Canada (Attorney General) v. S.D. Myers Inc.

Canada (Attorney General) v. S.D. Myers Inc.
Court (s) Database
Federal Court Decisions
Date
2004-01-13
Neutral citation
2004 FC 38
File numbers
T-225-01, T-81-03
Notes
Reported Decision
Decision Content
Date: 20040113
Docket: T-225-01
T-81-03
Citation: 2004 FC 38
IN THE MATTER OF SECTIONS 5 AND 6 OF THE COMMERCIAL
ARBITRATION ACT, R.S.C. 1985, C. 17 (2nd SUPP.)
IN THE MATTER OF ARTICLES 1, 6 AND 34 OF THE COMMERCIAL
ARBITRATION CODE SET OUT IN THE SCHEDULE TO THE
COMMERCIALARBITRATION ACT
AND IN THE MATTER OF AN ARBITRATION UNDER CHAPTER 11 OF
THE NORTH AMERICAN FREE TRADE AGREEMENT ("NAFTA")
BETWEEN S.D MYERS, INC. AND THE GOVERNMENT OF CANADA
BETWEEN:
THE ATTORNEY GENERAL OF CANADA
Applicant
- and -
S.D. MYERS, INC.
Respondent
- and -
THE UNITED MEXICAN STATES ("MEXICO")
Intervener
REASONS FOR ORDER
KELEN J.:
[1] This is an application pursuant Article 34 of the Commercial Arbitration Code, a schedule to the Commercial Arbitration Act, R.S.C. 1985, c. 17 (2nd Supp.), to set aside decisions dated November 13, 2000 ("liability award"), October 21, 2002 ("damages award") and December 30, 2003 ("costs award") made by an Arbitral Tribunal established pursuant to the North American Free Trade Agreement ("NAFTA").
BACKGROUND
[2] This application is the first to come before the Federal Court with respect to an arbitration award issued under Chapter 11 of the NAFTA.
[3] The applicant seeks judicial review of the NAFTA arbitration awards, which arose from a determination that Canada was in breach of articles 1102 and 1105 of the NAFTA, when it imposed a ban on exports of PCB wastes from Canada for treatment in the United States, implemented through an interim and a final Order-in-Council issued in November 1995 and February 1996 respectively. The Tribunal awarded the respondent $6,050,000 plus interest in compensation for damages, $500,000 for legal costs and $350,000 for arbitral costs.
S.D. Myers Inc.
[4] The respondent, S.D. Myers Inc., ("SDMI") is a privately held Ohio corporation headquartered in Tallmadge, Ohio. It is owned by Mr. Dana Myers (who holds fifty-one percent of the share capital and is its chief executive officer), and his three brothers. SDMI is in the business of treating or remediating toxic wastes contaminated with polychlorinated biphenyls (hereinafter referred to as "PCBs").
[5] SDMI assesses the level of PCB contamination in transformers and other equipment, transports and dismantles the equipment, removes and contains the PCBs in drums or tanks, and destroys or arranges for the destruction of the PCBs.
Myers Canada Inc.
[6] S.D. Myers (Canada) Inc. ("Myers Canada") is a privately held Canadian company incorporated in 1993 and owned by the four Myers brothers in equal shareholdings. SDMI, while not owning any shares, advanced hundreds of thousands of dollars to Myers Canada and provided Myers Canada with technical and other support personnel. The CEO of SDMI made all decisions regarding the business of Myers Canada.
[7] Myers Canada offered waste remediation services to Canadian customers. Myers Canada would drain PCBs from equipment in Canada, and then transport the equipment and PCBs to SDMI in Ohio for further decontamination of the equipment, and for the destruction of the PCBs.
The export ban of PCBs
[8] On or about November 15, 1995 the United States Environmental Protection Agency ("E.P.A.") issued an "enforcement discretion" permitting the respondent to import PCBs upon certain conditions. Anticipating this development, two Canadian operators of hazardous waste facilities met with the Environment Minister at her office to advise that this anticipated U.S. action would threaten the economic viability of their own operations.
[9] On November 16, 1995, Canada banned exports to the United States of PCB wastes and the ban remained in force for fourteen months until Canada replaced existing regulations controlling PCB exports and re-opened the border. Shortly after re-opening the border SDMI submitted an arbitration claim under Chapter 11 of NAFTA asserting that Myers Canada constituted its "investment" in Canada and that the Canadian PCB ban violated its entitlements
under NAFTA to National Treatment (Article 1102) and Minimum Standard of Treatment (Article 1105). SDMI also alleged that the ban was contrary to the provisions on Performance Requirements (Article 1106) and Expropriation (Article 1110), all of which resulted in harm to SDMI and its "investment", Myers Canada, in form of financial loss.
[10] The Tribunal found at paragraph 162 that the ban on the export of PCBs was "to protect and promote the market share of enterprises that would carry out the destruction of PCBs in Canada and that were owned by Canadian nationals". The Tribunal also found in the same paragraph that:
[...] the protectionist intent of the lead Minister in this matter was reflected in decision-making at every stage that led to the ban. Had that intent been absent, policy makers might have reached a conclusion in November 1995 that would have been consistent with the conclusion reached by Canada when the ban was lifted in February 1997. Canada's view in 1997 was that the opening of the U.S. border should be welcomed in the interests of expediting the elimination of PCBs from the environment, provided that any risks associated with exporting PCB waste to the U.S. was minimized through proper regulations and safeguards.
[11] It is noteworthy that the ban was directed against the respondent since it was the only company that was granted permission from the EPA to import PCBs.
[12] The Department of Environment officials had advised the Minister that closing the border from the Canadian side if the U.S. EPA opened it up from the U.S. side would raise NAFTA concerns. These NAFTA concerns were disregarded by the Minister.
[13] In paragraph 176 the Tribunal referred to evidence from Department of Environment officials that banning PCB exports "is not a viable option because it cannot be demonstrated that closing the border is required to deal with a significant danger to the environment or to human health".
[14] After the Tribunal reviewed the evidence in detail, it concluded in paragraph 195:
The Tribunal finds that there was no legitimate environmental reason for introducing the ban.
The arbitration proceedings
[15] On July 28, 1998 SDMI delivered a Notice of Intent to submit a claim to arbitration under NAFTA Chapter 11. Three months later, it delivered its Notice of Arbitration and Statement of Claim alleging that the Canadian ban on exports of PCBs breached NAFTA articles 1102, 1105 and two other Articles which were not upheld by the Tribunal.
Composition of the Arbitral Tribunal
[16] The Tribunal was constituted in accordance with the UNCITRAL Arbitration Rules. Each party selected one member of the Tribunal and the two parties jointly selected the chair. SDMI selected Professor Bryan P. Schwartz of the University of Manitoba, Faculty of Law. Canada selected Mr. Edward C. Chiasson, Q.C., of Borden, Ladner, Gervais, LLP of Vancouver. Both parties selected Professor Martin J. Hunter, Q.C. of London, England as the Chair. All three members are knowledgeable, experienced and distinguished in international law, international trade law and international arbitration. In fact, the Chair is the co-author of a leading text book with respect to international commercial arbitration. Canada's nominee, Mr. Chiasson has been the Chair of two other NAFTA panels, and chaired a panel under the Canada-U.S. Free Trade Agreement. Professor Schwartz is a highly respected Canadian authority on international law and NAFTA. Accordingly, the arbitration mechanism in Chapter 11 ensured that the parties had confidence in the persons who will be adjudicating the claim.
[17] The three Tribunal awards or decisions under review were unanimous with respect to the liability of Canada, the quantum of damages and the costs.
The Tribunal's Decision
[18] Based on the evidence the Tribunal found that the interim and final orders favoured Canadian nationals over non-nationals, and that the effect of the orders was to prevent SDMI and its investment from carrying out the Canadian business that they planned to undertake. It further found that "there was no legitimate environmental reason for introducing the ban." In particular the Tribunal found the following:
1) that Myers Canada operated as a branch of SDMI;
2) SDMI established Myers Canada as a means of furthering its business in Canada;
3) Dana Myers exercised control over Myers Canada in his capacity as President and CEO of SDMI;
4) The president of Myers Canada reported to Dana Myers;
5) SDMI committed to provide full financial and technical support to Myers Canada;
6) SDMI made loans to Myers Canada;
7) Myers Canada paid SDMI for certain services; and
8) SDMI had an expectation that it would share in any income or profit from Myers Canada's operations.
[19] The Tribunal decided that Canada had breached its NAFTA obligations, and was liable to compensate SDMI ("Frist Partial Award"). The Tribunal's "Second Partial Award" dated October 21, 2002 ordered that Canada pay SDMI compensation for the loss or damage suffered as a result of Canada's breaches of its obligations under Chapter 11 of NAFTA in the amount of $6,050,000 plus interest.
[20] The Tribunal's "Final Award" dated December 30, 2003 ordered that Canada pay SDMI $350,000 in respect of the arbitration costs it incurred and $500,000 in respect of its legal costs.
THE RELEVANT LEGISLATION, TREATY PROVISIONS AND ARBITRAL RULES
[21] This application for judicial review is pursuant to Article 34 of the Commercial Arbitration Code, the "Model Law on International Commercial Arbitration" adopted by the United Nations Commission on International Trade Law on June 21, 1985, and given the force of law in Canada by the Commercial Arbitration Act, which expressly applies to an arbitral claim under Chapter 11 of NAFTA.
[22] Chapter 11 of NAFTA applies to measures adopted or maintained by one of the NAFTA parties (Canada, United States of America, or United States of Mexico) which relate to investors and investments of another party. NAFTA imposes legal obligations and confer legal rights which apply to Canada and SDMI in this case.
[23] NAFTA also provides an arbitration mechanism for the settlement of investment disputes. The arbitration may be submitted under different international arbitration rules, and in this case the claim to arbitration was under the UNCITRAL Arbitration Rules (UNICITRAL is the acronym for the United Nations Commission on International Trade Law). Accordingly, the relevant excerpts from the UNCITRAL Arbitration Rules are set out herein.
[24] Finally, NAFTA, an international treaty, is subject to the rules for interpreting international treaties which are set out in the Vienna Convention. Accordingly, the relevant excerpts from the following authorities are set out in Appendix A to these Reasons:
1. Commercial Arbitration Act and Commercial Arbitration Code
2. NAFTA
3. UNCITRAL Arbitration Rules
4. Vienna Convention on the Law of Treaties
THE ISSUES
[25] The issues in this application are:
(i) whether the arbitral awards exceeded the scope of the arbitration agreement in Part B of the NAFTA Chapter 11 by dealing with a dispute or disputes not contemplated by Chapter 11 of the NAFTA; and,
(ii) whether the awards contravene the public policy of Canada.
[26] With respect to the first issue Canada, and Mexico, which intervened in support of Canada, raise the following sub-issues:
(1) whether the Tribunal erred in concluding that for the purposes of NAFTA Chapter 11, SDMI was an "investor" and Myers Canada was its "investment";
(2) whether the Tribunal misconstrued the obligation of National Treatment in NAFTA Article 1102 as permitting a comparison between the treatment accorded SDMI and Myers Canada with Canadian companies, and wrongly concluded that SDMI and Myers Canada were "in like circumstances" with Canadian companies for the purposes of Article 1102;
(3) whether the Tribunal erred in concluding that under international law, a breach of an obligation related to investment protection supports a finding that a State Party breached NAFTA Article 1105 and that in the circumstances of this case, a breach of Article 1102 essentially establishes a breach of Article 1105; and,
(4) whether the Tribunal exceeded the scope of the submission to arbitration by applying Chapter 11 obligations to "cross-border trade in services" which are governed by Chapter 12;
ANALYSIS
The objectives and interpretation of NAFTA
[27] The relevant objectives of NAFTA are set out in Article 102, and can be paraphrased as follows:
(1) to eliminate trade barriers in the free trade zone of Canada, United States and Mexico;
(2) to promote conditions of fair competition in the free trade area;
(3) to substantially increase investment opportunities in the free trade area;
(4) and to create effective procedure for the application of NAFTA and for the resolution of disputes under NAFTA.
[28] The objectives also provide that the parties "shall interpret and apply" NAFTA in light of its objectives and in accordance with "applicable rules of international law".
[29] Under Chapter 11, NAFTA has created an obligation on Canada to treat a U.S. company which chooses to invest and compete in Canada in a fair and non-discriminatory manner, and that the provisions of NAFTA shall be interpreted and applied in a manner which fulfills this objective.
[30] Article 1114 of NAFTA allows Canada to adopt a legitimate environmental measure without regard to Chapter 11. However, the Tribunal found that the Canadian law banning exports of PCBs was not a measure for a legitimate environmental purpose, but was for the purpose of protecting Canadian industry from U.S. competition. Therefore, Article 1114 is not in issue.
The meaning of the pertinent Chapter 11 NAFTA provisions
[31] In Article 1102 of NAFTA, Canada, the United States of America and the United States of Mexico, have agreed that each country will accord investors from the other two countries no less favourable treatment than it accords its own investor with respect "to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments".
[32] Moreover, NAFTA provides, unlike its predecessor, the Canada-U.S. Free Trade Agreement, a mechanism which allows individual investors to settle disputes with respect to alleged discriminatory treatment. This creates a powerful and significant new cause of action to protect investors against state protection. It also creates an impartial, efficient and timely arbitration process to settle such disputes. This arbitration process only applies to disputes with respect to Chapter 11 claims by "investors" with respect to "investments of investors".
Limited jurisdiction of the Federal Court for judicial review
[33] Canada and Mexico assert that the appropriate standard of review in this case is "correctness" because this international arbitration involves a State, and the State has only consented to arbitration to the extent provided in NAFTA. They state that this is a different situation from where private parties have agreed that the international arbitration will decide the whole matter in issue between the private parties.
[34] Canada submits at paragraph 87 of its Memorandum:
A corner stone of the law of arbitration is the requirement that parties consent to the arbitration. That consent must comprehend not only the fact of arbitration but also the specific issues to be resolved by arbitration and may stipulate the governing law. An arbitration tribunal only has jurisdiction over those specific issues that the parties have agreed to submit and any award that goes beyond those issues exceeds the scope of the submission to arbitration.
Canada's authority is Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration, 3d ed. (London: Sweet & Maxwell, 1999). (The co-author, Professor Martin Hunter, a world expert on the subject, was chosen by the parties to be the chairman of the Arbitration Tribunal in this case.)
[35] The limited extent of the Court's jurisdiction to review is under Article 34 of the Commercial Arbitration Code. The Canadian jurisprudence that examines the limited jurisdiction for judicial review of a NAFTA Chapter 11 arbitration tribunal is:
(i) The United Mexican States v. Metalclad Corp. (2001), 89 B.C.L.R. (3d) 359, 14 B.L.R. (3d) 285 (B.C.S.C.) and,
(ii) The United Mexican States v. Marvin Roy Feldman Karpa (8 December 2003), Ottawa 03-CV-23500, (Ont. Sup. Ct.) (unreported).
[36] In Metalclad, supra, Tysoe J. states at paragraph 54:
I need not decide whether it is appropriate to use the "pragmatic and functional approach" to determine the standard of review under the CAA. With respect to the International CAA, it is my view that the standard of review is set out in ss. 5 and 34 of that Act and that it would be an error for me to import into that Act an approach which has been developed as a branch of statutory interpretation in respect of domestic tribunals created by statute. It may be that some of the principles discussed by the Supreme Court of Canada in this line of authorities will be of assistance in applying ss. 5 and 34 but the "pragmatic and functional approach" cannot be used to create a standard of review not provided for in the International CAA. I note that since the "pragmatic and functional approach" was fully articulated by the Supreme Court of Canada in Pushpanathan v. Canada, [1998] 1 S.C.R. 982, the approach has not been utilized in Canadian cases involving international commercial arbitrations (e.g., Corporacion Transnacional de Inversiones, S.A. de C.V. v. STET International, S.p.A. (1999), 45 O.R. (3d) 183 (Ont. S.C.J.); affirmed (2000), 49 O.R. (3d) 414 and D.L.T. Holdings Inc. v. Grow Biz International, Inc. (2000), 194 Nfld. & P.E.I.R. 206 (P.E.I.S.C.T.D.)). [Emphasis added.]
[37] In Feldman, supra, Chilcott J. at paragraph 77 states:
In my view, a high level of deference should be accorded to the Tribunal especially in cases where the Applicant Mexico is in reality challenging a finding of fact. The panel who has heard the evidence is best able to determine issues of credibility, reliability and onus of proof.
And at paragraph 97 he concludes:
I accept the proposition that judicial deference should be accorded to arbitral awards generally and to international commercial arbitrations in particular.
[38] Other Canadian jurisprudence considers the limited jurisdiction of a superior court to judicially review an award under Article 34 of the Code with respect to international arbitration between two private parties, rather than investor-State arbitration. See Quintette Coal Ltd. v. Nippon Steel Corp., [1990] B.C.J. No. 2241 (BCCA).
[39] The Courts have held that the "pragmatic and functional" approach cannot be used to create a standard of review not provided for in Article 34 of the Code. Courts restrain themselves from exercising judicial review with respect to international arbitration tribunals so as to be sensitive to the need of a system for predictability in the resolution of disputes and to preserve the autonomy of the arbitration forum selected by the parties.
[40] In Desputeaux v. Éditions Chouette (1987) Inc., [2003] S.C.J. No. 15 the Supreme Court of Canada overturned a Québec Court of Appeal decision that allowed for the annulment of an arbitral award that arose out of a copyright dispute. The Supreme Court expressly disagreed with the Québec Court of Appeal's approach because it led to a merits based review not contemplated by legislation. At paragraphs 66 - 67 Lebel J. states:
The Court of Appeal stated at paras. 49:
[TRANSLATION] Where an arbitrator, in performing his or her mandated, is required to apply the rules of public order, he or she must apply them correctly, that is, in the same manner as do the courts.
That statement runs counter to the fundamental principle of the autonomy of arbitration (Compagnie nationale Air France, supra at p. 724). What it necessarily leads to is review of the merits of the dispute by the court. In addition, it perpetuates a concept of arbitration that makes it a form of justice that is inferior to the justice offered by the courts (Condominiums Mont St-Sauveur, supra, at p. 2785).
And with respect to the standard of review, LeBel J. states at paragraphs 68 - 69:
Some judgments have taken a broad view of that power, or sometimes tended to confuse it with the power of judicial review provided for in arts. 33 and 846 C.C.P.[...] The judgment in issue here illustrates this tendency when it adopts a standard of review based on simple review of any error of law made in considering a matter of public order. That approach extends judicial intervention at the point of homologation or an application for annulment of the arbitration award well beyond the cases intended by the legislature. It ignores the fact that the legislature has voluntarily placed limits on such review, to preserve the autonomy of the arbitration system.[emphasis added.]
[...]
Review of the correctness of arbitration decisions jeopardizes the autonomy intended by the legislature, which cannot accommodate judicial review of a type that is equivalent in practice to a virtually full appeal on the law. Thibault J.A. of the Court of Appeal identified this problem, when she said:
[TRANSLATION] In my view, the argument that an interpretation of the regulation that is different from, and in fact contrary to, the interpretation adopted by the ordinary courts means that the arbitration award exceeds the terms of the arbitration agreement stems from a profound misunderstanding of the system of consensual arbitration. The argument makes that separate system of justice subject to review of the correctness of its decisions, and thereby substantially reduces the latitude that the legislature and the parties intended to grant to the arbitration board.
[41] By analogy to a case where Parliament has spelled out in the Criminal Code the precise standard of judicial review, the Supreme Court of Canada decision in R. v. Owen, 2003 SCC 33 per Binnie J. at paragraphs 31 and 32 is applicable to the case at bar:
The appellant submitted an extensive analysis of the Court's administrative law jurisprudence applying the "functional and pragmatic test" to establish the appropriate standard of review from U.E.S. Local 298 v. Bibeault, [1988] 2 S.C.R. 1048, at p. 1087 (emphasis deleted), to Moreau-Bérubé v. New Brunswick (Judicial Council), [2002] 1 S.C.R. 249, 2002 SCC 11. However, in the case of these review boards, Parliament has spelled out in the Criminal Code the precise standard of judicial review, namely that the court may set aside an order of the review board only where it is of the opinion that:
(a) the decision is unreasonable or cannot be supported by the evidence; or,
(b) the decision is based on a wrong decision on a question of law (unless no substantial wrong or miscarriage of justice has occurred); or,
(c) there was a miscarriage of justice. (Cr. C., s. 672.78)
It must be kept in mind that "[t]o a large extent judicial review of administrative action is a specialized branch of statutory interpretation": Bibeault, at p. 1087. Where Parliament has shown its intent in the sort of express language found in s. 672.78 Cr. C. then, absent any constitutional challenge, that is the standard of review that is to be applied. [Emphasis added]
In the case at bar, Article 34 of the Code spells out the limited jurisdiction of the Court to set aside an arbitration award.
[42] It is noteworthy, that Article 34 of the Code does not allow for judicial review if the decision is based on an error of law or an erroneous finding of fact if the decision is within the jurisdiction of the Tribunal. The principle of non-judicial intervention in an arbitral award within the jurisdiction of the Tribunal has been often repeated. See Lax J. in Re Corporacion Transnacional de Inversiones, S.A. de C.V. et al. v. STET International, S.P.A. et al. (1999), 45 (3d) 183 at page 191, affirmed by 49 O.R. (3d) 414 (C.A.):
The broad deference and respect to be accorded to decisions made by arbitral tribunals pursuant to the Model Law has been recognized in this jurisdiction by the Ontario Court of Appeal in Automatic Systems Inc. v. Bracknell Corp. (1994), 18 O.R. (3d) 257 at p. 264, 113 D.L.R. (4th) 449 at p. 456:
The purpose of the United Nations Conventions and the legislation adopting them is to ensure that the method of resolving disputes in the forum and according to the rules chosen by the parties, is respected. Canadian courts have recognized that predictability in the enforcement of dispute resolution provisions is an indispensable precondition to any international business transaction and facilitates and encourages the pursuit of freer trade on an international scale: Kaverit Steel & Crane Ltd. v. Kone Corp. (1992), 87 D.L.R. (4th) 129 at p. 139, 85 Alta. L.R. (2d) 287 (C.A.).
An arbitral award is not invalid because, in the opinion of the Court hearing the application, the Arbitral Tribunal wrongly decided a point of fact or law. In the text book, Law and Practice of International Commercial Arbitration, supra at page 432:
Nevertheless, the Model Law, basic though it is, reflects the modern movement towards finality of arbitration awards. There is a belief that, so far as international arbitrations are concerned, the parties should be prepared to accept the decision of the arbitral tribunal even if it is wrong, so long as the correct procedures are observed. If a court is allowed to review this decision on the law or merits, the speed and, above all, the finality of the arbitral process is lost. Indeed, arbitration then becomes merely the first stage in a process that may lead, by way of successive appeals, to the highest appellate court at the place of arbitration. [Emphasis added]
And at page 433:
[...] there is no provision in the Model Law for any form of appeal from an arbitral award, on the law or on the facts, or for any judicial review of an award on its merits. If the Tribunal has jurisdiction, the correct procedures are followed and the correct formalities are observed, the award, good, bad or indifferent -- is final and binding on the parties.
Judicial Review under Article 34(2)(a)(iii)
[43] As discussed, the Federal Court has limited jurisdiction to hear an application for setting aside the arbitral awards in this case pursuant to Article 34 of the Code. The first pertinent subparagraph of the Code is Article 34(2)(a)(iii), which provides:
An arbitral award may be set aside by the Court specified in Article 6 only if:
(a)(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; The award deals with the dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration;
[44] In analysing the Court's jurisdiction under this subparagraph, the arbitral awards may only be set aside if the applicant, in this case the Attorney General of Canada, furnishes proof on one of two grounds:
(i) the awards deal with a dispute not contemplated by or not falling within the terms of the submission to arbitration; or,
(ii) the awards contain decisions on matters beyond the scope of the submission to arbitration.
[45] With respect to the first ground, I am not satisfied that the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, namely whether Canada breached Articles 1102 and 1105 of NAFTA in relation to the respondent. In fact, this is the dispute submitted by the respondent to arbitration.
[46] The second ground is more difficult. The Attorney General submits that the arbitral decision that SDMI falls within the definition of an "investor" or that Myers Canada is "an investment of the investor" in accordance with the definitions in Article 1139 of NAFTA are matters beyond the scope of the submission to arbitration. Mexico submits that the Tribunal exceeded the scope of the submission to arbitration by applying Chapter 11 obligations to "cross-border trade in services" which are governed by Chapter 12, and Chapter 12 is beyond the scope of arbitration.
Matters beyond the scope of arbitration go to jurisdiction
[47] Article 21 of the UNCITRAL Arbitration Rules give the Arbitration Tribunal the power to rule on objections regarding its jurisdiction. Article 21(3) requires that any plea that the Tribunal does not have jurisdiction be raised not later than the Statement of Defence. Article 21(4) requires that "in general" the Tribunal should rule on its jurisdiction as a preliminary question, however, the Tribunal may proceed with the arbitration and rule on its jurisdiction as part of its final award. In this case, SDMI submits that Canada did not object to the jurisdiction of the Tribunal as required in Article 21 of the UNCITRAL Arbitration Rules, and is now barred from seeking judicial review on this basis.
[48] The Court has considered the Notice of Arbitration and the Statement of Claim submitted by the respondent and Canada's Statement of Defence. Canada submits that it challenged the jurisdiction of the Arbitration Tribunal in paragraph 4 of its Statement of Defence under the heading "The Facts":
¶ 4. Except as expressly submitted below, Canada denies the facts alleged in paragraphs 2, 4 - 12 and 16 - 57 of the Claim and puts Myers to the strict proof of every fact alleged in those paragraphs.
Canada submits that this plea satisfies the requirements of Article 21(3) of the Arbitral Rules because paragraphs 6 to 12 of the Statement of Claim are under the heading "Jurisdiction of this Tribunal", and alleged that the claim is within the jurisdiction of the Tribunal.
[49] Article 21 requires that a party make a clear objection to the jurisdiction of the Arbitration Tribunal as soon as possible, and not later than the Statement of Defence. In reviewing paragraph 4 of Canada's Statement of Defence, the Court concludes that Canada did not make a clear objection to the Tribunal's jurisdiction. The plain and ordinary meaning of the Rules are that a party must make a specific, express objection to jurisdiction, and must ask the Tribunal to rule on its jurisdiction as a preliminary question. At that stage, parties can seek judicial review before the arbitration proceeds in, what was in this case, a lengthy and expensive arbitration. I find paragraph 4 of Canada's Statement of Defence obtuse with respect to jurisdiction.
[50] Canada's position on this matter is undermined by its own past practice. In a prior NAFTA Chapter 11 arbitration under the same Arbitration Rules between Ethyl Corporation and the Government of Canada, Canada clearly and expressly stated that the Tribunal is without jurisdiction to entertain Ethyl's claim and requested that:
"The Tribunal should, as a preliminary matter, determine that it does not have jurisdiction to hear the claim or any part of the claim."
As a result, the NAFTA Arbitration Tribunal in that case rendered a preliminary decision dated June 24, 1998 with respect to its jurisdiction in Ethyl Corporation and the Government of Canada 38 ILM 708 (1999).
[51] The Arbitration Tribunal decision in this case did not expressly address "jurisdiction". However, it considered Canada's argument that SDMI did not have any "standing" to bring the complaint in Chapter VII of its liability decision under the heading:
"WAS SDMI AN INVESTOR? WAS THERE AN INVESTMENT?"
[52] This issue was considered as a mixed question of fact and law, not as a question of jurisdiction. At no point in this part of the decision is there any reference to an objection to the "jurisdiction" of the Tribunal by Canada.
[53] Jurisdiction is a term of art and a legal objection must be raised clearly at the outset of the arbitration. Canada failed to do so in this case, and cannot now argue that the Tribunal did not have jurisdiction to render the three decisions which are the subject of these applications for judicial review. To find otherwise would undermine the clear and express procedures incorporated in NAFTA for the resolution of disputes.
Failure to give notice
[54] The rule requiring that jurisdiction be pleaded is analogous to the requirement in subsection 57(1) of the Federal Court Act that a party may not raise a constitutional question unless notice has been served in accordance with section 57. The Federal Court of Appeal and the Supreme Court of Canada have held that the failure to give notice under the Act bars a party from subsequently challenging the constitutionality of a law. See McIntosh v. Canada (Secretary of State), [1994] F.C.J. No. 67 at paragraph 5, (F.C.A.), Bell v. Canada (Canadian Human Rights Commission), [1996] 3 SCR 854 at paragraph 38, Nelson v. Canada, [2000] F.C.J. No. 1613 at paragraph 7, (F.C.A.), Stone v. Canada, [2003] F.J. No. 953 at paragraph 4 (F.C.A.).
Judicial Review under Article 34(2)(b)(ii) - Public Policy
[55] Article 34(2)(b)(ii) of the Code provides that a Court may judicially review and set aside an award where "it is in conflict with the public policy of Canada". "Public policy" does not refer to the political position or an international position of Canada but refers to "fundamental notions and principles of justice." Such a principle includes that a tribunal not exceed its jurisdiction in the course of an inquiry, and that such a "jurisdictional error" can be a decision which is "patently unreasonable", such as a complete disregard of the law so that the decision constitutes an abuse of authority amounting to a flagrant injustice. See Navigation Sonamar Inc. v. Algoma Steamships Ltd., [1987] R.J.Q. 1346; Analytical Commentary on the Draft Text of the Model Law on International Commercial Arbitration, Eighteenth Session of the United Nations Commission on International Trade Law; Mexico v. Feldman, supra at paragraph 87.
[56] In the case at bar, the Tribunal's findings with respect to the two jurisdictional questions, and with respect to Article 1102, are not "patently unreasonable", "clearly irrational", "totally lacking in reality" or "a flagrant denial of justice". Accordingly, the Court concludes that there is no aspect of the Tribunal decisions under review which "conflicts with the public policy of Canada".
Standard of review on legal meaning of definitions in NAFTA and
the application of NAFTA Chapter 12
[57] I will undertake this review in the alternative that I am wrong in my conclusion above that Canada did not properly plead jurisdiction before the Tribunal so that Canada is now barred from seeking judicial review on this basis.
[58] On the two issues raised by Canada and Mexico that go to the jurisdiction or the "scope of the submission to arbitration", the standard of review on a pure question of law is correctness, and on a mixed question of law and fact is reasonableness.
[59] In Dynamex Canada Inc. v. Mamona, [2002] F.C.J. No. 534, the Federal of Appeal stated that characterizing an issue as legal or jurisdictional does not mean that the standard of review must be correctness. In applying the "pragmatic and functional approach" the Federal Court held that on questions of law normally considered by the Courts, and not on questions that engage the special expertise of the tribunal or require the application of the facts to the law, the standard is correctness. However, the manner in which the correct legal principles are applied to the facts is a question of mixed law and fact, and should be reviewed on the standard of reasonableness. The Court of appeal stated at paragraph 45:
In my view, the determination of the referee as to the common law principles applicable to the determination of the status of a person as an employee should be reviewed on the standard of correctness. I reach that conclusion, despite the privative clauses, because it is a question of law of a kind that is normally considered by the courts, and is not a question that engages the special expertise of a referee. However, the manner in which those principles are applied to the facts, which is a question of mixed law and fact, should be reviewed on the standard of reasonableness. Thus, if the referee's reasons disclose no error of law, and the conclusion is reasonably supportable on the record after a somewhat probing examination, the decision will stand.
[60] For these reasons, I will review the arbitral award with respect to the legal meaning of the word "investor" and "investment of an investor" in NAFTA on the standard of correctness. With respect to the application of the facts to the definitions, I will review the award on the standard of reasonableness.
[61] With respect to the second issue related to jurisdiction, namely whether Chapter 11 applies to cross-border trade in services under Chapter 12, the same two standards will be applied.
The meaning of "investor" and "investment of an investor" in Chapter 11
[62] The Tribunal concluded that SDMI was an "investor" for the purposes of Chapter 11 of NAFTA and that Myers Canada was an "investment". (See paragraph 231 of the decision regarding liability.) Article 1139 defines "investor of a Party", "investment of an investor of a Party" and "investment" in broad terms.
[63] Myers Canada, the Canadian company incorporated by the Myers brothers in Canada, was an "investment". This is not disputed. The basis for Canada's objection to the right of SDMI to bring this claim is that SDMI did not own the shares of Myers Canada. The definition of "investment of an investor of a Party" means that the investment is either owned by the investor or "controlled directly or indirectly" by the investor. The definitions read:
investment of an investor of a Party means an investment owned or controlled directly or indirectly by an investor of such Party;
investor of a Party means a Party or state enterprise thereof, or a national or an enterprise of such Party, that seeks to make, is making or has made an investment;
This is broad language, and contrasts with the precise definition of "control" in a comparable chapter of the Canada-U.S. Free Trade Agreement (Chapter 16). In Chapter 11 of NAFTA there is no definition of "control". Instead the definition of "investment of an investor of a Party" uses the broad words "indirectly controlled" -- an open-ended, vague definition. The Vienna Convention provides that words in a treaty such as NAFTA shall be given their ordinary meaning. The ordinary meaning of "control" is defined in Barber, Katherine. The Canadian Oxford Dictionary. Toronto: Oxford University Press, 2001 as:
"The power of directing, command (under the control of)".
[64] Whether SDMI indirectly controlled Myers Canada becomes a question of fact. On the evidence Mr. Dana Myers, the President of SDMI, testified that he exercised control over SDMI in the United States and over SDMI's operations in Australia, Saudia Arabia, Mexico and Canada as CEO of SDMI. It was a family business which operated in the United States and other countries through SDMI. SDMI advanced the money necessary for the operation of Myers Canada, SDMI provided personnel and technical support for Myers Canada and SDMI expected to share in the profits from Myers Canada. Other witnesses confirmed that SDMI, through its President, Mr. Dana Myers, had "the power