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Procedural Background
This decision of the Ontario Superior Court of Justice (Commercial List) addresses an application brought by Alicia Grace and other investors (the "Applicants") to set aside an arbitral award dated August 19, 2024 (the "Award"), rendered in an arbitration seated in Toronto and administered by ICSID under the 1976 UNCITRAL Arbitration Rules (ICSID Case No. ARB UNCT/18/4). The underlying dispute arose under Chapter Eleven of the North American Free Trade Agreement ("NAFTA") in relation to the Applicants' investments in Integradora de Servicios Petroleros Oro Negro S.A.P.I. de C.V. ("Oro Negro"), which owned offshore drilling rigs leased to Mexico's state-owned petroleum company, Petróleos Mexicanos ("Pemex"). The Applicants alleged that Pemex unilaterally reduced contract revenues and subsequently terminated the contracts, driving Oro Negro into insolvency.
In the Award, the arbitral tribunal dismissed the arbitration for lack of jurisdiction on two grounds: first, concluding that it lacked jurisdiction ratione personae over two dual U.S.-Mexican nationals by importing a "dominant and effective nationality" requirement into NAFTA; and second, holding that it lacked jurisdiction over the remaining Applicants' claims under NAFTA Article 1116 on the basis that their claims constituted indirect or reflective losses. The Applicants applied to set aside the Award under Articles 16.2 and 34(2) of the UNCITRAL Model Law (as incorporated into Ontario law via the International Commercial Arbitration Act, 2017), also arguing that the tribunal's composition was improper under Article 34(2)(a)(iv) due to a reasonable apprehension of bias on the part of arbitrator Andrés Jana Linetzky.
Jurisdictional Determinations
Justice J. Dietrich conducted a de novo review on the jurisdictional questions, applying the standard of correctness pursuant to binding Ontario appellate authority (Mexico v. Cargill and Russian Federation v. Luxtona Limited). The Court analyzed the text of NAFTA Articles 1116 and 1117 under Article 31 of the Vienna Convention on the Law of Treaties ("VCLT"). Addressing dual nationality, the Court held that the ordinary meaning of Articles 1116 and 1117 contains no textual prohibition barring dual nationals from bringing claims against one State of their nationality under the UNCITRAL Rules. The Court rejected Mexico's submission that subsequent State practice under VCLT Article 31.3(b) established an agreement among NAFTA Parties to import the customary international law "dominant and effective nationality" rule, observing that the NAFTA Parties' Article 1128 submissions reflected divergent legal positions rather than a clear, well-understood, and agreed common position.
Regarding indirect loss, the Court held that the tribunal erred in concluding that NAFTA Article 1116 excludes claims by minority shareholders for indirect loss or diminution in share value. Relying on Cargill and the reasoning in Kappes v. Guatemala, the Court determined that Article 1116 requires only that the investment meet the definition in Article 1139 (which encompasses indirect investments) and that the loss be causally linked to the breach. The Court found no concordant subsequent practice among NAFTA Parties restricting Article 1116 to direct injury, noting that non-disputing party submissions had offered conflicting interpretations.
Reasonable Apprehension of Bias and Disposition
Applying the objective test set out in Aroma Franchise Company and the IBA Guidelines on Conflicts of Interest in International Arbitration, the Court evaluated the Applicants' challenge regarding Mr. Jana. While the arbitration was pending and the award remained under reserve, Mr. Jana accepted a mandate as counsel to the respondent State in Juan Carlos Arguello and Ernesto Arguello v. Republic of Honduras under the CAFTA-DR, which involved a substantially similar shareholder loss issue, without disclosing the retention to the Applicants. The Court concluded that an informed and fair-minded observer would conclude that an arbitrator acting simultaneously as counsel for a State defending against an indirect loss claim in another proceeding faced an irreconcilable conflict, establishing a reasonable apprehension of bias. Consequently, the Court granted the application, set aside the Award, and ordered Mexico to pay CAD 100,000 in agreed costs.
