Lisa Reflects (2023): Aroma – the blockbuster case of 2023? – #804

Aroma Franchise Company Inc. et al. v Aroma Espresso Bar Canada Inc., 2023 ONSC 1827 was the case I think created the biggest “buzz” in 2023, likely because it was the only Canadian case (of which I am aware) that has addressed the gnarly issue of arbitrator disclosure obligations in circumstances in which the arbitrator has taken on multiple appointments at the same time, a situation in which the IBA Guidelines on Conflict of Interest in International Arbitration provides little, well, guidance. I reported on this decision in an earlier case note: Ontario – Multiple arbitral appointments give rise to reasonable apprehension of bias – #734 – Arbitration Matters. Since then, the case has continued to generate interest and commentary, which has kept me thinking about it. The Ontario Court of Appeal heard the appeal on December 6, 2023.

Facts – The parties in Aroma were a franchisor and franchisee. Each alleged as against the other various breaches of the Master Franchise Agreement. It contained an arbitration clause, which provided that:

“…The parties shall jointly select one (1) neutral arbitrator… The arbitrator must be…a lawyer experienced in the practice of franchise law, who has no prior social, business or professional relationship with either party…”

The sole arbitrator was appointed by agreement of the parties. The terms of the arbitration clause were known to the arbitrator. They did not prohibit the appointment of an arbitrator who had a business or professional relationship with counsel for either party. 

While the Aroma arbitration was ongoing, the sole arbitrator accepted an appointment in an unrelated arbitration from the same lawyer who was counsel in the Aroma arbitration, without disclosing it. 

Counsel for the franchisor learned of the second appointment when the arbitrator emailed counsel in the Aroma arbitration concerning the final award. He mistakenly copied a lawyer from the firm acting for the franchisee who was not involved in the Aroma arbitration, but who was involved in the second arbitration, and did not copy all counsel at that firm who were involved. The arbitrator then disclosed the second appointment.

Court’s analysis – The Court held that the arbitrator should have made disclosure, and set aside the awards (on the merits and as to costs and interest) on the basis that the circumstances gave rise to a reasonable apprehension of bias.

The arbitration was international and seated in Ontario. The Court found its set-aside jurisdiction in Art. 34(2)(a)(iv) [the arbitral procedure was not in accordance with the Model Law].  Where there is a reasonable apprehension of bias, Art. 18 of the Model Law is violated: “[t]he parties shall be treated with equality and each party shall be given an opportunity of presenting his case.”

On the issue of the arbitrator’s duty to disclose, the Court referred to the IBA Guidelines. The “Orange List” is a non-exhaustive list of circumstances, which, “depending upon the facts of a given case, may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality and independence”, and therefore give rise to a duty of disclosure. While the circumstances in Aroma did not fall within any of the circumstances listed, the Court observed that the IBA Guidelines explicitly state that circumstances not on the “Orange List” are generally not subject to disclosure, but that “an arbitrator must make this assessment on a case-by-case basis”. For example: “…[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”.  These were the Aroma facts.

The Court considered the circumstances. A significant factor was pre-appointment correspondence between counsel (of which the arbitrator was unaware) that made it clear that only an arbitrator with no connection to either the parties or counsel would be acceptable. Also a factor was that the arbitrator was a sole arbitrator and not a member of a tribunal. The franchisor argued that this was important because the sole arbitrator controlled the outcome. The Court also was concerned about the lack of evidence about the circumstances concerning the second appointment, including who suggested the appointment of the arbitrator, “with all the other commercial arbitrators in Toronto”, and how much the arbitrator was paid.

Significance of Aroma  – First, it has contributed to the uncertainty and lack of predictability regarding when an arbitrator must make disclosure.  

This is another example of Ontario courts using interchangeably the domestic legislation “reasonable apprehension of bias” and Model Law “justifiable doubts” tests and blurring the duty to disclose and the arbitrator challenge tests. There may in fact be no difference in most cases and it likely did not affect the outcome, which was determined entirely on its facts. But there was no coherent analytical framework. Once the Court identified this as a Model Law case, it applied the IBA Guidelines, which it concluded required a case-by-case analysis. Therefore, the outcome was ultimately determined solely on the facts without the recognition of an overall principle.

In addition, previously, the U.K. Supreme Court decision of Halliburton v Chubb, 2020 UKSC 48 was viewed by many as a predictor of how arbitrator bias cases in general, and multiple appointments situations in particular, would be decided by the courts. Unlike Aroma, Halliburton involved circumstances in which the arbitrator had taken on and failed to disclose multiple appointments, including for one of the parties to the Halliburton arbitration, where there were overlapping facts and issues arising from the same event (an insurance loss). While the U.K. Court found that the arbitrator had breached his duty to disclose, this did not result in his removal because: there was a lack of clarity on the duty to disclose; there was no suggestion that the arbitrator was deriving a “secret” financial benefit; and there was unlikely to be any overlap in legal or evidentiary submissions. Those factors reasonably could have predicted a different outcome in Aroma – and affected the arbitrator’s view of his duty to disclose. 

Second, the Court failed to address the fact that the IBA Guidelines place disclosure obligations on counsel, not just the arbitrator. 

Third, some of the Court’s findings that led to its conclusion on duty to disclose are problematic. The arbitrator did not know of the pre-appointment correspondence between counsel, so it could not have formed any part of his disclosure decision. The Court failed to reconcile its conclusion that it was a factor that the arbitrator was the sole arbitrator with the IBA Guidelines, which specifically state that the same duty applies to sole arbitrators and members of tribunals.

Fourth, the Court did not consider whether counsel’s pre-appointment correspondence constituted an amendment to the arbitration agreement and, if so, whether there was a breach of the arbitration agreement, which would have allowed for a set aside pursuant to Model Law Art. 34(2)(a)(iv) [the composition of the arbitral tribunal … was not in accordance with the agreement of the parties].

Finally, and perhaps most importantly, Aroma had practical implications immediately upon its release. Even though the circumstances did not require disclosure pursuant to the Orange List in the IBA Guidelines, the Court found that disclosure was required and the failure to do so gave rise to a reasonable apprehension of bias that warranted set aside of the awards. Therefore, arbitrators I know have changed their practice and are now making more disclosures than was their previous practice. As more disputes are diverted from the backlogged courts, arbitrators are more and more often faced with circumstances like the ones in Aroma, in which they are sought out for appointment by the same counsel more than once. The arbitration marketplace is still relatively small even in the major business centres in Canada and the players are often known to one another.. If you are interested as I am in this topic, please see my last year’s case note:  2022 Hot Topic #2: Challenging the arbitrator – Lisa’s 2022 Hot Topic #2: Challenging the arbitrator – #700 – Arbitration Matters.