How much bias from an arbitrator on a three-member Tribunal suffices to set aside an award? In Vento Motorcycles Inc. v. United Mexican States, 2023 ONSC 5964, the applicant, Vento Motorcycles Inc. (Vento), sought to set aside an International Centre for Settlement of Investment Disputes (ICSID) award dated July 6, 2020. Vento challenged the award on two grounds: first, the alleged inability of Vento to present its case due to the Tribunal’s refusal to allow a witness to testify, and second, a reasonable apprehension of bias concerning one of the arbitrators. While the Court found that the conduct of one of the arbitrators gave rise to a reasonable apprehension of bias, the Court ultimately declined to set aside the award. We discuss the pertinent details and key takeaways from this decision, which is currently under appeal, below.
Background
Vento, a US motorcycle manufacturer, entered into a joint venture with a Mexican company in 2001. The arbitration arose from Mexico’s subsequent denial of NAFTA’s preferential import tariffs to motorcycles that Vento assembled in the US, and exported to Mexico, resulting in damage to and eventually loss of Vento’s business.
In the arbitration, Vento argued that Mexico’s actions were arbitrary and discriminatory, alleging that Mexican officials received “marching orders” to target Vento and exclude it from the Mexican motorcycle market. In its final written submission, Vento submitted a witness statement from Mr. Ortúzar, a former Tax Administration official, detailing those marching orders.
Mexico countered with a witness statement from Ms. Martínez, accompanied by a recording of a telephone conversation between Mr. Martínez, Mr. Ortúzar and other officials. The recording purportedly undermined Mr. Ortúzar’s credibility, as he expressed in that recording that he did not have time for the case and that he did not feel safe about the details of the events that happened a long time ago. Mexico argued, based on this recording, that it was not credible that Mr. Ortúzar remembered the relevant facts and events in his witness statement (which was provided after the date of the recording).
Vento sought to strike out the recording, arguing that it violated international privacy standards and ethical norms, and alternatively requested Mr. Ortúzar be allowed to testify further. Vento emphasized procedural fairness and the principle of equality of arms, asserting Mr. Ortúzar’s right to address Mexico’s allegations before the Tribunal.
The Tribunal dismissed Vento’s request to strike the recording on grounds that recording conversations in Mexico is not illegal. It did not address Vento’s alternative request for Mr. Ortúzar to testify in response to Mexico’s allegations. Although the Tribunal did not explain why it did not rule on Vento’s alternative request, the Court found that this may have been because Procedural Order #1 which stated that neither party would be permitted to submit additional or responsive documents after the filing of its respective last written submission.
During the hearing, Vento didn’t call Ms. Martínez as a witness, and Mexico didn’t call Mr. Ortúzar. The tribunal unanimously found that Mexico did not breach its obligations under NAFTA.
After the Award was issued, Vento discovered undisclosed communications between Mexican officials and Mr. Perezcano, the arbitrator appointed by Mexico, during the arbitration. These communications involved Mexico’s lead counsel, Mr. Pérez, and contained offers to nominate Mr. Perezcano as a candidate for arbitration panels under the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). These occurred approximately 4.5 months before the Tribunal’s decision on Vento’s request to strike out the recording from the evidence.
About a month after the parties submitted their post-hearing briefs, Mr. Perezcano received another email from an official within the Mexican government offering to nominate Mr. Perezcano to Mexico’s list of panelists for dispute settlement under the agreement between Mexico, the United States and Canada (CUSMA/USMCA/T-MEC). Mr. Perezcano submitted his resume and was subsequently appointed by Mexico. On the same day, all three arbitrators signed the Award.
The Court’s analysis
According to Article 34 of the UNCITRAL Model Law on International Commercial Arbitration (Model Law), which has force of law in Ontario through International Commercial Arbitration Act, 2017, an arbitral award may be set aside by the court if:
- One party was unable to present its case (Article 34(2)(a)(ii)), and/or
- There is a reasonable apprehension that the arbitral tribunal was biased (Article 34(2)(a)(iv)).
The Court started its analysis by establishing the ground rules for considering a setting aside application. Relying on Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939, the Court emphasized that courts cannot set aside an international arbitral award simply because they believe that the arbitral tribunal wrongly decided a point of fact or law.[1] Also, even where grounds may exist for the setting aside of an arbitral award, the court may exercise its discretion, as discussed by the Court in Aroma Franchise Company Inc. v. Aroma Espresso Bar Canada Inc., 2023 ONSC 1827(Aroma). Finally, the scope of discretion depends on the ground upon which the award could be set aside, as discussed in Popack v. Lipszyc, 2016 ONCA 135 (Popack).[2]
1- Whether Vento was able to present its case
Vento argued that Mr. Ortúzar served as a pivotal witness in the arbitration. The telephone conversation was recorded without his knowledge or consent, and this recording was admitted as evidence without adequate context. The tribunal failed to give Vento an opportunity to respond to Mexico’s arguments and to allow Mr. Ortúzar to address the challenges to his credibility. By doing so, the Tribunal violated the procedural fairness principle outlined in Browne v. Dunn, and effectively barred relevant testimony crucial to the determination of whether there were “marching orders” against Vento, constituting a breach of procedural fairness.
The Court first established that the applicable standard to the breach of procedural fairness is that the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice. The conduct must be so serious that it cannot be condoned under Ontario law.[3]
With regard to this standard, the Court was not persuaded by Vento’s arguments. The Court found Vento had ample opportunity to address the issue of “marching orders” during the proceedings. The Award showed that Vento was able to adduce substantial evidence and make arguments in support of its position on all issues on which the Tribunal made rulings. The request to strike out the recording was not a request to introduce new evidence, but rather a request for further response to Mexico’s arguments regarding Mr. Ortúzar’s credibility in light of the recording.
The Tribunal’s decision not to strike out the recording did not offend the most basic notions of morality and justice, because the parties had agreed that they wouldn’t file witness statements after their last written statements. Mr. Ortúzar’s witness statement was submitted in reply. At that time, Vento knew that Mexico disputed Vento’s position and evidence alleged “marching orders.” Vento had the right to examine Ms. Martinez regarding the recording but it chose not to do so.
Finally, the Court affirmed that the rule in Browne v. Dunn is not a fixed rule. It does not require that every scrap of evidence on which a party desires to contradict the witness for the opposite party be put to that witness in cross-examination. The Court stated that the cross-examination should confront the witness with matters of substance on which the party seeks to impeach the witness’ credibility and on which the witness has not had an opportunity of giving an explanation because there has been no suggestion whatever that the witness’ story is not accepted.[4] Also, there are remedies to this rule, such as the trial judge taking into account the breach of the rule when assessing a witness’ credibility and deciding the weight to attach to that witness’ evidence. In this case, the Tribunal is best suited to assess whether any unfairness has been visited on a party because of the failure to cross-examine, and the Tribunal did assess that. There is no reference to the recording or to Mr. Ortúzar’s telephone conversation with Ms. Martínez in the Award. If there is any breach, this has been remedied by the Tribunal by giving appropriate weight to Mr. Ortúzar’s evidence and not making any adverse credibility findings against him.[5] There were also indications in the Award that the Tribunal accepted points of Mr. Ortúzar’s evidence.
Finally, regarding Vento’s argument that it does not need to show that the alleged breach of procedural fairness had a decisive impact on the Award, the Court stated that this doesn’t mean that the decision on the merits cannot be considered to determine whether there was a breach of procedural fairness and if so, its extent.[6] In this case, the Court stated that it is not possible to determine whether there was a breach of procedural fairness that would justify setting aside the Award without considering the Award.
2- Whether the Award should be set aside on the basis that there is a reasonable apprehension
The Court affirmed that the test for reasonable apprehension of bias applicable to an arbitrator is the same as the test that applies to judges, as in Jacob Securities Inc. v. Typhoon Capital B.V., 2016 ONSC 604.[7]
Vento submitted that Mexico offered and awarded Mr. Perezcano prestigious and potentially lucrative opportunities. Neither Mexico nor Mr. Perezcano disclosed the communications between Mexico and Mr. Perezcano to Vento.
The Court considered the 2014 IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) as a widely recognized authoritative source of information. Accordingly, being nominated to a roster is not a situation that appears in IBA’s Red List, Orange List or Green List. The Court cited the decision of Justice Steele in Aroma, where Justice Steele found that the arbitrator’s failure to disclose a subsequent retainer from the respondent’s counsel while the case was ongoing gave rise to a reasonable apprehension of bias and she set aside the arbitral awards. Like in Aroma, the particular situation in this case is not included on the IBA Guidelines’ lists, as a result, a case-specific assessment is required to determine whether the conduct of Mexico and Mr. Perezcano gives rise to a reasonable apprehension of bias. However, the Court distinguished Aroma from this case as the Award in this case was made by three arbitrators instead of one, and the parties did not have the same concerns as in Aroma regarding prior relationships between the arbitrators and the parties or their counsel.[8]
The Court decided that Mr. Perezcano’s conduct gave rise to a reasonable apprehension of bias. While the appointments did not involve any direct financial compensation and did not constitute an actual appointment to a panel, these appointments were valuable professional opportunities for Mr. Perezcano, and a gateway to future work and remunerative appointments to panels. From the perspective of an informed person, Mr. Perezcano had an incentive to please Mexico after he was informed that he was being considered for these appointments, pending the confirmation that he had been appointed. Such confirmation only came on the day that the Award was issued.
Based on the determination in Wewaykum Indian Band v. Canada, 2003 SCC 45, the Court found that it is more likely than not that Mr. Perezcano, whether consciously or unconsciously, would have a leaning, inclination or predisposition towards Mexico or that he could be influenced by factors other than the merits of the case as presented by the parties in reaching his decision.[9] Further, the failure of both Mr. Perezcano and Mexico to disclose such offers and the related communications that took place during the arbitration aggravated the reasonable apprehension of bias.
While a finding of a reasonable apprehension of bias provided a ground to set aside the Award, the Court may, however, exercise its discretion not to set aside the Award. The Court framed its inquiry on whether to exercise this discretion as follows: “what did the procedural error do to the reliability of the result, or to the fairness, or the appearance of fairness of the process?”[10] The Court stated that according to Popack, the procedural errors must have produced real unfairness or real practical injustice. Whether to exercise its discretion, the Court considered factors such as the seriousness of the breach, the potential impact of the breach on the result, and the potential prejudice flowing from the need to redo the arbitration were the award to be set aside.[11]
The Court held that the existence of a reasonable apprehension of bias relating to one of the members of the panel did not necessarily “taint” the Award and the entire panel.
The Court acknowledged that, based on the statements of costs, Mr. Perezcano appeared to have significantly more time on the case than the other two arbitrators and may have done a significant part of the drafting of the Award.[12] However, this does not mean that the other two arbitrators were not involved in the drafting and passively accepted Mr. Perezcano’s views. To the Court, it appeared unlikely that the Tribunal would have adopted a process where one arbitrator would have been assigned the task to go through the case to brief the other arbitrators. All arbitrators signed the Award. They shared the same view, and there was no finding that the other two arbitrators had somehow become tainted by Mr. Perezcano. Therefore, the reasonable apprehension of bias in relation to Mr. Perezcano did not undermine the reliability of the result and did not produce real fairness or real practical injustice.[13]
Although not as important as the point of producing real fairness or practical injustice, the Court considered two additional factors: the seriousness of the breach and the potential prejudice flowing from the need to redo the arbitration. Accordingly, there were no communications between Mexico and
Mr. Perezcano regarding the arbitration, and no financial compensation was made to Mr. Perezcano. Meanwhile, arbitration took five years to complete with significant costs attached to it. Finally, the dispute happened almost twenty years ago. The Court considered that ordering to redo the arbitration would result in significant wasted time, resources and fees and would raise serious concerns regarding the impact of a considerable amount of time on witnesses’ recollection.[14]
Key takeaways
The Court affirmed that on applications to set aside international arbitration awards courts are not to consider evidence: they are concerned with the procedural fairness. Procedural fairness is subject to a high threshold. The applicant must show that the conduct of the Tribunal seriously harms procedural fairness in a way that it cannot be condoned.
Also, while a finding of a reasonable apprehension of bias provides a ground to set aside the Award, the Court established that courts may exercise their discretion not to set aside the Award. To that end, courts must question what the procedural error did to the reliability of the result, or to the fairness, or the appearance of fairness of the process. In this case, the fact that the Award was signed unanimously was an important consideration that one arbitrator’s potential bias did not taint the others. Given the general principle of confidentiality over the arbitrator’s deliberations, and Rule 34 of the ICSID Arbitration Rules, where it says the deliberations of the Tribunal remain confidential, it is unlikely to evidence any potential influence that Mr. Perezcano may have had over the two other arbitrators. However, the Court accepted that there is a strong presumption of impartiality and independence that applies to the rest of the arbitral panel, and found that no reasonable person informed of the circumstances of this arbitration would come to the conclusion that the other arbitrators biased or “tainted.”[15] The question remains: what threshold must be met to justify setting aside an award rendered by a three-membered tribunal based on a reasonable apprehension of bias?
It is worth considering how this issue would be resolved under the new IBA Guidelines.[16] For instance, the new IBA Guidelines introduce additional guidance under General Standard (6) concerning relationships between arbitrators and states. According to these guidelines, whenever a state or a state entity, subdivision or instrumentality is involved in the arbitration, even if the entity’s status is disputed, the arbitrator should consider disclosing relationships with entities such as regional or local authorities, autonomous agencies or state-owned entities. This disclosure requirement applies regardless of whether these entities are part of the state’s organization or have a private status, and vice versa. Importantly, the arbitrator’s duty to disclose is ongoing. If these guidelines were in effect, the arbitrator might have disclosed that he had been appointed to the roster by Mexico, and this might have changed the Court’s assessment.
Finally, the Court acknowledged that other considerations for exercising its discretion to not set aside an arbitral award are seriousness of the breach, and time, money and resources to redo the arbitration.
For more information on this topic, please contact the authors, Michael D. Schafler, Rachel Howie and Ekin Cinar.
[1] Vento Motorcycles Inc. v. United Mexican States, 2023 ONSC 5964, [Vento] para. 48.
[2] Vento, para. 49.
[3] Vento, para. 61.
[4] Vento, para. 70.
[5] Vento, para. 77.
[6] Vento, para. 87.
[7] Vento, para. 92.
[8] Vento, para. 111.
[9] Vento, para. 120.
[10] Vento, para. 123.
[11] Vento, para. 124.
[12] Vento, para. 126.
[13] Vento, para. 128.
[14] Vento, para. 131.
[15] Vento, para. 128.
[16] A redline between the 2014 IBA Guidelines and the new IBA Guidelines can be reached at: “https://www.ibanet.org/document?id=Guidelines-on-Conflicts-of-Interest-in-International-Arbitration-comparison-2014-2024”
