A. LEGISLATION AND RULES
A.1 Legislation
International arbitration in Canada is, for the most part, a matter of provincial jurisdiction. Each province and territory has enacted legislation adopting the UNCITRAL Model Law, occasionally with slight variations, as the foundational law for international arbitration. Canada’s federal parliament has also adopted a commercial arbitration code based on the UNCITRAL Model Law, which is applicable when the federal government or one of its agencies is a party to an arbitration agreement or where a matter involves an area of exclusive federal jurisdiction under Canada’s constitution. In addition, each of the provinces and the federal government has adopted the New York Convention.
Three Canadian provinces have adopted the 2006 amendments to the UNCITRAL Model Law, which offer a more flexible interpretation of some of the requirements of the New York Convention. In 2017, Ontario adopted the amendments with the International Commercial Arbitration Act (“Ontario ICAA“). In 2018, British Columbia amended its International Commercial Arbitration Act (“BC ICAA“). In 2023, Prince Edward Island amended its International Commercial Arbitration Act (“PEI ICAA“). Ontario and Prince Edward Island attached the UNCITRAL Model Law as a schedule to their Acts, and British Columbia incorporated the 2006 amendments directly into the BC ICAA along with other developments, including a higher threshold to successfully challenge an arbitrator and broad powers for tribunals to grant interim measures and preliminary orders.
The legal framework for investor-state arbitration in Canada is evolving. Canada is a party to 38 bilateral investment treaties, known as Foreign Investment Promotion and Protection Agreements, which typically contain investor-state arbitration provisions. In May 2021, the Government of Canada revised its model Bilateral Investment Treaty, the Foreign Investment Promotion and Protection Agreement Model.
On 1 July 2020, USMCA, the successor to NAFTA, came into effect. The USMCA limits the ability of investors to file investment arbitration disputes against the member states. As of 30 June 2023, US and Mexican investors cannot file ISDS claims against Canada and vice versa.
Canada is also a party to the Canada-European Union Comprehensive Economic Trade Agreement and the CPTPP, both of which contain provisions for investment arbitration. Although Canada did not sign on to the investor-state dispute settlement mechanism under USMCA, investor-state disputes between investors in Mexico and Canada may be brought under the CPTPP.
A.2 Institutions, rules and infrastructure
Canada remains a jurisdiction that strongly supports international arbitration, making major Canadian cities like Toronto, Vancouver, Calgary, Ottawa and Montreal a welcome “seat” of arbitration. Canadian organizations such as the Chartered Institute of Arbitrators Canada Branch, the Toronto Commercial Arbitration Society, the Western Canada Commercial Arbitration Society and Young Canadian Arbitration Practitioners are dedicated to the continued awareness and promotion of arbitration. Canada Arbitration Week takes place annually, bringing together practitioners, users of arbitration, institutions and other stakeholders to discuss important developments in the field.
Canada is distinct in having a dual heritage of common law and civil law (in the province of Québec). Canada offers highly regarded international arbitrators and experienced arbitration counsel. It has excellent hearing facilities, quality interpretation and translation services, modern and efficient transcription services and highly qualified experts. It also has a stable political system and reasonable visa entry requirements.
Local arbitration institutions in Canada include ADR Chambers, the ADR Institute of Canada, ICDR Canada and the Vancouver International Arbitration Centre. Canada has also attracted the presence of renowned international institutions that have partnered with Arbitration Place, a hearing venue with resident arbitrators in Toronto and Ottawa. These include the International Institute for Conflict Prevention and Resolution, ICDR, the ICC International Court of Arbitration, ICC Canada and the LCIA.
B. CASES
B.1 Arbitrator disclosure obligations and reasonable apprehension of bias
The Ontario Court of Appeal (ONCA) released two decisions regarding the setting aside of arbitral awards due to reasonable apprehension of bias. First, in Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc.,[1] (“Aroma“) the ONCA overturned a lower court ruling[2] that set aside arbitral awards after the arbitrator failed to disclose an engagement he accepted from the lead counsel for the successful parties midway through the arbitration process. Several weeks later, in Vento Motorcycles, Inc. v. United Mexican States[3], (“Vento v. Mexico“) a different panel of the ONCA overturned a lower court decision that had refrained from setting aside an arbitral award after a party appointee to a three arbitrator panel had similarly failed to disclose that lead counsel for one side had nominated him as a candidate for panels of arbitrators under trade agreements. Aroma is currently before the Supreme Court of Canada on a pending application for leave to appeal, which will raise the apparent discrepancy between the two cases. It is unknown at the time of writing whether leave will also be sought in Vento v. Mexico.
B.1.1 Application judge’s decision in Aroma
A dispute arose between Aroma Espresso Bar Canada Inc., the lead respondent and master franchisee, and Aroma Franchise Company Inc., the lead applicant and master franchisor, concerning, among other things, the respondents’ breach of the MFA and seizure of the supply chain for the Applicants’ franchise system in Canada and the ensuing termination of the master franchise agreement (MFA) between the parties. The arbitration agreement in the MFA stated in part:
The parties shall jointly select one (1) neutral arbitrator from the panel of arbitrators maintained by the ADR Institute. The arbitrator must be either a retired judge, or a lawyer experienced in the practice of franchise law, who has no prior social, business or professional relationship with either party. [4]
In correspondence between counsel, relationships between arbitral candidates and counsel had been identified at the outset as an issue of concern to both sides. One candidate proposed by counsel for the respondents was rejected because his office had been unilaterally contacted by that counsel. Another was rejected because of past engagements by counsel for the respondents. After establishing that no such prior engagements by either side existed for another candidate, the parties appointed him as arbitrator (“Arbitrator“). Mid-way through the MFA arbitration, the respondents’ lead lawyer engaged the Arbitrator in a separate matter with different parties. The Arbitrator accepted the engagement without informing the applicants during the MFA arbitration. The applicants only became aware of this undisclosed engagement after the Arbitrator decided the final award, which awarded the respondents in excess of CAD 10 million, plus over CAD 2 million in interest and costs. The undisclosed engagement remained hidden for 15 months and only came to light under repeated questioning from counsel for the applicants. The questioning was prompted when the Arbitrator sent an email announcing he had completed his award and inadvertently copied a lawyer at the respondents’ firm, who had not been involved in the arbitration to that point but was engaged on the undisclosed arbitration.
The application judge granted the applicants request to set aside the final award on the basis that the Arbitrator’s failure to disclose his engagement in the second arbitration created a reasonable apprehension of bias and directed there be a new arbitration before a different arbitrator. In addition to relying on the UNCITRAL Model Law and International Bar Association Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines“), the court relied on the MFA, the pre-appointment correspondence highlighting the importance to the parties that the selected arbitrator not have a professional or personal relationship with either party or their counsel, the fact that the Arbitrator was a sole arbitrator and, accordingly, controlled the outcome, and the fact that the undisclosed engagement was hidden from the applicants for 15 months while the Aroma arbitration was ongoing. The court also found that the Arbitrator deprived the parties of the opportunity to address an issue as to whether one of the respondents was a proper party to the arbitration and, accordingly, there was a breach of procedural fairness and natural justice contrary to Article 34(2)(a)(ii) of the UNCITRAL Model Law.
B.1.2 Court of Appeal
The main issues on appeal were whether the Arbitrator was required to disclose his role in the separate arbitration, and whether his failure to do so gave rise to a reasonable apprehension of bias. The ONCA answered both questions in the negative.
B.1.2.1 Duty to disclose
In analyzing the duty of disclosure, the ONCA drew upon a narrower set of sources of guidance than the application judge. First, they contrasted the IBA Guidelines with the Model Law and asserted that the parties must “adopt” the IBA Guidelines as their “legal regime that governs the arbitration”, departing from other case law that has recognized them as an “authoritative source of information as to how the international arbitration community may regard particular fact situations in reasonable apprehension of bias cases”. Second, unlike other case law that noted the similarities between the IBA Guidelines and the Model Law, the ONCA contrasted the two, contending the former adopted a “subjective test”, as it considers “the parties'” perspective. Even where the parties’ expectations were the same (that disclosure was required of engagements with the Arbitrator), the ONCA found they were irrelevant if they were not communicated to the arbitrator. The ONCA also did not address multiple authorities relied on by the application judge, including article 18 of the Model Law, which requires that “[t]he parties shall be treated with equality”, various provisions of the IBA Guidelines, the ADR Institute Code of Ethics, and several cases from Canadian and foreign courts.
B.1.2.2 Reasonable apprehension of bias
First, the ONCA applied the test for reasonable apprehension of bias/justifiable doubts as to impartiality and independence against the “backdrop” of what it referred to as a “strong presumption of impartiality” of arbitrators. In doing so, the ONCA equated publicly-appointed and funded adjudicators with privately-appointed and funded commercial arbitrators. This is the first appellate decision to find such a presumption and stands in contrast to the UK Supreme Court decision in Halliburton.
Second, the issue of justifiable doubts regarding an arbitrator’s impartiality or independence is to be viewed from the perspective of a fair-minded and informed observer, considering the entire context. The ONCA stated that the application judge “essentially” adopted a subjective standard, despite her statement that the inquiry is “objective” and considers “all the circumstances from the perspective of a reasonable person”. The ONCA limited the circumstances considered, stating that the application judge included too much context by considering the parties’ mutual expectations of disclosure. So long as the Arbitrator was not apprised of the parties’ expectations, the ONCA disregarded their perspective, while adopting the Arbitrator’s perspective.
B.1.3 Court of Appeal decision in Vento v. Mexico
Vento Motorcycles Inc. (“Vento“), a Texas company, filed a NAFTA claim alleging that Mexico had wrongly applied certain tariffs to its products. A three-member tribunal, including Mr. Hugo Perezcano, appointed by Mexico, held that Mexico did not breach its obligations under NAFTA and dismissed the claim. After the award was released, Vento learned that Mexico’s lead counsel, Mr. Perez, had undisclosed communications with Mr. Perezcano during the arbitration. Mr. Perez requested Mr. Perezcano’s CV so that Mexico could nominate Mr. Perezcano as a candidate for panels of arbitrators under two different trade agreements. These communications were not disclosed to Vento, which relied on these facts, among others, in seeking to set aside the award.
Relying on article 34(2)(iv) and articles 12 and 18 of the UNCITRAL Model Law, Vento contended that the reasonable apprehension of bias arose not only from the undisclosed ex parte communications themselves but from the fact that they concerned prestigious and potentially lucrative appointments, which were awarded to Mr. Perezcano during key phases of the arbitration without being disclosed. Vento submitted that the apprehension of bias was compounded by the fact that Vento had to “fight to obtain disclosure of the communications, which neither Mr. Perezcano nor Mexico disclosed in a forthright manner.” Vento also submitted that “the reasonable apprehension of bias is further compounded by the fact that Mr. Perezcano appears to have written the lion’s share of the award.”
The application judge found that Perezcano’s conduct during the arbitration gave rise to a reasonable apprehension of bias, but refused to set aside the tribunal’s award. In her view, the apprehension of Perezcano’s bias did not undermine the reliability of the tribunal’s award, nor did it result in real unfairness or practical injustice. The application judge found, further, that the seriousness of the breach and the potential prejudice from rehearing the arbitration also supported the exercise of her discretion not to set aside the award.
The ONCA resoundingly dismissed the idea that there could be one of three panel members tainted, yet the tribunal as a whole was not. They concluded that the application judge erred in failing to remedy the reasonable apprehension of bias she found by setting aside the Tribunal’s award. They concluded there was no basis to discount the significance of her finding at the remedial stage, or to refuse to remedy it on the basis of cost or inconvenience. Perezcano had a duty to disclose what the application judge described as lead counsel for Mexico’s “offers” during the arbitration. She found that these offers were “sufficient in themselves” to give rise to a reasonable apprehension of bias, and that the apprehension of bias was compounded by the failure of both Perezcano and Mexico to disclose the offers and the related communications during the arbitration. On appeal, Mexico did not challenge the finding that there was a reasonable apprehension of bias.
B.1.4 Significance of Aroma and Vento v. Mexico
First, the ONCA panel in Vento v. Mexico did not comment extensively on Aroma. They neither followed its analysis of reasonable apprehension of bias, nor explicitly say that their decision is at odds with Aroma. However, the two cases appear in tension. Canadian arbitrators and counsel alike will now be unclear whether disclosure is required of a second engagement during an existing engagement (or even a proffer of the opportunity for same). Aroma says ‘no’, while Vento v. Mexico treated the answer as so obviously ‘yes’, the contrary was not even argued. So too, arbitrators and counsel will be unclear whether the failure to make disclosure of a second engagement gives rise to a reasonable apprehension of bias/justifiable doubts as to impartiality or independence. It is hoped that the Supreme Court of Canada will grant leave to appeal in order to clarify matters.
The ONCA panel in Vento v. Mexico held that its conclusion “is not in tension with Ontario’s responsibility as a venue for international arbitration. On the contrary, it reinforces the integrity of the Canadian legal system and, relatedly, the integrity of the arbitration process. Finality and efficiency are important goals, but they are not to be achieved at the cost of an impartial hearing.” By contrast, the ONCA panel in Aroma stated: “The legislature allows parties to entrust their disputes to arbitration and restricts recourse to court when they have done so. It would undermine the integrity of this legislatively endorsed system of dispute resolution, as well as confidence in the finality of the results coming out of it, to hold there to be no presumption that those results were reached by an impartial decision-maker. This would place the entire arbitral scheme under an unwarranted cloud.”
B.2 Court revises injunction test in the arbitration context
In NorthStar Earth & Space Inc. v. Spire Global Subsidiary, Inc.,[5] the court granted an interim injunction before arbitration commenced, applying the lower threshold under article 17 of the UNCITRAL Model Law and departing from the established Canadian RJR-MacDonald test[6] for injunctive relief.
B.2.1 Background
The parties entered into a Constellation Services Framework Agreement, under which Spire was contracted to manufacture, launch, and operate satellites. NorthStar would then use the images obtained from these satellites to sell its services to customers. Of the four satellites launched, one was lost, and the remaining satellites failed to produce transmittable images that met the operational standards required by the agreement. Spire’s failure to inform NorthStar about replacing the remaining satellites within the specified timeframe under the agreement prompted NorthStar to initiate arbitration for breach of contract. Before arbitration began, NorthStar sought an interim measure from the Ontario Superior Court, requesting that Spire keep the failed satellites in orbit and continue providing images to NorthStar until the replacement satellites became operational or the arbitration concluded.
B.2.2 Analysis
The well-established test for obtaining an injunction as set out in RJR-MacDonald Inc. v. Canada (Attorney General), 3 SCR 199 has three branches[7]:
(a) there is a serious issue to be tried;
(b) the moving party would suffer irreparable harm should the injunction not be granted; and
(c) the balance of convenience favours granting the injunction.
When dealing with a mandatory injunction, the threshold for the first branch shifts to a more stringent ‘strong prima facie case’ standard.
Despite NorthStar seeking mandatory injunctive relief, which required Spire to deliver data from the failed satellites and keep them operating, the court applied the article 17 standard of the UNCITRAL Model Law.[8] This standard only requires that the arbitral tribunal be satisfied there is a “reasonable possibility of success” on the merits of the claim.[9] The court explained this departure by noting that the urgency of the matter prevented NorthStar from bringing its motion before the arbitral tribunal, which would have applied the “reasonable possibility of success” standard under article 17A(1)(b) of the Model Law. The court cited Article 17J of the Model Law for support, which grants courts the authority to issue interim measures in arbitration proceedings.[10] It specifies that courts should exercise this power “in accordance with its own procedures” but “in consideration of the specific features of international arbitration.”[11]
The court granted the injunction, finding a “reasonable possibility” that NorthStar would succeed in its claims that Spire breached the agreement by not having replacement satellites operational by the required date and by not delivering data from the existing satellites. NorthStar also met the irreparable harm and balance of convenience branches of the test.
B.2.3 Significance
NorthStar Earth & Space Inc. v. Spire Global Subsidiary, Inc., affirms that courts will consider a contextual approach to establish the appropriate framework for evaluating an injunction application.
B. 3 Disobeying an arbitral tribunal’s order may constitute fraud
In Eurobank Ergasias S.A. v. Bombardier inc.,[12] the Supreme Court of Canada (SCC) found that a beneficiary demanding payment on bank guarantee in breach of an arbitral tribunal’s order to not do so constituted fraud in the letter of credit context. Further, in a scenario with interlocking bank guarantees, the fraud conducted by the beneficiary in the first guarantee can be attributed to the beneficiary of a counter-guarantee, resulting in a court precluding payment on the counter-guarantee.
B.3.1 Background
In 1998, the Hellenic Ministry of National Defense (HMOD) contracted with Bombardier for aircraft procurement. A dispute emerged when Bombardier failed to fulfill its obligations under a related offsets contract. The offsets contract contained a liquidated damages clause contemplating payment of damages from Bombardier to HMOD. Bombardier was of the view that it was not required to pay the liquidated damages, but HMOD disagreed. An arbitral proceeding before the International Chamber of Commerce (ICC) was constituted to resolve the dispute around the offsets contract.
The payment of liquidated damages at issue were secured by a letter of credit (“Letter of Guarantee“) issued by a Greek bank, Eurobank, which was in turn secured by a second letter of credit (“Letter of Counter-Guarantee“) from a Quebec bank, the National Bank of Canada.
During the arbitration, HMOD undertook not to demand payment under the Letter of Guarantee from Eurobank before the issuance of the final award. However, despite its undertaking, HMOD demanded payment from Eurobank while the final award was pending. Accordingly, Bombardier sought and received an order from the ICC tribunal preventing HMOD from demanding payment. However, again, days before the final award was to be released HMOD called on Eurobank for payment. This time noting that Eurobank would be subject to civil and criminal legal measures if it continued to refuse to pay. Eurobank made the payment to HMOD and then turned to the National Bank of Canada for payment under the Letter of Counter-Guarantee.
The ICC tribunal released its final award, which found that the offsets contract violated EU law and was thus null and void from the outset. This meant that no liquidated damages should have been due by Bombardier to HMOD. With this final award in mind, Eurobank commenced legal proceedings against HMOD in the Greek courts to recover the moneys it had paid. However, Eurobank was unsuccessful, as the Greek courts held that HMOD’s conduct was not fraudulent under Greek law.
In parallel proceedings in the Quebec Superior Court, Bombardier successfully obtained a permanent injunction to prevent the National Bank of Canada from paying Eurobank. Bombardier successfully argued that because HMOD’s conduct was fraudulent, Eurobank’s demand for payment under the Letter of Counter-Guarantee was by extension also fraudulent. The trial judge agreed and held that the manner in which HMOD obtained payment under the Letter of Guarantee was fraudulent and that Eurobank’s conduct was also fraudulent because its payment to HMOD was a result of fraud of which Eurobank was aware.
Eurobank appealed the decision to the Quebec Court of Appeal. The Quebec Court of Appeal dismissed the appeal, affirming the conclusions of the trial judge.
Eurobank appealed to the SCC.
B.3.3 The Supreme Court of Canada’s decision
The central issue before the SCC was whether the fraud exception, the sole recognized exception to a bank’s obligation to pay the beneficiary of a letter of credit on demand, applied in this case. The court needed to determine if HMOD’s conduct constituted “fraud by a third party” under Quebec law and, if so, whether that third party’s fraud could be attributed to Eurobank, thereby prohibiting payment by the National Bank of Canada under the Letter of Counter-Guarantee.
Before delving into the central issue, the majority first explained the purposes of letters of credit and the governing principles applicable to letter of credit law. Letters of credit are commonly used as a means as managing risk in domestic and international commercial transactions. Letters of credit ensure the beneficiary will be paid and permit demand for payment which would typically arise when there is an allegation of a failure of a party to perform an agreed upon duty. In short, letters of credit provide for a ‘pay now and argue later’ approach.
In order for letters of credit to serve this function, the majority explained that there are two core governing principles that apply: (i) autonomy and (ii) strict compliance. Autonomy means that the letter of credit is an independent obligation of the issuing bank, such that the obligation to honour a valid demand is independent of the performance of the underlying contract. Strict compliance means that the obligation of the issuing bank must be determined based only on the strict conformity of the presentation with the terms of the letter of credit.
However, one exception to a bank’s near absolute obligation to honour a letter of credit is fraud. When fraud of the beneficiary is brought to the attention of the issuing bank, the bank does not need to honour the demand for payment. In this context, fraud must import an aspect of “impropriety, dishonest[y] or deceit.” Accordingly, the majority explained that if a beneficiary to a letter of credit demands payment while knowing that they have no right to be paid under the underlying contract, that conduct may amount to fraud.
The added factual wrinkle in this decision was that the majority had to determine if the fraud exception applied to the Letter of Counter-Guarantee between Eurobank and the National Bank of Canada. In other words, it was not enough if the court had only found HMOD’s conduct constituted fraud (as understood in the letter of credit context), but Eurobank’s conduct, as the beneficiary to the counter guarantee, had to be considered fraudulent on its own.
The majority held that conduct of a beneficiary of a counter guarantee may serve to make the fraud of a third party its own, in which case, the fraud exception would apply directly to the demand of the beneficiary of the counter guarantee. However, this will only be the case where the beneficiary is not innocent of the fraud. A beneficiary will cease to be innocent when it has knowledge of the fraud of the third party and participates in the fraud. When both those criteria are met, the third party’s fraud can be attributed to the beneficiary as the beneficiary’s own.
The majority concluded the trial judge’s findings that HMOD engaged in fraud (as understood in the letter of credit context) was entitled to deference. Particularly, the majority noted that the trial judge’s findings were supported by the evidence including: (i) HMOD’s attempts to circumvent the ICC arbitral tribunal interim order and final award by repeating its demand for payment before the award was released and (ii) HMOD’s refusal to return the money to Eurobank after the final award had been issued and it became clear that HMOD had no right under the offsets contract to the money it received.
The majority also concluded that there was no basis to interfere with the trial judge’s findings that Eurobank had clear knowledge of HMOD’s fraud and that Eurobank actively participated in it by paying HMOD in improper circumstances. The majority found that Eurobank clearly knew HMOD had demanded payment contrary to the Tribunal’s interim order. Because Eurobank had knowledge and participated in HMOD’s fraud, it became the “co-author” of that fraud and was required to bear responsibility for it. Accordingly, the fraud exception applied and precluded the National Bank of Canada from paying Eurobank under the Letter of Counter-Guarantee.
The majority considered the relevance of the Greek court judgments which had found no fraud on the part of HMOD. The majority held that the Greek judgments had no decisive relevance in measuring the conduct of HMOD and Eurobank. Neither HMOD or Eurobank sought to recognize and enforce the Greek judgments in Quebec, and absent that, the Greek judgments were merely evidence, and the weight given to them was an issue of fact to which deference was owed to the trial judge. The majority concurred with the lower courts that minimal or no weight should be attributed to the Greek judgments, which overlooked relevant Canadian rulings or posed public order concerns, such as allowing a party to ignore an arbitral tribunal’s order.
B.3.4 Significance
The majority’s holding that of the trial judge’s determination that HMOD engaged in fraud is entitled to deference is significant. It underscores Canada’s commitment to upholding the principles of international commercial arbitration – even where the defendant is an arm of a foreign state. However, the majority made clear, particularly, with a foreign state as defendant, that “fraud” in this case was used in the specific context of letters of credit where fraud would include a demand for payment by a beneficiary when it knew it did so without a right to payment. It remains to be seen whether and how Canadian courts will continue to develop the concept of fraud to protect international commercial arbitration.
The authors thank articling student Amy Bing for her valuable contributions to this chapter.
[1] Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839
[2] Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al., 2023 ONSC 1827
[3] Vento Motorcycles, Inc. v. Mexico, 2025 ONCA 82
[5] NorthStar Earth & Space Inc. v. Spire Global Subsidiary, Inc., 2024 ONSC 5060.
[6] RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC)
[7] Ibid.
[8] NorthStar, supra note 25 at para 41.
[9] Ibid.
[10] NorthStar, supra note 25 at para 42.
[11] Ibid.
[12] Eurobank Ergasias S.A. v. Bombardier inc., 2024 SCC 11.
