Posted on by Colin Trehearne

Colin’s 2024 Hot Topic: ONCA weighs in on Bias in Aroma – #888

In Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc., 2024 ONCA 839, the Court overturned a decision of the Ontario Superior Court of Justice, which had set aside two international arbitration awards on the basis of the existence of a reasonable apprehension of bias on the part of the Arbitrator.  Undoubtedly, this was the arbitration case of 2024.  The first instance decision and related proceedings have previously been canvassed by Arbitration Matters (see Ontario – Multiple arbitral appointments give rise to reasonable apprehension of bias – #734 – Arbitration Matters, Lisa Reflects (2023): Aroma – the blockbuster case of 2023? – #804 – Arbitration Matters, and Ontario – Arbitrator no jurisdiction to hear challenge for bias after partial final award – #691 – Arbitration Matters). It is a multiple appointments case. It arose out of a decision by the Arbitrator to take on a second appointment by the same counsel acting in the Aroma arbitration that was only disclosed by accident with the issuance of the final award.  The first Instance decision generated buzz in the arbitration community for, among other things: (1) the Judge below finding it was a “bad look” for the Arbitrator to have accepted an appointment in another arbitration part way through the Aroma arbitration by the same lead counsel in both matters; (2) the Judge considering relevant the parties’ pre-appointment communications on the criteria for the arbitrator to be appointed; and (3) the unresolved question of the impact, if any, of an arbitrator’s financial interest in appointments. It is the second issue that has received the most commentary on this decision.

The first instance decision and facts are recounted in more detail in other Arbitration Matters blog posts (linked above) so what follows is a shorter summary.

Background to the Dispute – The Aroma Arbitration

In 2007, Aroma USA and Aroma Espresso Bar Canada, Inc. (“Aroma Canada”) entered into a Master Franchise Agreement (“MFA”), pursuant to which Aroma Canada acted as master franchisee.  In 2019 a dispute arose between Aroma Franchise Company, Inc. (the assignee of Aroma USA), and Aroma Canada concerning inter alia Aroma Franchise’s assertion that the supply of coffee to the individual Aroma shops was on an exclusive basis and that Aroma Canada had breached the MFA.  Aroma Canada counterclaimed and rejected the termination as unlawful.

The Aroma Arbitration – the Arbitration Agreement and Selection of the Arbitrator

The MFA’s arbitration agreement provided inter alia for:

  • a jointly selected “neutral arbitrator” from the panels maintained by the ADR Institute of Canada (“ADRIC”); and
  • that the arbitrator was required to be retired judge or a lawyer experienced in the practice of franchise law having “no prior social, business or professional relationship with either party”. This latter language was central to the bias allegation and the court decisions.

Counsel for the parties exchanged “significant correspondence” regarding potential arbitrators.  This correspondence concerned, among other things, any relationships of the proposed arbitrators with counsels’ law firms.  In the result, the parties agreed to appoint a well-known arbitrator and to contact him through a joint letter.  The letter contained the portion of the MFA with the above-described arbitrator requirements.  The Arbitrator stated that he had no conflicts and accepted the appointment. The first instance judge found that the Arbitrator knew that, through the MFA, the parties required an arbitrator with no prior business or professional relationship with either party.

The Second Arbitration

In the fall of 2020, approximately 17 months into the Aroma Arbitration, counsel to Aroma Canada contacted the Arbitrator about sitting as arbitrator in a second arbitration.  The Second Arbitration did not involve the same parties or relate to franchise law and concerned a different industry.  However, lead counsel for Aroma Canada was also lead counsel for one of the parties in the Second Arbitration. The Arbitrator accepted the appointment.  Neither disclosed this to Aroma Franchise.

On 7 January 2022, the Arbitrator emailed to advise that the Final Award was completed and to request payment before releasing the award.  In so doing, he omitted copying two lawyers from the firm which had been acting for Aroma Canada in the Aroma Arbitration and copied a lawyer who had not been acting on the Aroma Arbitration but was from the firm acting for Aroma Canada and who was acting in the Second Arbitration.  Aroma Franchise’s counsel responded to ask why.  Aroma Canada’s counsel replied, asking that they “continue to add” one of the two omitted lawyers.  Neither Aroma’s counsel nor the Arbitrator made mention of the Second Arbitration.  The final award was delivered on 11 January 2022 and again copied this new lawyer.

On 13 January 2022 counsel to Aroma Franchise wrote again to the Arbitrator and counsel to Aroma Canada and asked why this new lawyer had been copied, specifically asking about any relationship between the Arbitrator and Aroma Canada’s counsel, including appointments as arbitrator.  The Arbitrator replied the same day stating that it was his mistake and that the new lawyer should not have been copied.  Four minutes later a second email was sent by the Arbitrator stating that Aroma Canada’s counsel had retained him as an arbitrator in another matter. Further questions were posed and the Arbitrator responded the same day.  The Arbitrator statedthat the Second Arbitration did not involve franchise law and did not involve any known connection between the parties in the two arbitrations.  Further correspondence followed and Aroma Franchise ultimately applied to set aside the Final Award, including on the basis of the Arbitrator’s reasonable apprehension of bias.

The Set-Aside Proceedings

At first instance (2023 ONSC 1827) the Judge set aside the awards and determined that the Arbitrator was required to disclose the Second Arbitration, and that there was a reasonable apprehension of bias.  The Judge recalled the provisions of the UNCITRAL Model Law on International Arbitration (“Model Law”) (adopted in the International Commercial Arbitration Act, 2017, S.O. 2017, c.2, Sched. 5) (“the ICCA”), noting that pursuant to Article 12 of the Model Law:

  • a potential arbitrator is to “disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence” and “from the time of [the arbitrator’s] appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him”; and
  • an arbitrator may be challenged “only if circumstances exist that give rise to justifiable doubts as to [the arbitrator’s] impartiality or independence…”.

In deciding the Arbitrator had a duty to disclose the Second Arbitration, the Judge considered that other guidelines, principles, and case law were also “of assistance”, including:

The Judge recounted that the IBA Guidelines at Article 3(a) provide that “[i]f facts or circumstances exist that may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence, the arbitrator shall disclose such facts or circumstances to the other parties, […] prior to accepting his or her appointment or, if thereafter, as soon as he or she learns of them.”  The Judge also discussed Article 6 of the Practical Application of the General Standards that says that, “[b]ecause the Orange List is a non-exhaustive list of examples, there may be situations not mentioned, which, depending on the circumstances, may need to be disclosed by an arbitrator…. [A]n appointment made by the same party or the same counsel appearing before an arbitrator, while the case is ongoing, may also have to be disclosed, depending on the circumstances.” [Emphasis added by the Judge.]

Having determined that the Second Arbitration appointment should have been disclosed but was not, the Judge proceeded to examine whether or not there was a reasonable apprehension of bias.  Quoting from Committee for Justice and Liberty et al. v. National Energy Board et al., [1978] 1 S.C.R. 369 (at p. 394), she determined that the test was to ask: “[W]hat would an informed person, viewing the matter realistically and practically – and having thought the matter through – conclude.  Would he think that it is more likely than not that [the decision-maker], whether consciously or unconsciously, would not decide fairly.”  She agreed with Aroma Canada’s submission that the inquiry is objective and requires a realistic and practical review of all the circumstances from the perspective of a reasonable person.  “Context” was said to be critical and determining reasonable apprehension of bias was “extremely fact specific.”

In this context the Judge concluded that (i) the fact that the Arbitrator accepted the Second Arbitration did not, by itself, give rise to a reasonable apprehension of bias, (ii) there was evidence lacking from Aroma Canada – which ‘spoke volumes’, and (iii) a significant factor was the pre-appointment correspondence’s emphasis any arbitrator-firm/counsel/party relationships.  She concluded that “a fair-minded and informed person, considering the facts and circumstances of this matter, would conclude that circumstances exist that give rise to a reasonable apprehension of bias.”

The Court of Appeal

The Court allowed the appeal on the basis that the Judge at first instance had erred in law in the way she articulated and applied the test for the duty to disclose and by taking into account subjective considerations that the parties did not make known to the Arbitrator. The Judge’s approach was said to have converted the objective test into a subjective one. Under the objective test, the Arbitrator’s failure to disclose the Second arbitration was not a breach of the duty of disclosure.  Further, the Court held that the duty to disclose and reasonable apprehension of bias were related but distinct issues: a finding that an arbitrator breached a legal duty to disclose would be a relevant but not determinative factor in deciding if a reasonable apprehension of bias had been shown.

(i)The Duty to Disclose

Examining first whether the Arbitrator had a duty to disclose under Art. 12(1) of the Model Law, the Court contrasted the subjective test in the IBA Guidelines (i.e. through the eyes of the parties) with the Model Law’s objective test (from the standpoint of a fair-minded and informed observer). The parties could have but did not adopt the IBA Guidelines.  While the IBA Guidelines provide guidance and set out good arbitral practice, they do not override the laws and rules chosen by the parties or create legal obligations.  By taking into account subjective considerations not made known to the Arbitrator (specifically, the bilateral correspondence exchanged concerning any relationships with potential arbitrators) and the IBA Guidelines’ subjective test, the Judge converted the applicable objective test into a subjective test, and erred in law. 

Further, the Court held that the IBA Guidelines circumstances identified by the Judge in the IBA Guidelines commentary under the Orange List (in which an appointment in a second arbitration, by the same party or counsel, may have to be disclosed, depending on the circumstances) as a matter of logic requires something more than only a further appointment itself to ground a disclosure obligation.  It required further material “circumstances”.  As matters in this situation was not expressly part of the Orange List (which does require disclosure) for this situation to be disclosable, other “circumstances” were needed. In this case none existed to mandate disclosure.

Having excluded the IBA Guidelines’ applicability, the correct question (underpinning the objective test) was whether a circumstance would likely give rise to justifiable doubts about impartiality from the standpoint of a fair-minded and informed observer (not as seen through the eyes of the parties).  By taking into account correspondence about which the Arbitrator had no knowledge, the Judge erred by taking into account matters which a fair-minded and informed observer would not.  There being no party in common between the two arbitrations and no significantly overlapping issues, applying the objective test for disclosure in Article 12(1) of the Model Law (and excluding the pre-arbitration counsel correspondence) resulted in the Court finding that the Arbitrator had  no legal duty to disclose the Second Arbitration.

(ii) A Reasonable Apprehension of Bias

Second, it was an error for the Judge to have considered “this kind of failure to disclose” in her analysis of reasonable apprehension of bias.  This test is also objective, considering the relevant circumstances from the standpoint of a fair-minded and informed observer and with the backdrop of a strong presumption of impartiality to which, the Court held, arbitrators are also entitled. (See Wewaykum Indian Band v. Canada, 2003 SCC 45, [2003] 2 S.C.R. 259, at para. 67.) The Court found that the Judge below had erred in law in the way she applied that objective test, effectively changing it to one “particularly attuned to unshared subjective views” held by the parties.

On an objective analysis, the decision by the Arbitrator to accept the appointment with respect to the Second Arbitration did not displace this strong presumption of impartiality: “[W]here, as here, the failure of disclosure by the Arbitrator relied on by the application judge was a failure to meet the parties’ expectations for disclosure of which he was never informed, the path from the Arbitrator’s non-disclosure to a reasonable apprehension of bias… disappears. This is simply not a situation of the Arbitrator ignoring obligations to disclose imposed by the objective test… The failure to disclose by the Arbitrator in these circumstances is therefore not indicative of bias on his part” (paragraph 124).

Contributor’s Notes

Key Takeaways

First, the Court of Appeal engaged with what it saw as the conflation of the IBA Guideline’s subjective test for disclosure with the Model Law’s objective test, explaining that – absent the parties agreeing to another standard for disclosure, such that found in the IBA Guidelines – the objective standard under the Model Law applies.  As such, arbitrators have a duty to disclose those facts and circumstances which might, in the eyes of a fair-minded and informed observer, give rise to justifiable doubts about the arbitrator’s impartiality or independence.  The parties’ subjective concerns (including those not communicated to the arbitrator) are irrelevant.

Second, the Court of Appeal made clear its view that under the IBA Guidelines (and otherwise) a repeat appointment – even in the middle of an existing arbitration – does not by itself trigger a duty on the arbitrator to disclose.  Something more is needed, such as overlapping issues or parties.

Third, the Court of Appeal emphasized the line separating a failure to satisfy the duty of disclosure and a reasonable apprehension of bias.  A failure to satisfy the duty of disclosure may (or may not) indicate a reasonable apprehension of bias.  It is unlikely (although the court declined to be absolute about this point) to find a reasonable apprehension of bias when there was no underlying duty to disclose.

A Few Thoughts

(i) Different Factual Emphasis and Findings Drive Different Results

While I do not take issue with Court of Appeal’s logic, I remain sympathetic to the decision of the Judge below.  At least some of the differences between the first instance and appeal decisions seem to me visible in the facts and matters recounted by each, which materially differ. One substantial point in this regard is the Court of Appeal’s conclusion (not found unambiguously in the first instance decision) in clear terms that the Arbitrator was never made aware of the parties’ expectations and concerns expressed in their counsels’ correspondence.  Much of the Court of Appeal’s judgment appears to turn on this finding of fact.

Further, despite the appellate judgment being almost 50% longer, it did not address any of the follow matters expressly considered by the Judge (nor did it expressly overturn any findings of fact).

First, the Judge below was clearly troubled by what she perceived as an incomplete evidentiary record provided by Aroma Canada, and its counsel; gaps in this record ‘spoke volumes’.  Evidence not submitted by Aroma Canada (none of which the Court of Appeal found necessary) appears to have included:

  • Whether the Arbitrator was made aware that the new lawyer was going to become involved in the Aroma Arbitration;
  • The full details of the circumstances of the Arbitrator’s appointment in the Second Arbitration;
  • The remuneration the Arbitrator received from the Second Arbitration (on this I can already hear eggnog and oil seasoned fingers tapping furiously at keyboards about its irrelevance);
  • Who suggested that the Arbitrator be appointed in the Second Arbitration;
  • Who contacted the Arbitrator about the Second Arbitration;
  • Aroma Canada’s awareness of the appointment of the Arbitrator in the Second Arbitration; and
  • Whether the parties to the Second Arbitration had been made aware of the ongoing Aroma Arbitration.

Second, the fact that this was a sole arbitrator and not a panel of three (which the IBA Guidelines General Standard 5 says is irrelevant to their application). 

Third, the impact of the ADRIC Code of Ethics, which requires its members to disclose any interest or relationship, “likely to affect impartiality or which might create an appearance of partiality or bias”.  It might be that the Court thought this a restatement of the objective test, but if it did, it did not say so. 

Fourth, the fact that counsel for both parties agreed (at least) that this was a circumstance that should have been disclosed in the Aroma Arbitration if the Second Arbitration appointment had occurred first.

For completeness I note that (although the details are unclear) the Court also said that the Judge did not refer to the “joint letter of appointment” which contained the Arbitrator qualifications and which was sent on behalf of both counsel to the Arbitrator on September 9, 2019 (see e.g. paragraphs 30, 45, 90), but as far as I can tell she took it into account (see paragraphs 40 and 82 of her judgement).  This point did not receive much attention from the Court nor detailed clarity in the judgment.

(ii) Calling Dear Abby (or Dan Savage): on Relationships

The fact that the Arbitrator was aware that he was to have “no prior social, business or professional relationship with either party” was confirmed in both decisions. The Court of Appeal stated that it “clearly informs disclosure” but that it does not mandate disclosure.  Nor did the Judge find that the Arbitrator’s appointment in the Second Arbitration constituted a “business or professional relationship” with either party, rather than counsel.  In my respectful view, the courts should have so found on this latter point: cast in general terms the phrase should be interpreted broadly.

It is generally counsel who choose which arbitrators to recommend to clients and a relatively rare client who has their own strong views on this matter.  Counsel generally either know or are better placed to evaluate the suitability of a potential arbitrator to a particular dispute. To the extent that a client has a “business or professional relationship” with an arbitrator it is likely to be one strongly mediated by their counsel, through whom all communication takes place.  This is why the IBA Guidelines require the disclosure of the relationship between counsel and arbitrators.  The Arbitrator’s appointment in the Second Arbitration forms an indirect relationship with Aroma Canada, but nonetheless, is a relationship.  There should be in principle no difficulty with recognizing an indirect relationship through counsel as potentially relevant and material given the treatment of indirect relationships in other circumstances with, for example, corporate subsidiaries or corporate parents.  For example, the IBA Guidelines require consideration of (i) the relationship of a corporate group (containing the direct arbitral party) with the arbitrator’s firm (General Standard 6(a) and the explanation thereto), and (ii) any relationship “direct or indirect” between the arbitrator and the party, or another company of the same corporate group, among others (General Standard 7(a)). Despite this, the Judge did not find that the Arbitrator’s engagement by Aroma Canada’s counsel for the Second Arbitration was a disqualifying “social, business or professional relationship” with Aroma Canada.  Nor did the Court of Appeal expressly confirm or clarify the position, touching only briefly upon it and noting that the Judge “did not find” this to be a relationship within the meaning of the MFA;s arbitration agreement.

(iii) Are Sole Arbitrators and Panels the Same when it Comes to the Duty to Disclose?

As noted above, the Judge accepted as relevant the fact that the Arbitrator was the sole arbitrator in the Aroma Arbitration and not part of a panel; in Aroma Franchise’s submission, (sole) control of the arbitral outcome was a relevant circumstance.  In accepting the applicants’ arguments, the Judge found that this weighed in favour of disclosure.  The Court of Appeal for its part, did not engage with this point (either by affirming it or overruling it), which appears potentially to place a more onerous disclosure obligation on sole arbitrators rather than members of panels.

I can only speculate as to why the Court did not address this, but it may be because the Court thought it addressed sufficiently by the Court’s other discussion of the “strong presumption of impartiality” that applies to – it appears from the judgement – all arbitrators, be they sole or a panel.  Elsewhere the Court also noted (in the context of discussing the fact that arbitrators receive remuneration) inter alia that “…arbitrators are expected to meet the same high standards of fairness and impartiality whether they are nominated by a party or chair a tribunal”.

There are arguments both ways on this point.  In favour of this heightened duty of disclosure is the fact that a sole arbitrator is, as the applicant had argued, in sole control of the outcome of the proceedings.  There is no internal corrective mechanism before a sole arbitrator (such as may exist in a majority decision by the two other panel members in a panel of three).  Against this argument is the fact that the strong presumption of impartiality appears to apply to all arbitrators equally, and that accepting this heightened duty on sole arbitrators may also be argued to imply a heightened duty on chairs – who often decide which way a decision goes – resulting in a three-member panel where two different (objectively assessed) duties of disclosure could therefore apply. 

In all, there is much to engage with in both the Aroma decision itself, and the substantial secondary commentary that has emerged since then.  No doubt some of the generally accepted key points relate to the Model Law’s objective standard for disclosure, the articulation of the role of the IBA Guidelines, and the fact that a single repeat appointment by itself does not trigger a duty of disclosure; but there is much more in the decision, too.  Others have celebrated – as a reassertion of Canada’s reputation as an arbitration friendly jurisdiction – the reaffirmation of the strong presumption of arbitrator impartiality (although one wonders how this sits with the apparently differing disclosure burdens on sole arbitrators and on panels), the robust treatment of the fact that arbitrators are remunerated for their time, and the clear division of the disclosure obligation analysis and the analysis applicable to the reasonable apprehension of bias.  In 2025, the ONCA will turn its mind from those fueled by caffeine to those simply fueled – Vento Motorcycles v Mexico is the next big decision due in this space.