Ontario Court Annuls NAFTA Award For Want Of Jurisdiction And Arbitrator’s Failure To Disclose Similar Mandate

In Grace et al v. United Mexican States, 2026 ONSC 2104, Justice Dietrich of the Ontario Superior Court set aside an arbitral award issued under the NAFTA on the basis that (i) the tribunal wrongly declined jurisdiction and (ii) one of the arbitrators failed to disclose his involvement as counsel for a state in an arbitration involving similar issues and was therefore subject to a reasonable apprehension of bias.

Background

The Applicants were investors in a group of Mexican companies known as Oro Negro. Oro Negro leased five offshore oil rigs to Mexico’s state-owned oil company. The Applicants alleged that Mexico unilaterally and improperly amended, and then terminated, the relevant contracts without compensation, driving Oro Negro out of business. The Applicants then commenced arbitration pursuant to Chapter 11 of the NAFTA, seated in Toronto under the UNCITRAL rules. Canada and the United States participated as non-disputing parties, as was their right under the NAFTA.

The Tribunal consisted of three arbitrators: Andres Jana Linetsky (“Mr. Jana”), appointed by the Applicants; Gabriel Bottini, appointed by Mexico; and Professor Diego Fernandez Arroyo, appointed as President.

The Tribunal ultimately issued an award ruling that it lacked jurisdiction (1) over two of the Applicants because their dominant and effective nationality was Mexican, making them ineligible to claim against Mexico under NAFTA; and (2) over the remaining Applicants under article 1116 of NAFTA because the Applicants’ losses were indirect losses, whereas article 1116 only contemplates claims for direct losses (the “Award”).

Following the arbitration, the Applicants became aware that Mr. Jana, their appointed arbitrator, had accepted an appointment as counsel for the state of Honduras in an arbitration under a different trade agreement where the indirect versus direct loss issue was in dispute (the “Arguello Arbitration”).

The Court’s decision

The Applicants sought to set aside the Award on the basis that the Tribunal incorrectly determined both jurisdictional issues, and on the basis that there were justifiable doubts as to Mr. Jana’s impartiality arising from his failure to disclose his involvement in the Arguello Arbitration.

Justice Dietrich ruled in the Applicants’ favour and set aside the Award on all three grounds.

The Jurisdictional Issues

Beginning with the standard of review, Justice Dietrich cited the Court of Appeal for Ontario’s decision in Mexico v Cargill, 2011 ONCA 622, for the proposition that an arbitral tribunal’s jurisdictional decision is reviewed for correctness. She also referenced the Court of Appeal’s more recent decision in Russian Federation v Luxtona Limited, 2023 ONCA 393, in which the Court of Appeal clarified that an application to set aside an arbitral award on jurisdictional grounds is a hearing de novo and not merely a review of the tribunal’s decision. In either case, the Court was not to defer to the arbitral tribunal’s assessment of its own jurisdiction.

The dual nationality issue centered on the language of articles 1116 and 1117 of NAFTA, which do not allow nationals of a NAFTA state to make claims against his or her own state. However, as Justice Dietrich noted, the application of these principles to dual nationals has been inconsistent. She pointed to conflicting decisions in which various tribunals have ruled that:

1. Dual nationals may bring claims against either state in respect of which they are a national.
2. Dual nationals may not bring claims against either state in respect of which they are a national.
3. Dual nationals are only prohibited from bringing claims against the state of their “dominant and effective nationality.”

Justice Dietrich acknowledged that, under the Vienna Convention on the Law of Treaties, one of the factors a court shall consider in interpreting a treaty is whether there is a “subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.”

Mexico primarily argued that no claims by dual nationals were permitted against either of their nationalities. In the alternative, Mexico argued that Canada, Mexico, and the United States had, through legal submissions, established a clear, well-understood and agreed common practice that the “dominant and effective nationality” test should be applied such that it amounted to “subsequent practice” that ought to decide the issue. Justice Dietrich rejected both arguments.

First, she found that the language of articles 1116 and 1117 does not prohibit claims by dual nationals against either of their nationalities and that the UNCITRAL rules similarly do not prohibit such claims.

Second, Justice Dietrich found that the NAFTA states had not established a subsequent practice of applying the dominant and effective nationality test. Among other things, Mexico’s primary argument undermined its alternative argument, as Mexico was arguing something different than the alleged “subsequent practice”. Indeed, all three NAFTA states took inconsistent positions on the ability of dual nationals to claim against one of the states in which they are a national.

Accordingly, Justice Dietrich found that the Tribunal applied an incorrect test (the dominant and effective nationality test) and, consequently, erred in declining jurisdiction.

On the second jurisdictional question—whether the Applicants could claim for indirect losses under NAFTA article 1116, or whether indirect loss claims fell exclusively under article 1117, which did not apply to several of the applicants—Justice Dietrich rejected Mexico’s position, finding that article 1116 covered losses relating to investments incurred “by reason of, or arising out of” the relevant breach. She held that the direct or indirect nature of a loss was not determinative.

Justice Dietrich again noted that the three NAFTA parties articulated aligned, yet different, positions on this issue in their respective briefs. As such, there was no common position upon which the Tribunal could rely to interpret the scope of Art. 1116 as barring indirect loss claims.

Justice Dietrich favoured the tribunal’s reasoning in Kappes v. Guatemala, (13 March 2020) ICSID Case No. ARB/18/43, a decision interpreting a different treaty with functionally identical provisions to NAFTA articles 1116 and 1117. That tribunal found that nothing in the two provisions’ text limited the equivalent to article 1116 to direct losses, and that reading that provision broadly did not render the equivalent to article 1117 redundant. Justice Dietrich therefore concluded that the Applicants’ claims for indirect losses fell within the Tribunal’s jurisdiction.

Justifiable doubts as to Mr. Jana’s impartiality

Justice Dietrich then turned to the Applicants’ allegation that there were reasonable doubts as to Mr. Jana’s impartiality. She referenced the Court of Appeal’s decision in Aroma Franchise Company v Aroma Espresso Bar Canada, 2024 ONCA 839, which confirmed that the objective bystander test applied to assess reasonable apprehension of bias in domestic Canadian law applied. Justice Dietrich then explained that the duty to disclose potential conflicts is broader than what may amount to justifiable doubts as to impartiality. Failing to adequately disclose certain circumstances may create justifiable doubts, even if those circumstances would not have been sufficient to disqualify an arbitrator had they been disclosed.

Justice Dietrich also referenced the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), which provide examples of situations where potential conflicts ought to be disclosed. One example on the “orange list” is that an arbitrator is “acting as counsel in an unrelated case with similar issues.” This was the case here since, after accepting his appointment to the tribunal, Mr. Jana took on the mandate to act for Honduras in defending indirect loss claims that Justice Dietrich found were materially similar to those before the Tribunal.

Justice Dietrich went on to find that this gave rise to a reasonable apprehension of bias (i.e., justifiable doubts) in respect of Mr. Jana. She found a significant risk that the Arguello Arbitration would raise similar issues to those before the Tribunal and therefore ought to have been disclosed. Justice Dietrich further explained that, had Mr. Jana disclosed his appointment in the Arguello Arbitration, the Applicants could have had the opportunity to ask Mr. Jana questions about the matter, including the position Honduras would take in that dispute. By failing to disclose, Mr. Jana hampered the Applicants’ ability to investigate, which resulted in a reasonable apprehension of bias.

Analysis

One interesting aspect of the decision arises from Justice Dietrich’s discussion of the standard of review. She referenced both Cargill, in which the Court of Appeal held that the arbitral tribunal’s jurisdictional determination is reviewed for correctness, and Luxtona, in which the same court held that challenges to jurisdictional decisions under Ontario’s enactment of the UNCITRAL Model Law are hearings de novo. In Luxtona, the Court reconciled these statements by stating that “The nature of a proceeding to set aside an arbitral award is a separate question from the standard to be applied in that proceeding.”

However, by its nature, a de novo hearing is not a “review”; it is a fresh consideration in which the court may hear evidence that the parties did not put before the arbitral tribunal, and without meeting the usual exacting test for admitting fresh evidence on appeal. As Lord Mance stated in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46 (cited with approval in Luxtona): “The tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue is whether the tribunal had any legitimate authority in relation to the government at all” (para 30). Lord Saville put an even finer point on it. Though acknowledging that it may be “useful to see how the arbitrators dealt with the question”, the proceeding before the Court is not in the nature of a review:

“In my judgment therefore, the starting point cannot be a review of the decision of the arbitrators that there was an arbitration agreement between the parties. Indeed no question of a review arises at any stage. The starting point in this case must be an independent investigation by the court of the question whether the person challenging the enforcement of the award can prove that he was not a party to the arbitration agreement under which the award was made.” (para 160).

It remains to be seen whether the Court of Appeal (or another Canadian appellate Court) takes the issue up in the future to clarify this technical point.

With respect to the impartiality issue, Grace is the latest in a line of Ontario cases, following Aroma and Vento Motorcycles, showing that courts will carefully guard arbitrator impartiality in Ontario-seated arbitrations. In particular, Grace reinforces the fact that arbitrators must be mindful of their continuing duty to disclose, and failing to do so when appropriate could imperil an arbitrator’s appointment or, as in this case, a tribunal’s award. The issue that arose in this case also brings into focus the added level of complexity visited upon arbitrators who still act as counsel, which is especially pronounced in the investor-state arbitration context where arbitrators are typically stratified into those appointed by investors and those appointed by states.

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