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Ontario Court of Appeal Decides an Application Court must De Novo Determine the Validity of Arbitration Agreement in International Commercial Arbitration

The decision of the Court of Appeal in Russian Federation v. Luxtona Limited, 2023 ONCA 393 clarifies an important issue on court proceedings pursuant to sections 16(3), 34(2)(a)(i) and 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration, which is enacted in all Canadian provinces and territories.

Even though Canada was an early adopter of the UNCITRAL Model Law, there was a lack of clarity on the nature of the court proceedings where a party to arbitration applied to have an arbitral award set aside on the basis that there is no valid arbitration agreement between the parties. Canadian common law jurisdictions have historically showed great deference to the conclusions of an arbitral tribunal on its own jurisdiction and approached jurisdictional challenges to an arbitral tribunal’s jurisdiction as a matter of judicial review.

In Cargill, Incorporated v. United Mexican States, 2011 ONCA 622, the Ontario Court of Appeal was asked, what is the standard of review of an arbitral tribunal’s decision on its jurisdiction under a jurisdictional challenge pursuant to section 34(2)(a)(iii) of the UNCITRAL Model Law. The Court of Appeal held that the applicable standard of “review” was “the standard of correctness”.

However, the use of the term “standard of correctness”, a term in Canadian jurisprudence associated with judicial review, raised a new and equally important question, namely: “Is a jurisdictional challenge to the validity of an arbitration agreement under sections 16(3), 34(2)(a)(i) and 34(2)(a)(iii) of the Model Law a hearing de novo, an appellate review, or a judicial review?” On this question, Cargill could be read in support of both views that such hearings are de novo hearings or judicial reviews. In its decision, the Cargill court endorsed the UK Supreme Court’s seminal decision in Dallah v. Pakistan, [2010] UKSC 46 which supported the de novo approach, but used the term “standard of correctness” and extensively relied on Canadian domestic administrative law jurisprudence. In fact, the Ontario Superior Court of Justice in Russian Federation v. Luxtona, 2019 ONSC 4503 read Cargill as being supportive of the judicial review approach, whereas the Ontario Superior Court of Justice Divisional Court in Russian Federation v. Luxtona, 2021 ONSC 4604 read Cargill as being silent on this question.

The decision of the Court of Appeal provides a clear answer to this question. The Court held, “an application to set aside an arbitral award for lack of jurisdiction is a proceeding de novo, not a review of or appeal from the tribunal’s decision”. As such, parties may adduce new evidence, as of right, to prove or disprove the existence of a valid arbitration agreement.

This decision harmonizes Ontario law with the international commercial arbitration jurisprudence that has developed in other major centers of international commercial arbitration, such as the United Kingdom, France, Singapore and Hong Kong. It promotes uniformity in the application of the Model Law internationally, and affirms that the foundational principle of international commercial arbitration is the consent of the parties to such arbitration.