In Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc., 2022 ONSC 6188, Justice Cavanagh dismissed the Respondents’ motion to stay or dismiss an application to set aside a final award on the merits on the ground of the reasonable apprehension of bias of the Arbitrator. The Respondents argued that the Applicant was required to bring its challenge to the Arbitrator first in accordance with Article 13 of the Model Law because the arbitration had not yet terminated; interest and costs had yet to be determined. However, Justice Cavanagh found that the Arbitrator was functus officio. Therefore, the application was properly before the Court.
The parties’ dispute -The dispute between the parties arose as a result of the termination of a master franchise agreement. Starting in 2019, the dispute was arbitrated pursuant to the Ontario International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sch 5, which adopted the UNCITRAL Model Law in Ontario. On January 11, 2022, the Arbitrator issued a Final Award on the merits, in which the Applicants were required to pay the Respondents $10.2 million in damages for breach of the statutory duty of fair dealing. The issues of costs and interest and were reserved, pending further submissions from the parties.
The application – By way of Notice of Application, the Applicants sought an order: (a) setting aside the final award on the merits and declaring it a nullity; (b) setting aside any subsequent award, including any awards dealing with interest and costs; (c) declaring the Arbitrator’s mandate as at an end; and (d) that the parties proceed to have the matters at issue in the arbitration decided by a different arbitrator. The Applicants asserted that the Arbitrator’s conduct gave rise to a reasonable apprehension of bias in that he “failed to disclose circumstances likely to give rise to doubts as to his impartiality or possible bias and thereby failed to ensure that the parties were treated equally” as he was required to do under Article 12 of the Model Law.
The motion – The Respondents moved for a stay or dismissal of the application under Ontario Rules of Civil Procedure Rules 21.01(1)(a) [determination of a question before trial, where the question may shorten the proceeding] and 21.01(3)(a) [stay or dismissal on the ground that the court has no jurisdiction over the subject matter].
The bias allegations – When the Arbitrator emailed the Final Award to counsel for the parties, he copied another lawyer at the same firm as counsel for the Respondents who was not involved in the arbitration. On January 13, counsel for the Applicants emailed the Arbitrator to find out why. Justice Cavanagh described the Arbitrator’s response:
“[14] The Arbitrator responded the same day with two successive emails, first advising that [the uninvolved lawyer] was copied on his January 11, 2022 email inadvertently, and secondly advising that the Respondents’ counsel’s law firm had retained the Arbitrator on another ongoing matter. Along with…..the Respondents’ lead counsel on the Arbitration…[the uninvolved lawyer]… is counsel to one of the parties in the other arbitration.”
On January 14, 2022, counsel to the Applicants emailed the Arbitrator a list of questions relating to his involvement in the other arbitration. The Arbitrator responded by email the same day as follows:
“[15]…In answer to your questions, [the uninvolved lawyer] has had day-to-day carriage on the other file but [Respondents’ lead counsel] has had involvement from time to time. I was retained on October 16, 2020. I understood that the parties agreed on my appointment. [The uninvolved lawyer] signed the terms of appointment for his client and I understand that he has full authority to act. I don’t think there is anyone else at [the Respondents’] counsel’s firm who is acting for their client. I am the sole arbitrator. The issues in that case do not involve franchise law but there are contract issues in an industry completely unrelated to the Aroma business and in a different contractual relationship. I believe the contract issues are not in any way related to the contract issues in the Aroma case. I don’t believe there is any overlap in the issues between the two cases. I am not aware of any connection between the parties in that arbitration and the Aroma arbitration.”
After further communications between counsel and questions to the Arbitrator, counsel for the Applicants wrote to the Arbitrator and Respondents’ counsel to advise that he had been instructed to apply to the court to set aside the Final Award on the basis of an alleged reasonable apprehension of bias on the part of the Arbitrator.
The parties disagreed on whether the Arbitrator should proceed to decide interest and costs and, after hearing submissions of counsel, the Arbitrator proceeded. Shortly thereafter, the Applicants brought their application. As of the date of the Respondents’ motion to stay or dismiss the application, the Arbitrator had not yet rendered an award on interest and costs.
The jurisdiction issue – The Respondents argued that because the arbitration had not terminated, the Applicants were required to follow the challenge procedure in Article 13(2) of the Model Law and submit their bias allegation to the Arbitrator for his determination in the first instance. Having failed to do so, the Applicants were precluded from advancing reasonable apprehension of bias as a ground for their set-aside application pursuant to Article 34 of the Model Law. Therefore, the Court did not have jurisdiction to decide the bias application.
The Respondents relied upon Jacob Securities Inc. v Typhoon Capital B.V., 2016 ONSC 604, in which the unsuccessful party to a commercial arbitration applied to set aside the final award under Model Law Article 34 [set-aside application] and Article 36 [grounds for refusing recognition and enforcement of an award] after the arbitrator was functus officio. That party became aware of circumstances that it alleged gave rise to a reasonable apprehension of bias only after the final award was issued and the arbitrator’s mandate was at an end. The Respondents argued that Jacob Securities is authority for the proposition that where an arbitration is extant and there is an application to set aside an award under Article 34 of the Model Law based on reasonable apprehension of bias on the part of the arbitrator, the party raising this ground must first submit a challenge on this ground to the arbitrator for his or her decision before seeking recourse to the court.
Justice Cavanagh disagreed that Jacobs Securities stands for this proposition:
“[40] The question before the application judge in Jacobs Securities was whether, in circumstances where after an award is released (in respect of which the arbitrator is functus officio) there is an application to set aside the award based on reasonable apprehension of bias on the part of the arbitrator, the court has jurisdiction to set aside the award on this ground. The application judge held that in such circumstances, Articles 12 and 13 have no application and the only recourse is to challenge the award or its enforcement. The fact that in Jacobs Securities the arbitration was terminated through release of the final award was not, on my reading of the case, a significant consideration for the application judge. The decisive consideration was whether the challenge of the award was made after a final award had been released and the arbitrator was functus officio.”
Justice Cavanagh found that the Arbitrator was functus officio with respect to the Final Award, relying upon Chandler v Alberta Association of Architects, 1989 CanLII SCC. He found that the Applicants could not obtain an order setting aside the Final Award under Articles 12 or 14 of the Model Law and could only do so under Article 34. One of the available grounds for such recourse is that there is a reasonable apprehension of bias on the part of an arbitrator which amounts to a claim of unequal treatment contrary to Article 18 of the Model Law, relying upon Jacob Securities at para. 33. Therefore, the Applicants were not required to follow the procedure in Article 13 of the Model Law before bringing a set-aside application.
Justice Cavanagh dismissed the Respondents’ motion to dismiss or stay the set-aside application.
Editor’s Notes:
First, both the parties and Justice Cavanagh appear to have used, interchangeably, the grounds for challenge of the arbitrator in the Ontario Arbitration Act, 1991, S.O. 1991, c. 17 (“reasonable apprehension of bias”) and in Article 12 of the Model Law (“circumstances exist that give rise to justifiable doubts as to [the arbitrator’s] impartiality or independence”). Justice Mew did so in Jacob Securities as well. A summary of Canadian law on that test is found at paras. 35 to 40 of that decision, which also applies the IBA Guidelines on Conflicts of Interest in International Law. There is likely no practical difference between these tests, although I am not aware of a case that has addressed this issue head on.
Second, the Jacob Securities decision can be distinguished on the basis that the arbitrator who was challenged had issued the final award and the arbitration was terminated, as a result of which he was functus officio. In this case, the Arbitrator had issued his final award on the merits, but the arbitration was not terminated and he was not functus officio because he had expressly reserved on the issues of costs and interest. Does that make a difference to the outcome of this motion to stay or dismiss the application to set aside the Final Award? Probably not. Article 33 of the Model Law provides that a party may apply to the arbitrator within 30 days of receipt of the award asking for a correction or interpretation of the award. That provision clearly has no application to these circumstances. The Applicants had no other recourse against the Final Award except a set-aside application under Article 34 of the Model Law.However (and third), the Applicant also sought an order setting aside any subsequent award of the Arbitrator, including on interest and costs. On those issues, the Arbitrator was not functus officio and the arbitration was not terminated. Pursuant to Article 13 of the Model Law, any challenge to the Arbitrator’s independence or impartiality with respect to the remaining issues in the arbitration would have to be made directly to the Arbitrator within 15 days of the Applicant becoming aware of the grounds for challenge. If the challenge was rejected by the Arbitrator, the Applicant could apply to the court to decide the challenge within 30 days, during which time the Arbitrator could continue with the arbitration. Under Article 4, a failure by the Applicants to follow this procedure would constitute a waiver of their right to object. This issue was not addressed by Justice Cavanagh because he dismissed the motion outright. His Reasons do not disclose whether the Applicants brought a challenge to the Arbitrator directly with respect to the remaining issues in the arbitration. If not, they are out of time and have no other recourse against any future award.