The advent of generative artificial intelligence (AI) has brought unprecedented capabilities and efficiencies to the legal profession. However, alongside its benefits come profound risks, particularly when AI is employed in adjudicative decision-making. The recent landmark ruling by the Quebec Superior Court in Association des ressources intermédiaires d’hébergement du Québec (ARIHQ) c. Santé Québec (2026 QCCS 1360) serves as a stark warning to the international and domestic arbitration communities. In an unprecedented move, the Court annulled an arbitral award after finding that the sole arbitrator had implicitly delegated his decision-making authority to a generative AI tool, which resulted in the inclusion of “hallucinated” jurisprudence and legal doctrine.

This article unpacks the ARIHQ judgment, explores the comparative international grounds for setting aside such awards under the New York Convention and the UNCITRAL Model Law, surveys the growing global judicial consensus on AI, and proposes practical safeguards for inclusion in arbitration agreements and Terms of Reference.

The Judgment: ARIHQ c. Santé Québec

The dispute originated from an unpaid retroactive remuneration claim between a healthcare intermediary resource (Osman) and a Montreal health authority (CCSMTL, now Santé Québec). An arbitrator dismissed the claim on preliminary grounds, ruling that the contractual notice periods had expired. The claimants sought to annul the award before the Quebec Superior Court, relying on two grounds: first, that the award violated public policy by modifying statutory prescription periods; and second, that the arbitral procedure was not respected because the arbitrator relied on non-existent legal authorities, strongly suggesting the use of generative AI.

The Honourable Martin F. Sheehan swiftly dismissed the public policy argument, affirming the well-established principle that a mere error of law—even concerning public policy provisions—does not justify setting aside an arbitral award unless the outcome itself is fundamentally repugnant to public order.

However, the Court decisively upheld the procedural challenge. Reviewing the award, the Court verified that the central doctrinal and jurisprudential authorities cited by the arbitrator to support the validity of the forfeiture clause simply did not exist. The arbitrator had referenced a fabricated doctrinal article by a real author and hallucinated judgments ostensibly from the Quebec Court of Appeal and the Superior Court (e.g., fictitious citations for Ville de Montréal c. Syndicat des cols bleus and Tremblay c. Commission scolaire de la Jonquière).

The Court emphasized the intuitu personae nature of arbitration—the principle that an arbitrator is chosen for their personal expertise, judgment, and authority. Relying on an AI tool to formulate the substantive reasoning without verifying the output violated the fundamental maxim delegatus non potest delegare (a delegate cannot delegate) and breached the secrecy of deliberations.

Translating the crucial analytical and operative parts of the judgment, Justice Sheehan concluded:

“The preponderance of the evidence therefore leads to the conclusion that the Arbitrator’s authority was delegated and that he abdicated his role to review the result. This conclusion is inevitable given that all of the doctrinal and jurisprudential references on which the Arbitrator relies are non-existent and ‘hallucinated’. For this reason, the Award must be annulled.”

The Court, however, added a critical caveat: not every use of AI will automatically lead to annulment. If the AI usage is minimal, or if the hallucinated references do not form the crux of the reasoning, the award might survive if the breach did not fundamentally taint the proceedings. But in this case, the breach struck at the very heart of the arbitrator’s reasoning and affected the confidence of the parties in the arbitration regime.

The operative part (dispositif) reads:

“FOR THESE REASONS, THE COURT: ANNULS the arbitral award rendered on August 8, 2025, by the impleaded party, Mr. Michel A. Jeanniot; ORDERS the parties to choose a new arbitrator within 60 days of this judgment; THE WHOLE, with legal costs.”

Domestic Set-Aside Grounds and Comparative International Frameworks

The Quebec Code of Civil Procedure (C.C.P.) is deeply influenced by the UNCITRAL Model Law, making this judgment highly instructive for international practitioners. The Court annulled the award under Article 646(3) of the C.C.P., which allows set-aside where “the applicable arbitral procedure was not respected.”

The UNCITRAL Model Law and the New York Convention

Under Article 34(2)(a)(iv) of the UNCITRAL Model Law, and identically under Article V(1)(d) of the New York Convention, an award may be set aside or refused enforcement if “the arbitral procedure was not in accordance with the agreement of the parties.”

When parties agree to arbitrate, they contract for a bespoke dispute resolution process wherein a specific human tribunal exercises independent intellectual judgment. The use of an unverified Large Language Model (LLM) to draft the award’s substantive reasoning is a structural deviation from this agreed procedure. Furthermore, feeding confidential submissions into a public AI tool violates the confidentiality and secrecy of deliberations inherent in arbitration.

The Public Policy Exception

While the Quebec Court dismissed the substantive public policy argument, an award heavily reliant on AI hallucinations could trigger the procedural public policy exception under Article 34(2)(b)(ii) of the Model Law and Article V(2)(b) of the New York Convention. An award anchored in fabricated law deprives the losing party of the right to a fair hearing and the opportunity to present its case (audi alteram partem). The parties cannot possibly address or distinguish phantom precedents during the proceedings. Enforcement courts in major hubs like London, New York, or Singapore would view the abdication of the adjudicative function to a “black box” algorithm as a severe affront to fundamental notions of justice, procedural fairness, and due process.

Global Court Directions on AI Usage in Proceedings

The ARIHQ judgment resonates with an emerging global judicial consensus that demands strict guardrails around the use of generative AI in dispute resolution. Courts and tribunals worldwide have recently confronted the consequences of “AI hallucinations” and have responded with firm directives.

United States

The U.S. has been ground zero for AI in litigation, notably following the infamous Mata v. Avianca case, where lawyers were sanctioned for submitting AI-generated fictitious case law. Consequently, numerous federal and state judges have issued standing orders. These orders typically mandate that counsel file a certificate attesting that no generative AI was used in drafting, or that if it was, a human attorney rigorously verified the accuracy of all citations and legal propositions. The focus is squarely on human accountability and preventing the waste of judicial resources on fabricated jurisprudence.

United Kingdom

In late 2023, the UK Courts and Tribunals Judiciary issued official guidance for judicial office holders. While acknowledging the utility of AI for administrative tasks, the guidance explicitly warns judges about the severe risks of hallucinations and deepfakes. The UK Master of the Rolls has emphasized that judges remain personally responsible for their judgments and must not delegate legal analysis or substantive drafting to AI tools, safeguarding the integrity of the “judicial mind.” Furthermore, it firmly warns against entering any confidential case information into public AI chatbots.

Middle East (QFC and ADGM)

Progressive commercial courts in the Middle East have taken decisive action against AI misuse. In the Qatar Financial Centre (QFC), the Civil and Commercial Court’s late-2025 judgment in Sheppard v Jillion LLC found a lawyer in contempt for repeatedly citing AI-generated fake cases. This prompted the QICDRC to issue Practice Direction No. 1 of 2026, which established a comprehensive framework requiring lawyers to independently verify AI-generated submissions. Similarly, in the Abu Dhabi Global Market (ADGM), the Court in Arabyads v Gulrez Alam [2025] ADGMCFI 0032 ordered severe wasted costs against a legal team that submitted a defense riddled with false, AI-generated legal authorities, concluding that unverified AI use amounts to reckless professional conduct.

Proposed Directions for Terms of Reference and Arbitration Agreements

The ARIHQ decision underscores a critical vulnerability: waiting for a court to set aside a tainted award means the parties have already suffered the immense costs and delays of a compromised arbitration. To proactively mitigate these risks, parties should expressly regulate the use of AI in their Arbitration Agreements, or more practically, in the Terms of Reference (ToR) and Procedural Order No. 1 (PO1).

Practitioners should consider integrating the following AI protocols:

• Explicit Prohibition of Delegation: The ToR should clearly state that the arbitral tribunal must not delegate its adjudicative, analytical, or substantive decision-making functions to any generative AI tool. The arbitrator must assume full, personal responsibility for the reasoning, legal research, and drafting of the award.
• Permitted Uses and Mandatory Verification (Human-in-the-Loop): Parties can define acceptable AI use, such as utilizing AI for translation, formatting, or document summarization, provided it does not replace substantive analysis. PO1 should include an affirmative obligation for both the tribunal and counsel to strictly verify any AI-assisted output against primary legal sources. The tribunal could be required to issue a “Statement of Human Authorship” within the final award confirming that all citations and factual references have been manually verified.
• Confidentiality and Data Security Guardrails: To protect the secrecy of deliberations and party confidentiality, the ToR must prohibit the uploading of confidential case information, pleadings, or evidence into open-source or publicly accessible generative AI models (e.g., public versions of ChatGPT). Only secure, closed-loop enterprise AI systems that do not retain data for model training should be permitted.
• Transparency and Disclosure: If a party intends to rely on materials or legal submissions substantially generated by AI, they should be required to disclose this fact to the tribunal and opposing counsel. Likewise, the tribunal should disclose if AI tools were used for any significant administrative or drafting assistance.

Conclusion

The Quebec Superior Court’s annulment of the award in ARIHQ c. Santé Québec serves as a defining precedent in the modern era of dispute resolution. It establishes a clear boundary: while technology can enhance the efficiency of the arbitral process, it cannot usurp the human judgment that parties contractually bargained for. As generative AI tools become ubiquitous, the international arbitration community must proactively regulate their use. By embedding robust AI guidelines into Terms of Reference, parties can protect the integrity of their proceedings, safeguard confidentiality, and insulate their awards from the devastating consequences of digital hallucinations.

Introduction

In the rapidly expanding world of digital finance, courts face a novel challenge: determining the legal location, or situs, of supposedly borderless crypto assets. When a digital asset is lost or stolen on an international platform, where exactly does the legal harm occur? The Ontario Superior Court of Justice recently addressed this critical issue head-on in Iakovlev v. Epayments Systems Ltd., 2026 ONSC 1296.

In a decision that will undoubtedly resonate across global legal frameworks, Associate Justice R. Frank granted a motion by the defendant, ePayments Systems Limited, “for an order dismissing the plaintiff’s claim as against it on the basis that this court has no jurisdiction over it.”

The ruling firmly rejects the notion that the residency of a crypto owner dictates the jurisdiction of the digital asset. More importantly, it tackles the technological realities of centralized crypto custody, providing much-needed clarity and a formidable defense against judicial overreach in cross-border crypto disputes.

The Dispute and the Question of Situs

In this action, “the plaintiff seeks damages for alleged misrepresentation and civil conspiracy,” claiming that “due to the bankruptcy of DSX Global, the plaintiff has been deprived of the six bitcoins he purchased.” The plaintiff attempted to establish assumed jurisdiction in Ontario by arguing that “his retirement savings, an Ontario-based asset, were the source of the funds invested on the platform,” and therefore, he suffered financial loss in his home province.

Under Canadian common law, “an actionable conspiracy occurs in the jurisdiction where the alleged harm is suffered, regardless of where the wrongful conduct occurred.” Therefore, the Court had to determine exactly where the legal harm involving the loss of the digital assets took place.

Paragraph 47: Defining the Location of Digital Assets

Associate Justice R. Frank systematically dismantled the plaintiff’s argument that localized financial impact equates to localized legal harm. In paragraph 47, the Court provided a profound analysis of the location of digital assets, prioritizing the physical infrastructure and the custodial entity over the domicile of the investor:

“[47] Further, even if some or all of the funds used by the plaintiff to purchase the allegedly lost crypto assets had originated in Ontario – which is not supported by the evidence – the plaintiff’s digital assets were held on servers in the European Union. Those crypto assets were never held on servers in Ontario or anywhere in Canada, nor were they held by or through an entity located in or with any connection to Ontario or Canada. As such, the alleged harm and loss did not occur in Ontario.”

The Court highlighted the extreme danger of adopting the plaintiff’s logic, warning that it would effectively subject global platforms to litigation everywhere simply because their users are distributed worldwide:

“If the plaintiff’s position were accepted and taken to its logical conclusion, then damages would occur in Ontario whenever an Ontario resident suffers a loss of one of their assets located outside Ontario, regardless of whether the asset has any connection to Ontario other than its ownership by the Ontario resident. In my view, the fact that an Ontario resident suffers a loss of or damage to an asset located outside Ontario does not, on its own, mean that the harm occurs in Ontario. That would be akin to universal jurisdiction, a result that the Supreme Court has cautioned against in Van Breda.”

The Technical Reality vs. The “Borderless” Myth: Anchoring Crypto to Servers

To fully appreciate the weight of the Court’s ruling, one must understand the technical tension at the heart of the digital asset industry. In the mainstream consciousness, cryptocurrencies like Bitcoin are frequently championed as strictly “borderless”, built on decentralized, globally distributed public ledgers where the underlying assets theoretically exist everywhere and nowhere simultaneously.

However, Iakovlev introduces a vital technical distinction by piercing this “borderless” myth in the context of centralized platforms and payment gateways. When an investor purchases cryptocurrency on a centralized platform like DSX Global or uses a service like ePayments, they are not usually holding the private keys directly on the decentralized public blockchain. Instead, they hold a custodial right, an IOU, recorded on the platform’s proprietary, centralized internal databases.

Justice Frank acutely recognized this technical reality. By explicitly observing that “the plaintiff’s digital assets were held on servers in the European Union” and “never held on servers in Ontario,” the Court established a tangible, physical nexus based on the technological hardware managing the platform’s internal database. The court brilliantly bridged the gap between decentralized technology and traditional legal geography by tethering the situs of the asset to these physical servers, and the fact that they were never “held by or through an entity located in” Ontario. It aligned legal jurisdiction with the technical reality of centralized digital asset custody infrastructure, rather than the abstract, borderless nature of the blockchain protocol.

Global Ramifications and Effects on Common Law Jurisdictions

The global ramifications of Iakovlev are immense. By ruling that a platform’s “presence in Ontario was virtual only, and passive,” and by anchoring the situs of digital assets to the jurisdiction where they are “held on servers” or “held by or through an entity,” the Court has erected a powerful shield against forum shopping across the digital asset industry.

Because the legal geography of cryptocurrency is still actively being mapped, this physical infrastructure-based precedent will heavily influence other major common law and international financial hubs:

• The United Kingdom (UK): English courts have frequently grappled with the lex situs of crypto assets. In earlier rulings, UK courts have suggested that a crypto asset is legally located where its owner is domiciled. Iakovlev introduces a compelling counter-approach. By stating that “the fact that an Ontario resident suffers a loss… does not, on its own, mean that the harm occurs in Ontario,” the Canadian court directly challenges the domicile-based model. UK litigators defending foreign Virtual Asset Service Providers (VASPs) will undoubtedly cite Iakovlev to argue that the true situs of custodial assets lies with the centralized server infrastructure and the hosting entity, not the claimant’s residence.

• Singapore and Hong Kong: As premier crypto hubs in Asia, Singapore and Hong Kong have definitively recognized cryptocurrencies as property capable of being held in trust. However, identifying the geographical nexus for cross-border torts remains highly contested. Iakovlev provides the legal certainty that centralized platforms operating in these regions desire. If an exchange incorporated in Singapore or Hong Kong stores client assets on local servers, Iakovlev provides highly persuasive authority that foreign plaintiffs cannot easily sue these exchanges in their home countries just because the “borderless” assets were accessed globally.

• DIFC and ADGM (United Arab Emirates): The Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) operate under English common law principles and have enacted bespoke, entity-focused digital asset property laws to attract Web3 businesses. The Iakovlev judgment inherently strengthens their jurisdictional appeal. By reinforcing that digital assets are tied to where they are “held by or through an entity located in” a specific region, digital asset firms licensed within the DIFC or ADGM can be confident that international courts will respect these hardware and corporate boundaries, preventing foreign users from bypassing UAE forums based solely on localized economic harm.

• Australia: Australian courts apply strict “real and substantial connection” tests for assumed jurisdiction and are highly cautious regarding extraterritorial overreach. In dealing with class actions or individual claims against international crypto exchanges, Australian courts will find the Iakovlev reasoning highly persuasive. The judgment provides a technologically grounded metric, the location of the servers, for dismissing claims where the only domestic connection is the plaintiff’s residency, preventing Australian courts from exercising what “would be akin to universal jurisdiction.”

Conclusion

Iakovlev v. Epayments Systems Ltd. represents a triumph of established jurisdictional principles and technological pragmatism in the face of decentralized finance. By decisively ruling that the physical location of servers and custodial entities dictates the legal location of digital assets, the Ontario Superior Court of Justice has successfully blocked a backdoor to “universal jurisdiction.” As common law courts around the globe continue to navigate the complexities of the crypto industry, this judgment stands as a vital reminder: while the blockchain network may be borderless, the corporate infrastructure and servers that hold these assets remain firmly tethered to physical reality.

The intersection of digital currency and the tax collector has always been a point of friction, but a recent judgment from the Tax Court of Canada has provided a clarifying jolt to the system. In Amicarelli v. The King, 2025 TCC 185, delivered in December 2025, Justice John A. Sorensen stripped away the technological hype of cryptocurrency to reveal its bare economic bones. While the case adjudicated the specific misfortune of a taxpayer caught in the notorious collapse of the QuadrigaCX exchange, the principles articulated in the decision offer a profound warning to global policymakers currently flirting with the taxation of unrealized gains. As nations from the United States to Australia consider expanding their tax nets to capture the paper wealth of the digital age, the Amicarelli decision stands as a testament to the dangers of taxing value that can vanish in a heartbeat.

To understand the legal and economic implications, one must start with the asset itself. The court provided a definition of Bitcoin that is remarkable for its clarity and its exclusion of traditional financial attributes. The judgment accepted that Bitcoin “subsists on a blockchain, which is a decentralized and encrypted ledger of information.” It noted that while the asset “exists in a virtual, digital domain,” it lacks the fundamental characteristics of income-generating property. Unlike a bond that pays interest or a stock that yields dividends, the court stated explicitly: “Bitcoin does not generate interest or dividends. It is a medium of exchange and temporary store of value.”

This definition is crucial. It establishes that the only way to make money with Bitcoin, barring some exotic derivative structure, is through the mechanism of price appreciation. You buy it, you hold it, and you hope it goes up. In the case of Jeanette Amicarelli, she did more than just hope. She engaged in what the court described as “optimistic behaviours” to fund her acquisition of Bitcoin in 2017. She took out a second mortgage at an interest rate of nearly 12 percent, cleared out her retirement savings, and used high-interest credit cards. The court observed that “only a person with a bona fide belief that they were going to enjoy positive financial outcomes would engage in such costly financing.”

Because of this aggressive pursuit of profit, the court ruled that her trading activities constituted an “adventure or concern in the nature of trade.” This legal determination meant that her subsequent loss, nearly half a million dollars that evaporated when QuadrigaCX failed, was a business loss, not a capital loss. The distinction allowed her to deduct the full amount against her other income, a victory for the taxpayer that hinged on the court’s recognition of her intent and the reality of her loss.

However, the deeper lesson of Amicarelli lies in its implicit critique of the “mark-to-market” taxation philosophies gaining traction globally. In the United States, political debates have cycled through proposals to tax the unrealized gains of high-net-worth individuals, essentially asking taxpayers to pay cash taxes on the increase in value of their assets, even if those assets haven’t been sold. Similar ideas circulate in the European Union under the guise of wealth equalization, while countries in East Asia and Australia continue to refine the timing of capital gains events.

The Amicarelli judgment exposes the peril of these approaches by highlighting the concept of symmetry. Justice Sorensen wrote what should be a guiding maxim for tax authorities everywhere: “Ultimately, to the extent that material profits earned in a market frenzy are fully taxable regardless of the risk profile of the market, losses, including catastrophic losses, must be given symmetrical treatment.”

Consider the timeline of the Amicarelli case through the lens of taxing unrealized gains. In late 2017, the taxpayer’s account balance reportedly swelled to over two million dollars. In a regime that taxes paper wealth, the government might have assessed a massive tax liability on those gains at the end of the fiscal year. Yet, just weeks later, the exchange collapsed, and the balance “inexplicably fallen to nil.” If the taxman had already taken a cut of the two million dollars, the taxpayer would have been left destitute, having paid taxes on wealth she never truly possessed and could never access.

The court’s recognition that cryptocurrency is merely a “temporary store of value” underscores the volatility that makes taxing unrealized gains so dangerous. Assets in this sector are not stable; they are prone to “modern cryptocurrency surges” that the judgment compared to “Dutch tulip mania” or the “dot com bubble.” When a government steps in to tax the upside of a bubble before it bursts, they effectively become a partner in the speculation. The Amicarelli decision confirms that if the state wants a share of the “market frenzy,” it must also underwrite the “catastrophic losses” that follow.

Furthermore, the judgment acknowledges the unique risks of the crypto ecosystem. The court accepted that “asset loss due to theft or fraud is a business risk.” In the unregulated “wild west” of digital exchanges, where platforms “operate outside the purview of securities regulators,” wealth is far more precarious than it is in traditional banking. Taxing the theoretical value of a Bitcoin wallet as if it were a savings account ignores the reality that the wallet can be emptied by a hacker or a fraudster in seconds.

In jurisdictions like Japan, where crypto income is often treated as miscellaneous income upon realization, or Australia, where Capital Gains Tax events are strictly defined by disposal, the tax codes generally align with the “realization” principle upheld in Amicarelli. These systems wait until the money is real before asking for a share. The Canadian ruling reinforces the wisdom of this caution. It reminds us that “Bitcoin is property” but it is a distinct, volatile, and intangible form of property that “can even be stolen.”

Ultimately, Amicarelli v. The King is a vindication of economic reality over theoretical valuation. The court looked at the taxpayer’s “actual conduct”, her borrowing, her daily monitoring, her “scheme for profit making”, and determined that she was running a business. Because she was running a business, she was entitled to deduct her losses when the business failed due to “malfeasance.”

For global policymakers, the warning is clear. If you rewrite the rules to tax the phantom wealth of a rising market, you must be prepared to refund those taxes when the market crashes or the assets disappear. As Justice Sorensen concluded, the tax system must provide “symmetrical treatment.” Without that symmetry, the tax code becomes a mechanism for confiscation rather than contribution, punishing taxpayers for the ephemeral spikes of a volatile market while offering no shelter when the screen goes black.

The recent judgment in Nguyen v. Tambosso (2024 BCSC 1551) is significant for its recognition of loans made in cryptocurrency, specifically Bitcoin, under standard legal principles of contract law. The Supreme Court of British Columbia unequivocally held that loans denominated in Bitcoin are enforceable and treated in the same manner as loans involving traditional forms of currency or property. This decision underscores the legal recognition of cryptocurrency in contractual arrangements.