Ontario – court revisits/reverses prior decision which allowed new evidence on post-award jurisdictional challenge

In The Russia Federation v. Luxtona Limited, 2019 ONSC 7558, Mr. Justice Michael A. Penny held that a party to a challenge of an arbitral tribunal’s jurisdiction under articles 16 and 34 of the UNCITRAL Model Law on International Arbitration may not file fresh evidence as of right.  A party must obtain leave to do so by providing a “reasonable explanation” for why new evidence is necessary, including why that evidence was not, or could not have been, put before the tribunal in the first place.  Abiding by the Mexico v. Cargill, Incorporated, 2011 ONCA 622 approach restricting courts to a “review” and not a trial de novo, Penny J. held that competence-competence was best served by requiring parties to put their “best foot forward” before the arbitral tribunal and not re-try the jurisdictional issue with additional evidence informed by hindsight.

Note – A prior court ruling between the same parties/in the same court/in the same file/regarding the same evidence/ruling on the same objections resulted in an order by Mr. Justice Sean F. Dunphy in The Russian Federation v. Luxtona Limited, 2018 ONSC 2419

In that earlier 2018 case, Dunphy J. asserted the court’s autonomy vis-à-vis the arbitral tribunal’s evidentiary record when hearing a challenge to that tribunal’s preliminary award on jurisdiction.  In the context of a dispute over the admissibility of evidence which had not been before the arbitral tribunal, Dunphy J. determined that a court was neither limited to the tribunal’s findings of fact nor confined by the record relied on by the tribunal to reach its conclusions. See the earlier Arbitration Matters note “arbitral tribunal’s evidentiary record on jurisdiction challenge is not ignored but also does not confine court”.

However, in a preceding July 29, 2019 decision, The Russia Federation v. Luxtona Limited, 2019 ONSC 4503, Penny J. closed his reasons with comments that, as the newly assigned judge, he required the parties to prepare to reargue “the narrow question of whether new evidence, which does not meet the test for new evidence under Ontario law, is admissible on a court review of an arbitral tribunal’s jurisdiction under Article 16(3) of the Model Law”.  For more on the procedural history of the parties’ involvement in the Superior Court challenge, see the urbitral note below.

Luxtona Limited (“Luxtona”), a former shareholder of Yukos, initiated arbitration against the Russian Federation for alleged breach of the Energy Charter Treaty (“Treaty”).  During the arbitration, the Russian Federation objected to the arbitral tribunal’s jurisdiction based on, among other things, application of a provisional treaty which had been signed but never ratified by law.   The Russian Federation disputed that it had effectively agreed to give provisional application of the Treaty and argued that as part of a jurisdictional challenge before the arbitral tribunal. 

The arbitral tribunal received extensive expert evidence from both parties on Russian law. (See para. 17 of Penny J.’s reasons for the process followed in the arbitral proceedings.) In lengthy reasons, the tribunal held that it had jurisdiction (“Award”).

As the seat of the arbitration was in Toronto, the Russian Federation applied to the Ontario Superior Court to set aside the Award on jurisdiction under articles 16(3) and 34(2) of the Model Law, enacted into law in Ontario as Schedule 2 to Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5.

In support of its set aside application, the Russian Federation sought to produce two (2) expert reports and some documents which had not been before the arbitral tribunal. Paras 22-24 outline in some detail the Russian Federation’s motivation and grounds for providing the additional expert reports and documents.  Luxtona objected to the attempt to file the evidence, grouping the evidence into six (6) categories summarized by Penny J. at para. 20.

As a result of his direction in his earlier July 29, 2019 decision requiring that the parties be prepared to “reargue” the question, Penny J. identified two (2) questions of his own to address which he answered in his December 13, 2019 decision.

First, Penny J. held that he had authority to reconsider a prior interlocutory ruling concerning admissibility of evidence in which he, as the newly assigned judge, would hear applications.  See paras 11-16 of his reasons.

Second, having determined that he had that authority, Penny J. then determined that filing new evidence was not as of right but required leave justified by a reasonable explanation, regarding why the evidence was not or could not have been put before the arbitral tribunal in first instance.  See paras 17-68 of his reasons.

This note looks at both those questions and Penny J.’s reasoning.

(i) Revisit and reverse – Penny J. nodded to the argument that revisiting earlier interlocutory rulings on admissibility of evidence required a “material change” but observed that revisiting such rulings had occurred and provided an illustration.  Compare R. v. Adams, 1995 CanLII 56 (SCC), [1995] 4 SCR 707 and R. v. R.V., 2018 ONCA 547, rev’d on other grounds in R. v. R.V., 2019 SCC 41.

The Russian Federation pointed to the parties’ reliance on Dunphy J.’s earlier decision which lead to expense when responding to and cross-examining on that new evidence.  Penny J. perceived that the Russian Federation’s theory in the main set aside application undermined the Russian Federation’s objection to new evidence.  Subject to a more fulsome analysis later in his own reasons, Penny J. held that:

I will only say that the force of this argument is significantly undermined by the fact that, on Russia’s theory of the court’s role in a review of jurisdiction under Article 16(3) of the Model Law and the admission of new evidence as of right, the entire process and hearing before the tribunal, conducted at much greater expense, is also rendered somewhat superfluous.

Independent of the above considerations, Penny J. asserted a court’s authority to revisit such earlier decisions so that it not decide a case on evidence it believed was not correctly admitted.  Rather, he had authority “to satisfy myself that it was correct and, if I conclude that it was not correct, to make a different ruling”.

(ii) New evidence only with leave – Penny J. devoted the balance of his reasons to determining the manner in which a party might adduce new evidence on a post-award challenge under the Model Law.  He divided his analysis into six (6) components:

(a) “Ontario’s Model Law” – paras 25-29

(b) “Judicial Precedent” – paras 30-49

(c) “The UK is not a Model Law Jurisdiction” – paras 50-56

(d) “The UK Approach is not Consistent with Cargill” – paras 57-59

(e) “The UK Approach Undermines the Competence-Competence Principle” – paras 60-62

(f) “When New Evidence May be Admitted” – paras 63-68

His analysis lead him to conclude at para. 69 that fresh evidence in an application to set aside an arbitral tribunal’s award on jurisdiction under articles 16 and 34 of the Model Law may not be introduced as of right.  A party seeking to adduce such evidence must demonstrate:

(1) the evidence could not have been obtained using reasonable diligence;

(2) the evidence would probably have an important influence on the case;

(3) the evidence must be apparently credible; and,

(4) the evidence must be such that if believed it could reasonably, when taken with the other evidence adduced at the hearing, be expected to have affected the result.

Overview of six (6) part analysis – Penny J. identified Mexico v. Cargill, Incorporated as the “starting point” for his analysis of the Model Law and articles 16 and 34. He noted that Mexico v. Cargill did not address the issue of what constitutes the “record” and in which circumstances that record could include “fresh evidence”.  He held that “[t]here is in fact no case in Canada dealing with this issue”.  (Some might argue that it might be more accurate to affirm that there is no prior case with which Penny J. agreed, having already decided to reconsider the reasons issued by Dunphy J. on that very issue.)

Penny J. considered non-Canadian cases submitted by the Russian Federation which had admitted new evidence in court challenges on jurisdiction.  He distinguished them as establishing “at least” the proposition that a court owes no deference to an arbitral tribunal’s findings, factual or legal, on jurisdiction and must decide for itself whether the tribunal has jurisdiction. Having identified the proposition established in those other cases, Penny J. stated that that proposition was not disputed in the application before him.

Standard of review is a separate question from the format of the review itself.  One does not necessarily dictate the other, Ford v. Toronto (City), 2012 ONCJ 92.  In other words, the standard of review involving correctness, no deference and the reviewing court deciding for itself the question of jurisdiction, does not necessarily result in the conclusion that fresh evidence may be filed as of right.

Penny J. then focused in a body of decisions issuing from the U.K. which bolstered the Russian Federation’s argument but distinguished them.  That jurisdiction was not a Model Law jurisdiction and the body of decisions considered “takes the view” that section 67 of the U.K. Arbitration Act, 1996 allows the courts to approach the matter like a trial de novo.  See paras 40-46.

Penny J. then pursued his analysis, building on the gap created by the U.K. authorities/approach which was informed by the U.K. not being a Model Law jurisdiction. He held that the U.K. approach was not consistent with Ontario’s United Mexican States v. Cargill Inc.  In particular, at para. 58, Penny J. focused on the narrow role left to a court on a jurisdictional challenge, namely that it restrict itself to a “review” and not a trial de novo.

Allowing parties to adduce fresh evidence “at will” would undermine the competence-competence principle.  The latter principle already incentivizes parties to put their best evidence forward in the hearing before the tribunal.

[60] Giving effect to the competence-competence principal requires that parties to an arbitration, where jurisdiction is challenged, have strong incentives to bring forward, to the extent possible, all of their evidence at the hearing before the tribunal.  Here, the fresh expert evidence, prepared with the benefit of hindsight and knowing the tribunal’s decision, is specifically directed at attacking the reasons of the tribunal to show why it was wrong.  The evidence, therefore, is quite explicitly seeking to shore up or bolster the jurisdictional case which Russia lost at the tribunal. 

[61] If parties can adduce fresh evidence at will, both parties to the jurisdictional challenge will have an incentive, knowing what the tribunal’s decision now is, to file new evidence providing further support for their position and why the tribunal was right or wrong in its determination.  This, it seems to me, will result in such evidence being routinely filed and the court routinely conducting a trial de novo on jurisdiction.  This will have the further result that the record put before the court will routinely be materially different than that put before the tribunal.  The tribunal, in that scenario, will not have, as Article 16(1) requires, the ability to “rule on its own jurisdiction including any objections with respect to the existence or validity of the arbitral agreement”.

Penny J. acknowledged that a complete bar existed to prevent new evidence from being added but asserted only a “reasonable explanation” standard.  “What I am saying is that in such a case, a party proposing to file new evidence ought to have to advance some reasonable explanation for why new evidence is necessary, including why that evidence was not or could not have been tendered in the first place, and that, in the absence of a sufficient explanation, fresh evidence ought not to be admitted.

He pointed to D.D.S. Investments Ltd. v. Toronto (City), 2010 ONSC 1393 as a recent application of the “well known and understood” test established in R. v. Palmer.  That test, he explained, rested on “significant policy concerns involving order, finality and the integrity of the adjudicative process”, the first two (2) of which are “essential” to the third.  They require parties to put their “best foot forward” during the hearing in first instance.

In a brief close to the reasons, Penny J. reiterated the principles applicable to authorizing fresh evidence but concluded, at para. 69, that the Russian Federation “has not attempted to justify admission of its fresh evidence under any of the first four requirements”. Penny J. therefore held that the evidence was not admissible.

urbitral note – First, prior to his December 13, 2019 decision noted above, in an earlier July 29, 2019 decision in the same case, in The Russia Federation v. Luxtona Limited, 2019 ONSC 4503 Penny J. openly questioned the “correctness” of Dunphy J.’s earlier decision on a similar question in the April 13, 2018 decision in The Russian Federation v. Luxtona Limited, 2018 ONSC 2419

In his first ruling on July 29, 2019, Penny J. remarked that he was not bound by Dunphy J.’s earlier evidentiary ruling which, to recall, stemmed from Dunphy J.’s own remark that he was not bound by the arbitral tribunal’s findings.

[35] Dunphy J. was assigned to hear this matter on the merits and it was in that capacity that he made an important preliminary ruling on the admissibility of new evidence not before the arbitral tribunal.

[36] As I am now to be the judge hearing the application, as a purely technical matter, the evidentiary ruling of Dunphy J. is not binding on me.

[37] While I am loathe to create uncertainty in the management and orderly conduct of these proceedings, I confess to having serious doubt about the correctness of Dunphy J.’s ruling.  This ruling has produced the peculiar result or possibility that the Court will be deciding the issue of the arbitral tribunal’s jurisdiction on a completely different record than the record that was before the arbitral tribunal itself.

[38]  As a result, on the argument of the main application the parties are directed to be prepared to reargue the narrow question of whether new evidence, which does not meet the test for new evidence under Ontario law, is admissible on a court review of an arbitral tribunal’s jurisdiction under Article 16(3) of the Model Law.

The December 13, 2019 decision noted above reflected Penny J.’s direction in para. 38 of his July 29, 2019 decision for the parties to “reargue” that “narrow question”.

Second, Penny J.’s reasons turn, at their close, on an affirmation of the “significant policy concerns involving order, finality and the integrity of the adjudicative process” and needing to put one’s “best food forward” during the first hearing.  See para. 67.  That affirmation corresponded to his protection of the competence-competence standard and supported the requirement to put all the evidence forward in first instance. Without further explanation, those reasons appear jarred with the earlier reasoning asserted in support of Penny J.’s answer to his first determination, namely that he did have authority to change a prior evidentiary ruling. 

The reasons are welcome reinforcement of the arbitral process but revisiting the court’s earlier decision unsettles the litigation process.