Judicial Restraint Is Alive And Well: ONCA Affirms The Limits Of Applications To Set Aside Arbitral Awards In Clayton V Canada

Last month, the Court of Appeal for Ontario released its decision in Clayton v Canada (Attorney General), 2024 ONCA 581, upholding the dismissal of an application to set aside a NAFTA arbitration award. The decision affirms the principle of judicial restraint that governs the courts' approach to intervention in final and binding arbitration awards. It also helpfully summarizes the legal principles applicable to attempts to set aside awards on the basis of alleged excess of jurisdiction and conflict with public policy.

This appeal arose from an award made pursuant to the NAFTA arbitration process. The appellants sought to develop a quarry in Nova Scotia, but the federal and provincial Ministers of the Environment denied approval of the proposed project. The appellants invoked the NAFTA arbitration process, which proceeded in two stages.

At the first stage, the tribunal held that the government had breached its NAFTA obligations by conducting a flawed environmental assessment. At the second stage, the appellants sought USD $440 million in damages for profits they allegedly would have earned had the project gone ahead. The tribunal found that there was not a sufficient causal link between the NAFTA breach and the alleged injury. Applying the standards of proof set out in international law, the tribunal concluded that the appellants failed to establish "in all probability" or with a "sufficient degree of certainty" that they would have obtained the necessary project approval and the project would be operating profitably, had the environmental assessment process operated properly. The appellants only established loss in the form of deprivation of the opportunity to have a fair and non-arbitrary environmental assessment and were awarded only USD $7 million in damages – much less than was sought.

The appellants sought to set aside the tribunal's damage award under art. 34 of the Commercial Arbitration Code, Schedule I to the Canadian Commercial Arbitration Act.¹ This provision, like comparable provisions in Ontario's arbitration legislation,² empowers a court to set aside an arbitral award in specific circumstances. Such circumstances include where the arbitration agreement is not valid, a party did not receive proper notice of the proceeding or otherwise was unable to present their case, the award deals with matters beyond the scope of the submission to arbitration, the composition of the arbitral tribunal was not in accordance with the parties' agreement, the subject matter of the dispute is not capable of being arbitrated under Canadian law, or the award conflicts with Canadian public policy.

The appellants argued that the tribunal exceeded its jurisdiction and that its award violated public policy. The application judge dismissed the application, finding that the tribunal identified the proper international law standard in determining causation and that the proper application of that standard did not raise a "true question of jurisdiction" or, in the alternative, that the tribunal did not exceed its jurisdiction. She further found that the award was not contrary to public policy.

The Court of Appeal upheld the application judge's determinations and dismissed the appeal. Neither of the appellants' two main grounds of appeal found favour with the court:

1. Jurisdiction: The appellants essentially argued that the tribunal's alleged error in applying the legal standard of proof was so significant that it amounted to a failure to apply the law altogether. This, they claimed, raised a jurisdictional issue rather than a misapplication of the law, the latter of which would not be subject to review. The court disagreed, as such an approach would have it involved in reviewing the merits of final and binding arbitration awards routinely, with no authority permitting it to do this. Noting the limited scope of judicial oversight under art. 34, the court emphasized that the set-aside process is not an appeal, and should not be used to undermine final and binding arbitration awards with "spurious jurisdictional arguments."
2. Public Policy: The appellants also argued that the tribunal's award conflicted with Canadian public policy because it was so "substantively unreasonable and manifestly flawed that it conflicts with the principles of adjudicative fairness and fundamental justice required by the public policy of Canada." The court rejected this argument on the basis that its authority to set aside an arbitration award on public policy grounds is narrow and exceptional, with a very high burden that must be met. It is not to be used as a backdoor means of permitting an otherwise impermissible reasonableness review. An award generally will conflict with Canadian public policy where it "offends our sense of morality", and nothing in this case came close to meeting that standard.

Ultimately, this appeal came down to the appellants' failure to establish their entitlement to the damages they sought, their disagreement with the tribunal's analysis, and their attempt to do an "end-run" around the final and binding nature of the award. It was, in the court's words, "a transparent attempt to circumvent clear limits on the ability of courts to interfere with the decisions of arbitration boards". This is not the purpose of a set-aside application.

Clayton v Canada is an important reminder that Canadian courts take seriously their limited role in overseeing arbitral awards. Where an award is not subject to appeal, courts will not allow a party to use the set-aside process as a backdoor appeal or substantive review. Counsel advising their clients on post-award rights should take this to heart, and be mindful of what review grounds realistically are available in the event of an undesirable award.

Footnotes

1. RSC 1985, c 17 (2nd Supp).

2. Arbitration Act, 1991, SO 1991, c 17, s 46(1); International Commercial Arbitration Act, RSO 1990, c I.9, Sch, art 34(2).