Joel Richler, Seumas Woods

Blake, Cassels & Graydon LLP

There are many reasons to choose Canada as the seat of international arbitrations. Canada is a desirable neutral venue with proximity to Europe and the United States. The legislative regime in Canada is modern, robust and attuned to the needs of the international commercial and arbitration communities. Canada is the home of sophisticated and experienced counsel and arbitrators who are active in the arbitration community and well-versed and trained in the law of arbitration. There are several cities in Canada that can host arbitrations at reasonable cost. And, Canadian courts are consistent in according a high degree of deference to arbitral decisions and in protecting arbitration awards from an inappropriate amount of intervention in the arbitration process. Indeed, with one notable exception (in which one part of an award of an international arbitration panel was set aside),¹ there is simply no case in which a Canadian court has refused to enforce or has set aside an award of an international commercial arbitration tribunal on any of the grounds set out in the UNCITRAL Model Law. This article reviews a November 2006 decision of the Ontario Superior Court of Justice that exemplifies this latter point.²

The international arbitration regime in Canada

Before reviewing the case, a brief review of the international arbitration regime in Canada is appropriate.

Canada is a federal state comprised of a federal government, 10 provinces and three territories. Property and civil rights, and the administration of justice in particular, are within provincial jurisdiction. Hence, except for limited matters particularly germane to the federal level of government,³ it is provincial legislation that governs and provides the framework for international arbitration.

International arbitration legislation in Ontario typifies that of all of the provinces. There, the International Commercial Arbitration Act, RSO 1990, c I-9 adopts, with few exceptions, the UNCITRAL Model Law. The principles provided for by the New York Convention have also been adopted. For purposes of the Model Law, Ontario is a ''state''. The primary divergences from the Model Law are that arbitrators are permitted without subsequent disqualification and with the consent of the parties to utilise mediation and conciliation in order to settle cases,⁴ in the absence of agreement by the parties the arbitrators are to apply the rules of law that they consider appropriate,⁵ and the courts are empowered to consolidate arbitration proceedings.⁶

Insofar as court intrusion on arbitration awards is concerned, all Canadian provinces have followed the Model Law in precluding all appeals, even on pure questions of law, except, of course, where the parties have otherwise agreed.⁷ Even where the parties have agreed to permit appeals, it is noteworthy that appellate courts in Canada are generally deferential to decisions made in first instance. Appeal courts will only reverse trial judgments (and presumably arbitral awards) where there are errors of law or ''overriding and palpable errors'' on questions of fact or questions of mixed fact and law. Insofar as defences to recognition and enforcement and applications to set aside awards are concerned, articles 34 and 36 of the Model Law are incorporated into provincial law and cannot be avoided or even limited by agreement of the parties. In brief, arbitration awards can be set aside only on very limited grounds; primarily where a panel exceeds its jurisdiction, and this jurisdictional exception will apply where there is a fundamental denial of due process, or where there are breaches of the rules of natural justice, or where there is a contravention of public policy.

The Xerox v MPI decision

In Xerox v MPI the Honourable Justice Colin Campbell of the Ontario Superior Court of Justice dismissed Xerox's application to set aside a decision of a three member panel of arbitrators constituted under the International Commercial Arbitration Act (Ontario) and the UNCITRAL Model Law. In the award that was under review, the panel, which was comprised of a retired Federal Court judge, an intellectual property lawyer and a retired printing technology expert (who was not a lawyer or trained arbitrator), had awarded MPI approximately US$89 million plus interest for unpaid royalties owing under a 1994 licence agreement and damages for unauthorised use of confidential information or breach of copyright in software that was licensed under that agreement.

As to the underlying facts in the arbitration, under the licence agreement MPI licensed software to Xerox for use in the latter's high speed printing systems which, in turn, were used by Xerox customers. Disputes arose between the parties as to the proper calculation and payment of royalties. Resolution of those disputes required the arbitral panel to construe and interpret several provisions of the license agreement and, in particular, to define what a royalty bearing event was (a primary issue being whether royalties were to be paid when upgraded versions of the software were provided to Xerox customers).

Also, during the course of the license agreement, Xerox had developed its own software that performed the same or very similar functions as did the MPI software. MPI claimed that in so doing, Xerox had infringed MPI's copyright in the licensed software. MPI claimed that Xerox had breached duties of confidentiality that formed an express or implied part of the license agreement. The arbitration proceedings were characterised by several interlocutory motions and rulings and culminated in a 40-day hearing and a 78-page award.⁸

On its court application, Xerox maintained that the arbitral panel exceeded its jurisdiction by fundamentally misconstruing its powers and duties under the Model Law, by improperly conducting the hearing and by allowing the misuse of knowledge gained by the non-lawyer arbitrator that was not disclosed to Xerox such that the award was made not on the evidence that the parties had adduced at the hearing. Accepting the very high threshold for a successful challenge under article 34 of the Model Law, Xerox argued that these errors were so fundamental that the entire award had to be set aside and the arbitration repeated before another panel. In rejecting all of Xerox's arguments and in dismissing the application to set aside, Justice Campbell affirmed that properly constituted and conducted international arbitration proceedings in Canada will be accorded great deference by reviewing courts and that any party seeking to overturn an international arbitration award will have to overcome a ''powerful presumption'' that the arbitral tribunal acted within its powers in all respects.

Parties to the arbitration

The software in issue had been developed by the MPI parent company, based in France, and licensed by MPI's US-based subsidiary. Only the latter had signed the licence agreement and it was the subsidiary that had launched the arbitration. Later, MPI successfully moved to add the MPI parent as a claimant over Xerox's objection that article 7 of the Model Law does not permit the joinder of non-signatory parties. In allowing the joinder, the panel acceded to MPI's evidence that, during the course of their relationship, Xerox had dealt with MPI as one entity (such that this did not really represent the addition of a true 'third party'), and it took note of the fact that the copyright infringement claim had its foundation in the licence agreement and was a dispute arising under that contract. The panel also noted that, at the motion stage, it made no determination that the MPI subsidiary could not have prosecuted the infringement claim on its own. In its final award, the panel ruled that Xerox was estopped from denying that the copyright claim could be resolved under the agreement by arbitration. The panel also ruled that it was not persuaded that the addition of the MPI parent was actually necessary to resolve the infringement and confidentiality claims.

Xerox raised the addition of the MPI parent as jurisdictional error on its application to set aside the entire award. On this issue, the court was called upon to construe the agreement together with the Model Law. In doing so, the court applied prior appellate authority that established the ''broad deference'' to be given to arbitral panels at the ''high end of the spectrum''.⁹ In particular, the court cited with approval the statement of Justice Armstrong of the Ontario Court of Appeal that ''notions of international comity and the reality of the global marketplace suggest that courts should use their authority to interfere with international commercial arbitration awards sparingly''.¹⁰

Having noted the foregoing as a standard of review and non-interference, Justice Campbell ruled that the agreement was to be construed and interpreted to reflect the parties' intentions that all disputes arising under that agreement were to be settled by arbitration and that the Model Law was to be interpreted liberally so as to reflect legislative purpose and remedial intent consistent with Ontario's public policy that mandates arbitration where that process is selected by contracting parties. He also agreed with the panel that during the course of their commercial relationship Xerox had treated the MPI companies as one and he ruled that Xerox could not later take the position that the MPI parent company could not be a party to the arbitration only because it was not a signatory to the licence agreement.

In summary, the court on Xerox's application to set the award aside, applied a nuanced view of the parties' dealings and interactions as well as a purposive interpretation of the underlying agreement and the Model Law in dealing with the propriety of the joinder of a non-signatory to that contract to the arbitration proceedings.

The proper role of the arbitrators

As ''bluntly'' characterised by Justice Campbell, a critical issue before the panel was whether Xerox misused MPI's software by copying the latter's source code. During the course of the hearing, the parties filed several versions of the software and had that code marked as exhibits. Later, the non-lawyer arbitrator distributed to counsel some charts that, according to that arbitrator, reflected his notes as to certain aspects of the software development. The charts summarised those parts of the code that certain developers had worked on, and the names of the developers who worked on the Xerox code. Also, the arbitrator adverted to some testimony on software development methodologies that had been adduced through an expert witness called by Xerox and he suggested to counsel that further information on that particular subject could be found on some websites.

Both of the foregoing were met by Xerox objections at the hearing and later on their subsequent application to set aside the award to the effect that the panel had exceeded its jurisdiction and acted contrary to law by acting extrajudicially. In particular, it was argued that the panel had: (i) conducted extrajudicial investigations and research; (ii) permitted the non-lawyer arbitrator to act as a panel-appointed expert as if he had been appointed under article 26 of the Model Law; (iii) relied on that extraneous evidence to bridge gaps in MPI's case; and, (iv) supplied evidence not adduced by any of the parties.

The panel rejected the Xerox objections and the court did likewise. In so doing, the court deferred to the panel's conduct of its own process and it also reaffirmed in the context of an attack on a panel's integrity the very high standard of proof that has to be met by an applicant in attempting to upset an award based upon public policy grounds or allegations of an unfair hearing.

In reaching its conclusions, the court noted that it had reviewed the entire record of the arbitration, and noted the irony inherent in the situation whereby a single judge is called upon to sit in review of a decision reached by three arbitrators acting in accordance with the arbitration agreement of the parties.

The court then considered the precise role of an 'expert' arbitrator; that is, an arbitrator chosen for his technical expertise rather than his or her legal experience. In this context, accepting that the arbitrator was supposed at all times to act impartially and in a quasi-judicial capacity, the court ruled that the arbitrator was nevertheless entitled to use his or her own background in the subject field of expertise in assessing evidence and in coming to conclusions on contentious issues, just as a judge or lawyer acting as an arbitrator can exercise the benefits of his or her own legal experiences and expertise . In particular:¹¹

There seems little point in having an individual with technical expertise unless that individual can use his or her background in assessing the evidence before the tribunal. That is indeed one of the hallmarks of commercial arbitration as opposed to courtroom adjudication. There is a difference between an individual who because of his or her expertise is in a position to assess technical evidence that is before the Panel and an expert who relies on evidence from other sources outside the evidence and only available to that expert and not disclosed to the parties.

The court further ruled that, in any event, the panel's decisions on breach of confidentiality and copyright infringement were well-founded on the record, that the analysis of the non-lawyer arbitrator did not form part of the panel's conclusions, and that the arbitrator did not, in fact, exceed the propriety of his role in analysing the evidence in the way that he did. Also noteworthy is that the court reviewed what the panel itself had stated in response to Xerox's objections at the hearing and accepted the veracity of what the panel said it had done.

In further dealing with this issue, Justice Campbell also reviewed the ways in which the panel and counsel interacted during the course of the hearing. Before acceding to Xerox's argument that it was denied due process and a fair opportunity to respond to the issues that the panel had, in its view, raised, the court ruled that it had to be satisfied that, in fact, Xerox really could not have dealt with the issues at the hearing. In this context, the court noted that the panel had, throughout, provided full disclosure to the parties as to what it was doing; that was why the charts and websites had been given to the parties. Noted was the observation made by the authors of the Redfern and Hunter text,¹² drawing from Minmetals Germany GmbH v Ferco Steel Ltd,¹³ that a party claiming absence of due process cannot, by so doing, benefit from any failure on its part to take advantage of opportunities to remedy the situation provided by an arbitral panel. In this case, the court ruled that Xerox could have dealt with the perceived problem by recalling witnesses or seeking an adjournment; its failures to do so could not be the basis for a subsequent challenge.

That brought the court to its ultimate review of principles that Canadian courts will apply in considering any attack on an arbitral award founded upon allegations of public policy breaches or failures to adhere to the rules of natural justice. In so doing, Justice Campbell cited the following principles articulated by Madam Justice Lax in Re Corporation Transnacional de Inversiones SA de CV v Stet International Sp A.¹⁴ In that case, Justice Lax wrote that in order to set aside an international arbitration award under article 18 or article 34 of the Model Law, ''the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice''. Further:

Instances of corruption, bribery or fraud referred to in the Report of the United Nations would not only offend the essential morality of Ontario, but would offend shared notions of justice that are common to legal systems throughout the world. No court would hesitate to set aside an award arrived at in this manner. In considering other kinds of conduct, it is important to bear in mind that the Report of the United Nations may be used as an interpretive aid to the Model Law and it refers to ''similar serious cases''. In my view, this contemplates that judicial intervention for alleged violations of the due process requirements of the Model Law will be warranted only when the Tribunal's conduct is so serious that it cannot be condoned under the law of the enforcing state [Emphasis added by Justice Campbell].

So, the bar established by the courts for the invocation of the courts' jurisdiction to either set aside an award, or to refuse enforcement of an award, is very high. The list of impugned behaviour is not, of course, limited to the classical examples of bribery, fraud or corruption. Nevertheless, reviewing courts will examine the entire record of arbitral proceedings with a critical and nuanced eye, accord great deference and always give arbitral panels the benefit of any appropriately-held doubt.

The decision in Xerox v MPI is, to be sure, not new law in Canada. It represents the continuation of a theme and policy of deference that affords parties who have chosen to arbitrate their differences confidence that awards that are obtained will, absent highly unusual facts, be sustained, recognised and enforced.

Notes

1. United Mexican States v Metalclad Corp (2001), 89 BCLR (3d) (SC).
2. Xerox Corporation Ltd and Xerox Corporation v MPI Technologies Inc and MPI Tech SA, 2006 CanLII 41006. The present writers acted as counsel to MPI in the arbitration and in the subsequent application to set aside the panel's award.
3. The federal Commercial Arbitration Act RSC 1985, c 17 (2nd Supplement) applies to international and domestic arbitrations where one of the parties is the Crown, a department of the federal government or where the subject-matter of the arbitration relates to marine or maritime matters.
4. Section 3.
5. Section 6.
6. Section 7. The acts of the other provinces are: Alberta: International Commercial Arbitration Act, RSA 2000, c I-5; British Columbia: International Commercial Arbitration Act, RSBC 1996, c 233; Manitoba: International Commercial Arbitration Act, CCSM c C-151; New Brunswick: International Commercial Arbitration Act, SNB 1986, c 112.2; Newfoundland and Labrador: International Commercial Arbitration Act, RSN 1990, c I-15; Northwest Territories and Nunavut: International Commercial Arbitration Act, R.S.N.W.T. 1988, c. I-6; Nova Scotia: International Commercial Arbitration Act, RSNS 1989, c 234; Prince Edward Island: International Commercial Arbitration Act, RSPEI 1988, c I-5; Quebec: An Act to Amend the Civil Code and the Code of Civil Procedure in Respect of Arbitration, SQ 1986, c 73; Saskatchewan: International Commercial Arbitration Act, SS 1988-89, c I-10.2; Yukon: International Commercial Arbitration Act, RSY 2002, c 123.
7. Generally, in domestic arbitrations, appeals are permitted on questions of law where prior leave is obtained, with the applicant having to establish a degree of importance that transcends the immediate result in the award under appeal.
8. The interlocutory proceedings included a challenge to the panel's jurisdiction, as a matter of Canadian law, to entertain a claim for copyright infringement. The panel dismissed that challenge and that decision was affirmed by a judge of the Ontario Superior Court of Justice well in advance of the hearing.
9. Quintette Coal Ltd v Nippon Steel Corp (1990), 47 BCLR (2d) 201 (SC); aff'd (1991) 1 WWR 219 (CA); United Mexican States v Karpa (2005), 74 OR (3d) 180 (CA); United Mexican States v Metalclad Corp (2001), 89 BCLR (3d) (SC); Canada v SD Myers Inc, (2004) 3 FCR 368 (TD)
10. Quintette, at paragraph 34.
11. At paragraph 85.
12. Law and Practice of International Commercial Arbitration, fourth edition (London: Sweet & Maxwell, 2004), p449.
13. (1999) 1 All ER (Comm) 315 (Eng QBD (Comm.)).
14. (1999) 45 OR (3d) 183; aff'd (2000), 49 OR (3d) 414 (CA).