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12 May 2016
The Ontario Court of Appeal has recently clarified the scope of an application judge's discretion to set aside an arbitral award pursuant to Article 34(2) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law. The decision in Popack v Lipsyzc(1) affirms the decision of the lower court(2) (for further details, please see "Court refuses to set aside international award despite breach of UNCITRAL Model Law") to uphold an arbitral award in the unique circumstances of that case despite an ex parte meeting that amounted to a breach of the arbitration agreement.
In upholding the application judge's decision, the court held that the scope of discretion to set aside an award depends on the circumstances of the breach and concluded that an award should be set aside for a breach of the arbitration agreement's procedure only if it has resulted in "real unfairness" or "real practical injustice".
This dispute arose out of a failed business partnership that was submitted to arbitration before a rabbinical court. After an initial arbitration before Rabbi Schwei, a second dispute arose. During the second arbitration, Lipszyc's representative suggested that the panel speak to Schwei. Without further notice to the parties, the panel met with Schwei ex parte.
Popack's representative heard about the meeting and wrote a letter to the arbitral panel (without notice to Lipszyc) setting out Popack's version of the events and requesting that a full hearing be held if the panel planned to consider Schwei's evidence. The arbitral panel rendered its award shortly thereafter.
After Popack applied to set the award aside, the panel wrote a letter to both parties indicating that Schwei's evidence had no impact on their decision.
Ontario Superior Court of Justice
Popack applied to set aside the arbitral award pursuant to Article 34(2) of the UNCITRAL Model Law – as is incorporated into Ontario's International Commercial Arbitration Act (RSO 1990, c-I.9) – on the bases that:
The application judge upheld the award, noting that although there had been a breach of the parties' arbitration agreement, Article 34(2) is permissive in nature. After weighing the seriousness and potential impact of the breach, potential prejudice flowing from the breach and parties' conduct after learning of the breach, the court held that it was not an appropriate case to set aside the award. The lower court also considered the terms of the parties' arbitration agreement.
Ontario Court of Appeal
On appeal, Popack's counsel argued that the application judge had erred by failing to exercise her discretion in a way that was consistent with international judicial decisions. Popack's counsel submitted that the adoption of the model law was a clear legislative signal to courts to recognise and enforce awards in line with the approach followed in other model law jurisdictions.
The court began by affirming the considerable deference owed to arbitrators:
"The parties' selection of their forum implies both a preference for the outcome arrived at in that forum and a limited role for judicial oversight of the award made in the arbitral forum…The application judge's decision to not set aside the award is consistent with the well-established preference in favour of maintaining arbitral awards rendered in consensual private arbitrations."(3)
The court then reviewed several international cases and concluded that there is no bright-line rule as to the nature of the discretion under Article 34(2). Instead, the application judge held that "the scope of discretion under Article 34(2) is significantly affected by the ground upon which the award could be set aside".(4) Where a party establishes that there was no valid arbitration agreement, for example, the court held that there would be considerably less discretion to uphold the award than in the face of a procedural error.
Accepting that the purpose of the discretion in Article 34(2) is to prevent "real unfairness and real practical injustice", the court went on to hold that when faced with a procedural breach, an application judge should focus on the nature of the breach and "the extent that the breach undermines the fairness or the appearance of fairness of the arbitration and the effect of the breach on the award itself".(5) The court held that the application judge had weighed the relevant factors – including Popack's ex parte communications with the panel after learning of the breach and the death of a material witness – and concluded that she had properly exercised her discretion.
The court also commented on Popack's argument that the judge had erred by failing to independently consider his alternative grounds of appeal (ie, the opportunity to be heard and public policy). In holding that there was no obligation to consider each ground separately, the court said:
"I do not see how the outcome of that balancing exercise can depend on the specific label placed on the procedural error giving rise to the Article 34(2) complaint. For example, characterizing the procedural failure as a breach of Ontario 'public policy' if it could be so characterized, would not, in my view, automatically make the breach more serious or tip the scale in favour of setting aside the award. Whatever label is placed on the procedural error, and whichever subsection of Article 34(2) is invoked, the essential question remains the same – what did the procedural error do to the reliability of the result, or to the fairness, or to the appearance of the fairness of the process?"(6)
This decision affirms the substantial deference afforded to arbitrators by Canadian courts and supports a sensible approach to the scope of application judges' discretion to set aside international arbitral awards under Article 34(2) of the Model Law.
It remains to be seen how this analysis will be applied to the various grounds of appeal under Article 34(2), however, for procedural breaches, the court has clarified that an award should be set aside only if – after considering the seriousness of the breach, the potential impact of the breach, the potential prejudice flowing from setting aside the award and the parties' conduct – the court concludes that the error caused "real unfairness or real practical injustice".
For further information on this topic please contact Craig R Chiasson or Kalie McCrystal at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or email (email@example.com or firstname.lastname@example.org). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
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