Introduction
In Grace et al v. The United Mexican States, 2026 ONSC 2104, (Grace), the Ontario Superior Court of Justice (Commercial List) set aside an investment treaty arbitration award rendered by an arbitral tribunal against a group of US investors in a Mexican offshore oil rig business. The court decision, released on April 10, 2026 by Justice Dietrich, is a significant ruling for the international arbitration community—and for any party arbitrating in Ontario—as it addresses two key issues that often arise on set‑aside applications: jurisdictional error and reasonable apprehension of bias.
Facts of the Dispute
The applicants were individuals and entities holding approximately 43.2% of Integradora de Servicios Petroleros Oro Negro S.A.P.I. de C.V. (Oro Negro), a Mexican holding company whose subsidiaries leased five offshore oil rigs to Pemex, Mexico's state‑owned oil company. The applicants alleged that Pemex unilaterally cut Oro Negro's revenues, suspended and ultimately terminated the rig contracts without compensation, and drove the company out of business after Oro Negro refused to participate in the bribery of Mexican officials. They commenced an ICSID‑administered arbitration under the UNCITRAL Arbitration Rules pursuant to Chapter 11 of the North American Free Trade Agreement (NAFTA), with Toronto as the seat (the Oro Negro arbitration).
After a four‑year proceeding, the three‑member arbitral tribunal rendered an award in August 2024 declining jurisdiction on two bases:
- (i) two applicants were dual US/Mexican nationals whose "dominant and effective" nationality was held to be Mexican, and
- (ii) the remaining applicants' losses were characterized as "indirect" losses that the arbitral tribunal held were not recoverable under Article 1116 of NAFTA.
The investors applied to the Ontario court to set aside the award on both jurisdictional grounds and on the additional basis of a reasonable apprehension of bias in respect of one tribunal member, Mr. Andrés Jana Linetzky. The court set aside the award in full.
Jurisdictional Issues
Justice Dietrich applied the correctness standard for true jurisdictional questions confirmed in Mexico v. Cargill, and reaffirmed—based on Russian Federation v. Luxtona Limited—the de novo nature of such review. As a result, she engaged in a de novo assessment of the relevant provisions of the NAFTA, applying principles of treaty interpretation laid down in the Vienna Convention on the Law of Treaties (Vienna Convention).
Dual Nationality
Like many investment treaties, NAFTA expressly stipulated that only an "investor of a Party" could submit a claim against "another Party". As such, the question of nationality is a threshold jurisdictional issue: a claimant must establish that it qualifies as an investor of one Party in order to bring a claim against another. This requirement raises the question of whether dual nationals, who hold the nationality of both the claimant state and the respondent state, qualify as protected investors.
In Grace, two of the claimants were dual nationals of both the United States and Mexico. In determining the underlying nationality of the dual nationals for purposes of establishing jurisdiction, the arbitral tribunal applied the "dominant and effective nationality" test based on submissions from the United States and Canada, acting as non-disputing parties. Both countries contended that, based on "subsequent practice" as recognized under Article 31.3(b) of the Vienna Convention, a dual national may bring a claim under NAFTA, provided the claim is directed against a NAFTA Party other than the country of the individual’s "dominant and effective nationality."
Having determined that each dual national’s dominant and effective nationality was Mexican, the arbitral tribunal found it lacked jurisdiction over their claims.
On review, Justice Dietrich determined that the ordinary meaning of NAFTA Articles 1116 and 1117 did not prohibit dual nationals from submitting claims against one state of their nationality, and that the UNCITRAL Arbitration Rules (unlike the ICSID Convention) contain no such restriction. In considering the application of Article 31.3(b) of the Vienna Convention, Justice Dietrich referred to the stipulation articulated by the Ontario Court of Appeal in Cargill, that a "subsequent practice" must reflect a "clear, well-understood, agreed common position" among the parties to carry interpretive weight. Justice Dietrich found that the positions of the three NAFTA Parties did not amount to a "subsequent practice" because they did not satisfy the Cargill threshold of a “clear, well-understood, agreed common position”— Canada and the United States adopted "slightly different positions" in respect of predominant nationality while Mexico’s primary position was that no claims by dual nationals were permitted at all, advancing the dominant and effective nationality test only in the alternative.
Indirect Loss
The arbitral tribunal had concluded that Article 1116, which permits an "investor of a Party" to bring its own claim for breach of a NAFTA obligation, was confined to direct loss, while Article 1117 (claims brought on behalf of an enterprise) was the proper vehicle for "indirect" or "reflective" loss. Because the non‑dual‑national applicants were minority investors who could not bring an Article 1117 claim on Integradora's behalf, the arbitral tribunal's interpretation effectively foreclosed their claims entirely.
In the Ontario court, Mexico relied principally on the reasoning in Bilcon of Delaware et al. v Government of Canada to argue that Articles 1116 and 1117 must be read together as establishing a mutually exclusive scheme: Article 1116 for direct loss and Article 1117 for reflective or indirect loss suffered through an enterprise. Mexico further alleged a "subsequent practice" of the NAFTA Parties in their pleadings before other arbitral tribunals that Article 1116 should not permit claims for indirect or reflective loss. However, Justice Dietrich adopted the reasoning of the arbitral tribunal in Kappes v. Guatemala, (Kappes) which involved the interpretation of substantially similar treaty provisions (i.e., the Dominican Republic-Central America Free Trade Agreement or CAFTA‑DR), that nothing in the text of Article 1116 or its reading in the context of Article 1117 limited Article 1116 to direct loss.
On the "subsequent practice" argument, the court emphasized that the NAFTA Parties had each articulated meaningfully different views of what constitutes indirect loss. The United States, Canada and Mexico did not share a "clear, well‑understood, agreed common position" as required by Cargill. The court further noted that "when considering whether repeat legal submissions made by the NAFTA Parties before other tribunals amount to subsequent practice, the history of success of those submissions is a matter to consider"; on the issue of Article 1116 and indirect loss, however, except for Bilcon, no arbitral tribunal had accepted Mexico's interpretation, undermining any claim of consistent subsequent practice.
Accordingly, Justice Dietrich concluded that the arbitral tribunal had erred in declining jurisdiction on both dual nationality and indirect‑loss grounds.
Reasonable Apprehension of Bias Issue
In the Ontario court, the applicants also alleged that Mr. Jana—the arbitrator they themselves had appointed—developed a reasonable apprehension of bias while the arbitral tribunal's deliberations in the Oro Negro arbitration were ongoing as a result of having accepted a mandate as counsel to Honduras in an arbitration referred to as Juan Carlos Arguello and Ernesto Arguello v. Republic of Honduras (Arguello). Arguello involved a CAFTA‑DR claim by minority shareholders for harm to the underlying enterprise, the very type of "indirect loss" question Mr. Jana was simultaneously deciding in the Oro Negro arbitration. The applicants further alleged that, after his appointment in the Oro Negro arbitration, Mr. Jana had restructured his practice into a state‑side boutique without disclosing those developments or his pursuit of state appointments.
Justice Dietrich applied the framework recently articulated by the Ontario Court of Appeal in Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc. The test for reasonable apprehension of bias on the part of an arbitrator under the Model Law on International Commercial Arbitration (the Model Law) is objective, and is assessed from the perspective of a fair‑minded and informed observer, against a strong presumption that an arbitrator is impartial. Articles 12(1) and 12(2) of the Model Law impose duties of disclosure and permit challenges where "justifiable doubts" arise. Justice Dietrich noted that while the duty to disclose covers a wider range of circumstances than those that will justify disqualification of an arbitrator or setting aside an award for a reasonable apprehension of bias, the duty to disclose is aimed at the same kind of circumstances that give rise to a challenge for reasonable apprehension of bias. She also accepted that while the IBA Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines) place certain situations on a colour‑coded list, situations falling outside the so-called "Orange List" can still warrant disclosure on a case‑by‑case basis, including, as the IBA Guidelines specifically note, where an arbitrator acts as counsel in an unrelated case raising similar issues.
Drawing additional support from the recently released Deutsche Lufthansa AG (Germany) v. Venezuela decision of the Secretary General of the Permanent Court of Arbitration relating to the challenge of an arbitrator, Justice Dietrich rejected Mexico's argument that the differing treaty frameworks (NAFTA versus CAFTA‑DR) eliminated overlap, observing that Kappes itself demonstrates the substantive similarity of the indirect‑loss provisions across the two treaties. Justice Dietrich also rejected the argument that the alleged bias was "speculative" because Honduras's position in Arguello was unknown, observing that the very purpose of the disclosure duty is to give parties the opportunity to investigate, and that Mr. Jana's failure to disclose could not be used to defeat the application.
The court concluded that a fair‑minded and informed observer would find a reasonable apprehension of bias arising from Mr. Jana acting as counsel for Honduras on a similar indirect‑loss claim while the decision in the Oro Negro arbitration was under reserve.
Insights and Takeaways
- Ontario courts are increasingly willing to intervene in arbitral decision making: The decision reaffirms that Ontario courts are increasingly willing to intervene in international arbitrations through a rigorous application of their supervisory function where the record supports it, both in respect of jurisdictional questions and the procedural integrity of arbitrations.
- Ontario appears to be gaining traction as an arbitral seat: The decision builds on a growing body of jurisprudence in Ontario on set aside and enforcement applications under Ontario's International Commercial Arbitration Act. This jurisprudence offers greater predictability to both sovereigns and private parties involved in international arbitrations seated in Ontario, and an increasingly detailed roadmap of what parties on either side of a set aside or enforcement application may expect from Ontario courts excising their supervisory function under Ontario legislation.
- Arbitrator conduct is under heightened scrutiny: Grace—read together with Aroma— confirms that Ontario courts will continue to apply a unified, objective disclosure and justifiable doubts standard under the Model Law, taking guidance from the IBA Guidelines on a case by case basis. Additionally, where concerns of issue conflict arise, particularly in the investment treaty context, Ontario courts are likely to find that the standard under the Model Law requires an arbitrator to disclose other mandates in which they or their firm are involved or become involved at some point during the pendency of the arbitration in order to give the parties an opportunity to ask questions and satisfy themselves of the arbitrator's impartiality.
- Minority investor protection is strengthened: Although NAFTA itself has been superseded by the Canada-United States-Mexico Agreement, the court's reasoning has broader significance for disputes under investment treaties that adopt a structure for claims similar to NAFTA Articles 1116 and 1117. By rejecting a narrow reading of Article 1116, which would have funneled all reflective loss claims into Article 1117, the court has preserved a meaningful avenue for minority investors who cannot bring a derivative claim on behalf of the enterprise. Investors and sovereigns engaged in disputes under treaties with comparable provisions should note that Ontario, as a seat, is likely to resist jurisdictional interpretations that render investor protections "illusory" for minority stakeholders.
- Dual nationality is not an automatic bar to investor-state claims: The court determined that the ordinary meaning of NAFTA Articles 1116 and 1117 did not prohibit dual nationals from submitting claims against one state of their nationality, and that the UNCITRAL Arbitration Rules (unlike the ICSID Convention) contain no such restriction. Dual nationals advancing claims under treaties whose wording is similar to NAFTA will take some comfort from the court's decision regarding dual nationality. Investors who are dual nationals and have the option to pursue their claims under the UNCITRAL Arbitration Rules or the ICSID Arbitration Rules would also be wise to consider the court's reasoning in this case.
Bennett Jones