Navigating Arbitral Challenges: Contravention of Browne v. Dunn and Reasonable Apprehension of Bias Not Enough to Set Aside Arbitral Award

Introduction

The Court ultimately dismissed Vento’s Application, holding that, despite technical breaches in both procedural grounds, these breaches, when assessed in conjunction with other factors, were not significant enough to justify setting aside the award on procedural grounds.

Factual Background

Vento, the Applicant, was a US-based motorcycle manufacturer that sought to export its US-built motorcycles into Mexico under NAFTA’s preferential ad valorem import tariffs. Mexico had denied Vento the preferential tariff, which, according to Vento, ultimately culminated in the destruction of its Mexican joint-venture. Subsequently, Vento initiated an arbitration claim under Chapter 11 of NAFTA to challenge Mexico’s denial, with the International Centre for Settlement of Investment Disputes (“ICSID”) overseeing the arbitration.

Adhering to ICSID Rules, each arbitrator submitted a statement of independence and impartiality, detailing past and present professional, business, and other relationships with the involved parties, including any circumstances that may cast doubt on the arbitrator's reliability for independent judgment.

Mexico’s appointee, Mr. Perezcano, disclosed familiarity with officials in Mexico’s Ministry of Economy, a friendly relationship with one of Vento’s counsel, and one of the other arbitrators. Importantly, Mr. Perezcano stated that he ceased working for the Mexican government more than seven years prior to the arbitration. Given this disclosure, Vento did not raise any challenges over Mr. Perezcano’s appointment.

After the panel was confirmed, the Tribunal directed that pleadings, which included exhibited witness statements, expert reports, and supporting documentation, were to be filed in the following sequence: Vento’s Memorial, Mexico’s Counter-Memorial, Vento’s Reply, and, finally, Mexico’s Rejoinder. 

In response, Mexico submitted rejoinder evidence from Ms. Martinez, which included a covertly recorded conversation between her and Mr. Ortúzar, among others. Mexico asserted that this recording contradicted and undermined Mr. Ortúzar’s evidence regarding the pressure to deny the preferential tariffs and, in particular, the “marching orders.”

Vento sought to exclude the recording and related evidence or, in the alternative, requested that Mr. Ortúzar be permitted to present additional evidence to address the recording. The Tribunal dismissed Vento's motion to strike the evidence while also denying Mr. Ortúzar the opportunity to respond to Ms. Martinez’s evidence.

Post-arbitration, Vento discovered that Mr. Perezcano had engaged in undisclosed communications with members of the Mexican Government, including Mexico’s lead arbitration counsel, during the arbitration. These communications involved discussions about the potential inclusion of Mr. Perezcano in Mexico's roster of tribunal chairpersons under the Comprehensive and Progressive Agreement on Trans-Pacific Partnership and another trade agreement. Additionally, based on the Tribunal’s statement of costs, it appeared that Mr. Perezcano undertook a significant share of the Tribunal’s workload to deliver the award.

Vento’s Application

Due to the Tribunal’s treatment of Mr. Ortúzar’s evidence and Mr. Perezcano’s undisclosed communications, Vento sought to set aside the Award on two procedural grounds:

The Rule in Browne v. Dunn and Vento’s Alleged Inability to Present its Case

In explaining this standard, the Court highlighted two principles arising out of foreign case law interpreting the equivalent provisions within the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Firstly, a court, in this process, should recognize and apply basic minimum requirements that are generally acknowledged, even if not universally, as essential for a fair hearing across the international legal order. Secondly, if a sufficiently serious violation of due process is demonstrated, there is no need to establish a causal link between the violation and the award’s outcome. However, a court may exercise its discretion to not set aside an award when it is “clear beyond doubt” that the violation did not change the outcome.

Vento’s argued grounds as to why it was unable to present its case centered on the Tribunal’s decision to not allow one of its witnesses, Mr. Ortúzar, to respond to evidence that Mexico adduced to impeach his credibility. This inability for Mr. Ortúzar to respond, Vento argued, allowed Mexico to impugn Mr. Ortúzar’s credibility while preventing Vento from adduced further, relevant evidence in support of its argument that Mexican authorities were under “marching orders” to discriminate against it.

In support of its position, Vento relied heavily on the rule in Browne v. Dunn, which requires that a party seeking to impeach the credibility of a witness through contradictory evidence, must give the witness an opportunity to provide an explanation for the contradictory evidence.

While acknowledging the rule, the Court also acknowledged the leniency with which Ontario courts have applied the rule: “as a rule of fairness, it is not a fixed rule. The extent of its application lies within the sound discretion of the trial judge and depends on the circumstances of each case. Compliance with the rule in Browne v. Dunn does not require that every scrap of evidence on which a party desires to contradict the witness for the opposite party be put to that witness in cross-examination,” quoting from R. v Quansah.

This leniency is further reflected in the remedies available when there is a breach of the rule. As the Court noted, a court, when confronted with a breach of the rule, can decline recalling the witness whose credibility is being impeached and take the breach into consideration when assessing the reliability of the evidence.

With that, the Court held that Vento had failed to show that it was unable to present its case and that there was no breach of procedural fairness arising out of the rule in Browne v. Dunn. Without wading into a discussion about whether there was a breach of the rule, the Court found that any potential breach was remedied through the Tribunal’s treatment of Mr. Ortúzar’s evidence, which in the Court’s opinion was not “disregarded or rejected.” Rather, the Court was satisfied that the Tribunal placed significant weight on Mr. Ortúzar’s evidence and refrained from making adverse credibility findings against him.

This finding is not surprising. As alluded to above, there is significant judicial leniency towards technical breaches of the rule in Brown v. Dunn, and courts, such as the one here, have adopted a “so what” approach in assessing the prejudicial effects of these breaches. A mere technical breach is not enough; there must be enough to show that the witness’ credibility, in the context of the proceedings, was adversely affected, thereby affecting the reliability of his or her evidence. Thus, while not becoming an exercise to wade into the merits of a case, any challenge as to the fairness of a decision must exhibit strong indicators that the technical breach actually caused a misassessment of the material evidence and its underlying facts. Only then should a more robust analysis into the effects of the misassessment on the ultimate decision be undertaken.

Reasonable Apprehension of Bias

Vento raised a two-pronged argument asserting a reasonable apprehension of bias on the part of Mexico's nominee, and the Court agreed that a sufficient basis for a reasonable apprehension of bias had been made. Firstly, Vento contended that Mexico's appointee was presented with "prestigious and potentially lucrative opportunities to be listed on panels of arbitrators under two different trade agreements" while the arbitration was ongoing, creating a reasonable apprehension of bias. Vento also referenced the UK Supreme Court's decision in Halliburton Company v. Chubb Bermuda Insurance Ltd., submitting that the failure of the Mexican appointee to disclose the impugned communications alone raised justifiable doubts about his independence and impartiality.

The Court, referencing the IBA Guidelines on Conflicts of Interest in International Arbitration, noted the absence of the circumstances in this case in the IBA Guidelines’ list of situations that are meant to provide guidance as to which situations do or do not constitute conflicts of interest, or should or should not be disclosed, necessitated a case-specific assessment. The Court also referred to Halliburton, establishing that a failure to disclose could contribute to doubts regarding an arbitrator's impartiality.

While acknowledging a reasonable apprehension of bias due to Mexico's offers to its appointee, the Court declined to set aside the award. Citing Popack v. Lipszyc, the Court affirmed its discretion to deny relief in set-aside applications under Art. 34, even when grounds under Art. 34(2) are established.

The Court reasoned that the lack of impartiality and independence of Mexico's appointee did not necessarily affect the other two arbitrators, who retained a strong presumption of independence and impartiality. With a unanimous award, the Court concluded that the reasonable apprehension of bias in relation to Mexico's appointee did not compromise the reliability of the result or cause real unfairness or practical injustice. In doing so, the Court likened the tribunal to the Supreme Court of Canada stating that “each member of the Supreme Court prepares independently for the hearing of appeals.  All judges are fully prepared, and no member of the Court is assigned the task to go through the case so as to “brief” the rest of the panel before the hearing.  After the case is heard, each judge on the panel expresses his or her opinion independently.” 

The Court’s decision not to set aside the award in spite of the finding of a reasonable apprehension of bias and a lack of impartiality on behalf of Mexico’s appointee is an unanticipated one. As outlined in the arbitrator’s statement of costs, Mexico’s appointee evidently played a significant role in the formation of the arbitral award. In an administrative law context, the mere presence of bias in one tribunal member has been found to be enough to disqualify the entire panel, even if that member only participated as an observer during the hearing without actively engaging in it or subsequent deliberations: Surrey Knights Junior Hockey v. The Pacific Junior Hockey League. Again, Mr. Perezcano did not merely act as an observer, he had significant involvement in the deliberation of the award. Despite Mr. Perezcano appearing to have spent significantly more time on the matter than the other two arbitrators and, inferentially, may have performed a significant part of the drafting of the Award, the Court found that this did not mean that the other two arbitrators were not involved in the drafting and passively accepted Mr. Perezcano’s views.

There also exists a compelling practical rationale that supports the notion that the partiality or lack of independence of a single arbitrator should be found to compromise the entire tribunal. The fundamental issue lies in the practical impossibility of definitively confirming such biases haven’t permeated and tainted the tribunal as a whole. If one member is found to be partial and the arbitral award is not set aside, an inherent uncertainty that inevitably casts doubt on the integrity of the arbitral process is created. 

The Court further reasoned that balancing the potential prejudice that would result from redoing the arbitration, namely; the wasted time, resources, fees, and reduced recollection of events on behalf of the witnesses was not insignificant and stood to support the dismissal of the application.

Take Aways