In Johnston v. Octaform Inc., 2024 BCSC 537, the Court dismissed a petition to have an arbitrator removed from an ongoing arbitration on the basis of an alleged reasonable apprehension of bias. The circumstances relied on by the petitioners arose from the arbitrator’s issuance of a freezing order and other procedural directions, in a hard fought and contested arbitration. The fact that the freezing order required the arbitrator to make findings of credibility and preliminary merits determinations did not give rise to bias. Also, the trigger for the 15-day period to challenge an arbitrator for bias is not an “open and fluid concept”.
The Arbitration – The dispute related to an ongoing arbitration between Octaform Inc. (“Octaform”) and two of its former employees. Octaform sells PVC liner panels and formwork products. The petitioners were Bruce Johnston and Alba Lozano (the “Petitioners”). Johnston was a former general manager of Octaform and Lozano was a warehouse and logistics coordinator.
The Petitioners had each signed employment agreements with Octaform that contained arbitration clauses.
Octaform commenced an arbitration and claimed that the Petitioners had breached their employment and fiduciary duties, breached their employment agreements, misused confidential information, and misappropriated business opportunities that belonged to Octaform. It also alleged that the Petitioners had set up a competing business and disguised their interests in it, hired Octaform’s employees, and improperly used Octaform’s confidential information to solicit customers and suppliers.
The Petitioners denied breaching any duties or agreements with Octaform and denied that the employment agreements were valid. They denied that they operated, managed, or had any interest in the competing business and counterclaimed for owed commission, bonus payments, loss of income, unjust enrichment, and emotional distress.
The hearing started on October 26, 2020, and had run 57 days at the time of the Court application to have the arbitrator removed on the basis of an alleged reasonable apprehension of bias. It was still ongoing at the time of the Court application to have the arbitrator removed. The arbitrator had made a number of procedural orders and interim awards during the hearing, including: issuing a freezing order in which the arbitrator made credibility findings against one of the Petitioners; making other procedural directions, including admitting a reply expert report into evidence over objections of the Petitioners; refusing to set aside the freezing order; refusing to delay the decision on a recusal application while the Petitioners’ counsel was in Europe; and ultimately, refusing the Petitioners’ request to recuse himself.
The Petition – During the arbitration hearing, the Petitioners applied to Court to have the arbitrator removed on the basis of alleged reasonable apprehension of bias.
(a) Grounds for challenge and test – The arbitration was governed by the International Commercial Arbitration Act, R.S.B.C. 1996, c. 233 (“ICAA”). The Petitioners relied upon section 12 of the ICAA, which sets out the grounds upon which an arbitrator’ may be challenged for bias:
“12(3) An arbitrator may be challenged only if
(a) circumstances exist that give rise to justifiable doubts as to the arbitrator’s independence or impartiality …
(3.1) For the purposes of subsection (3) (a), there are justifiable doubts as to the arbitrator’s independence or impartiality only if there is a real danger of bias on the part of the arbitrator in conducting the arbitration”.
The Court identified the leading test for bias set out in Wewaykum Indian Band v. Canada, 2003 SCC 45. The test is “whether an informed person, viewing the matter realistically and practically and having thought the matter through would conclude it was more likely than not the arbitrator, consciously or unconsciously, did not decide fairly?” (at para. 42, citing Wewaykum at para. 60).
The Court indicated at para. 45 that “there must be serious or substantial grounds raising an apprehension of bias to displace the presumption of judicial impartiality.” (citing Wewaykum at para. 76).
Further, the Court pointed out at para. 46 that “the onus of demonstrating reasonable apprehension bias lies with the person alleging it and the threshold is high” (citing R. v. S. (R.D.), [1997] 3 S.C.R. 484 at paras. 113-114).
(b) Preliminary Issue of Time –The Court had to address whether the Petitioners’ complaints were time barred pursuant to section 13(2) of the ICAA. It provides that unless a different procedure had been agreed to for challenging an arbitrator, “a party who intends to challenge an arbitrator must, within 15 days after … becoming aware of any circumstances referred to in section 12(3), send a written statement of the reasons for the challenge to the arbitral tribunal.”
A number of the grounds of alleged bias that were pleaded by the Petitioners related to events that occurred more than 15 days before the Petitioners had submitted the recusal application to the arbitrator.
The Petitioners argued that the time trigger of “becoming aware of” and the 15-day limit is an open and fluid concept and includes “time to read the respective decisions, consult counsel, review the law, and formalize [s]ubmissions” (at para 53).
The Court disagreed with this position. It stated at para. 54:
“I completely reject the petitioners’ submission that the 15-day limit in the ICAA should be so loosely and broadly interpreted as they suggest. They provide no authority for such an interpretation and it is completely contrary to the spirit and intent of the section which is to ensure that such important issues are addressed quickly. The interpretation urged upon the court by the petitioners would render the 15-day limit completely meaningless.”
The Petitioners alternatively argued that the 15-day time limit applies to the cumulative effect of the individual events. Again, this position was rejected by the Court. The cumulative effects were not pleaded by the Petitioners, and indeed, to the contrary, they pleaded that the grounds of bias were “independent” and “fully independent”. The Court at para. 56 agreed there may be circumstances in which the time limit applies to the cumulative effect of individual events starting the 15-day clock later, “[h]owever, this is not such a case.”
(c) Was there a Reasonable Apprehension of Bias? – The Petitioners’ first complaint of bias was that the arbitrator had admitted one of Octaform’s expert reports into evidence.
The Petitioners had withdrawn one of their expert reports. They took that position that, as a result, Octaform’s reply report that Octaform had submitted should not be admitted. The Petitioners cited cases under the British Columbia Supreme Court Civil Rules, BC Reg 168/2009 (the “Rules”) to support their position.
The Petitioners complained that the arbitrator held that the Rules did not apply to the arbitration, but instead, the procedural orders that dealt with the submission of the expert reports governed. The arbitrator found that the expert report was still admissible, but that portions of it that referred to the Petitioners’ expert report that had been withdrawn should be redacted. The arbitrator then proceeded to redact these portions of the expert report himself.
The Petitioners submitted that the arbitrator should not have admitted the report, and that when he redacted it without submissions, he impermissibly re-wrote the report. The Petitioners suggested that this gave rise to a reasonable apprehension of bias.
The Court rejected this argument and held that this did not give rise to an apprehension of bias. The Court confirmed that the Rules did not apply to the arbitration and that the arbitrator had merely redacted the portions of the report and had not re-written it or engaged in creating evidence to suggest any kind of bias or impartiality.
The Petitioners’ second complaint related to the freezing order the arbitrator made. During the arbitration, Octaform alleged that the Petitioners had improperly transferred the competing business and assets. The arbitrator granted a freezing order that prohibited the Petitioners from further removing, disposing of, or otherwise dealing with the property.
The Petitioners made multiple allegations of bias against the arbitrator in connection with the granting of the freezing order. In particular, they objected to the arbitrator making findings of credibility against one of the Petitioners and use of a witness statement of the Petitioners that had been submitted for the arbitration but was not yet in evidence because the Petitioners had not yet presented their case. As well, the Petitioners objected to the fact that the freezing order was issued for the full amount of the claim.
The Court rejected all of these claims of bias. With respect to the arbitrator’s statements about the credibility of the Petitioners, the Court said that these findings were necessary given the nature of the application for preliminary relief (at para. 117). Further, the Court stressed that in addressing this issue, the arbitrator had repeatedly stated that he was not making any final determinations.
In addition, the freezing order was for the full amount of the claim and this amount was a simple mathematical calculation of the potential damages. The Petitioners had not pointed to anything to suggest this amount was calculated incorrectly or was wrong in principle. The Court stated that this did not give rise to a reasonable apprehension of bias or a suggestion of a lack of impartiality.
Finally, with respect to the use of a petitioner’s witness statement, this was a function of the reality in arbitrations in which arbitrators are typically given the bulk of the witness statements ahead of time. It was not an indicator of bias. The arbitrator had not pre-judged any of the ultimate issues. The Court stated at para. 128 “No reasonable and informed person could conclude […] reference to these witness statements gives rise to a reasonable apprehension of bias.”
The Court held that none of these events established a reasonable apprehension of bias or lack of impartiality on the part of the arbitrator.
Following the freezing order, the Petitioners brought a further application before the arbitrator to set aside the freezing order. The arbitrator rejected the application on the basis that it was simply re-arguing the earlier application leading to the freezing order.
Following this, the Petitioners claimed the arbitrator was biased because he refused to stay the arbitration while the Petitioners brought a recusal application, refused to delay the decision of the recusal application while the Petitioners’ counsel was in Europe, and ultimately refused to recuse himself from the arbitration. The Court concluded that none of these events gave rise to a reasonable apprehension of bias, but instead noted that the arbitrator “has been courteous in his dealings with the parties, has treated the parties equally, has given the parties a reasonable opportunity to make submissions and has based his rulings on proper legal principles” (at para. 173).
Contributor’s Notes:
This case contains many important points about challenging an arbitrator for bias.
First, this case illustrates that the test for reasonable apprehension of bias as set out by the Supreme Court of Canada (at para 42) in 2003 continues to apply. The test emphasizes that the key issue is whether an informed person looking at the matter realistically and practically would conclude that it was more likely than not that the arbitrator would not decide fairly. This is a high standard.
Second, this case emphasizes that challenges for arbitral bias are serious and must not be used to seek the removal of an arbitrator simply because a party disagrees with his or her decision or a procedural direction. The bar is higher than that. Further, it illustrates that Courts will likely give arbitrators a significant degree of deference in making procedural decisions and there must be serious or substantial grounds to support a finding that an informed person would likely conclude that the arbitrator was not fair and independent.
Third, this case highlights the tricky position in which arbitrators sometimes find themselves when asked to grant preliminary relief in an ongoing matter. For example, in this case, the arbitrator was asked to grant a freezing order, which under s. 17 of the ICAA, necessitated an initial determination of whether “there is a reasonable possibility that [Octaform] will succeed on the merits of the claim”. Plus, the arbitrator had to make initial and limited purpose credibility determinations. This potentially exposes the arbitrator to claims of bias by the unsuccessful party. Consequently, arbitrators must be aware and take extreme care to limit the decision to the application at bar. As an example, the arbitrator in this case took pains to state multiple times that the interim award did not adjudicate the disputes in the arbitration or make any findings except as they relate to each application itself. This highlighted the arbitrator’s awareness of the distinct and limited purpose of the interim award, which was to preserve the property. Here the arbitration continued while the application challenging the arbitrator was before the courts.Fourth, this case illustrates the test for bias to be applied in the context of conducting an arbitration itself. The Court applied the test that is well established and endorsed by the Supreme Court. It is a good comparator to Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al., 2023 ONSC 1827, which dealt with an arbitrator’s duty of disclosure of multiple appointments. The Supreme Court of Canada test was also applied. See: Ontario – Multiple arbitral appointments give rise to reasonable apprehension of bias – #734.