Ontario – Multiple arbitral appointments give rise to reasonable apprehension of bias – #734

In Aroma Franchise Company Inc. et al. v Aroma Espresso Bar Canada Inc. et al., 2023 ONSC 1827, Justice Steele set aside two international awards (on the merits and as to costs and interest) arising out of a franchise dispute on the basis of a reasonable apprehension of bias on the part of the Arbitrator for failure to disclose that during the arbitration he had been appointed by counsel for one of the parties to serve as sole arbitrator on another matter even though it did not involve a franchise dispute and was in a different industry.

The Applicant franchisor sought: (1) to set aside two international awards and; (2) an order that the matters in issue be decided by a new arbitrator. The Applicant argued that there was a reasonable apprehension of bias on the part of the Arbitrator, that the Arbitrator exceeded his jurisdiction, and that the Arbitrator gave inadequate reasons. This Case Note will focus only on the first ground. Justice Steele described the issue before her as, “whether the Arbitrator ought to have disclosed a subsequent retainer from the same lawyer while the case was ongoing, and whether in the circumstances of this case, his failure to do so would give rise to a reasonable apprehension of bias”.  

Background dispute – Respondent Aroma Espresso Bar Canada Inc. was the master Canadian franchisee (the “Franchisee”) of Applicant Aroma Franchise Company Inc. (the “Franchisor”), and acted as a mediary between the Franchisor and individual coffee shop owners in Canada. A dispute arose regarding the Franchisee’s cancellation of supply orders from Aroma Israel, which had been the sole supplier of coffee for many years. The Franchisor took steps under the Master Franchise Agreement (the “MFA”) to terminate and assume the Franchisee’s role with respect to the individual Canadian franchisees. The Franchisee in turn also alleged various breaches of the MFA by the Franchisor.

The Aroma Arbitration – The parties alleged various claims and counterclaims in the Aroma Arbitration. Ultimately, the Arbitrator found that the Franchisor had wrongfully terminated the MFA and ordered it, in part, to pay the Franchisee $10 million in damages. However, the Franchisor was successful in its claim against the Franchisee for certain unpaid royalties in the amount of $69,000.

The reasonable apprehension of bias issue -The MFA contained an arbitration clause which stated, among other things, that:

“…The parties shall jointly select one (1) neutral arbitrator from the panel of arbitrators maintained by the ADR Institute. The arbitrator must be either a retired judge, or a lawyer experienced in the practice of franchise law, who has no prior social, business or professional relationship with either party…”

Approximately 17 months into the Aroma arbitration, the Arbitrator was appointed as the sole arbitrator on another dispute by one of the counsel for the Franchisee and a colleague at the same firm. This was not disclosed to counsel for the Respondent Franchisor. The essential facts that are relevant to the allegation of a reasonable apprehension of bias on the part of the Arbitrator are as follows.

On January 7, 2022, the Arbitrator emailed counsel for the parties to advise that the final award was ready and requested additional payment before releasing it. In this email and an email dated January 11, 2022, enclosing the final award, the Arbitrator copied a lawyer from the firm acting for the Franchisee who had not been involved in the Aroma arbitration. Counsel for the Franchisor asked for an explanation from counsel for the Franchisee first (before the outcome of the arbitration was known) and then from both him and the Arbitrator (after the outcome was known). He stated in the latter email that “our clients wish to have clarification as to why he was copied, including whether there is or has been any other relationship of any kind between Mr. Arbitrator and [the firm acting for the Franchisee], including any other appointments as arbitrator or mediator.”

In response to that email and two others from counsel for the Franchisor the following week, the Arbitrator explained that copying new counsel was an error, and he disclosed that:

1. The firm acting for the Franchisee in the Aroma arbitration had retained him as sole arbitrator in October 2020 in another dispute which was ongoing;

2. He was retained by the new lawyer who, not his client, signed the terms of appointment. This new lawyer had day-to-day carriage, but counsel for the Franchisee in the Aroma arbitration had involvement in the new dispute from time to time; 

3. The issues in the new dispute did not involve franchise law, but there were contract issues in an industry completely unrelated to the Aroma business and in a different contractual relationship. The Arbitrator stated that, in his view, the contract issues were not in any way related to the contract issues in the Aroma arbitration and that there was no overlap in the issues between the two cases. He also stated that he was not aware of any connection between the parties in the new dispute and the Aroma arbitration.

On January 20, 2022, the Franchisor advised the Arbitrator that it intended to apply to the Court to set aside the final award, including on the basis of a reasonable apprehension of bias. 

The decision of Justice Steele – The arbitration was seated in Ontario. Justice Steele relied upon two provisions of the Model Law [as adopted in the Ontario International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sch 5 (the “ICCA”)]. Article 34(2)(a)(iv) provides that a court may set aside an award where “the composition of the tribunal…was not in accordance with the agreement of the parties….” Also, Article 18 provides that all, “parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”. Justice Steele held that a violation of Article 18 would provide sufficient grounds to set aside an award.

Justice Steele considered an arbitrator’s duty to disclose.

First, she noted that Article 12 of the Model Law provides:

(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his 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.

(2) An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.” [emphasis added]

Second, Justice Steele considered the IBA Guidelines on Conflicts of Interest in International Arbitration. The parties argued about their applicability, but Justice Steele relied upon Justice Mew’s decision of Jacob Securities Inc. v. Typhoon Capital B.V., 2016 ONSC 604, at para 41, in which he stated that they are “are widely recognized as an authoritative source of information as to how the international arbitration community may regard particular fact situations in reasonable apprehension of bias cases.” 

Justice Steele referred to the following provisions in the IBA Guidelines (paras. 33 to 37) –which I list, along with my commentary:

  • If facts or circumstances exist that mayin 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. [emphasis added] [Part I, General Standard 3(a)];
  • Circumstances on the “Orange List”, which raise “potentially a problem” include where the arbitrator has, within the past three years, been appointed on more than three occasions by the same counsel or the same law firm. This effectively recognizes that an arbitrator may be engaged more than once by the same counsel. It does not automatically fall on the Orange List unless the appointment has been made more than three times within the past three years. Note that the Orange List is non-exhaustive. [Part II, Practical Application 3, the “Orange List”]; 
  • …An 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”. [Part II, Practical Application 6] However, this language does not appear in the Orange List proper, where one might expect to find it, but rather in the Practical Application of the General Standards section – which also says that situations not listed in the Orange List or falling outside the time limits used in some of the Orange List situations are not subject to disclosure [emphasis added]. It all depends upon the circumstances.

Third, with respect to the relevant circumstances, the Franchisor argued that the new engagement ought to have been disclosed in the circumstances of this case, which included: “the expectations of the parties in the selection of the Arbitrator, the fact that the Arbitrator was the sole arbitrator in the Aroma arbitration and not part of a panel (and therefore controlled the outcome), the existence of overlapping issues between the [new dispute] and the Aroma arbitration, the terms of the MFA, and the correspondence between counsel regarding the sorts of things that would be a concern prior to the engagement of the Arbitrator.” That pre-appointment correspondence included discussions about whether counsel for either party or their firms had any business relationship with the proposed appointees in the past. Counsel for the Franchisor rejected a proposed appointee who had an ongoing arbitration with counsel for the Franchisee. This correspondence was, of course, unknown to the arbitrator.

On cross-examination, the representative for the Franchisor said that had he learned of the circumstances, and he would have objected to the Arbitrator continuing to act. Justice Steele found that this evidence was supported by the correspondence. Counsel for the Franchisee admitted that the circumstances of the new dispute would have been an “expected” disclosure.” Justice Steele agreed that the fact that the Arbitrator was a sole arbitrator was a factor. 

Fourth, Justice Steele cited Article 11 of the UNCITRAL Rules (which she said applied because the parties had chosen the ADRIC Rules and that Rule 1.3.2 provides that the UNCITRAL Rules apply if the arbitration is international). Article 11 of the UNCITRAL Rules states that: 

When a person is approached in connection with his or her possible appointment as an arbitrator, he or she shall disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence. An arbitrator, from the time of his or her appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed by him or her of these circumstances”.

Fifth, she referred to Section 6 of the ADR Institute of Canada Code of Ethics, which provides that a Member shall disclose any interest or relationship likely to affect impartiality or which might create an appearance of partiality or bias.

Finally, she cited a number of relevant Canadian cases and international cases, including what is likely the leading case on the issue of multiple appointments (and persuasive in Canada), Halliburton Company v. Chubb Bermuda Insurance Ltd. [2020] UKSC 48, in which the U.K. Supreme Court noted, at para. 131, where an arbitrator has appointments in multiple matters with the same or overlapping issues with one common party, “this may, depending on the relevant custom and practice, give rise to an appearance of bias.” Justice Steele found that the Arbitrator ought to have disclosed this new appointment and that there was a reasonable apprehension of bias, which justified setting the award aside and ordering a new hearing.

Editor’s Notes:

First, Justice Steele’s analysis, in this case, is a reminder that the IBA Guidelines are just that – guidelines – and that each arbitrator must apply judgment to the decision about whether to disclose or not. But the decision is not an easy one, and the Guidelines are not prescriptive. In this case, there were several potentially relevant Guidelines that could have led to different conclusions about the duty to disclose. Ultimately, the decision of whether or not to disclose always depends upon the circumstances, which will always create uncertainty and risk. In the Halliburton case cited by Justice Steele, the arbitrator’s appointment in multiple arbitrations with respect to related and overlapping matters – not the case here – did not give rise to a finding of a reasonable apprehension of bias. In addition, this may be a rare case in which both the applicant and the respondent agreed that the circumstances required disclosure.

Second, this is one of only a few cases I am aware of in Canada in which the IBA Guidelines on Conflicts of Interest in International Arbitration have been applied by a Court as part of the analysis. In Ontario, the disclosure test is whether the circumstances give rise to a “reasonable apprehension of bias”. However, elsewhere and under the IBA Guidelines, the disclosure test is whether “facts or circumstances exist that may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality and independence.” This case is consistent with what appears to be commonly accepted, which is that these tests are the same. Both provide for an ongoing duty of disclosure, even after the arbitrator is appointed. 

Third, this case does not refer at all to IBA Guidelines, Part I, General Standard 7, which provides that the duty of disclosure applies to parties as well. Presumably, this duty applies, by extension, their counsel when they are aware of circumstances that require disclosure. Also, Justice Steele’s analysis and the IBA Guidelines make it relevant whether the arbitrator was appointed by the parties or their counsel. Neither of these issues was explored in the decision. Finally, for a Case Note on an earlier decision in this matter, see Ontario – Arbitrator no jurisdiction to hear challenge for bias after partial final award – #691.