COURT OF APPEAL FOR ONTARIO
CITATION: Clayton v. Canada (Attorney General), 2024 ONCA 581
DATE: 20240724
DOCKET: COA-23-CV-0026
Huscroft, George and Favreau JJ.A.
BETWEEN
William Richard Clayton, Douglas Clayton, Daniel Clayton and
Bilcone of Delaware Inc.
Applicants (Appellants)
and
Attorney General of Canada
Respondent (Respondent)
Gregory J. Nash, Brent R.H. Johnston, John Terry and Natasha Williams, for the
appellants
Roger Flaim and Andrea Bourke, for the respondent
Heard: May 15, 2024
On appeal from the judgment of Justice Jasmine T. Akbarali of the Superior Court
of Justice, dated November 24, 2022, with reasons reported at 2022 ONSC 6583.
Huscroft J.A.:
[1] This is an appeal from the order of the application judge dismissing an
application to set aside an arbitration award made pursuant to Chapter 11 of the
NAFTA. The appellants argue that the tribunal exceeded its jurisdiction and that
its award violates public policy.
[Page 2]
[2] There is no merit to this appeal. As I will explain, the appellants' jurisdictional
argument is a transparent attempt to circumvent clear limits on the ability of courts
to interfere with the decisions of arbitration boards, limits that this court has already
explained fully: Mexico v. Cargill, Incorporated, 2011 ONCA 622, 107 O.R. (3d)
528 (C.A) and Alectra Utilities Corporation v. Solar Power Network Inc., 2019
ONCA 254, 145 O.R. (3d) 481 (C.A). The argument that the tribunal's award
violates public policy is a variation on the jurisdictional theme.
[3] I would dismiss the appeal for the reasons that follow.
[4] The facts are set out fully in the decision of the application judge at paras. 2-
13. It is enough for purposes of this decision to set out the facts in brief compass.
[5] The appellants sought to develop a quarry in Nova Scotia. Their proposed
project required approval from both the federal and provincial Ministers of the
Environment. As part of the approval process, a federal-provincial joint review
panel (JRP) conducted an environmental assessment. The JRP concluded that
the project would cause significant and irreversible changes that would have
adverse effects on the “community's core values” and recommended that approval
be denied. The federal and provincial Ministers denied approval subsequently.
[6] The appellants invoked the NAFTA arbitration process. At the first stage of
the arbitration, the tribunal held that the respondent breached its obligations under
[Page 3]
arts. 1102 and 1105 of the NAFTA by conducting a flawed environmental
assessment. The respondent's application to the Federal Court of Canada to set
aside this decision was dismissed: Canada (Attorney General) v. Clayton, 2018
F.C. 436, [2018] 4 F.C.R. 394.
[7] The appellants sought redress for the injury caused by the NAFTA breaches
in the second stage of the arbitration. Specifically, the appellants sought damages
for the profits they say they would have earned had the project gone ahead -
US$440 million over a 50-year period.
[8] The tribunal found that the causal link between the NAFTA breach and the
injury alleged by the appellants was not established. Although the appellants were
deprived of an opportunity to have the environmental impact of their proposed
project assessed in a fair and non-arbitrary manner, recommendation of the project
was not inevitable had the assessment been conducted properly. The tribunal
noted that at the first stage of the arbitration it did not decide what the outcome of
a proper environmental assessment should have been, including what mitigation
measures should have been prescribed. Various outcomes of a NAFTA-compliant
process were reasonably conceivable. For example, the JRP could reasonably
have: (1) concluded the project would have serious adverse effects on right whale
and lobster habitats not capable of mitigation; (2) concluded the project had
serious socio-economic adverse effects not capable of mitigation that could have
[Page 4]
outweighed the expected positive effects and justified rejection of the project; or
(3) recommended approval of the project subject to conditions that would render it
economically unviable.
[9] Even if the proposed project had received a positive recommendation from
the JRP following a NAFTA-compliant process, ministerial approval could have
been denied, or approval could have been granted subject to conditions that
rendered the project economically unviable.
[10] Thus, the tribunal concluded that the appellants failed to establish “in all
probability" or with a “sufficient degree of certainty”—the standards of proof set out
in international law—that they would have obtained the necessary approval for
their project and would be operating profitably if the environmental assessment
process had operated properly. The appellants failed to establish injury beyond
deprivation of the opportunity to have a fair and non-arbitrary environmental
assessment, and the tribunal awarded the appellants US$7 million in damages for
this loss.
[11] The application judge dismissed the appellants' application to set aside the
damage award. She noted that the tribunal identified the proper international law
standard in determining causation and concluded that the correct application of
that standard did not raise a “true question of jurisdiction”, as set out in Cargill. In
[Page 5]
the alternative, the application judge concluded that if she was wrong and the
question was jurisdictional in nature, the tribunal applied the correct standard of
proof and did not exceed its jurisdiction. The application judge also concluded that
the award was not contrary to public policy, in that it was not morally repugnant
and was not arrived at in a manner contrary to our notions of morality and justice.
[12] There is no right of appeal from the tribunal's award. An application to set
aside the award is the exclusive recourse and is governed by s. 34 of the
Commercial Arbitration Code, Schedule I to the Commercial Arbitration Act, R.S.C.
1985, c. 17, which provides in relevant part as follows:
(1) Recourse to a court against an arbitral award may be made only
by an application for setting aside in accordance with paragraphs (2)
and (3) of this article.(2) 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 Canada; or(ii) the party making the application was not given proper notice
of the appointment of an arbitrator or of the arbitral proceedings
or was otherwise unable to present his case; or(iii) the award deals with a dispute not contemplated by or not
falling within the terms of the submission to arbitration, or
[Page 6]
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; or(iv) the composition of the arbitral tribunal or the arbitral
procedure was not in accordance with the agreement of the
parties, unless such agreement was in conflict with a provision
of this Code from which the parties cannot derogate, or, failing
such agreement, was not in accordance with this Code; or(b) the court finds that:
(i) the subject-matter of the dispute is not capable of settlement
by arbitration under the law of Canada; or(ii) the award is in conflict with the public policy of Canada
[emphasis added].
[13] Section 34 imposes strict limits on the ability of courts to interfere with
arbitration awards. Subsection 34(2)(a)(iii) makes clear that a court may set aside
the tribunal's award only if the appellants establish that it determined matters
beyond those that were submitted to the tribunal for arbitration. “True jurisdictional
questions" is a term that has been used to describe the limited nature of reviewable
error under s. 34(2)(a)(iii), and the standard of review for such errors is
correctness. However, as I will explain below there is good reason to stick to the
wording of the legislation that authorizes the court to set aside an arbitration award
under s. 34(2)(a)(iii).
[Page 7]
[14] An award may also be set aside if it is in conflict with the public policy of
Canada under s.134(2)(b)(ii). This is a mixed question of law and fact and is
subject to review on the deferential palpable and overriding error standard.
[15] The appellant abandoned the procedural fairness argument it made in the
court below but renews the other two arguments it made before the application
judge. According to the appellants:
[16] This court emphasized the limited scope of judicial oversight under
s. 34(2)(a)(iii) in Cargill, at para. 47:
[C]ourts are to be circumspect in their approach to
determining whether an error alleged under
art. 34(2)(a)(iii) properly falls within that provision and is
a true question of jurisdiction. They are obliged to take a
narrow view of the extent of any such question. And when
they do identify such an issue, they are to carefully limit
the issue they address to ensure that they do not,
[Page 8]
advertently or inadvertently, stray into the merits of the
question that was decided by the tribunal.
[17] In Alectra the court was concerned with domestic rather than international
arbitration but considered an almost identical provision in the Arbitration Act,
s. 46(1)(3). Again, the court emphasized the limited scope of judicial oversight,
paras. 25-27:
In order to succeed on an application to set aside an
arbitration award, an applicant must establish either that
the award deals with a dispute that the arbitration
agreement does not cover or contains a decision on a
matter that is beyond the scope of the arbitration
agreement....
In short, s. 46(1)3 requires that arbitrators act within the
bounds of the authority granted by the arbitration
agreement pursuant to which they are appointed – no
less, but no more. Section 46(1)3 is not an alternate
appeal route and must not be treated as such.
[18] There is no room for doubt as to this court's approach to commercial
arbitration: review under s. 34(2)(a)(iii) of the Code or s. 46(1)(3) of the Arbitration
Act is not an appeal. It is not an occasion for courts to review final and binding
arbitration awards for either correctness or reasonableness. In order to intervene,
the court must identify what Cargill described as a “true jurisdictional question”.
That term, and in particular the modifier “true”, is intended to emphasize the limited
scope of judicial oversight. The modifier “true” is necessary because of the
[Page 9]
problems inherent in the concept of jurisdiction itself, in particular its amenability
to manipulation.
[19] Courts must not permit final and binding arbitration awards to be undermined
by spurious jurisdictional arguments. The limited review contemplated by
s. 34(2)(a)(iii) of the Code cannot be permitted to expand beyond its legitimate
boundaries.
[20] The appellants' burden under s. 34(2)(a)(iii) of the Code is to establish that
the tribunal's award “contains decisions on matters beyond the scope of the
submission to arbitration".
[21] The appellants submit that the tribunal failed to determine causation on the
balance of probabilities standard of proof it was required to apply and instead
"applied a standard of proof unknown to international law”—essentially a higher
standard akin to proof beyond a reasonable doubt. In so doing, the appellants
submit that the tribunal “exceeded its jurisdiction":
The Tribunal's causation analysis was nine paragraphs
long. The Tribunal failed to determine what, “in all
probability,” would have happened but for Canada's
breach. Instead, it adopted hypothetical scenarios of
outcomes which “could” have happened. Because these
scenarios were "reasonably conceivable" or "not
impossible," the Tribunal concluded that the [appellants]
[Page 10]
had not met the balance of probabilities standard. In
effect, this required the [appellants] to prove that no other
outcomes were “conceivable” or “possible." That is
different than proving the approval ... [T]he Tribunal paid
lip service to the required standard of proof but what it
actually applied was a standard akin to proof beyond a
reasonable doubt.
[22] There is no question that the tribunal identified the correct standard of proof.
That being so, how could the tribunal be said to have decided a matter beyond the
scope of the submission to arbitration? The answer, according to the appellants,
is that error in applying the law in the course of deciding the damages question
may constitute a failure by the tribunal to apply the law at all - a matter going to
jurisdiction, as opposed to a misapplication of the law of damages within
jurisdiction, which is not subject to review.
[23] This is a fine distinction, to say the least. It suggests that an error by a
tribunal made in the course of deciding a matter remitted to it - in other words, an
error within the tribunal's jurisdiction - may at some point become so substantial
that it leads the tribunal to decide something other than the matter remitted to it,
and so act beyond its jurisdiction.
[24] The appellants' argument invites the court to scrutinize the tribunal's award
for an error of law that is otherwise immune from appeal or review and, if it finds
one, to elevate it into a jurisdictional error - an error that permits the court to set
the award aside - if the court considers the error sufficiently serious on some
[Page 11]
unknown standard. On this approach, the court would find itself involved in
reviewing the merits of final and binding arbitration awards routinely, without any
authority permitting it to do so.
[25] This is a straightforward case. The appellants invoked the arbitration
procedure to redress their damages claim. The expert tribunal was tasked with
determining the quantum of damages caused by Canada's NAFTA breaches and
set about doing so.
[26] On January 26, 2018, the tribunal identified several issues and questions
related to the arbitration and invited the parties to address them in their
submissions. The seventh of these specifically addressed the appellants'
concerns. The tribunal posed the question: “What is the consequence under
NAFTA and/or general international law of factual uncertainty as to whether the
damage would have occurred in the absence of a breach of international law?" The
tribunal directed the parties' attention to the decision of the Permanent Court of
International Justice in the Case Concerning the Factor at Chorzów (Germany v.
Poland), 1928 P.C.I.J. (ser.A.) No. 17 (13 September 1928), which stated that
reparations “must, as far as possible, wipe-out all the consequences of the illegal
act and reestablish the situation which would, in all probability, have existed if that
act had not been committed” (emphasis added). The tribunal also referred to the
decision of the International Court of Justice in the Application of the Convention
[Page 12]
on the Prevention and Punishment of the Crime of Genocide (Bosnia and
Herzegovina v. Serbia and Montenegro), (ICJ Reports 2007), Judgment,
26 February 2007, in which the court outlined the burden on claimants to show a
"sufficiently direct and causal nexus” between the wrongful act and the injury
suffered: “Such a nexus could be considered established only if the Court were
able to conclude from the case as a whole and with a sufficient degree of certainty
that the [injury] would in fact have been averted if the Respondent had acted in
compliance with its legal obligations" (emphasis added).
[27] The tribunal understood the matter before it. The “bone of contention”, as
the tribunal put it, was whether, but for the NAFTA breaches, the appellants would
have obtained the regulatory approval they required to run the quarry.
[28] The tribunal conducted a lengthy hearing and considered a massive factual
record before rendering its decision. It found that the appellants failed to establish
a causal link between the NAFTA breaches and the injury they alleged. In other
words, the appellants failed to prove that their proposed project would have been
approved, quite apart from the subsidiary question, whether it would have operated
profitably for a 50-year period. As a result, the appellants were not entitled to the
damages they claimed and were awarded a lesser amount that reflected the loss
of a fair and non-arbitrary environmental assessment.
[Page 13]
[29] The appellants parse the tribunal's award, singling out particular words and
phrases and inviting the court to find that there is a “true question of jurisdiction"
that requires the court's intervention. But imprecise or infelicitous expression in an
arbitration award - even assuming that is what we have here - does not establish
that the tribunal decided matters beyond the scope of the submission to arbitration
in breach of s. 34(2)(1)(a).
[30] A fair reading of the tribunal's award makes plain that it did what it was asked
to do. It decided the damages matter remitted to it, and in doing so applied the
international law standard. The appellants do not accept the tribunal's analysis, but
they offer no basis that would permit this court to intervene.
[31] The appellants repackage their jurisdictional error arguments in arguing that
the tribunal's award is in conflict with the public policy of Canada. The argument is
essentially as follows: Canadian public policy is rooted in the rule of law. Public
policy means fundamental notions and principles of justice, and an arbitration
award that is patently unreasonable, clearly irrational, totally lacking in reality, or a
flagrant denial of justice is in conflict with the public policy of Canada. The tribunal
failed to act judiciously. It ignored expert evidence proffered by the appellants and
required the appellants to prove that outcomes other than approval of the quarry
were not possible. Ultimately, the tribunal failed to value the appellants' loss of
[Page 14]
their ability to build and operate the quarry and so allowed Canada to benefit from
its own wrongdoing in denying approval of the quarry. The tribunal's award is
"irrational, illogical, arbitrary, and perverse” - so “substantively unreasonable and
manifestly flawed that it conflicts with the principles of adjudicative fairness and
fundamental justice required by the public policy of Canada.” Counsel concluded
his submission by asserting that the tribunal's award “shocks the conscience of the
court".
[32] This argument invokes broad principles developed in administrative and
constitutional law to regulate the exercise of public authority and invites the court
to set aside the tribunal's award on the basis that it is so substantively
unreasonable that it conflicts with these principles.
[33] As I have said, reasonableness review is not available in the context of
arbitration under the Code, and Canada (Minister of Citizenship and Immigration)
v. Vavilov, 2019 SCC 65, [2019] 4 SCR 653 neither requires nor permits otherwise.
Review under s. 34(2)(b) is for the limited purpose of determining whether an
award is in conflict with public policy. This is a high standard that has nothing to do
with reasonableness review. Final and binding arbitration decisions are not to be
reviewed for reasonableness to determine whether they can be said to be so
unreasonable as to be unenforceable on public policy grounds. The appellant's
hyperbolic criticisms of the award do not change the essential nature of the
[Page 15]
problem. The court's authority to set aside an arbitration award on public policy
grounds is narrow and exceptional in nature. It is not a backdoor means of
permitting reasonableness review.
[34] The public policy concept is well understood in the context of the
enforcement of foreign judgments, where it also has a limited scope. In Beals v.
Saldhana, 2003 SCC 72, [2003] 2 S.C.R. 416, the Supreme Court described it as
follows, at para. 75:
The use of the defence of public policy to challenge the
enforcement of a foreign judgment involves
impeachment of that judgment by condemning the
foreign law on which the judgment is based. It is not a
remedy to be used lightly. The expansion of this defence
to include perceived injustices that do not offend our
sense of morality is unwarranted. The defence of public
policy should continue to have a narrow application.
The Court made these remarks in rejecting an argument similar to the one made
by the appellants in this case, at para. 73:
The appellants submitted that the defence of public policy
should be broadened to include the case where neither
the defence of natural justice nor the current defence of
public policy would apply but where the outcome is so
egregious that it justifies a domestic court's refusal to
enforce the foreign judgment. The appellants argued
that, as a matter of Canadian public policy, a foreign
judgment should not be enforced if the award is
excessive, would shock the conscience of, or would be
unacceptable to, reasonable Canadians. The appellants
claimed that the public policy defence provides a remedy
where the judgment, by its amount alone, would shock
the conscience of the reasonable Canadian.
[Page 16]
[35] Conflict with public policy has been considered by this court in the context
of international arbitration decisions in several cases: see e.g., Corporacion
Transnacional de Inversiones S.A. de C.V. v. STET International S.p.A (2000), 49
O.R. 414 (C.A.); United Mexican States v. Karpa (2005), 74 O.R. (3d) 180 (C.A.);
and Consolidated Contractors Group S.A.L. v. Ambatovy Minerals S.A., 2017
ONCA 939, 70 C.L.R. (4th) 51. All of these decisions endorse this statement from
Schreter v. Gasmac Inc. (1992) 7 O.R. (3d) 608 (Gen Div.), at p. 623:
The concept of imposing our public policy on foreign
awards is to guard against enforcement of an award
which offends our local principles of justice and fairness
in a fundamental way, and in a way which the parties
could attribute to the fact that the award was made in
another jurisdiction where the procedural or substantive
rules diverge markedly from our own, or where there was
ignorance or corruption on the part of the tribunal which
could not be seen to be tolerated or condoned by our
courts.
[36] Canadian public policy is committed to respecting the resolution of disputes
by final and binding arbitration, a commitment supported by the posture of judicial
restraint the Code requires. A very high burden must be met if the court is to set
aside an arbitration award on the basis that it is in conflict with Canadian public
policy.
[37] This is not an appropriate case to set out the parameters of the public policy
concept. In general, an award will conflict with Canadian public policy where it
offends our sense of morality. For example, an award may be profoundly at odds
[Page 17]
with Canadian conceptions of justice, such that its enforcement cannot be
countenanced. Corruption is an example in this regard. Canadian courts cannot
be associated with the enforcement of corrupt awards.
[38] Nothing in this case comes close to offending Canadians' sense of morality.
The appellants' claim for damages flowing out of the NAFTA breaches was heard
and determined by an expert tribunal they helped establish. The appellants simply
failed to establish that they were entitled to the damages they sought - they failed
to establish that, but for the NAFTA breaches, they would have been permitted to
develop and operate the quarry they proposed. The appellants established only
that they were denied the opportunity to have a fair and non-arbitrary
environmental assessment of their proposal, and as a result they were
compensated only for this breach. This was the tribunal's decision to make and
there is no basis for the court to set its award aside.
[39] In summary, the tribunal heard and determined the matter that was remitted
to it. The tribunal's award is not subject to appeal nor is it subject to review for
reasonableness. The tribunal's award does not conflict with Canadian public
policy.
[Page 18]
[40] I would dismiss the appeal. The respondent is entitled to costs in the agreed
amount of $100,000, all inclusive.
Released: July 24, 2024 “G.H.”
"Grant Huscroft J.A."
"I agree. J. George J.A.”
“I agree. L. Favreau J.A.”