In Grace et al v. The United Mexican States, 2026 ONSC 2104, the Ontario Superior Court of Justice set aside an International Centre for Settlement of Investment Disputes (ICSID) tribunal’s August 2024 Award[1] that had declined jurisdiction over a NAFTA[2] Chapter 11 claim. The dispute involved allegations that Mexico had engaged in a politically motivated campaign to destroy the foreign investor’s investments in Oro Negro, an offshore oil rig operator. There were two issues on the set-aside:
(a) the alleged reasonable apprehension of bias on the part of one of the three Tribunal members; and
(b) the correctness of the Tribunal’s jurisdictional analysis, to the effect that: (i) two of the Applicants were not entitled to commence a NAFTA claim against Mexico because they were dual American-Mexican nationals; and (ii) the remaining Applicants’ claims were beyond the scope of NAFTA Article 1116 in that they raised only indirect losses.
This decision further developed on the law of reasonable apprehension of bias by tribunal members in Canada. In its reasons, the Court for the first time applied the principles in Aroma (ONCA)[3] to ‘double hatting’—where an arbitrator simultaneously acts as arbitrator in one dispute, and counsel in another. The Court ultimately found a reasonable apprehension of bias on the part of one of the Tribunal members who had accepted a mandate as counsel in another arbitration involving substantially similar issues while deliberations were ongoing, without disclosure to the parties.
Second, the Court examined the correctness of the Tribunal’s jurisdictional analysis. While NAFTA and other investment treaties provide protections to investors, these are not without limit. Each treaty contains exacting requirements that the investor must meet. Absent falling within these requirements, a tribunal will decline jurisdiction to hear the claim because the claimant failed to meet the conditions of the State’s ‘consent to arbitrate’.
The Court applied a de novo standard of review. After undertaking its own interpretive analysis pursuant to the 1969 Vienna Convention on the Law of Treaties,[4] the Court disagreed with the Tribunal on both jurisdictional issues.
At the heart of the review was the Tribunal’s reliance on the submissions of the NAFTA parties (Canada, United States and Mexico)[5] in the proceeding on the interpretation of the treaty—namely that NAFTA did not allow claims by dual-national investors against the State of their ‘dominant and effective’ nationality, and that NAFTA Article 1116 did not permit claims for indirect losses. The Tribunal adopted the treaty parties’ interpretation in its findings on the basis that their submissions were ‘subsequent practice’ under Article 31(3) of the VCLT. Applying Cargill,[6] the Court rejected the Tribunal’s analysis, finding that the NAFTA parties’ positions set out in these submissions did not constitute a sufficiently “clear, well-understood, and agreed common position” to qualify as ‘subsequent practice’ under Article 31(3) of the VCLT.
Background
The Applicants were certain individuals and entities that owned approximately 43.2% of Integradora de Servicios Petroleros Oro Negro S.A.P.I. de C.V., a Mexican holding company whose subsidiaries (collectively, Oro Negro) owned five offshore oil rigs. Between 2013 and 2015, Oro Negro leased those rigs to Petróleos Mexicanos (Pemex), Mexico’s state-owned oil company. Oro Negro alleged that Mexico had carried out a politically motivated campaign to destroy its business because of Oro Negro’s refusal to “pay-to-play.” This, the Applicants alleged, led to Pemex unilaterally reducing Oro Negro’s revenues, suspending its contracts, compelling adverse amendments and ultimately terminating the contracts without compensation—driving Oro Negro out of business.
The Applicants commenced arbitration under NAFTA Chapter 11 in June 2018. The proceeding, which spanned some four years, was administered by ICSID under the UNCITRAL Rules[7] with the seat of arbitration in Toronto.
In its August 19, 2024 Award, the Tribunal declined its jurisdiction, finding that:
(a) Dual Nationality: the ‘dominant and effective nationality’ test applied to matters of dual nationality not governed by NAFTA and accordingly the two claimants who were dual nationals had no standing to commence arbitration because they could not submit a claim against their own State;[8] and
(b) Indirect Losses: the remaining claimants were not entitled to submit a claim under NAFTA Article 1116 (claims by an investor on its own behalf) because the losses alleged were indirect losses caused by damages to the underlying enterprise[9]—reasoning that tracked the award in Bilcon.[10]
In reaching this conclusion, the Tribunal adopted the NAFTA parties’ position on the interpretation of the treaty. In its view, the position set out in the NAFTA parties’ respective submissions amounted to ‘subsequent practice’ under Article 31(3) of the VCLT.
While deliberations on the Award were still ongoing, the Applicants’ appointee, Mr. Andrés Jana Linetzky, accepted a mandate to act as counsel for Honduras in the Arguello arbitration. He failed to disclose this engagement to the parties.
The Applicants then applied to the Ontario Superior Court of Justice to set aside the award on the basis that one of the Tribunal members had a reasonable apprehension of bias, and that the Tribunal had incorrectly determined both jurisdictional issues.
The Superior Court’s analysis
The Court exercised its supervisory jurisdiction over the arbitration under the International Commercial Arbitration Act, 2017[11] and the UNCITRAL Model Law.[12]
Reasonable apprehension of bias
In addressing the alleged reasonable apprehension of bias, the Court applied the Court of Appeal for Ontario’s decision in Aroma: “[the] test for a reasonable apprehension of bias on the part of an arbitrator is objective – like the legal test for disclosure, it considers the relevant circumstances from the standpoint of a fair-minded and informed observer, applied against the backdrop of a strong presumption that an arbitrator is impartial.”[13] Referring also to the Aroma decision’s articulation of the Model Law standard, the Court found that Article 12(2) permits challenging an award if circumstances exist that give rise to justifiable doubts about the arbitrator’s impartiality which had not been made aware to the challenging party.[14]
Although Aroma dealt with a tribunal member’s appointment as arbitrator in multiple proceedings, the Court applied the Aroma principles to ‘double hatting’ by one of the Tribunal members—his appointment as counsel for Honduras in the Arguello arbitration while deliberating on the Award in the Grace arbitration.
The Court found that the Arguello arbitration raised an indirect loss issue substantially similar to the one Mr. Jana was required to impartially decide. The fact that two different treaties were at issue was not sufficient to find that the issues were not similar, particularly where the indirect losses provisions in the applicable treaties (NAFTA and the CAFTA-DR) were substantially similar.[15] Following Aroma, the Court further considered that although an appointment as counsel in a case with similar issues did not fall within the Orange List in the IBA Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines),[16] it was one of the examples listed under the IBA Guidelines where disclosure may be required, depending on the circumstances.
In this case, the Court found that Mr. Jana had a duty to disclose his appointment as counsel for Honduras in the Arguello arbitration because both arbitrations had substantially similar issues, which he failed to do—the Court accordingly found that a fair-minded and informed observer would conclude that the arbitrator had a reasonable apprehension of bias.[17]
Jurisdictional issues
Applying the correctness standard established in Cargill,[18] the Court approached the jurisdictional questions de novo, based on Russian Federation v. Luxtona Limited.[19]
The Court invoked the principles of interpretation of treaties as codified in Article 31 of the VCLT, which requires consideration of: (a) the ordinary meaning of the treaty’s terms, (b) the context and (c) the object and purpose of the treaty.[20]
On the dual nationality issue, the Court agreed with the Tribunal that the ordinary meaning of Articles 1116 and 1117 of the NAFTA does not prohibit dual nationals from submitting claims against one of the states of their nationality. It also agreed that the UNCITRAL Rules, unlike the ICSID Convention, contain no textual restriction on claims by dual nationals.
The critical point of departure was the Tribunal’s finding in response to the positions advanced by Canada and the United States, who participated as non-disputing parties. In their view, a dual national can only submit a claim under NAFTA to the extent that such claim is presented against a NAFTA party other than that of the investor’s own nationality, determined by the ‘dominant and effective nationality’ test. The Tribunal considered that these positions, together with the Respondent’s submissions in the arbitration, constituted ‘subsequent practice’, which can inform the interpretation of NAFTA pursuant to Article 31(3)(b) of the VCLT (“any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation”).
Referring to Burr,[21] the Court held that there is no principle of stare decisis in international arbitration and neither the Tribunal nor the Court were bound by the decision of any other arbitral tribunal. However, the Court did note that it was bound by decisions of the Court of Appeal for Ontario, such as Cargill.[22] On the basis of Cargill, the Court found that only a “clear, well-understood, and agreed common position” could amount to a subsequent practice under Article 31(3) of the VCLT.[23] Ultimately, the Court concluded that the positions advanced by each of the NAFTA parties fell short of that standard: Canada invoked customary international law, the US differed slightly caveating that permanent residents are not nationals under customary international law, and Mexico’s primary position was that no claims by dual nationals are permitted at all, advancing the ‘dominant and effective nationality’ test only in the alternative.[24] The Court instead found that under Article 31(1) of the VCLT, the ordinary interpretation of the language in NAFTA and the UNCITRAL Rules created no such restriction to claims by dual nationals.[25]
On the indirect loss issue, the Court rejected Mexico’s argument that the NAFTA parties had established subsequent interpretative practice with respect to NAFTA Article 1116 sufficient to meet the threshold required under Article 31(3) of the VCLT. The Court examined each of the NAFTA parties’ positions and found that they did not “provide specific enough agreement” to meet the threshold. Further, applying Burr, the Court considered that since no other arbitral tribunal except Bilcon had accepted the NAFTA parties’ position on prohibition of indirect losses, it was “difficult to see they could meet the standard of a clear and well-understood position as set out in Cargill at para. 84.”[26]
The Court ultimately disagreed with the Tribunal and found that NAFTA does not limit itself to Article 1117 for indirect losses claims, adopting instead the analysis in Kappes v. Guatemala,[27] which noted that interpreting Article 1116 as barring indirect loss would render the protection of minority investors “illusory” since minority shareholders cannot bring claims on behalf of the enterprise under Article 1117.[28]
On that basis, the Court found that the Tribunal had erred in declining its jurisdiction to the claim.
Key takeaways
This decision reinforces the Ontario courts’ supervisory role over international arbitrations seated in Ontario and shows the Court’s willingness to ensure the integrity of arbitral proceedings.
The decision also further develops the law on the reasonable apprehension of bias of a tribunal member—applying the Aroma principles to ‘double hatting’. Arbitrators are reminded about their disclosure obligations: accepting a mandate as counsel in another proceeding involving substantially similar issues, without disclosure, may give rise to a reasonable apprehension of bias.
The decision also serves as a good example of courts applying customary international law principles of treaty interpretation under Article 31 of the VCLT. In particular, it reinforces what conduct Canadian courts consider to amount to a State’s subsequent practice under Article 31(3)—absent meeting this threshold, a tribunal’s decision is at significant risk in Ontario.
The scope of treaties will be an area to watch going forward as Canada embarks on an aggressive policy of entering into additional investment treaties.
For more information on this topic, please reach out to the authors, Michael Schafler, Rachel Howie, Chloe Snider and Ramy Sarouf.
[1] Alicia Grace and others v. United Mexican States, ICSID Case No. UNCT/18/4, Award dated August 19, 2024 (Grace Award).
[2] North American Free Trade Agreement, 1992(NAFTA).
[3] Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839 (Aroma).
[4] Vienna Convention on the Law of Treaties, 1969 (VCLT).
[5] Note, Canada and the United States, as non-parties to the arbitration, made submissions under NAFTA Article 1128, which allows a non-respondent NAFTA party to make submissions to NAFTA tribunals on matters relating to the interpretation of the treaty.
[6] Mexico v. Cargill, 2011 ONCA 622 (Cargill).
[7] Arbitration Rules of the United Nations Commission on International Trade Law, adopted by the United Nations General Assembly on December 15, 1976 (UNCITRAL Rules).
[8] Grace Award, paras. 471-475.
[9] Grace Award, paras. 532-534.
[10] William Richard Clayton, Douglas Clayton, Daniel Clayton, and Bilcon of Delaware, Inc. v. Government of Canada, PCA Case No. 2009-04, Award dated March 17, 2015.
[11] International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5.
[12] UNCITRAL Model Law on International Commercial Arbitration, UN Doc A/40/17, Annex I (1985), as amended by UN Doc A/61/17, Annex I (2006) (Model Law).
[13] Para. 87, citing to Aroma, para. 13.
[14] Para. 88, citing to Aroma, para. 2.
[15] Para. 95.
[16] International Bar Association, IBA Guidelines on Conflicts of Interest in International Arbitration (approved by the IBA Council, 25 May 2024) (IBA Guidelines), Part II (3).
[17] Para. 99.
[18] Cargill, para. 48.
[19] Russian Federation v. Luxtona Limited, 2023 ONCA 393, para. 40.
[20] Para. 46.
[21] The United Mexican States v. Burr, 2020 ONSC 2376.
[22] Para. 47, citing to Burr, paras. 80 and 154.
[23] Para. 48, citing to Cargill, para. 84.
[24] Paras. 55-59.
[25] Para. 63.
[26] Para. 84, citing Cargill, para. 84.
[27] Kappes v. Guatemala, ICSID Case No. ARB/18/43, Decision on Respondent’s Preliminary Objections dated March 13, 2020.
[28] Paras. 72-77.
