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09 July 2015
A recent decision of the Ontario Superior Court of Justice has reaffirmed the Canadian courts' commitment to upholding the principles underlying the United Nations Commission on International Trade Law (UNCITRAL) Model Law and the New York Convention. The decision confirms that the courts retain considerable discretion to uphold an international arbitral award, even where grounds for setting aside the award have been established.
In Popack v Lipsyzc (2015 ONSC 3460) the court dismissed an application to set aside an international arbitral award on the basis that an ex parte meeting between the tribunal and a former adjudicator had violated the notice requirements in the parties' arbitration agreement, prevented the plaintiff from presenting his case and rendered the resulting award contrary to public policy.
The court rejected the plaintiff's arguments despite finding that the ex parte meeting had established grounds to set aside the award under Article 34 of the Model Law – that is, the lack of notice of the meeting to the parties amounted to a breach of the parties' arbitration agreement. After weighing the potential prejudices to each party, the court concluded that setting aside the award would result in actual prejudice and therefore refused to do so.
The applicant and respondent were former business partners. When their relationship broke down, they referred their dispute to arbitration in a rabbinical court. The arbitrator, Rabbi Schwei, ordered Lipsyzc to sell his shares to Popack. Subsequently, Popack alleged that he had relied on certain misrepresentations by Lipsyzc in entering into the share purchase agreement, sparking a second dispute. When Schwei was unavailable to preside over the second dispute, the parties agreed to the jurisdiction of an alternative rabbinical court.
During the second arbitration, Lipsyzc asked the tribunal to interview Schwei. Popack did not object. After hearings concluded, the tribunal met with Schwei privately, without notice to either party. A month later, the tribunal rendered its decision.
When the parties learned of the meeting, Popack's counsel suggested that there should be a full hearing on the matter if the tribunal intended to consider Schwei's evidence. The tribunal responded by confirming that Schwei's evidence had not affected the decision.
Popack applied to set aside the award in the Ontario Superior Court of Justice, relying on Article 34 of the UNCITRAL Model Law, which is incorporated into Ontario's International Commercial Arbitration Act (RSO 1990, c-I.9). Popack's arguments were based entirely on the effect of the ex parte meeting between the tribunal and Schwei. Specifically, Popack claimed that the award should be set aside because:
Lipsyzc contended that the parties had contracted out of Article 34 of the Model Law; however, the court disagreed with this interpretation of the arbitration agreement and held that Article 34 applied to the dispute. The court also noted that any modification of the Model Law would be ineffective insofar as it attempted to contract out of mandatory provisions of the Model Law (eg, Articles 18 (equal treatment) and 24 (notice of hearings and communication of information)), or conflicted with Ontario public policy.
In considering the merits of the application, the court acknowledged that the tribunal's failure to give the parties notice of its meeting with Schwei was grounds to set aside the award pursuant to Article 34(2)(a)(iv) of the Model Law – that is, the tribunal had failed to conduct the arbitration in accordance with the notice requirements set out in the arbitration agreement.
Noting that Article 34 is permissive in nature, the court held that despite the breach of the Model Law, it retained discretion to uphold the award. As such, the court went on to consider the whether to exercise its discretion.
The court accepted that it would usually be inappropriate for a tribunal to hold an ex parte interview with a witness without express or implied authority from the parties, but held that the seriousness of the tribunal's breach should inform its decision to uphold or set aside the award. The court also took note of the broad language in the parties' arbitration agreement, which bestowed wide procedural powers on the tribunal.
Mandating in favour of upholding the award, the court pointed out that the tribunal had interviewed Schwei in response to an unopposed request by one of the parties, and that Schwei was a neutral witness. The court was also influenced by the conduct of Popack's counsel in making inappropriate ex parte submissions to the tribunal and relaying only a qualified request for a hearing.
The court then examined the prejudice that could arise from upholding or setting aside the award. The arbitration agreement precluded any transcript or reasons for the tribunal's decision. While it accepted that Schwei's evidence could potentially have prejudiced Popack, the court found little evidence of actual prejudice. Conversely, the court found that setting aside the award would cause actual prejudice to Lipsyzc because a material witness had since passed away and there was no record of his evidence.
In weighing the evidence, the court dismissed Popack's application, concluding that:
"The breach by the Arbitral Tribunal, although significant, must be weighed against the other relevant factors discussed above including the actual prejudice that will result if the Award is set aside. Taking everything into consideration in the exercise of my discretion, I conclude that this is not an appropriate case to set aside the Award."
While the court did not expressly consider Popack's alternate arguments regarding his inability to present his case and the alleged violation of Ontario public policy, it noted that the gravamen of each submission was the same (ie, potential unfairness arising from the meeting with Schwei). Implicit in the court's decision to dismiss the application was the conclusion that the breach did not render the award contrary to public policy and did not significantly affect Popack's ability to present his case.
Popack v Lipszyc further affirms the Canadian courts' propensity to uphold international arbitral awards under Article 34 of the Model Law. It provides a unique example of a court's exercise of its discretion under the Model Law to uphold an award despite grounds for setting it aside having been established. The decision sends a strong reminder to courts to carefully weigh potential prejudices before setting aside an arbitral award, regardless of the ground advanced for doing so.
For further information on this topic please contact Craig R Chiasson at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email (firstname.lastname@example.org). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
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