Thought leadership from our experts

Domestic and international arbitration: A living tree

Stephen L Drymer, Norton Rose Fulbright, Canada , Woods, Canada

Canada's Constitution has often been likened to a "living tree" capable of growth and expansion; one which, by way of progressive interpretation, accommodates and addresses the realities of modern life. The same might be said of the domestic and international legal instruments that govern arbitration, the interpretation and application of which continue to develop in response to modern commercial reality. Three recent developments illustrate the point.

Arbitrators’ Competence to Order Specific Performance

Nearctic Nickel Mines Inc. v. Canadian Royalties Inc., 2012 QCCA 385, the competence of an arbitral tribunal to order specific performance, and the distinction between specific performance and injunctive relief, was at issue. In addressing the question the Québec Court of Appeal reaffirmed the deference owed to arbitral tribunals and recalled the importance of taking due account of international sources when considering questions related to arbitration law and practice.

Nearctic had granted Canadian Royalties several options to purchase up to 80% of a mining project, as well as a further option to acquire an additional 10% interest in the project if Canadian Royalties met certain conditions. A dispute arose in respect of this 10% option, and Canadian Royalties commenced arbitration. The arbitrator concluded that Canadian Royalties had satisfied the relevant conditions and ordered Nearctic to transfer the 10% interest to Canadian Royalties in accordance with the parties' contract. The award was subsequently homologated (recognized and enforced) by the Superior Court of Québec. Nearctic appealed that decision, arguing that the arbitrator had exceeded his jurisdiction by rendering an order of an "injunctive nature", a power that Nearctic claimed is reserved exclusively to the courts.

Unlike other jurisdictions in Canada and elsewhere where the law explicitly provides for the issuance of injunctive relief by arbitrators, Québec law is silent as regards the competence of arbitrators in this respect. The Court of Appeal reaffirmed the principle that arbitration agreements must be interpreted liberally. It stated that the scope of an arbitrator's mandate includes "all matter connected to the agreement or the questions in dispute." According to the Court of Appeal, "the arbitration process is understood to constitute a complete system of alternate dispute resolution … such a system would not be complete if it was unable to ascertain that its decisions be executed through comprehensive orders of specific performance." The Court distinguished such orders from injunctions. The essence of the test in each case, it said, is "whether the pith and substance of the order truly constitutes an injunction with all of its known penal implications or whether [as in the present case] it is more of a declaratory nature which serves the purpose of giving full effect to the Arbitrator's determinations of the parties' rights."

In concluding that arbitrators may order specific performance, the Court of Appeal has now settled a question that, although clear in many other jurisdictions, had until recently remained unsettled under Québec civil law.

In a separate section of its judgement the Court of Appeal affirmed the authority of arbitral tribunals to order provisional measures even if the parties have not explicitly provided for such authority in their arbitration agreement. The Court noted that the provisions of the UNCITRAL Model Law, including those which grant such power to arbitrators, are incorporated into Québec law (specifically, the Code of Civil Procedure) with regards to inter-provincial and international arbitration. Although Nearctic involved a domestic arbitration, the Court asked – rhetorically, yet significantly – "why should domestic arbitration follow different rules?" given that the intention of the legislature was to "harmonize the Code with the Model Law".

Mandatory R&D Expenditures Constitute Prohibited Performance Requirements under NAFTA

In May 2012, a tribunal constituted under Chapter 11 of the NAFTA and the ICSID Additional Facility Rules issued its award in Mobil Investments Canada Inc. & Murphy Oil Corporation v. Canada (ICSID Case No. ARB (AF)/07/4). The dispute concerned the adoption by the Canada-Newfoundland Offshore Petroleum Board, in 2004 (many years after the Claimants commenced operations), of guidelines requiring investors in offshore petroleum projects to expend specific sums on research and development (R&D Guidelines).

The tribunal found that Canada was not in violation of Article 1105 of the NAFTA ("Minimum Standards of Treatment"), since there was no evidence indicating that the Claimants were "induced to make their investments by clear and explicit representations in relation to any future change to the regulatory framework …" The tribunal did find, however, in a decision addressing the question for the first time, that the issuance of the R&D Guidelines constituted a violation of NAFTA Article 1106 ("Performance Requirements"). The tribunal determined that requiring investors to expend sums on R&D in the host State of the investment (in this case, Canada) in excess of what they would otherwise spend constitutes a prohibited performance requirement under Article 1106(1), which provides that "No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory: … (c) To purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory."

At Long Last: Canada’s Impending Ratification of the ICSID Convention

Mobil v. Canada was, as mentioned, decided under the ICSID Additional Facility Rules. Those rules allow the International Centre for Settlement of Investment Disputes (ICSID) to administer proceedings for the settlement of investment disputes between States and nationals of other States that fall outside the scope of the ICSID Convention, in particular where the respondent State is not a Contracting State to the Convention. The case could not have been brought under the ICSID Convention itself because Canada, although a Signatory since 2006, has not yet ratified the Convention and so is not a Contracting State. As a consequence, both foreign investors in Canada (such as the Claimants in Mobil v. Canada) and Canadian investors abroad remain unable to take advantage of the wide scope of the substantive protections afforded by the Convention and the procedural assurances that flow, among other things, from the self-executing nature of Convention awards.

Happily, all signs point to 2013 as the year when Canada will finally ratify the ICSID Convention. After years of wrangling between Canada's federal and provincial governments and much anguished hand-wringing by practitioners, politicians and pundits, Canada is at long last poised to take its place among the 147 nations that to date have attained the status of Contracting State.