To Bifurcate or Not? The Ontario Court of Appeal Prohibits Appeal on a Preliminary Question of Jurisdiction

Why This Decision is Important

In United Mexican States v Burr, 2021 ONCA 64 (“Mexico v Burr”), the Ontario Court of Appeal (the "Court") addressed a nuanced distinction for parties seeking to challenge an arbitral tribunal's award on jurisdiction as “a preliminary question” under Article 16(3) of the UNCITRAL Model Law on International Commercial Arbitration (the "Model Law") as opposed to “in an award on the merits” under Article 34 of the Model Law.  

Pursuant to Article 16(3) of the Model Law, if a preliminary ruling is made by the tribunal on the issue of jurisdiction, the respondent may appeal that ruling to the supervisory court, which decision shall not be subject to appeal. By contrast, Article 34 of the Model Law provides for the right of recourse to a court for an arbitral award, but places no limits on the respondent’s ability to seek appellate review of the supervisory court’s decision.

In this case, the Court found that the argument before the application judge proceeded substantially under Article 16 of the Model Law and that neither the substantive issues before the application judge, nor her decision, turned on Article 34. Accordingly, the Court gave effect to the language of Article 16(3) of the Model Law that prohibited the appeal from the ruling of the application judge on the arbitral tribunal’s decision on the preliminary question of jurisdiction. Consequently, the Court quashed the appeal.

Background to the Appeal

Mexico v Burr arose out of an international arbitration involving thirty-nine nationals of the United States of America (“USA”) who brought claims totalling USD $100 million for losses allegedly caused by Mexico’s closure of the casinos that they had been operating in Mexico.

The arbitral tribunal (the "Tribunal") was constituted on February 14, 2017 under chapter 11 of the North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States ("NAFTA"), December 17, 1992, Can TS 1994 No 2 (entered into force on January 1, 1994),[1] which includes an investor-state arbitration mechanism. On April 4, 2017, the Tribunal bifurcated the proceedings into a jurisdiction phase and a merits and damages phase. It also determined that Toronto, Canada, would be the seat of the arbitration. At the jurisdictional phase of the proceedings, a majority of the Tribunal held that the Tribunal had jurisdiction over all but one of the USA nationals’ claims (the “Partial Award”).

Mexico brought an application to the Ontario Superior Court of Justice to set aside the Partial Award under s. 11 of the International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch. 5 (the "ICAA") and Articles 16 and 34 of the Model Law.[2]

The Ontario Superior Court of Justice dismissed Mexico’s application[3], holding that the latter had “not discharged its burden of proof of establishing that the Tribunal was incorrect in its conclusion that it had jurisdiction over all but one of the claims before it”.[4] Mexico then appealed to the Ontario Court of Appeal to overturn the application judge’s decision.

The Appeal Decision

The focal point of the Court of Appeal’s analysis was the text of Article 16(3) of the Model Law, which states:

(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, [the Ontario Superior Court of Justice] to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award. [Emphasis added]

Under Article 16(3) of the Model Law, an arbitral tribunal's ruling on jurisdiction is either a preliminary question, or in an award on the merits. If the ruling is a preliminary question, the decision cannot be appealed beyond the supervisory court’s initial ruling. If the arbitral tribunal’s ruling on jurisdiction is in an award on the merits, it may be subject to further recourse pursuant to Article 34 of the Model Law. Where the arbitral tribunal ruled on its own jurisdiction in the award on the merits, there is no prohibition against appealing the court’s ruling on an application to set aside the award.

The text of Article 16(3) therefore required the Court to consider whether the Tribunal’s ruling was on a “preliminary question” of jurisdiction. In the affirmative, the application judge’s ruling was final and could not be appealed.

The Court concluded that the Tribunal’s ruling was on a “preliminary question” of jurisdiction under Article 16(3) of the Model Law based on four reasons:

  1. The Tribunal saw its role as addressing jurisdiction as a preliminary question. In the Partial Award, the Tribunal noted that it held a hearing on jurisdiction and the Tribunal was going to decide on three preliminary issues.
  2. The Tribunal’s decision did not address the substantive merits of the dispute, and the merits phase of the dispute was proceeding despite Mexico’s effort to appeal the application judge’s ruling.
  3. Although Mexico cited Article 34 of the Model Law in its pleadings and in its factum, Mexico had not relied on Article 34 in any meaningful way in its arguments before the application judge.
  4. The application judge’s ruling did not turn on the substance of Article 34 of the Model Law.

Commentary

Although the parties asserted that it is possible to rely on both Articles 16 and 34 of the Model Law in challenging the ruling of an arbitral tribunal (in other words, to “ride both horses”[5]), the Court declined to make a ruling on whether “both horses can be ridden”, noting that it would be unwise for the Court to undertake an interpretation of Article 34 and its interaction with Article 16 in the absence of full argument by parties committed to opposite perspectives of the issue. However, the Court observed that prohibiting an appeal where a ruling is pursued “as a preliminary question” under Article 16(3) has the benefits of clarity, simplicity and expediency for which international arbitration is touted.

The Court of Appeal’s decision provides guidance regarding the prohibition on appealing a decision on a preliminary question of jurisdiction and may impact a party’s decision on how to address a jurisdictional challenge before an arbitral tribunal and whether or not to bifurcate the proceedings into a jurisdiction phase and a merits and damages phase.

[1] On July 1, 2020, the new Canada-United States-Mexico Agreement (“CUSMA”) entered into force, replacing NAFTA.

[2] The Model Law has the force of law in Ontario under s. 5 of the ICAA.

[3] 2020 ONSC 2376

[4] Supra, para. 7.

[5] Para. 27.

alternative dispute resolution arbitration commercial arbitration international arbitration

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