Ontario Superior Court confirms that indirect losses are recoverable under Article 1116 of NAFTA

The decision represents a significant development in international investment arbitration case law, with important consequences for investors with international investments.  

On 10 April 2026, the Superior Court of Justice of Ontario set aside an UNCITRAL award in Grace et al v The United Mexican States [2026] ONSC 2104. The Court held that, among other matters, the arbitral tribunal had wrongly determined that it lacked jurisdiction to hear the claimants' claims under Article 1116 of the NAFTA because those claims were for indirect losses. On that basis, the Court set the award aside.

Background

Between 2013 and 2015, Integradora de Servicios Petroleros Oro Negro S.A.P.I. de C.V. (Integradora Oro Negro) leased five oil rigs to Mexico's state-owned oil company, PEMEX. Between 2015 and 2017, during a global decline in oil prices, PEMEX reduced its budget and accordingly amended pre‑existing supplier contracts, resulting in (i) a 50% reduction in lease payments owed to Integradora Oro Negro; (ii) the suspension of two of five rig contracts and the refusal to pay approximately USD 50 million in overdue amounts; and (iii) the termination of several leases without compensation—measures which the claimants allege forced Integradora Oro Negro out of business.

In 2018, 27 of Integradora Oro Negro's shareholders commenced international arbitration against Mexico under the North American Free Trade Agreement (NAFTA). The arbitration was held at the International Centre for Settlement of Investment Disputes (ICSID) under the Arbitration Rules of the 1976 United Nations Commission on International Trade Law (UNCITRAL Rules), and seated in Toronto. The claimants alleged that Mexico had breached its obligations to accord them the minimum standard of treatment required by international law, and had unlawfully expropriated their investments. Importantly, the claimants brought their claims in their own names (under NAFTA Article 1116), and not on behalf of the local Mexican subsidiaries (as allowed under NAFTA Article 1117). This was because only an investor who owns or controls a local subsidiary can bring a claim on its behalf under NAFTA Article 1117, whereas the claimants were minority shareholders so could only bring claims in their own names.

On 19 August 2024, the arbitral tribunal decided that it had no jurisdiction over the dispute because the claimants had failed to establish that they had standing. The tribunal unanimously held that Article 1116 of NAFTA is intended only to give claimants standing in respect of measures that directly interfere with their rights, indicating that "Articles 1116 and 1117 of the NAFTA consist of two different rules of locus standi, one regulating allegations of direct interference with investors' rights and the other regulating allegations of indirect interference with said rights." The tribunal concluded that only investors who own or control a local subsidiary, and are therefore entitled to bring claims under Article 1117, can claim for reflective losses (i.e. losses suffered as a result of harm to the rights of a subsidiary). The tribunal dismissed the claimants' claims on the basis that they had claimed for reflective losses under Article 1116.

However, being minority shareholders, the claimants never had any entitlement to bring claims on behalf of a subsidiary under NAFTA Article 1117. The 27 claimants therefore applied to the Ontario Superior Court of Justice to set the award aside. They did so on a number of grounds, including that the tribunal had improperly declined jurisdiction because they had claimed for indirect loss under Article 1116, which we consider here.

The Ontario Court's Decision

The Superior Court of Justice of Ontario agreed with the applicants (as they were in the set aside proceedings) and concluded that the tribunal had wrongly determined that it lacked jurisdiction to hear the claimants' claims under Article 1116.

The Court made the following key findings: 

1. There is no restriction on claims for reflective loss. The existence of Article 1117 of NAFTA does not limit the application of Article 1116 of NAFTA to indirect loss claims. In addition, the Court found that, when applying the principles set out in Article 31 of the Vienna Convention on the Law of Treaties of 1969, NAFTA does not confine recoverable loss under Article 1116 to direct loss.
2. Article 1116 allows claims for reflective loss. The Court endorsed the reasoning of the Kappes v Guatemala tribunal, which had found that CAFTA-DR Article 10.16 (which is similar to Article 1116) does not limit claims to those for direct loss. Moreover, the Court determined that the decision to the contrary of the Bilcon of Delaware v Government of Canada tribunal was an outlier, and in any case inconsistent because the Bilcon tribunal ultimately did award damages for reflective loss.
3. The treaty parties have not shown that they share clear, well-understood, agreed common position. Canada and the US (as non-disputing parties) argued that Article 1116 should not allow claims for indirect or reflective loss. While both States shared that position, they offered different interpretations of what would constitute indirect loss. The US, for example, considered measures impacting shareholders’ rights to declared dividends, voting rights, or a share in residual assets to constitute direct loss covered by Article 1116, whereas Canada took the view that loss would be direct only where it is distinct from the treatment of the enterprise. In contrast, Mexico focused on whether the shares were held directly or indirectly by the investor. The Court found that, despite a shared understanding of the distinction between Articles 1116 and 1117, these divergent approaches to direct and indirect loss fail to meet the legal standard of a “clear, well-understood, agreed common position” to guide interpretation of the treaty and claims such as the claimants' would be characterised as direct loss under the US interpretation, but indirect under Mexico’s.
4. Strict application of the definition of investment. The Court concluded that, in determining jurisdiction, the arbitral tribunal should have applied the definition of investment as stipulated in Article 1139 of NAFTA and assessed whether the investors' loss was incurred "by reason of, or arising out of" the treaty breach. The Court recalled that the arbitral tribunal’s role is simply to make findings of fact and to apply those facts to the relevant definitions. Instead, the Court determined that the tribunal had incorrectly interpreted the law, and should not have refused jurisdiction simply because the claims involved indirect loss.

Implications

The conclusion of the Ontario Superior Court has important consequences for investors with international investments. Although future investment tribunals will not be formally bound by the Court's decision, the Court's conclusion that minority shareholders can bring investment treaty claims for losses that they have indirectly suffered should be influential in the decision-making of future tribunals.

Importantly, the Court's conclusion also signals that an investment treaty tribunal that reaches the opposite conclusion may run the risk of its award being set aside or annulled. The implications may be far reaching given that a significant number of international investment treaties currently in force replicate the language of NAFTA Articles 1116 and 1117.

Investors should seek specialist legal advice when entering into commercial relationships with States or State-owned enterprises and consider the extent of any investment treaty protections to which they may have access. Clifford Chance has extensive experience of advising international investors on their treaty rights. Please contact one of our team for further details.