This article was first published on the Arbitration Matters blog, here.
In Nelson v The Government of the United Mexican States, 2022 ONSC 1193, Justice Penny dismissed Nelson’s application to set aside the award of a three-member tribunal constituted under Chapter 11 of the North American Free Trade Agreement (“NAFTA”). Nelson relied upon Article 34(2)(a)(ii) of the Model Law, which allows the court to set aside an award on the basis that the applicant was, “otherwise unable to present his case”. Justice Penny relied upon the Ontario Court of Appeal’s decision of Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939, at para. 65, leave to appeal refused, 2018 CarswellOnt 17927 (S.C.C), which held that the standard of review for setting aside an award under Article 34(2)(a)(ii) is whether the tribunal’s conduct is “sufficiently serious to offend our most basic notions of morality and justice” and “that it cannot be condoned under the law of the enforcing State”.
Nelson claimed that he was denied natural justice and procedural fairness because: (1) the award was based on a theory of the case not pleaded or argued by either of the parties; and (2) the tribunal ignored or failed to take the applicant’s expert evidence into account on issues which formed the basis of the tribunal’s award.
The underlying dispute – Nelson was an experienced businessperson in the telecommunications industry. In 2010, he invested in Tele Fácil México S.A. de C.V. (“Tele Fácil”), a Mexican corporation. On May 17, 2013, Tele Fácil obtained a 30-year concession from México’s Ministry of Communications and Transportation to operate a public telecommunications network. Tele Fácil required interconnection rights with a Mexican carrier to allow Tele Fácil’s customers to communicate with customers on other networks. It approached México’s largest telecom providers, Teléfonos de México and Teléfonos del Noroeste (together, “Telmex”).
On August 26, 2013, Telemex offered Tele Fácil a draft interconnection agreement for a period expiring on December 31, 2017. Its terms included a standard “reciprocal interconnection” rate of USD $0.00975 per minute and certain “portability” charges. There was no provision for what is called “indirect interconnection”. Tele Fácil did not respond immediately to the offer.
On March 6, 2014, the Federal Institute of Telecommunications (“IFT”) declared Telmex to be a “preponderant economic agent” in the telecommunications sector and, on March 26, 2014, issued regulations that (among other things) required Telmex to provide “indirect interconnection” and a “special interconnection” rate of approximately USD $0.00172. Justice Penny found that this was a significantly lower rate than that offered by Telmex to Tele Fácil in the August 26, 2013, draft agreement.
On July 7, 2014, Tele Fácil provided comments on the Telmex August 26, 2013 draft agreement. Its letter included a request for “indirect interconnection”, which had been excluded, and to eliminate the proposed “portability” charges.
On July 11, 2014, and before Telmex had responded to the July 7 letter, Tele Fácil initiated disagreement proceedings under Article 42 of México’s Federal Telecommunications Law (“FTL”) before the IFT to resolve alleged “divergences” between Tele Fácil and Telmex concerning: (1) “indirect interconnection”; and (2) “portability” charges.
On November 26, 2014, the IFT issued Resolution 381, in which it found in favour of Tele Fácil and concluded, among other things: (1) that Telemex had, in the course of the proceeding, accepted the provision of “indirect interconnection” service and eliminated the “portability” charges; (2) found that the “interconnection” rates were those set out in the Telmex August 26, 2013, draft agreement; and ordered the parties to execute the agreement on these terms within 10 days.
On December 10, 2014, Telmex sent to Tele Fácil a new draft interconnection agreement, but asserted that under the new regulatory framework in effect as of March 26, 2014, it could no longer lawfully offer the USD $0.00975 “reciprocal interconnection” rate. The draft agreement also did not include “portability” charges, as was required by the IFT.
Tele Fácil refused to accept this limitation on the rate and on December 19, 2014, asked the IFT to enforce Resolution 381. At about the same time, Telmex challenged Resolution 381 though an amparo indirecto before a specialized Mexican court (which Justice Penny found was, “roughly analogous to judicial review in Canada”).
Telemex also sought “confirmation of criteria” from the IFT regarding the meaning and effect of Resolution 381 as it related to rates. On April 8, 2015, the IFT issued Decree 77, which said that its powers were limited only to issues not agreed upon by the parties, in this case “indirect interconnection” and “portability” charges. Therefore, Resolution 381 and Decree 77 did not establish the “interconnection” rate. It simply required the parties to interconnect their systems and sign the interconnection agreement.
Thereafter, Telmex offered a third draft interconnection agreement to Tele Fácil, which Tele Fácil declined.
Therefore, on June 16, 2015, Telmex submitted a new interconnection disagreement to the IFT. It issued Resolution 127, which held that the original interconnection agreement between Telmex and Tele Fácil was null and void because it was never signed by Telmex and that the “interconnection” rate for 2015 would be USD $0.000253.
Further amparo actions and appeals by the parties in the Mexican courts were dismissed or withdrawn.
The arbitration – In 2016, Nelson initiated the NAFTA arbitration against México; Tele Fácil believed that further challenges before the IFT and the local courts would be futile. Nelson alleged that México’s measures resulted in an expropriation of Tele Fácil’s interconnection rights in violation of Article 1110 of NAFTA and that he and Tele Fácil had been denied fair and equitable treatment by México contrary to 1105 of NAFTA. He alleged that three measures resulted in the expropriation of interconnection rights: (1) the “confirmation of criteria” proceedings, which he said avoided enforcement of Resolution 381; (2) Decree 77, through which he said that Resolution 381 was repudiated; and (3) Resolution 127 that, contrary to Resolution 381, imposed a new “interconnection” rate detrimental to Tele Fácil but favourable to Telmex.
The tribunal found against Nelson because Tele Fácil had no interconnection rights to lose as a result of the impugned actions of México.
First, there was no interconnection agreement between the parties. Tele Fácil never accepted Telmex’s draft interconnection agreement dated August 26, 2013. Its July 7, 2014, response did not constitute an acceptance under the law of México. The tribunal viewed Tele Fácil as trying to “steal a March” when Telmex’s status and rate regime were changed by regulation in March, 2014. And Tele Fácil brought disagreement proceedings to the IFT before Telmex had answered its July, 2014, letter. Because Tele Fácil had no rights under an interconnection agreement, it had no rights that could have been determined by Resolution 381.
Second, Resolution 381 did not confer any interconnection rights upon Tele Fácil either. When Tele Fácil initiated disagreement proceedings, it raised only the “indirect connection” and “portability” charges. It did not submit any disagreement on the rates, so that issue was not before the IFT. Therefore, the IFT assumed there was no disagreement on rates, which was reflected in Decree 77. Therefore, Resultion 381 did not confer any rights upon Tele Fácil to interconnect and to charge a reciprocal rate of USD $0.00975, as provided for in the Telmex August, 2013, draft interconnection agreement, when it was only paying USD $0.00172 to Telmex as a result of the new reguations.
Standard of review by the court– Justice Penny set out the established principles that determine whether an award may be set aside under Model Law Article 34(2)(a)(ii) on the ground that, “the party making the application… was otherwise unable to present his case”:
“ … Ontario courts have held that the standard of review for setting aside an award under Article 34(2)(a)(ii) is whether the tribunal’s conduct is “sufficiently serious to offend our most basic notions of morality and justice” and “that it cannot be condoned under the law of the enforcing State”: Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A.,2017 ONCA 939, at para. 65, leave to appeal refused, 2018 CarswellOnt 17927 (S.C.C).
 In Consolidated Contractors, the Court also confirmed that a party may be said to have been “unable to present his or her case” under Article 34(2)(a)(ii) when:
(a) the award is based on a theory of liability that either or both of the parties were not given an opportunity to address, or based on a theory of the case not argued for by either of the parties;
(b) a party was not given an opportunity to respond to arguments made by an opposing party; or
(c) the tribunal ignored or failed to take the evidence or submissions of the parties into account.
 A party is not permitted to review the award on its merits under the guise of alleged breaches of Article 34(2)(a)(ii). Where a party merely disagrees with the outcome, the court should not permit reargument of the merits in the guise of a claim for breach of procedural fairness: Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2016 ONSC 7171, at para. 89.”
The set aside application – Justice Penny dismissed the set aside application on the two issues raised by Nelson: (1) that the NAFTA tribunal decided the case on a basis not argued; and (2) that the tribunal failed to consider relevant evidence. Justice Penny found that the parties’ pleadings, expert reports and evidence, cross-examinations, and questions put by the tribunal clearly demonstrated that the tribunal heard argument on all issues and considered all the evidence, which conclusion was amply supported by the detailed reasons and analysis in the award. Justice Penny found that, “no one could reasonably be in any doubt about whether the tribunal considered the applicant’s evidence or why the tribunal decided the case the way it did.”
The parties apparently agreed that costs of $100,000 should be awarded to the successful party. Justice Penny awarded those costs to México.
First, Model Law Article 34(2)(a)(ii) goes to the fundamental issues of fairness and natural justice, which parties to an arbitration are entitled to expect. Article 18, for example, states that, “the parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”. This encapsulates both procedural and substantive fairness. As the leading case, Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2016 ONSC 7171, demonstrates, the threshold required to satisfy a court that an award should be set aside on this basis is very high. It must be, “sufficiently serious to offend our most basic notions of morality and justice”.
Second, Nelson’s main complaint appears to be that the reasons of the tribunal were deficient. Justice Penny rejected this argument. While the grounds asserted by Nelson in support of his set aside application were appropriate for consideration under Article 34(2)(a)(ii), Justice Penny found that they were not supported based upon review of the substantial record and the tribunal’s detailed reasons.
Third, for recent Case Notes on the duty of the arbitrator to provide sufficient reasons, the standard to be applied, and the remedy where reasons are insufficient, see Case Notes: Ontario – tests for adequacy of reasons and for remitting awards considered and applied – #245, P.E.I. – set aside application invoking arbitral misconduct is neither a judicial review nor an appeal – #422, B.C. – Scope/excess of authority when arbitrator considers variation of award made based upon incorrect facts – #523, B.C. – Statutory arbitrator’s award set aside on basis that it was “arbitrary and irrational” – #529, B.C. – Leave to appeal denied where alleged legal errors did not reflect arbitrator’s reasoning – #530, and Ontario – It’s not cricket: Ontario court emphasizes arbitral awards must include reasons – #580.
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