Cargill (“Cargill”) held that tribunals’ determinations on issues of jurisdiction attract the standard of correctness when reviewed by the courts. When applying the correctness standard, courts should intervene rarely on jurisdiction questions and should not address the merits of those questions.
Dual Nationality
Two of the applicants were Dual Nationals, and so a live issue in this dispute was whether the rules of the arbitration allowed them to proceed in their claim against one of their states of nationality, namely, Mexico.
Both Canada and the U.S. submitted that a Dual National could submit a claim under NAFTA if the adverse NAFTA Party is not of the national’s “dominant and effective nationality”. The U.S. further specified that permanent residency was not considered nationality. In contrast, Mexico argued that Dual Nationals could not pursue claims against their own state, only accepting the “dominant and effective nationality” test in the alternative.
The tribunal applied this test, finding that the dominant and effective nationality of the two Dual National applicants was Mexico. Therefore, it determined that it did not have jurisdiction over their claims.
Justice Dietrich noted that there was no consensus in previous tribunals on this issue and that the NAFTA Parties themselves did not share a “clear, well-understood, agreed common position” as required by Cargill. Instead, she found that an ordinary interpretation of the NAFTA did not prohibit the Dual Nationals from pursuing their claim against Mexico. Therefore, the tribunal incorrectly assessed its jurisdiction relating to the claims by the Dual National applicants.
Indirect Loss
The NAFTA Parties generally agreed that Article 1116 of the NAFTA did not allow claims for indirect loss. As a result, Oro Negro would need to bring the claim directly, and not the investors on its behalf. However, they differed in their interpretations of what constituted an indirect loss relating to shareholders and Oro Negro.
The applicants disagreed, arguing that the NAFTA supported claims for both direct and indirect investments. They relied on Cargill which required a reading of the definitions to ensure that the investments claimed were the type contemplated by the NAFTA.
Justice Dietrich agreed with the applicants. In applying the rules of interpretation from the Vienna Convention of the Law of Treaties, she found that Article 1116 did not prohibit indirect losses. Accordingly, she found that tribunal also incorrectly decided this jurisdiction issue.
Reasonable Apprehension of Bias
The applicants alleged that after his appointment to the tribunal, Mr. Jana engaged in activities that led to a reasonable apprehension of bias. They further alleged that Mr. Jana did not comply with his duty to disclose those actions, essentially depriving the applicants of the opportunity to inquire further and potentially request his recusal.
After his appointment to the tribunal, Mr. Jana became counsel for Honduras in a separate arbitration (the “Arguello Arbitration”), where he defended the state against a very similar argument that the applicants in this arbitration had put forward. Mr. Jana also opened his own law practice where he only represented states in arbitrations.
Justice Dietrich applied the objective test for reasonable apprehension for bias from Aroma Franchise Company Inc. v. Aroma Espresso Bar Canada Inc (“Aroma”), which, presuming that the arbitrator is impartial, considers the circumstances from the perspective of a “fair-minded and informed observer”. She concluded that Mr. Jana had a duty to disclose his involvement in the Arguello Arbitration. Ultimately, his involvement in the Arguello Arbitration alone was enough to find a reasonable apprehension of bias.
Takeaways
Finding in favor of the applicants on the issues of jurisdiction and reasonable apprehension of bias, Dietrich J. set aside the arbitral award.
The decision underscores the importance of arbitrator independence and ongoing disclosure obligations throughout an arbitration. Parties, counsel, and arbitrators should remain vigilant to potential conflicts and overlapping mandates that arise after an arbitrator’s appointment. In complex construction arbitrations, where arbitrators often maintain active practices as counsel, undisclosed engagements involving similar issues may place an award at risk, even absent evidence of actual bias.