The Model Law of the United Nations Commission on International Trade Law (UNCITRAL) applies to international commercial arbitration agreements and awards. The Model Law has been adopted in all the provinces and territories of Canada, For instance, the Model Law has been adopted in the Ontario International Commercial Arbitration Act (ICCA).
Under article 34 of the Model Law, the court of the seat of the arbitration may set aside the award of the arbitral tribunal in certain circumstances. In Popack v. Lipszyc, the Ontario Superior Court of Justice recently dealt with two questions arising under the Model Law.
First, can the parties contract out of the Model Law, and in particular article 34?
Second, does the court have a discretion to not set aside the award even if a breach of the Model Law has occurred? The court answered No to the first question and Yes to the second question, and in the exercise of its discretion declined to set aside the award.
In answering these questions, the court did not rely on any prior decisions as authoritative, so its decision appears to be a matter of first impression. Moreover, the decision on the first question appears to be contrary to another decision of the Ontario Superior Court in Noble China Inc. v. Lei (1998), 42 O.R. (3d) 69 (Ont. Gen. Div. [Commercial List]). For this reason, it is hoped that the first question will soon be considered by appellate courts in Canada.
The issues raised in this case are important due to the increasing application of the UNCITRAL Model Law in today’s shrinking commercial world. More and more construction, procurement and other business contracts involve parties from different countries. Because they do, those contracts are governed by the Model Law in those jurisdictions like Canada, which has adopted that Law. Accordingly, the parties to those contracts and their advisors must understand how the Model Law applies to arbitration under those contracts.
The dispute arose between two businessmen, Mr. Popack and Mr. Lipszyc, one from Toronto and one from New York and their respective companies. Their arbitration agreement referred any dispute between them to a Rabbinical Court in New York. That Rabbinical Court, and in particular a Rabbi Schwei, dealt with the dispute for a while. Then, as a result of various events, the parties agreed that the dispute would be dealt with by a second Rabbinical Court in New York (the Arbitral Tribunal).
The arbitral agreement under which the second Rabbinical court was appointed stated that: the arbitrators did not need to explain to anyone the reasons for their decision; the decision of the Arbitral Tribunal was not open for appeal either in any religious court or any secular court; and the arbitrators had jurisdiction regarding disputes after the award including motions due to “judicial error, new evidence, etc., … to the extent permitted by law.”
The arbitral hearing commenced in January 2011 and continued intermittently until March of 2013. The proceedings were not recorded and no transcript of the evidence was prepared. As a result, there were disputes about what actually transpired during the hearing. The Award issued in September 2013 ordered that $400,000 be paid to the applicants by the respondents. No reasons for decision were given.
After release of the Award, Mr. Popack was told by the Arbitral Tribunal that it had met with Rabbi Schwei on July 8, 2013 regarding the dispute. The parties were not notified that the Arbitral Tribunal was going to, and did, meet with Rabbi Schwei, and they were not present at that meeting. The length of the meeting was estimated at between 1.3 and 4 hours.
Mr. Popack initially acknowledged that he had heard a rumour about the meeting shortly after it took place in July, before the Award was released. The extent to which the possibility of a meeting between the Arbitral Tribunal and Rabbi Schwei had been discussed during the arbitral hearing was a matter of controversy. On July 15, 2013, after the meeting between the Arbitral Tribunal and Rabbi Schwei, Mr. Popack’s representative, Rabbi Fried, wrote to the Arbitral Tribunal. He mentioned a rumour about the meeting with Rabbi Schwei, discussed the potential subject matter of Rabbi Schwei’s testimony at the private meeting and made submissions and provided factual information about that subject matter and said that Rabbi Schwei’s testimony was worthless. The letter also provided suggested language for the hoped-for result of the arbitration and other commentary. Rabbi Fried’s letter did not make an unqualified request for a hearing if the rumour was true and requested was that “if the Rabbinical Court considers Rabbi Schwei’s testimony (which was without our knowledge)” there should be a tribunal hearing about it. Rabbi Fried’s letter was not copied to the other side and there was no response to that letter by the Arbitral Tribunal.
The application to set aside the award was commenced by Mr. Popack and his companies in November 2013, seeking relief as a result of the meeting with Rabbi Schwei. Mr. Lipszyc then contacted the secretary to the Arbitral Tribunal and asked the secretary of the Arbitral Tribunal to write a letter about the matter.
On March 13, 2014, the Arbitral Tribunal issued a letter. Unlike the other written communications from the Arbitral Tribunal, which were in Hebrew, this letter was in English. The applicants submitted that the letter was effectively written to the court. It said, inter alia, the following:
“During the [hearing], in the presence of all parties and counsel, [Mr. Lipszyc] requested from us to meet with [Rabbi Schwei]. We granted his request and no party objected to our decision, or requested the opportunity to be present at the meeting that the Beth Din will schedule with [Rabbi Schwei]. Had any party requested to be present at the meeting with [Rabbi Schwei], we would have granted the parties request…..Although we met with [Rabbi Schwei], we confirm that the ruling and final order we issued would have been the same, even if the Beth Din meeting with [Rabbi Schwei] had not occurred….we received a fax from Rabbi S. Fried (Popack’s Rabbinical advisor) requesting, that if Bais Din will take into consideration any evidence they heard from [Rabbi Schwei], his party (Popack) is requesting a hearing with Bais Din. Accordingly since the meeting with [Rabbi Schwei] didn’t make any change in our ruling, a hearing was unnecessary. The Bais Din proceeded to issue the Final Order.”
In their application, the applicants asserted that the meeting with Rabbi Schwei violated:
Article 34(2)(a)(iv) of the Model Law which permits the court to set aside the arbitral award if the party making the application to the court “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”;
Article 34(2)(a)(ii) of the Model Law which permits the court to set aside the award if the applicant to the court “was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case”;
Article 34(2)(b)(ii) of the Model Law which permits the court to set aside the award if it conflicts with the “public policy of this State [in this case, Ontario].”
In support of these assertions the applicants submitted that the arbitral award violated:
Article 18 of the Model Law which requires that ‘[t]he parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”;
Article 24 which stipulates that [t]he parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of goods, other property or documents, and that “[a]ll statements, documents or other information supplied to the arbitral tribunal by one party shall be communicated to the other party” and that “any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties.”
Decision of the Ontario Superior Court
Justice Matheson of the Ontario Superior Court of Justice stated that there was no issue that the Arbitral Tribunal was an international tribunal seated in Ontario under the ICAA. She held that “ICAA and Model Law recognize the autonomy of parties to craft an adjudicative process of their own choosing, subject to limited exceptions.” She also held that “[b]road deference and respect must be accorded to decisions made by arbitral tribunals pursuant to the Model Law” relying on Corporacion Transnacional de Inversiones S.A. de C.V. v. STET International S.p.A.,  O.J. No. 3573 (Ont. S.C.J. [Commercial List]) at para. 22, aff’d  O.J. No. 3408 (Ont. C.A.).
There were two issues to be decided:
- whether the parties had contracted out of Article 34 of the ICAA, precluding all access to the courts; and
- whether the meeting of the Arbitral Tribunal with Rabbi Schwei justified setting aside the award on any of the grounds submitted by the applicants.
Contracting out of Article 34
Justice Matheson held that the parties had not effectively contracted out of right to seek an order setting aside the arbitral award, provided by Article 34 of the Model Law. The decision in Noble was not authority for the proposition that the parties may contract out of Article 34. Justice Matheson’s view was that, while the Court in Noble China did state, in obiter dicta, that Article 34 is not mandatory, the findings in the rest of its decision were “all different ways of showing that parties cannot effectively contract out of Article 34 for all purposes.” Justice Matheson noted that the respondents conceded that “there are mandatory provisions in the ICAA, two of which are relied upon here. If parties can contract out of Article 34 for all purposes, there would be no jurisdiction for a court to set aside an award as a remedy for breach of these admittedly mandatory provisions.”
Justice Matheson found that none of the alleged acts of contracting out of Article 34 had that effect. The provision in the arbitration agreement that the award is not open for appeal in any religious or secular court did not address the parties’ right to seek to have the award set aside. Nor did the parties contract out of Article 34 by agreeing in the arbitration agreement’s that the Arbitral Tribunal had jurisdiction to hear disputes about interpretation of the award, compliance of the parties or re-argument due to claims of a judicial error or new evidence. None of those matters were raised in the present case. Nor was the application to set aside the arbitral award barred by the provision in the arbitration agreement that precluded a “claim” in court without permission of the Rabbinical Court, which had not been obtained. Read in the context of the ICAA, a “claim” was a substantive claim, not a claim to challenge and set aside the award.
Justice Matheson concluded this part of her reason by saying the following:
“I therefore conclude that the Arbitration Agreement does not exclude the provisions in Article 34 that the applicants seek to invoke. However, even if it purported to do so, it would not be effective in regard to either the mandatory provisions of the ICAA or any conflict with public policy….” (underlining added)
Accordingly, Justice Matheson seems to have held that, while she performed an analysis of whether the arbitration agreement had excluded the operation of Article 34, that analysis was unnecessary because the parties were incapable of contracting out of Article 34, at least so far as the enforcement of the “mandatory” provisions of ICCA and public policy.
Discretion to Refuse a Remedy
Justice Matheson found that the meeting by the Arbitral Tribunal with Rabbi Schwei “was a breach of the Arbitration Agreement and satisfies the prerequisites for potential relief under Article 34(2)(a)(iv).” Nevertheless, she held that the court’s power to set aside the award should not be exercised in this case for a number of reasons:
- Seriousness of the breach: The seriousness of the breach of the Model law or public policy was relevant to the exercise of the court’s discretion to set aside the award. In Justice Matheson’s view, the Arbitral Tribunal had not gone off on a frolic of its own to interview a witness. Rabbi Schwei was not a third party witness but a former adjudicator. Both parties had discussed the arbitral tribunal and the possibility of interviewing Rabbi Schwei and neither party had opposed that step being taken.
- Parties’ procedural choices: The parties disagreed about the discussions they had had with the Arbitral Tribunal about the interviewing of Rabbi Schwei, and about the extent to which the Arbitral Tribunal may have been led to believe that the parties consented to such an interview. However, the parties had chosen to have no transcript of the proceedings. Justice Matheson held that, while the absence of a transcript “does not excuse the failure to comply with the notice obligations, the circumstances of the request could have left the Arbitral Tribunal with the impression that they were empowered to proceed as they did.” In addition, the parties had decided not to require the Arbitral Tribunal to issue reasons for decision. As a result, Justice Matheson said that “when considering whether the evidence of Rabbi Schwei might have caused some prejudice to the applicants, I must observe that these parties agreed to arbitration without either a transcript or reasons for decision. While they were free to do so, both sides must accept the consequence that I have little information upon which to conclude that Rabbi Schwei’s evidence might have prejudiced either side. I accept the possibility of prejudice for both sides, but cannot practically go further.”
- Serious prejudice if the Award was set aside: Justice Matheson considered two sorts of prejudice that would arise if the award was set aside. First, the hearing would have to be held again, and eight weeks of hearing and the very expensive costs of that hearing wold be thrown away. Justice Matheson did not consider that type of prejudice to be “especially significant.” Second, a material witness – Mr. Popack’s father – had died and there was no record of his evidence. Justice Matheson considered that this fact amounted to incurable prejudice.
- Applicants’ own procedural conduct: Justice Matheson referred to the fact that, after the rumour about the meeting with Rabbi Schwei, Rabbi Fried’s letter to the Arbitral Tribunal only made a qualified request for a hearing “if” the Arbitral Tribunal was going to consider the evidence they had received. As well, Justice Matheson noted that “Rabbi Fried’s letter made ex parte submissions to the Arbitral Tribunal about matters relating to Rabbi Schwei and the arbitration, which also raises fairness issues.” While she ruled that Rabbi Fried’s letter did not disentitle the applicants to relief, “it augurs against granting the application.”
- Evidence from the Arbitral Tribunal: Justice Matheson accepted the letter from the Arbitral Tribunal as evidence, stating that she had “taken the potential frailties of this communication into account in exercising my discretion.” At the very least, the letter made it evident that there was no point in referring the dispute back to the Tribunal as the applicants requested.
Taking those factors into consideration, Justice Matheson concluded as follows:
“The breach by the Arbitral Tribunal, although significant, must be weighed against the other relevant factors discussed above including the actual prejudice that will result if the Award is set aside. Taking everything into consideration in the exercise of my discretion, I conclude that this is not an appropriate case to set aside the Award.”
There are many aspects of this interesting decision to be discussed. Two issues will be addressed in this article.
Contracting out of the Model Law
One important issue is whether the parties to an international commercial arbitration can opt out of the provisions of the Model law. As she set out the facts and her initial discussion of the issues, Justice Matheson appears to contemplate that the parties can do so, because she undertakes an analysis of the arbitration agreement and the parties conduct, and then concludes that the parties did not agree to waive the provisions of the Model Law. But then at the end of this part of her decision, she appears to conclude that the parties cannot contract out of the “mandatory provisions” of the Model Law, and the “public policy”. She does not define which articles of the Model Law she is referring to. But she appears to clearly include Article 34 within those non-waivable provisions, on the sensible ground that if Article 34 could be waived then there would be no remedy for the breach of the other provisions of the Model Law.
With respect to Justice Matheson, the decision by Justice Lax In Re Noble China does appear to have directly held that the parties can contract out of the Model law, and in particular Article 34 of that Law. In her decision, Justice Lax said the following:
“In summary, Article 34 is not a mandatory provision of the Model Law. Parties may therefore agree to exclude any rights they may otherwise have to apply to set aside an award under this Article. They may do so as long as their agreement does not conflict with a mandatory provision of the Model Law. The arbitration agreement here does not conflict with any mandatory provision of the Model Law, nor does it confer powers on the arbitration tribunal which is in conflict with Ontario public policy. Noble’s motion to dismiss or permanently stay the Lei application is therefore granted.
Accordingly, it was on the very basis that the parties could and did contract out of the Model Law, and in particular Article 34, that Justice Lax dismissed the motion to set aside the award.
With these two decisions being in apparent conflict on this important issue, it is to be hoped that an appellate court will review this issue soon. My own view is that the better argument is that the parties to an international commercial arbitration cannot contract out of the provisions of the Model Law, other than certain specific articles, which the Model law states are waivable by the parties. The following are my reasons for this view.
The first is that the Model Law does expressly state in numerous articles that the parties can otherwise agree. Thus, Articles 3(1), 10(1), 11(2), 13(1), 17, 19(1), 21, 23(2), 24(1), 25, 28(1)-(3), 29, 31(2), 33(1). 33(1)(b) and 33(32) expressly state that the Article applies “unless the parties agree otherwise” or that the “parties are free to agree upon” other provisions, or words to the same effect. Article 4 refers to ‘‘a provision of this Law from which the parties may derogate”, and requires a party to make a timely complaint about the non-compliance, failing which that party is deemed to waive the objection. The words ‘‘unless the parties agree otherwise”, “the parties are free to agree” and “may derogate” imply that the parties may not agree otherwise or derogate from other provisions. Having stated in about 18 separate Article and sub-Articles that the parties may “otherwise agree” or are “free to agree upon” other provisions, it seems that the drafters thought they had stated which Articles and sub-Articles were non-mandatory and had thereby delineated between the mandatory and non-mandatory sections, and most unlikely they would have intended that the parties could contract out of the other provisions. If that is not so, and if the line between the two is not drawn by reference to those Articles and sub-Articles, then no clear line between the mandatory and non-mandatory Articles is apparent.
Second, a comparison to the Ontario domestic Arbitration Act, 1991 (AA) is in order. Section 3 of that Act specifically lists the section of the Act that the parties cannot waive. Section 46, which provides that the parties can apply to court to set aside the arbitral award, is one of the sections that is listed. So the parties cannot contract out of section 46 of the domestic arbitral statute – comparable to Article 34 of the Model Law. Both the AA and ICAA deal with the same subject matter – arbitration – and it seems unlikely that the Ontario legislature would provide that the parties cannot contract out of access to the courts to challenge domestic arbitration awards, but can do so in relation to international commercial arbitration awards. Similarly, it seems unlikely that having specified the provisions of the domestic statute that the parties cannot contract out of, the same legislature would intend that the parties can contract out any provisions of ICCA without that ever being mentioned.
In Noble China, Justice Lax examined these two arguments and arrived at a contrary view. In her view, the legislature could have stated in ICCA that certain articles were mandatory as it had done in the domestic Act, but did not do so. The failure of either the Model Law or ICCA to state that Article 34 was mandatory was sufficient to conclude that it was not mandatory. She rejected the argument that the words “unless otherwise agreed by the parties” or “the parties are free to agree” in some Articles meant that the other Articles were mandatory. In her view, to accept that argument would be to:
“ignore the Commentary to which recourse may be had as an aid in interpretation. It makes clear that the ‘Magna Carta’ of the Model Law and its most important provision is Article 19. By it, the parties make their own agreement, constrained only by the mandatory provisions of the Model Law which are listed in the Commentary and which each contain explicit mandatory language. This, in my view, is the structure of the Model Law and the approach to be taken in its interpretation.”
Justice Lax concluded her analysis of Article 34 as follows:
“As can be seen, Article 34 does not contain any of the familiar mandatory language…… Lei argues that the requirement of a full opportunity to present one’s case and equality of treatment are mandatory provisions of the Model Law under Article 18 and that violation of them constitute grounds for setting aside an award. I accept this. Lei further argues that since the parties may not derogate from those fundamental principles in an arbitration agreement, it necessarily follows that they may not derogate from the only means under the Model Law for enforcing those principles. I accept the first part of this proposition, but I do not accept the second….In this case, the arbitration agreement does not contain a waiver of the right to resist recognition and enforcement of the award as did the agreement in Food Services. However, there is waiver of the right to bring an application to set aside the award. In my opinion, the court should give effect to this. This is consistent with the philosophy and structure of the Model Law, indeed with its ‘Magna Carta’. The parties make their own agreements, so long as they do not derogate from its mandatory provisions. Article 34 is not such a provision.”
Third, the Model Law was prepared for adoption by the statute law, and enforced by the courts, of countries around the world. It seems likely that the drafters intended that the Model Law would be uniformly enforced in every country which adopted the Law since uniformity of application is the basis for one State being willing to enforce awards made in another State. It seems very unlikely that the drafters intended to leave open the possibility that the courts in one country could hold that the parties can contract out of the Model Law while the courts of another country could hold that the parties cannot, while the courts in a further country could hold that the parties are able to contract out of some provisions but not others. But that might be the result if the courts of a signatory country held that the provisions of the contract are waivable, since there is no court with world-wide jurisdiction to ensure that only one result is the right one. Only if the Model law is interpreted to mean that its provisions cannot be waived or amended, except where that is expressly stated in the Law, can uniformity of application between all signatory states be accomplished.
Fourth, in common law jurisdictions at least, prohibiting access to the courts is contrary to public policy. And as Justice Matheson noted, if Article 34 could be waived, then all of the other provisions of the Model Law could not be enforced. However, this is an argument that Justice Lax in Noble China implicitly rejected.
While none of these points, except the fourth, were referred to by Justice Matheson, she did conclude that the parties to an international commercial arbitration agreement have “the autonomy …to craft an adjudicative process of their own choosing, subject to limited exceptions”, and that Article 34 fell within the mandatory exceptions. However, it is submitted that the better way to state this proposition is the other way around: the Model Law is mandatory subject to approximately 18 situations in which the parties may otherwise agree.
But whether this proposition is a correct statement of the law must, in view of the apparent conflict between the Noble China and Popack decisions, await the decision of an appellate court. The issue of whether one can contract out of the Model Law is obviously of great importance to international commercial arbitrations. It may also impact the acceptability of Ontario as a place for those arbitrations to be held.
In this latter regard, those interested in how contracting out of the Model law has been dealt with in other countries may wish to examine, through Google, the history of Section 21 of the Australian International Arbitration Act. The following is what I understand to be the history of that section. Up to July 6, 2010, Section 21 of that Act apparently allowed the parties to opt out of the Model Law. Then, case law and controversy developed about the meaning and effect of that section and the impact of the section on the acceptability of Australia as a place for international commercial arbitrations. In the International Arbitration Amendment Act 2010, section 21 was amended to provide that if the Model Law applies to an arbitration, then the law of a State or Territory does not apply to the arbitration. I understand that the amended section effectively forbids contracting out of the Model Law. That amended section is similar, for instance, to section 2(b) of the Ontario Arbitration Act, 1991 which states that that Act applies to an arbitration under an arbitration agreement unless ICCA applies to that arbitration.
Discretion To Refuse A Remedy
Justice Matheson’s decision provides a useful checklist of some factors that are relevant to the exercise of the court’s discretion to set aside an arbitral award. Some of these factors may be controversial – such as receiving the letter from the Arbitral Tribunal – and others may be out of the parties’ control – such as the seriousness of the breach of the arbitral agreement, Model Law or rules of natural justice.
But the procedural choices made by the parties are very much in their control. And Justice Matheson’s treatment of these choices is very interesting. In effect, she held that if the parties choose not to record the proceedings and choose not to have the arbitral tribunal deliver a reasoned decision, then they are forcefully stating that the arbitral process is final, unless there is something egregious that occurs during the arbitration. And that is because, by their choices, the parties are depriving a reviewing court of elementary tools to judge the fairness and correctness of the process and the award, and are ensuring that the evidence is not preserved for use in a re-hearing. By their choices, they have demonstrated that they are really trusting the arbitral tribunal to arrive at the right result.
Often, for the sake of expedition and expense, the parties to an arbitration may do without a transcript of the evidence. Sometimes but infrequently, they may do without a reasoned award. But when deciding to opt out of these elementary protections for procedural fairness and substantive correctness, the parties should expect a less welcome reception from the court if they later challenge the award.
See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 3(d), 6 and 11(b).
Popack v. Lipszyc, 2015 CarswellOnt 8001, 2015 ONSC 3460
Arbitration – International Commercial Arbitration – review of arbitral award – contracting out of the Model Law – discretion to set aside an arbitral award
Thomas G.Heintzman O.C., Q.C., FCIArb April 24, 2016
This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.