This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.
“Arbitration is animportant, statutorily sanctioned, mode of dispute resolution.Undergirding its acceptability is the core principle that an arbitrator mustbe impartial. An arbitrator must not actually be biased, nor can there be areasonable apprehension that the arbitrator is biased.”
These are the opening sentences from the reasons of Justice BenjaminZarnett of the Court of Appeal for Ontario in
Aroma Franchise Company,Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839 (Aroma). TheCourt of Appeal overturned the decision of Justice Jana Steele (the“application judge”) reported at Aroma Franchise Company Inc. et al. v.Aroma Espresso BarCanada Inc. et al. , 2023 ONSC 1827. The applicationjudge set aside two awards in an international commercial arbitration of amultimillion-dollar franchise dispute due to reasonable apprehension ofbias on the part of the arbitrator by not disclosing his role in a separatearbitration. The Court of Appeal reinstated those awards.
Last year, I reported in Law360 Canada about the application judge’s decision and why this “coffeecaper” left both a bitter taste in many mouths and the law pertaining to arbitrator disclosuresomewhat murky.
Aroma concerned a master franchise agreement (MFA) requiring arbitration of disputes by a singlearbitrator who “must be either a retired judge or a lawyer experienced in the practice of franchiselaw, who has no prior social, business or professional relationship with either party…” (emphasismine).
In his final award, the appointed arbitrator (the arbitrator) determined that Aroma FranchiseCompany Inc. (AF) had wrongfully terminated the MFA. He ordered AF to pay Aroma Espresso BarCanada Inc. (AC) the sum of $10 million in damages. AF, along with Aroma USA, Inc., was alsoordered to pay the sum of $200,000 in damages for breach of the statutory duty of fair dealing. A costs award followed.
However, 17 months into the MFA arbitration, the arbitrator accepted another appointment in a non franchise matter that did not involve the same parties but did involve AC’s law firm (the “secondarbitration” or “Sotos arbitration” after the law firm). The second arbitration only came to AF’sattention, inadvertently, after the release of the final award. AF and others applied to the SuperiorCourt to set aside the awards on various grounds (no pun intended), including “reasonableapprehension of bias.”
The UNCITRAL Model Law on International Arbitration (the Model Law), which is part of Ontario’s International Commercial Arbitration Act, 2017, governed the MFA arbitration. Article 12(1) providesthat from the time a person is approached about being appointed arbitrator, and throughout thearbitration, they shall disclose any circumstances likely to give rise to justifiable doubts as to theirimpartiality or independence (which is equivalent to “reasonable apprehension of bias”).
While the Model Law does not permit appeals of an arbitral award for factual or legal errors, an awardmay be challenged on certain grounds — including where a party was unaware of circumstancesgiving rise to arbitrator impartiality at the time of appointment.
Justice Zarnett summarized the application judge’s ruling:
[She] directed that there be a new arbitration before a different arbitrator. In her view,the Arbitrator was required to disclose that he was being engaged for the SotosArbitration and his involvement in it without such disclosure gave rise to a reasonableapprehension of bias, fatally tainting the result of the MFA Arbitration. …[S]he placedsubstantial weight on the parties’ expectations about disclosure of engagements, derivedfrom correspondence their counsel had exchanged before the Arbitrator was approachedand then appointed. In that correspondence, counsel explained their own relationshipswith potential arbitrators and asked certain questions about opposing counsel’srelationships. That correspondence was never provided to the Arbitrator, nor was he evermade aware of the expectations said to flow from it.
However, according to Justice Zarnett, the Model’s Law’s test for disclosure is “objective,” and theapplication judge erred in law by taking into account subjective considerations in their lawyers’correspondence that the parties did not make known to the Arbitrator. He explained that: “[u]nderthe objective test, the Arbitrator’s failure to disclose his engagement in what the application judgeherself termed a second unrelated arbitration one which, vis-á-vis the ongoing MFA Arbitration, hadno common party or overlapping issues of significance — was not a breach of the legal duty ofdisclosure.”
The application judge considered the IBA Guidelines on Conflicts of Interest in InternationalArbitration
(the IBA Guidelines) in establishing a duty to disclose the second arbitration. However,Justice Zarnett stated that “[t]he parties’ decision not to select the IBA Guidelines as the legal regimefor their arbitration, and not to share with the Arbitrator the correspondence that revealed theirsubjective disclosure expectations, could only be taken to mean that they could expect, from theArbitrator, the disclosure legally required under the objective test — nothing less, nothing more.”
Justice Zarnett then explained that the test for a reasonable apprehension of bias is, like the duty todisclose, an objective one:
… it considers the relevant circumstances from the standpoint of a fair-minded andinformed observer, applied against the backdrop of a strong presumption that anarbitrator is impartial. The application judge erred in law in the way she applied that test,in effect changing the test to one particularly attuned to unshared subjective views. Thecircumstances she considered … went outside of those properly considered in applyingthe test objectively
… Applying the standard of reasonable apprehension of bias objectively, the presumption of impartiality on the part of the Arbitrator was not displaced by his acceptance of aretainer to arbitrate a second matter that did not involve any of the parties to the MFAArbitration nor any overlapping issues of significance.
In fact, the most important lesson to draw from Aroma may be that the Court of Appeal left no doubtthat, like judges, privately appointed arbitrators benefit from the presumption of impartiality. Thiswas something that AF and the other respondents (on appeal) had argued against. According to thecourt, the lack of this strong presumption “would place the entire arbitral scheme under anunwarranted cloud”.
In reinstating the arbitrator’s award, the court remitted the matter back to the Superior Court toaddress the other grounds raised to attack the awards, “some of which the application judge did notfully address.”
William G. Horton, a prominent commercial arbitrator based in Toronto, reflected that it is“unfortunate” that the respondents chose “to attack the award by accusing the Arbitrator of anappearance of bias” as they “had other grounds for trying to set aside the award which will now bedecided. But setting aside an award on those grounds is discretionary. It is possible that theremaining grounds will be weaker than they might have been were it not for this initial misfire.”
The coffee caper continues, and the parties will be back at court one day despite their agreement toarbitrate their dispute.
Mitchell Rose is a mediator and arbitrator with Rose Dispute Resolution in Toronto. He can be reachedat mitch@mitchellrose.ca
.