Recent Development in International Commercial Arbitration

This scepticism dates back to the Alaska Boundary Dispute of 1903 between the United States, Great Britain and Canada, in which a panel of six arbitrators were tasked with drawing the boundary between Alaska and the Yukon during what is alternately called the Alaskan or Yukon Gold Rush. When the sole British arbitrator joined the three American members to outvote the Canadians, a wave of nationalist and protectionist sentiment washed across the country. More recently, this scepticism was apparent – though certainly less pronounced – in the early days of NAFTA, particularly about the investor-state arbitration provisions in Chapter 11.

Perhaps as a result of this checkered history, Canada was somewhat slow to join the world in embracing international arbitration as a preferred method of resolving cross border disputes. The Canadian Parliament ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("The New York Convention") in 1986, some 27 years after the Convention was drafted, and after 67 other countries had already ratified the convention. Additionally, Canada only signed the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States ("The ICSID Convention") in 2006. To this day, Canada has not ratified the convention, even though over 140 other countries have.

Nonetheless, in both public and private spheres, Canada has become recognized as a leading arbitration jurisdiction. Canadian lawyers are highly sought after as arbitrators and counsel in international arbitral disputes. Canada is recognized for having a highly developed and predictable legal system, and Canadians are uniquely experienced in both the common law and civil law traditions.

Every province has enacted laws implementing the New York Convention, and adopting the UNCITRAL Model Law on International Commercial Arbitration, UN Doc. A/40/17, ann. I (1985) ("Model Law"). Four of the 10 provinces have also implemented the ICSID Convention (British Columbia, Newfoundland and Labrador, Ontario and Saskatchewan), and there are indications that Parliament will ratify the ICSID Convention without waiting for all the provinces to implement it.

In short, Canada has become a recognized world leader in international arbitration. In 2006, Montréal hosted the conference of the International Council for Commercial Arbitration, and the very next day Toronto hosted the International Law Association's Biennial conference.

As it stands today, Canada is a leading site for holding international arbitrations, and generally speaking, is a friendly jurisdiction for the enforcement of foreign arbitral awards.

In this article, we canvas some of the most significant recent developments in the practice of international arbitration in Canada, as well as major developments from around the world that affect Canadian arbitrators. First, we consider procedural changes to how arbitrations are conducted. Second, we comment on the most recent judicial decisions on the enforcement of arbitral awards and arbitration agreements.

The growth in the number of investor state cases tracks the equally dramatic increase in the number of Bilateral Investment Treatment (BITs), or Foreign Investment Protections Agreements (FIPAs) as they are called by the Department of Foreign Affairs and International Trade Canada. Over 2500 BITs have been concluded worldwide.⁵ Out of the 27 BITs to which Canada is a party, seven were signed since 2005,⁶ and a dozen additional BITs are currently being negotiated.⁷ Investor-state dispute settlement procedures are now standard provisions in Canadian BITs, modelled after the investor-state procedures found in NAFTA's Chapter 11.⁸

In recent years, two major procedural changes have occurred in the case of investor-state arbitrations, and these are reflected in Canada's recent BITs. First, the proceedings typically are open to the public, and increasingly the public has gained access to all the documents submitted to and produced by the arbitral tribunals. Second, tribunals have allowed third parties to make submissions in investor-state arbitrations as interveners or amicus curiae.

However, in recent years, the practice of the Canadian Government has been to publish information about the arbitrations it is involved in, and this is now the prevailing practice for NAFTA Chapter 11 arbitrations. Starting in 1998, Canada's position has been that transparency is permitted under Chapter 11 disputes even if it is not mandatory. For instance, many of the key documents to its arbitrations are made available on the DFAIT Canada's website.

NAFTA Free Trade Commission (FTC), which adopted an interpretive note on transparency in 2001, recognizing that while NAFTA does not mandate disclosure, neither does it "impos[e] a general duty of confidentiality on the disputing parties to a Chapter Eleven arbitration."¹⁰

Perhaps mindful of Canada's past skepticism about international arbitrations, NAFTA tribunals have recognized that greater openness in Chapter 11 arbitrations will improve the public's perception of the legitimacy of the process.¹¹ In recent cases, Tribunals have made public the parties' submissions and the transcripts from the hearings, along with the communications between the tribunal and the parties, the orders of the tribunals and arbitral awards.¹²

These procedural changes to how NAFTA Chapter 11 arbitrations are conducted were entrenched by the 2006 amendments to the ICSID Arbitration Rules and Additional Facility Rules. These amendments stated that tribunals have the power to open up hearings to the public unless a party objects. This is significant since the ICSID Rules and Additional Facility Rules are two of three sets of arbitral rules contemplated under Chapter 11, the other being the UNCITRAL Arbitration Rules.

However, these practices under NAFTA remain optional. While most arbitrations involving Canada are conducted openly and transparently, parties retain the power to object to public disclosure.

Canada's recent BITs with other countries provide for much firmer guarantees of transparency. In the Model Foreign Investment Protections Agreement ("Model Agreement") found on DFAIT Canada's website, full transparency in arbitrations is mandated, not just permitted. Article 38 of the Model Agreement – titled "Public Access to Hearing and Documents" – establishes that investor-state arbitrations "shall be open to the public," and portions may be held in camera only where it is "necessary to ensure the protection of confidential information." It also provides that "[a]ll documents submitted to, or issued by, the Tribunal shall be publicly available unless the disputing parties otherwise agree, subject to the deletion of confidential information." Instead of having to agree to make the proceedings open, the parties must agree to have them closed, meaning that Canada can now guarantee openness.

Moreover, Canada has ensured that these specific provisions are included in its most recent BITs. These exact provisions, or very similar ones, are found in Canada's agreements with Slovakia (2010), Romania (2009), the Czech Republic (2009), Latvia (2009), Jordan (2009) and Peru (2006).¹³

The importance of increased transparency in investor-state arbitrations highlights one of the key differences between investor-state arbitration and private commercial arbitrations. In private arbitrations, confidentiality often is a mutually important goal for the parties. The ability to elect a decision-maker, and conduct the resolution of a dispute privately, are key advantages in commercial arbitrations. By contrast, in investor-state arbitrations the cross-border aspects of the dispute resolution process, and the lack of any alternate process such as a court with clear jurisdiction over both parties, gives rise to the need for arbitration as a consensual dispute resolution mechanism. Transparency becomes the goal to be achieved as an integral part of that process. Nevertheless, the need for transparency may conflict in some cases with a desire by private parties to use arbitration to resolve disputes in a confidential forum.

The first such occasion was the 2001 decision in Methanex v. United States, where environmental groups participated in an arbitration about the removal of certain additives from gasoline.¹⁴ This was followed closely that year by the decision in UPS v. Canada, where the Canadian Union of Postal Workers successfully applied to make third party submissions.¹⁵

The FTC subsequently endorsed the practice in 2003, and set out criteria to be considered when deciding whether to allow third party interveners. In 2006, this practice was incorporated into the ICSID rules, along the lines set out by the FTC.¹⁶ Consequently, since NAFTA contemplates the use of the ICSID rules, the third party rules are now an entrenched feature in Chapter 11 arbitrations.

Additionally, Canada's Model Agreement expressly allows for third party participation. Article 39, titled "Submissions by Non-Disputing Party" roughly replicates the criteria set out by the FTC for allowing third party interveners. These provisions, or very similar ones, are found in Canada's agreements with Slovakia (2010), Romania (2009), the Czech Republic (2009), Latvia (2009), Jordan (2009) and Peru (2006).¹⁷

One of the main focuses of the new rules is cost effectiveness and efficiency. This is the express object of Art. 22, which specifies that:

"The arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute."

The tribunal is authorized to take the parties' conduct into account when deciding about costs. This includes the extent to which the parties conducted the arbitration expeditiously and cost-effectively.¹⁸

The new Rules also make provision for the appointment of an emergency arbitrator, proceedings with multiple parties and arising out of multiple contracts.¹⁹ Another provision of note is Article 22(3), which allows any party to make requests concerning the confidentiality of the proceedings, in addition to the power to protect trade secrets which was found in the ICC Rules 1998.²⁰

One noteworthy development is that there are no longer any formal requirements for international arbitration agreements.²¹ Also of note is Article 1447, which establishes that arbitration agreements are independent from the contract to which they relate. Accordingly, a finding that a contract is void will not affect the arbitration agreement, and vice-versa.

Four recent appellate decisions on the enforcement of arbitral awards are worthy of note. The first is Seidel v. Telus, in which the Supreme Court was asked to determine whether the arbitration clause in a cell phone contract was a bar to a class action court proceedings under consumer protection legislation.²² The second the decision of the Supreme Court of the United States in AT&T Mobility v. Concepcion, which considered a very similar issue to Seidel, the enforceability of a clause in a cell phone contract that forbade class proceedings.²³ A third case of note is Yugraneft Corp. v. Rexx Management Corp., which asked whether domestic limitation periods apply to the enforcement of foreign awards.²⁴ The fourth case is Accentuate Ltd v. Asigra Inc, which considered whether a party could enforce an award in Canada while simultaneously challenging it in the UK.²⁵

The claimant Ms. Seidel was a TELUS cell phone customer who complained that TELUS falsely represented how it calculates air time for billing consumers. The standard form contract between her and TELUS specified that any "claim, dispute or controversy" arising out of the contract would be "determined by private, confidential, and binding arbitration." When Ms. Seidel brought suit in BC's Supreme Court under British Columbia's Business Practices and Consumer Protection Act, seeking a declaration that TELUS engaged in deceptive and unconscionable trade acts and practices, TELUS argued that this complaint was barred by the arbitration agreement.

Ms. Seidel argued that the purpose of the BPCPA was to deter companies from engaging in deceptive or unconscionable conduct, and the only way this could be accomplished was through a public court proceeding. She noted that the Act allowed anyone to bring this type of claim against TELUS, not just customers. Additionally, s. 3 of the BPCPA specified that "[a]ny waiver or release by a person of the person's rights, benefits or protections under this Act is void except to the extent that the waiver or release is expressly permitted by this Act."

TELUS argued that mediation and arbitration allow parties to resolve their conflicts in a less costly fashion. It urged the Court to give effect to the contract between the parties, and to allow individuals to structure their affairs as they see fit.

The Supreme Court split five to four, with the majority siding with Ms. Seidel. On behalf of the majority, Binnie J. held that private arbitration is "antithetical" to the goal of the consumer protection legislation, which is to deter companies by publicly shaming them for violations of the Act. Moreover, he noted that an arbitrator would not have jurisdiction to grant remedies to third parties who were also affected by the alleged deceptive practices.

Justices Deschamps and LeBel wrote for the dissent. They held that the majorities' interpretation of the consumer protection legislation was out of synch with the New York Convention and the UNCITRAL Model, both of which had been implemented by the BC Legislature. They held that a clear intention to depart from these international agreements is necessary, and that otherwise, courts should give effect to the clear intentions of the parties in arbitration clauses.

The Court's decision may have profound implications for consumer protection legislation across the country. It also remains to be seen whether the two recent retirements of Justices Binnie and Charron affect whether the decision in Seidel will be followed in future.

The case pit an arbitration agreement against, on the one hand, a California law that deemed class action waivers in arbitration agreements to be unenforceable, and on the other, the Federal Arbitration Act, which establishes that arbitration agreements are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."²⁶

The claimants, who were successful in the Ninth Circuit Court of Appeal, argued that the bar to class proceedings in the arbitration agreement was unconscionable under California law, and therefore qualified as grounds for "the revocation of any contract" under the FAA. They argued that the arbitration agreement did not have the same deterrent effect as class proceedings. Following the California Supreme Court's decision in Discover Bank, a class-action waiver in a contract that would involve small amounts of damages is unconscionable if the "the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money."²⁷

AT&T underlined the highly favourable terms in the arbitration agreement. For instance, under the agreement, AT&T would pay all of the costs of a non-frivolous claim, and in the event that the arbitral award exceeded AT&T's last offer, AT&T would pay a premium of US$7,500 on top of the award. Considering that the Concepcions' claim was for US$30.22, this created a significant incentive for AT&T to settle. Moreover, the costumer would never have to pay AT&T's legal fees, and could participate in the arbitration over the phone.

Scalia J. allowed AT&T's appeal, holding that the state law was an obstacle to the FAA. He held that the overriding goal of the Act was to allow parties to design their own arbitration schemes that fit their unique requirements, and to enforce these agreements as so designed. Requiring all arbitrations to allow for class proceedings would complicate the proceedings and delay their resolution. Thomas J. wrote concurring reasons that reached the same conclusions.

Justice Breyer dissented, joined by Ginsburg, Sotomayor and Kagan JJ. In their view, Courts interpreting the FAA should defer to state law on whether the arbitration agreement qualified as unconscionable. Since the California Supreme Court had ruled that such agreements were unconscionable, the provision of the FAA did not apply. Moreover, the dissent underlined that there is a long history of class arbitrations, and that such proceedings do not undermine the efficiency of dispute resolution.

As noted above, Canada has ratified the New York Convention, and every province (including Alberta) had enacted laws implementing the Convention. The central object of the Convention is to make arbitral awards uniformly and reciprocally enforceable in all 142 signatory states. However, Article III of the Convention creates a major exception to this uniformity, specifying that arbitral awards shall be enforced "in accordance with the rules of procedure of the territory where the award is relied upon." Local rules are permitted to interfere with enforcement if they qualify as "rules of procedure." Indeed, the UNCITRAL Model Law on International Commercial Arbitration, UN Doc. A/40/17, ann. I (1985) ("Model Law") does not specify procedural rules for enforcing arbitral awards, nor does it set out limitation periods.

The issue to be decided in the Yugraneft case was whether foreign arbitral awards are subject to the limitation periods in force in Canadian provinces. More broadly, the Court was asked to determine the degree to which each of the different provinces could interfere with the enforcement of international arbitral awards.

Rexx was successful both at trial in the Alberta Queen's Bench and in the Alberta Court of Appeal, both of which held that a foreign arbitral award is subject to a two-year limitation period. The Court of Appeal's decisions was the object of criticism and ridicule throughout the international legal community, with one commentator referring to Alberta as the "the new Old West," and calling on "the sheriff" Chief Justice McLachlin of the Supreme Court of Canada to "restore law and order."²⁸ Recognizing the importance of this case to the field of International Arbitration in Canada, a number of arbitral institutions intervened and made submissions to the Supreme Court, including the London Court of International Arbitration and the Canadian Arbitration Congress.

The LCIA argued that the Alberta Limitations Act should not apply to arbitral awards because no limitation period was contained in the Model Law. It argued that the Model Law was intended to set out a comprehensive and exhaustive list of the circumstances in which a local court may decline to enforce awards.²⁹ The Canadian Arbitration Congress argued that the failure to include limitation periods in the Model Law could mean only that arbitral awards could be enforced at perpetuity. Further, it argued that limitation periods were not merely procedural rules under Canadian law because they were determinative of a party's substantive legal claim. Consequently, applying a local limitation period would be contrary to the New York Convention, which only exempted local "rules of procedure."³⁰

Rexx responded that limitation periods have historically been treated as procedural in common law courts. It further argued that since limitation periods are found in many jurisdictions around the world, the silence of the Model Law could only mean that it was left up to the local government to decide.

Justice Rothstein held that the term "rules of procedure" in Art. III of the New York Convention had a broader meaning than the term "procedural rules" under Canadian law.³¹ Consequently, regardless of whether limitation periods were procedural or substantive, they were "rules of procedure", under Article III of the Convention. He agreed with Rexx that the Model Law intentionally left limitation periods up to the local authority. As such each Canadian province has the authority to enact its own limitation periods for foreign arbitral awards.

The Court further held that arbitral awards are not akin to judgments or court orders. Quoting from its own decision in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, the Court wrote that "[a]rbitration is part of no state's judicial system" and "owes its existence to the will of the parties alone."³² Accordingly, arbitral awards are subject to the ordinary limitation period in Alberta, namely two years from the time the plaintiff discovers that it has a claim.

Additionally, it is unclear just how broadly the Supreme Court will interpret the phrase "rules of procedure" in the future. The reasons of Justice Rothstein come close to saying that a local rule will qualify as a "rule of procedure" whenever the legislature wants it to. As he wrote for the unanimous Court:

"The only material question is whether or not the competent legislature intended to subject recognition and enforcement proceedings to a limitation period. If it did, the limitation period in question will be construed as a "rule of procedure" as that term is understood under the Convention."³³

If carried to its logical extreme, this argument could allow legislatures to effectively neutralize the reciprocal enforcement rights guaranteed by the New York Convention.

There is one encouraging note in the decision for those interested in enforcing foreign arbitral awards in Canada. The Court underlined that the clock only starts to run for the limitation period once the arbitral creditor discovers that the debtor has assets in that particular province. In practice, this will greatly reduce the risk that practical difficulties in discovering the location of a party's assets would defeat the claim.

This question arose in a dispute between Asigra, an Ontario company, and Accentuate, a United Kingdom company that acted as reseller of Asigra's products in the UK. The parties agreed that their contract would be governed by the laws of Ontario, and that any dispute would be resolved by a panel of three arbitrators under the UNCITRAL rules.

A dispute arose in 2006 when Asigra announced to Accentuate that it intended to terminate their contract immediately. It gave notice of its intention to arbitrate the matter. Accentuate responded with a counter-claim, and sought compensation for wrongful dismissal. It claimed that it was entitled to £310,426.94 compensation under the terms of its contract with Asigra, and additionally that it was entitled to £1,750,000.00 under the Commercial Agents Regulations of the UK.

As agreed to in their contract, the arbitration took place in Toronto. The tribunal held that it had jurisdiction to rule on Accentuate's UK claim as well. The three-member panel went on to hold that Accentuate was not entitled to compensation under the UK regulations because it had contracted to be bound by the laws of Ontario, to the exclusion of other jurisdictions. The panel ultimately held that Accentuate was nonetheless entitled to $14,112.32 compensation under the terms of its agreement.

Accentuate moved to enforce this arbitral award in Ontario, while simultaneously also challenging the award in UK courts. Asigra objected. It argued that the Ontario court should refuse to enforce the award because it would be contrary to public policy within the meaning of Article 36(1)(b)(ii) of the UNCITRAL Model Law to allow the UK company to both enforce and challenge an arbitral award in different jurisdictions. It also asked for an anti-suit injunction prohibiting Accentuate from pursuing its UK claim.

The Court of Appeal disagreed. The court delivered a unanimous oral judgment holding that re-litigating the arbitral award in the UK "does not rise to the level of public policy sufficient to defeat the respondent's right to enforce the arbitration award within the meaning of art. 36(1)(b)(ii)."³⁴ To hold otherwise would weaken the guarantee that Ontario would enforce foreign arbitration awards in accordance with the New York Convention.