Mexico v. Burr: Judicial Review of Ontario Court on Investor-State Arbitration Tribunal’s Partial Award on Applicant’s Jurisdictional Objections – #30

This dispute arose between the United Mexican States and the United States of America nationals. The Respondents alleged that they suffered USD$100 million in damages when the Applicant closed down the casinos the Respondents had been operating in Mexico (The United Mexican States v. Burr, 2020 ONSC 2376). Attempts at settlement failed, the Respondents submitted their claims to arbitration according to Chapter 11 of the North America Free Trade Agreement between the Government of Canada, the Government of Mexico and the Government of the United States (NAFTA). The International Centre for Settlement of Investment Disputes (ICSID) registered the claim to arbitration. Toronto, Canada was determined as the seat of the arbitration. In May 2018, the Tribunal held a five-day hearing on jurisdiction in Washington, DC as the Applicant insisted that the Tribunal did not have jurisdiction on this matter. The Tribunal dismissed all three of the Applicant’s jurisdictional objections in July 2019 ((B-Mex, LLC and Others v. United Mexican StatesICSID Case No. ARB(AF)/16/3)). Consequently, the Applicant brought this applicant to the Superior Court of Justice for Ontario for a declaration that the Tribunal had no jurisdiction or had limited jurisdiction to decide the claims before it.

Key Facts Related to the Appeal

On May 23, 2014, three USA nationals and five USA companies (the “Original Claimants”) submitted a notice of intention to submit a claim against Mexico to arbitration under Chapter 11 because as the investors, they suffered USD$100 million in damages when Mexico closed down the casinos they had been operating in Mexico.

On June 15, 2016, as all the attempts at settlement failed, the Original Claimants filed a request for arbitration (the “Request”) with ICSID pursuant to Article 1117 of NAFTA on behalf of the Mexican companies. In addition to the eight Original Claimants, 31 new, previously unidentified United States investors (the “Additional Claimants”) also brought claims in the Request. 16 of these Additional Claimants were minority shareholders in the Mexican companies controlled by the Original Claimants. Mr. Emanuel was the legal counsel of all the claimants of the arbitral proceeding (the “Respondents” of the court proceeding) and was authorized to act in that proceeding on their behalf. However, Mexico (the “Applicant”) objected to the registration of the claim by ICSID because (a) the Additional Claimants failed to provide a notice of intent at least 90 days prior to the submission of the Request according to Article 1119; AND (b) all the claimants had failed to consent to arbitration and to provide written waivers according to Art. 1121.

On August 5, 2016, Mr. Emanuel submitted relevant powers of attorney for the purpose of expressing the Mexican companies’ consent to arbitration and to waive their rights to pursue other dispute resolution procedures.

On August 11, 2016, ICSID registered the claim to arbitration after it received the consents and waivers under Art. 1121 from the Respondents by way of powers of attorney.

On September 2, 2016, the Respondents delivered an Amended Notice of Intent to Submit a Claim to Arbitration which included the information of the Additional Claimants. This Amended Notice did not satisfy the requirement of Art. 1119.

In late September 2016, the Respondents appointed as arbitration Professor Gary Born, and the Applicant appointed as arbitrator Professor  Raúl E. Vinuesa. In January 2017, ICSID appointed Dr. Gaëtan Verhoosel as presiding arbitrator. On February 14, 2017, the Tribunal was constituted.

On April 4, 2017, the Tribunal bifurcated the proceedings into three phases: jurisdiction, merits and damages.

In May 2018, the Tribunal held a five-day hearing on jurisdiction in Washington, DC. The Applicant raised three objections on the matter of jurisdiction. The USA and Canada also made submissions, according to Art. 1128 in support of the Applicant’s position on jurisdiction.

On July 19, 2019, the Tribunal issued the Partial Award dismissing all three of the Applicant’s jurisdictional objections.

Applicable Laws and Relevant Jurisprudence

Art. 1117 (1) (2) of NAFTA provides that an investor of a Party (A) of NAFTA may submit to arbitration on behalf of an enterprise of another Party (M) of NAFTA a claim that the Party (M) has breached certain obligations within three years from the date on which the enterprise first acquired, or should have first acquired, knowledge of the alleged breach and its loss.

Art. 1117 (3) of NAFTA provides that the claims under Art. 1116 and 1120 should be heard together with the claims under Art. 1117 by a Tribunal established under Art. 1126 if the dispute is arising out of the same events, unless the Tribunal finds that the interests of a disputing party would be prejudiced thereby.

Art. 1119 of NAFTA stipulates that an investor “shall” deliver to the disputing State written notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted, which notice “shall” specify (a) the name and address of the investor or the enterprise if applicable; (b) the NAFTA provisions having been breached; (c) the issues and the factual basis for the claim; AND (c) the relief sought and the amount of damages claimed.

Art. 1121 (1)(2) of NAFTA set out a jurisdictional requirement, meaning that an investor may submit a claim to arbitration only if it has consented to arbitration and waived its rights to initiate or continue before any administrative tribunal or court under the law of any Party or other dispute settlement procedures.

Art. 1121 (3) of NAFTA sets out an admissibility requirement, stipulating that the consent and the waiver mentioned above shall be (a) in writing; (b) shall be delivered to the disputing State; AND (c) included in the submission of a claim to arbitration.

Art. 1128 NAFTA provides that a Party may make submissions to a Tribunal on a question of interpretation of the provisions in NAFTA on written notice of the disputing parties.

Art. 31.1 Vienna Convention on Law of Treaties provides that “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.

In para. 32 of United Mexican States v. Cargill Inc., 2011 ONCA 622, the Court of Appeal for Ontario held that the approach to determine whether a tribunal exceeded its jurisdiction on the NAFTA Chapter 11 arbitration requires the Court to assess: (a) the agreement of the parties; (b) the words of the relevant Articles of NAFTA; and (c) any interpretation of these words subsequently agreed to by the NAFTA Parties.

In para. 42 of Cargill 2011 ONCA 622, the Court of Appeal concluded that in the application to set aside the Partial Award on jurisdiction matter, the Court must consider the jurisdictional matter anew and that the standard of review on the application to challenge jurisdiction under the Model Law is correctness.

In para. 90 of Hochtief AG v. The Argentine Republic, ICSID Case No. ARB/07/31, Decision on Jurisdiction, the tribunal distinguished between what is a new, independent, right to arbitrate and what is simply a manner in which an existing right to arbitrate must be exercised. The former concerns the question of jurisdiction. The latter concerns the question of admissibility. And objection to jurisdiction refers to the authority of a tribunal to hear a case, whereas an objection to admissibility refers to the characteristic of a claim and whether it is fit to be heard by the tribunal. The tribunal also drew a distinction between questions of admissibility and questions of deceivability. 

Issues

1. For the Additional Claimants and their claims, did the Tribunal correctly conclude that it had jurisdiction over the claims they advanced despite their non-compliance with Art. 1119 NAFTA?

2. For the Respondents (Original Claimants and Additional Claimants) and their claims, did the Tribunal correctly conclude that it had jurisdiction over the claims they advanced despite their non-compliance with Art. 1121 NAFTA?

3. For the submissions of the USA and Canada in support of Applicant’s position, did the Tribunal make a jurisdictional error in its treatment on these submissions according to Art. 31 of the Vienna Convention?

Analysis of the Court

1. The Court found no error in the Tribunal’s decision over the claims advanced by the Additional Claimants.

At the hearing before the Tribunal as well as before the Court, the Applicant insisted that the Notice of intent to submit the claim to arbitration delivered by the Original Claimants was missing the information of the Additional Claimants as required by Art. 1119 and that this omission was not a mere defect, but a failure to file a notice of intent at all as it is a sine qua non condition for the valid submission of any claim to arbitration. Thus, the Tribunal had no jurisdiction. The Respondents argued that the defect in the Notice of intent did not deprive the Tribunal of jurisdiction.

First, the Applicant is correct that the drafters of the NAFTA used the mandatory language of “shall” in Art. 1119. However, treaty interpretation is a balancing exercise. This interpretation requires thorough consideration of: (a) the “ordinary meaning” of the treaty’s terms; (b) the context; AND (c) the object and purpose of the treaty (Febles v. Canada (Citizenship and Immigration), 2014 SCC 68).

Second, about the “ordinary meaning” of Art. 1119, the Court agreed with the Tribunal which found that Art. 1119 does not provide that satisfaction of the requirements of Art. 1119 was a condition precedent to a NAFTA party’s consent; and does not state that failure to include all the required information in the Notice would vitiate a party’s consent. Indeed, Art. 1119 was a procedure that occurred prior to an arbitration and therefore could not fall within the scope of Art. 1122, which deals directly with the Applicant’s consent to arbitration.

Third, about the “context”, the Tribunal examined whether the consequence of the non-compliance with Art. 1119 NAFTA could be implied from the context of the provisions that precede, and the provisions that follow, Articles 1119 and 1122(1). In its contextual review, the Tribunal found that the “Statement of the Free Trade Commission on notices of intent to submit a claim to arbitration” points out that “the notice of intent naturally serves as the basis for consultations or negotiations between the disputing investor and the competent authorities of a Party.” In other words, the information in the notice of intent is used for the settlement discussions. It does not suggest that this information is essential for arbitration procedures. Thus, the failure to provide this information would not vitiate a party’s consent to arbitration. In other words, the Court agreed with the Tribunal that a failure to engage in settlement discussions did not bar access to arbitration.

Fourth, about NAFTA’s “object and purpose”, Art. 1115 NAFTA states that one of the purposes of the dispute resolution provisions of Chapter 11 is to establish a mechanism for the settlement of investment disputes that assures equal treatment among investors of the NAFTA parties. The Tribunal observed that this objective cannot be furthered by barring access to arbitration on the basis of names having been omitted from the notice of intent. 

The Court found that the Tribunal’s interpretation of Art. 1119 emphasized the overall object, purpose, context and ordinary meaning of the article over a strict technical construction of the statutory language. The Court found that this treaty interpretation is appropriate and well-established in the jurisprudence (para. 99 of Cargill 2011 ONCA 622).

2. The Court found that it is limited to a review only of the Tribunal’s finding that the consent requirement under Art. 1121 (1) (2) NAFTA. The manner in which the consent was provided concerns the admissibility requirement which is not reviewable by the Court.

In the present case, the Respondents did not submit consents directly. They submitted identically-worded powers of attorney giving their counsel, Mr. Emanuel, power to take any steps required for the commencement of the arbitral proceedings under the NAFTA. The Applicant insisted that the Respondents have failed to respect Art. 1121 NAFTA, which deprived the Tribunal of jurisdiction.

In determining whether the Tribunal had jurisdiction over all the Respondents, the Tribunal focused its analysis on whether the Respondents had in fact consented to arbitrate with the Applicant as required by Art. 1121 (1) NAFTA. In the present case, the powers of attorney from the Juegos Companies were delivered after the Request because the Respondents acquired de facto control of those companies by August 5, 2016. The Tribunal found that the powers of attorney were prospective in nature and they also ratified all steps previously taken by Mr. Emanuel on their behalf in the arbitration, including the filing of the Request. The Tribunal unanimously concluded that “the record permits no other conclusion than that the Respondents did in fact consent.” Accordingly, the Tribunal had jurisdiction.

The Court acknowledged that Art. 1121 (3) required the Respondents to give their consent “in writing”, to deliver it to the Applicant and to include it in the submission of a claim to arbitration. But these requirements concern the manner in which the consent was provided, which is not reviewable by the court.

3. The Court finds that the legal submissions from Canada and the USA in this case do not rise to the level of subsequent practice. The Tribunal did not err in its treatment of their submissions.

The Court acknowledged that Art. 31(3) of the Vienna Convention states that a tribunal shall take into account any subsequent agreement or subsequent practice between NAFTA parties regarding the interpretation of the NAFTA.

First, as the seat of arbitration in the present case is Toronto, Canada. The Court is bound by the Court of Appeal for Ontario’s definition of “subsequent practice” set out in Cargill 2011 ONCA 622. In para. 84 of Cargill 2011 ONCA 622, the Court of Appeal defines a “subsequent practice” as “a clear, well-understood, agreed common position in accordance with Article 31 (3)(b).” Further, the Court also cited the WTO Appellate Body’s definition of “subsequent practice”, which is “a concordant, common and consistent sequence of acts or pronouncements which is sufficient to establish a discernable pattern implying the agreement of the parties regarding its interpretation.” (Japan – Taxes on Alcoholic BeveragesAB-1997-2). But the Court clearly held that it would not apply the standard set out in the WTO decision.

Second, the Court held that the legal submissions by the NAFTA parties can constitute subsequent practice (See paras. 188-90 of Canadian Cattlemen for Fair Trade v. United States of AmericaAward on Jurisdiction and para. 158 of Mobil Investments Canada Inc. v. Government of CanadaICSID Case No. ARB/15/6).

Third, in the present case, the NAFTA parties’ submission does not meet the Cargill standard for subsequent practice. The Court found that there is distinction between the NAFTA parties’ historical submissions, which was paraphrased as: “consent under Article 1121 or 1122 is conditioned by strict compliance with the procedural requirements in Articles 1116 – 1121,” and their submissions in the present case, which are generally that “consent under Article 1121 is conditioned by strict compliance with the procedural requirements of Art. 1119.”

In Cargill 2011 ONCA 622, the Court of Appeal did not accept NAFTA’s parties submissions on subsequent practice because they did not provide a specific enough agreement between the parties as to the only compensable damages being those suffered in the territory of the party where the investment is located. Following the same logic, the NAFTA parties’ submission under Art. 1128 NAFTA, in this case, do not meet the Cargill standard.

The Court also noted that the international law does not emphasize merely on formal considerations, nor does it require new proceedings to be commenced where a merely procedural defect is involved (para. 86 of Mondev International Ltd. v. United States of AmericaICSID Case No. ARB(AF)/99/2).

Having found that the NAFTA parties’ submissions do not constitute subsequent practice, the Court found that the Tribunal did not err in its treatment of their submissions.

Reflection

The NAFTA has been replaced by the Agreement between Canada, the United States of America and the United Mexican States (“CUSMA“) since July 1, 2020. It’s worth to mention that Canada has withdrawn itself from investor-state dispute settlement (ISDS) entirely under this new treaty. Chapter 14 of USMCA, which replaces Chapter 11 of NAFTA, provides that Canada’s consent to ISDS for legacy investment claims expires 3 years after NAFTA’s termination. Thus, Canadian investors with potential legacy investment claims under NAFTA Chapter 11 against US or Mexico through ISDS must ensure that any claim is brought in timely manner in accordance with the transitional provisions in CUSMA to avoid jurisdictional challenges. The Canadian investors in the US and Mexico, and the US and Mexican investors in Canada, may want to check the provisions in Trans-Pacific Partnership for ISDS for dispute resolution tools. Otherwise, they should be prepared to bring their applications before the domestic courts of the host state for resolution of their disputes or to seek the intervention of their home state government.

Other Resource: Ontario – states’ legal submissions can qualify as “subsequent practice” in investor-state arbitration (Urbitral Notes)

(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention. 😊)