COURT OF APPEAL FOR ONTARIO
CITATION: Russian Federation v. Luxtona Limited, 2023 ONCA 393
DATE: 20230602
DOCKET: C70318
Fairburn A.C.J.O., MacPherson and Miller JJ.A.
BETWEEN
The Russian Federation
Applicant
(Respondent)
and
Luxtona Limited
Respondent
(Appellant)
Lincoln Caylor, Sabrina A. Bandali, Gannon Beaulne, Sakina Babwani, Shaan
Tolani, for the appellant
Jonathan Lotz and Natali Antturi, for the respondent
Heard: April 3, 2023
On appeal from the order of the Divisional Court (Justices Calum U.C. MacLeod
R.S.J., David L. Corbett and Freya Kristjanson), dated June 30, 2021, with reasons
reported at 2021 ONSC 4604, setting aside the order of Justice Michael A. Penny
dated December 13, 2019.
MacPherson J.A.:
[1] This appeal is grounded in a contractual dispute between a country,
the Russian Federation (“Russia”), and a corporation, Luxtona Limited (“Luxtona”),
[Page 2]
incorporated in Cyprus. The dispute arose from a contested arbitral decision on
jurisdiction that went in favour of Luxtona. The arbitration was “seated” in Toronto
so Ontario courts became involved in the appeals that arose from the initial
decision of the arbitral tribunal.
[2] A procedural issue arose almost immediately in the Canadian courts: could
Russia file fresh evidence on its appeal of the arbitral tribunal's decision on
jurisdiction? Justice Dunphy, a Commercial List judge of the Superior Court, said
"Yes".
[3] After Justice Dunphy made this ruling, he left the Commercial List and
assumed other judicial duties. Justice Penny was assigned the case. The parties
asked Justice Penny to decide additional evidentiary issues respecting the new
evidence adduced by Russia. During that inquiry, Justice Penny raised questions
about the legal basis for filing the new evidence in the first place.
[4] Justice Penny determined that, as the application judge, he was not bound
by Justice Dunphy's prior interlocutory ruling. He concluded that Russia was not
entitled as of right to file evidence on the application and could only do so if it could
meet the stringent test for admission of fresh evidence on appeal, set out in
Palmer v. The Queen, [1980] 1 S.C.R. 759, or bring itself within one of the
exceptions to the principle that review of an arbitral decision is based on the record
before the tribunal.
[Page 3]
[5] Russia appealed Justice Penny's interlocutory decision declining to admit its
proposed fresh evidence to the Divisional Court.
[6] The Divisional Court panel identified the issues: 1) whether Justice Penny
erred in revisiting an issue previously decided by Justice Dunphy; and 2) if not,
whether Justice Penny erred in finding that Russia is not entitled to adduce
evidence that was not before the arbitral tribunal.
[7] The Divisional Court agreed with Justice Penny on the first issue, holding
that he had jurisdiction to revisit Justice Dunphy's interlocutory ruling.
[8] The Divisional Court disagreed with Justice Penny on the second issue.
It held that jurisdictional set-aside applications are hearings de novo and,
therefore, the parties can, as of right, introduce evidence that was not before the
tribunal.
[9] Luxtona sought and was granted leave to appeal the Divisional Court's
decision.
[10] The appellant Luxtona is a former shareholder of Yukos, an energy company
based in Russia. It alleges that the respondent Russia violated provisions of the
Energy Charter Treaty, 17 December 1994, 2080 U.N.T.S. 95, relating to
[Page 4]
protection of investments, including Luxtona's investment in Yukos. Russia is a
signatory to the Treaty but has not ratified it.
[11] Luxtona seeks damages of US $701 million. It contends that, pursuant to
article 45(1) of the Treaty, Russia agreed provisionally to apply the Treaty,
including its arbitration provisions, to the extent that this provisional application
was not inconsistent with Russia's constitution, laws and regulations.
[12] Russia takes the position that it did not agree to apply the Treaty
provisionally and that the arbitration provisions of the Treaty are inconsistent with
Russian law.
[13] The parties appointed an arbitral tribunal seated in Toronto. The tribunal
received evidence and heard legal arguments on the jurisdiction issue.
Both parties put forward extensive evidence on relevant Russian law. In a lengthy
interim award, the arbitral tribunal held that it had jurisdiction to arbitrate Luxtona's
claims against Russia.
[14] Russia applied to the Ontario Superior Court to set aside the arbitral
tribunal's decision on jurisdiction. It based its application on the UNCITRAL Model
Law on International Commercial Arbitration (the “Model Law”), enacted in Ontario
as Schedule 2 to the International Commercial Arbitration Act, 2017, S.O. 2017, c.
2, Sch. 5.
[Page 5]
[15] In particular, Russia relied on Articles 16(3) and 34(2) of the Model Law.
Article 16(3) reads:
The arbitral tribunal may rule on a plea referred to in paragraph (2) of
this article either as a preliminary question or in an award on the
merits. If the arbitral tribunal rules as a preliminary question that it has
jurisdiction, any party may request, within thirty days after having
received notice of that ruling, the court specified in article 6 to decide
the matter, which decision shall be subject to no appeal; while such a
request is pending, the arbitral tribunal may continue the arbitral
proceedings and make an award. [Emphasis added.]
[16] Article 34(2) reads, in relevant part:
An arbitral award may be set aside by the court specified in article 6
only if:
(a) the party making the application furnishes proof that:
(i) a party to the arbitration agreement referred to in article 7 was under
some incapacity; or the said agreement is not valid under the law to
which the parties have subjected it or, failing any indication thereon,
under the law of this State.
[17] The Ontario Superior Court rendered three decisions on the jurisdiction
issue.
[18] In support of its application to set aside the tribunal's decision on the
jurisdiction issue, Russia filed new expert evidence on Russian law. This evidence
had not been before the arbitral tribunal. Luxtona objected.
[Page 6]
[19] In his ruling, Justice Dunphy held that Russia was entitled as of right to
adduce its proposed fresh evidence. He said:
... I am not confined to the findings of fact made in regard
to Russian law by the tribunal where these relate to the
question of jurisdiction nor am I confined to the record
consulted by the tribunal in reaching its own conclusions.
...
The application of the standard of correctness does not
imply ignoring the work that has been done by the
tribunal to date but it does not confine my task to that
record either.
[20] When he rendered his decision, Justice Dunphy was a member of the
Commercial List of the Superior Court. When he left the Commercial List, Justice
Penny was assigned to hear the application.
[21] During argument on the application, Justice Penny expressed some doubt
about the correctness of Justice Dunphy's reasoning and decision. In his reasons,
Justice Penny explained the situation in this fashion:
Due to changes in judicial assignments, Dunphy J. left
the Commercial List and the application was assigned to
me. I was asked to decide a further evidentiary question
resulting from the new evidence filed. In the course of the
hearing on that issue, I questioned the legal basis for the
filing of new evidence in the first place. Not being
satisfied with the answer, I directed that the issue of
admissibility of the new evidence be re-argued before
me. That re-argument took place on October 23, 2019.
[Page 7]
[22] Following the re-argument, Justice Penny released reasons that determined
that Russia could not introduce its proposed fresh evidence. He concluded:
For these reasons I conclude that fresh evidence in an
application to set aside an arbitral tribunal's award on
jurisdiction under Articles 16 and 34 of the Model Law
may not be introduced as of right. A party seeking to
adduce fresh evidence in this circumstance must show
that:
1) the evidence could not have been obtained using
reasonable diligence;
2) the evidence would probably have an important
influence on the case;
3) the evidence must be apparently credible; and
4) the evidence must be such that if believed it could
reasonably, when taken with the other evidence
adduced at the hearing, be expected to have affected
the result.
Russia has not attempted to justify admission of its fresh
evidence under any of these four requirements.
Accordingly, Russia's new evidence is not admissible in
its application to review the correctness of the arbitral
tribunal's award on jurisdiction.
[23] Russia appealed this decision to the Divisional Court.
[24] The three-judge panel of the Divisional Court allowed the appeal and set
aside Justice Penny's decision. Speaking for the court, Justice D.L. Corbett framed
the issues:
There are two issues for this court to decide:
[Page 8]
a. Did the application judge err in revisiting a
previously decided issue?
b. If the answer is no, did the application judge err in
finding that Russia is not entitled as of right to
adduce evidence that was not before the tribunal?
[25] On the first issue, the Divisional Court agreed with Justice Penny.
Justice Corbett concluded:
The application judge was satisfied that the prior ruling
was in error. He concluded that the error would involve
the parties assembling and the court adjudicating upon a
substantial additional record that should not be
considered on a review of the tribunal's interim award.
Thus, he concluded that it was in the interests of justice
to revisit the ruling so that the parties and the court would
not waste further time and money assembling a
potentially extensive record that was not admissible.
On this logic this was a sound basis for the application
judge to revisit the earlier ruling and he had jurisdiction to
enter into this inquiry and to make the ruling that he did.
[26] On the second issue, the Divisional Court disagreed with Justice Penny.
Justice Corbett concluded:
In my view the text of the Model Law, adopted in Ontario
law, prescribes a de novo hearing in a court application
"to decide the matter" of the tribunal's jurisdiction. Mexico
v. Cargill does not say otherwise. Dallah is strong
authority to the contrary, and although the Court of
Appeal decision in Mexico v. Cargill does not rule on this
point, it does generally approve the reasoning in Dallah.
The strong international consensus on this point favours
the Dallah approach, and the Model Law itself
encourages “uniformity” on such points. The onus is on
the challenging party to set aside a tribunal's preliminary
ruling on jurisdiction. But because the court is hearing the
jurisdictional issue de novo, the parties are entitled as of
[Page 9]
right to adduce evidence, including expert evidence,
relevant to the jurisdictional issue. [Emphasis added.]
[27] The appellant frames the issues as follows:
[28] Luxtona argues that the Divisional Court erred in not referring to the
competence-competence principle. It says that this principle, which allows an
arbitral tribunal to rule on its own jurisdiction, requires that parties be given strong
incentives to put as much of the record before the tribunal as possible. Otherwise,
in Luxtona's submission, the tribunal will not truly be able to rule on its own
jurisdiction.
[Page 10]
[29] I do not accept this submission.
[30] Article 16(1) of the Model Law provides that an arbitral tribunal may rule on
its own jurisdiction. This principle, referred to variously as competence-
competence, compétence de la compétence, or Kompetenz-Kompetenz, is
fundamental to international commercial arbitration.
[31] Competence-competence serves two primary functions. First, it resolves a
legal loophole whereby an arbitral tribunal that finds itself lacking jurisdiction would,
ipso facto, lose its ability to make a ruling to that effect: see Nigel Blackaby, K.C.,
Constantine Partasides, K.C., & Alan Redfern, Redfern and Hunter on International
Arbitration, 7th ed. (Oxford: Oxford University Press, 2023). And second, it
promotes efficiency by limiting a party's ability to delay arbitration through court
challenges to the tribunal's jurisdiction: see Uber Technologies Inc. v. Heller, 2020
SCC 16, at para. 122 (per Brown J., concurring).
[32] Thus, in Dell Computers v. Union des consommateurs, 2007 SCC 34, at
para. 84, the Supreme Court of Canada set out a “general rule that ... a challenge
to the arbitrator's jurisdiction must be resolved first by the arbitrator.”
[33] That is precisely what happened in this case: the tribunal was provided with
the first opportunity to resolve Russia's challenge to its jurisdiction.
[34] That is as far as the competence-competence principle goes. It does not
require any special deference be paid to an arbitral tribunal's determination of its
[Page 11]
own jurisdiction. Competence-competence is best understood as “a rule of
chronological priority" rather than as “empowering the arbitrators to be the sole
judge of their jurisdiction”: see Emmanuel Gaillard & John Savage, eds., Fouchard,
Gaillard, Goldman on International Commercial Arbitration (The Hague: Kluwer
Law International, 1999), at paras. 659-60.
[35] As the Divisional Court correctly noted, the “uniformity principle” set out in
Article 2A(1) of the Model Law makes international decisions strongly persuasive
in Ontario. The very nature of international arbitration makes it highly desirable that
Ontario's regime should be coherent with those of other countries, especially (but
not exclusively) those that have also adopted the Model Law. The weight of
international authority shows that the competence-competence principle does not
limit the fact-finding power of a court assessing an arbitral tribunal's jurisdiction.
[36] In Dallah Real Estate and Tourism Holding Company v. The Ministry of
Religious Affairs, Government of Pakistan, [2010] UKSC 46, a unanimous decision
of the United Kingdom Supreme Court, Lord Collins wrote, at para. 84, that
competence-competence “is no doubt a general principle of law.” However, he
wrote, “it does not follow that the tribunal has the exclusive power to determine its
own jurisdiction ... Nor does it follow that the question of jurisdiction may not be
reexamined by the supervisory court of the seat in a challenge to the tribunal's
ruling on jurisdiction.”
[Page 12]
[37] The U.K. court in Dallah referred to the decision of the French Cour de
cassation in the Pyramids case (République Arabe d'Egypte c. Southern Pacific
Properties Ltd, Cour de cassation Civ. 1re, 6 January 1987, No. 84-17.274). There,
the French court held that the court's role in assessing the tribunal's jurisdiction is
[translation] "to examine as a matter of law and as a matter of fact all circumstances
relevant to the alleged defects” [Emphasis added.]
[38] Because the court retains the final say over questions of jurisdiction, it
necessarily follows that the court must be, as a Singapore court put it, "unfettered
by any principle limiting its fact-finding ability”: AQZ v. ARA, [2015] SGHC 49, at
para. 57.
[39] There are sound policy reasons why this should be the case. As set out in
another Singapore decision (Insigma Technology Co. Ltd. v. Alstom Technology
Ltd., [2008] SGHC 134, at para. 22, aff'd [2009] SGCA 24):
First, if the court was limited to a process of review, it
might be reviewing the decision of a tribunal that itself
had no jurisdiction to make such a finding. Second, the
procedure to determine jurisdiction is available to a party
that took no part in the arbitral proceedings; if the court
was confined to a review of the tribunal's decision this
would greatly undermine the ability of the challenging
party to make its case. Third, if there is to be a challenge
on an issue of fact, the court should not be in a worse
position to make an assessment than the tribunal, and
should therefore be able to examine witnesses in the
usual way.
[Page 13]
[40] For these reasons, as the Singapore court held in AQZ, a court assessing
an arbitral tribunal's jurisdiction is not limited to the record that was before the
tribunal. Put another way, an application to set aside an arbitral award for lack of
jurisdiction is a proceeding de novo, not a review of or appeal from the tribunal's
decision.
[41] However, that comes with a significant caveat. I agree with the following
proposition, set out in the English case of Electrosteel Castings Ltd v. Scan-Trans
Shipping and Chartering Sdn Bhd, [2003] 2 All E.R. (Comm) 1064, at para. 23
(Q.B.), and cited in AQZ:
[N]othing said here should encourage parties to seek two
evidential bites of the cherry in disputes as to the
jurisdiction of arbitrators, not least because (1) evidence
introduced late in the day may well attract a degree of
scepticism and (2) the court has ample power to address
such matters when dealing with questions of costs.
[42] Accordingly, while there is no need to strictly apply the Palmer test, where a
party has participated fully in the arbitration, its failure to raise a piece of evidence
before the tribunal may be relevant as to the weight the court should assign that
evidence.
[43] The appellant's second submission is that the Divisional Court erred by
saying that there was a “strong international consensus” in favour of its conclusion
that a de novo hearing was appropriate in the circumstances of this case.
[Page 14]
[44] I do not accept this submission. During oral argument, counsel for Luxtona
referred to a single Singapore lower-court decision (Government of the Lao
People's Democratic Republic v. Sanum Investments Ltd., [2015] SGHC 15) in
support of its position. However, the weight of international authority supports the
Divisional Court's conclusion. The leading case in this area, specifically relied on
by the Divisional Court, is Dallah, wherein a five-judge panel of the United Kingdom
Supreme Court addressed this issue.
[45] In his reasons, Lord Mance said, at para. 30:
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. This is so however full was the evidence before it
and however carefully deliberated was its conclusion.
[46] In a similar vein, Lord Collins said, at para. 96:
The consistent practice of the courts in England has been
that they will examine or re-examine for themselves the
jurisdiction of arbitrators. This can arise in a variety of
contexts, including a challenge to the tribunal's
jurisdiction... or in an application to stay judicial
proceedings on the ground that the parties have agreed
to arbitrate. Thus in Azov Shipping Co v. Baltic Shipping
Co... Rix J. decided that where there was a substantial
issue of fact as to whether a party had entered into an
arbitration agreement, then even if there had been a full
hearing before the arbitrator the court, on a challenge...
should not be in a worse position than the arbitrator for
the purpose of determining the challenge. This
decision... is plainly right.
[47] In a third judgment, Lord Saville said, at para. 160:
[Page 15]
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. The findings of fact made by
arbitrators and their view of the law can in no sense bind
the court, though of course the court may find it useful to
see how the arbitrators dealt with the question. Whether
the arbitrators had jurisdiction is a matter that in
enforcement proceedings the court must consider for
itself.
[48] Courts in several other countries, including Hong Kong, Singapore and
Australia, have explicitly endorsed Dallah and followed its reasoning: see, for
example, S Co v. B Co, [2014] 6 HKC 421; AQZ v. ARA, [2015] SGHC 49; Sanum
Investments Limited v. The Government of the Lao People's Democratic Republic,
[2016] SGCA 57; and Lin Tiger Plastering Pty Ltd. v. Platinum Construction (Vic)
Pty Ltd, [2018] VSC 221.
[49] Based on all of these authorities, I cannot conclude that the Divisional Court
erred in determining that there was a “strong international consensus” in favour of
a de novo hearing in the circumstances of this dispute.
[50] The appellant's third submission is that the Divisional Court erred by
concentrating on only Article 16 of the Model Law and ignoring Article 34. It was
[Page 16]
incumbent on the Divisional Court to consider the appellant's position under both
provisions before making a final determination.
[51] I am not persuaded by this submission. In its reasons, the Divisional Court
explicitly set out Articles 16 and 34 of the Model Law and considered the leading
cases relating to both provisions, including this court's discussion about Article 34
in Mexico v. Cargill, 2011 ONCA 622, wherein Feldman J.A. said, at paragraph 48,
"when deciding its own jurisdiction, the tribunal has to be correct.”
[52] Moreover, I disagree with the appellant that the nature of the court's
jurisdiction is any different under Article 34 than it is under Article 16. This issue
was not before the court in Cargill. The question in that case was whether
deference was owed to the tribunal's determination of its own jurisdiction, not
whether an application to set aside is a review or a proceeding de novo. The nature
of a proceeding to set aside an arbitral award is a separate question from the
standard to be applied in that proceeding. The Divisional Court correctly
interpreted Article 16(3) as providing for a proceeding de novo, rather than a review
or an appeal. Nothing in the language of Article 34(2)(a)(i) or (iii) suggests the
nature of the proceeding under those articles is any different. Indeed, the
provisions should be interpreted harmoniously, since the grounds for setting aside
a jurisdictional award under Article 34(2)(a)(i) also apply under Article 16(3): see
Gary B. Born, International Commercial Arbitration, 3rd ed. (The Hague: Kluwer
Law International, 2021), at p. 1191.
[Page 17]
[53] I would dismiss the appeal. Pursuant to the agreement of counsel, the
respondent is entitled to its costs of the appeal fixed at $75,000, inclusive of
disbursements and HST.
Released: June 2, 2023 “J.M.F”
"J.C. MacPherson J.A.”
"I agree. Fairburn A.C.J.O.”
“I agree. B.W. Miller J.A.”