The Aroma of Bias: Ontario Court of Appeal Clarifies Arbitrator’s Duty to Disclose New Mandates
In November 2024, the Ontario Court of Appeal released the eagerly awaited decision of Aroma Franchise Company Inc. v Aroma Espresso Bar Canada Inc., 2024 ONCA 839(“Aroma”), which dealt with the appeal of a decision setting aside an arbitral award on the basis of finding a reasonable apprehension of bias on the part of an arbitrator due to the arbitrator’s failure to disclose his appointment by counsel on an unrelated matter.
In doing so, the Ontario Court of Appeal clarifies the duty of disclosure for arbitrators and discusses the relationship between disclosure and the existence of a reasonable apprehension of bias. This decision is significant to arbitrators and counsel with an arbitration practice, providing important guidance on the disclosure obligations of arbitrators who are appointed for multiple matters by the same party or counsel, as well as when a reasonable apprehension of bias may be found where an arbitrator does not disclose the fact that they have been retained for a separate and unrelated mandate.
Background
The background of this decision involves a franchise dispute between a master franchisee, Aroma Espresso Bar Canada Inc. (“Aroma Canada”) and the franchisor, Aroma Franchise Company Inc. (“Aroma Franchise”) relating to an alleged wrongful termination of a Master Franchise Agreement (the “Agreement”).
The Agreement contained an arbitration agreement requiring that the dispute be submitted to arbitration before a sole arbitrator. With respect to the appointment of the sole arbitrator, the parties were required to “jointly select one (1) neutral arbitrator” who “has no prior social, business or professional relationships with either party”. The arbitration was governed by the International Commercial Arbitration Act, 2017 which incorporates the UNCITRAL Model Law on International Arbitration (the “Model Law”).
Following the delivery of a notice of request to arbitrate, counsel for the parties engaged in dialogue to identify an arbitrator. The parties proposed and rejected three potential arbitrators, including on the basis that one of the candidates had a number of previous appointments by the law firm representing Aroma Canada. The parties ultimately agreed to an arbitrator (the “Arbitrator”) who had not previously acted as a mediator or arbitrator for either party and who confirmed that he had no conflicts and met the criteria for appointment.
The arbitration between the parties (the “Arbitration”) occurred over a period of more than two years and ultimately culminated in an award finding that Aroma Franchise had wrongfully terminated the Agreement and awarding substantial damages to Aroma Canada as a result. The Arbitrator issued the final award of the arbitration (the “Final Award”) on January 12, 2022 via an email to counsel for the parties.
However, in sending out the Final Award to the parties, the Arbitrator inadvertently copied another lawyer from Aroma Canada’s law firm who had not been involved in the Arbitration. In subsequent correspondence, Aroma Franchise learned that approximately 17 months after the Arbitration began, the lead lawyer for Aroma Canada had engaged the Arbitrator to serve as arbitrator for a separate dispute involving another client of their firm (the “Second Arbitration”). The Second Arbitration involved different parties and issues from those involved in the Arbitration. The Second Arbitration also involved the lawyer who had been inadvertently copied by the Arbitrator when sending out the Final Award. Throughout the Arbitration, Aroma Franchise had been unaware that the Arbitrator had been involved in the Second Arbitration as the Arbitrator had not disclosed that he been approached, or had agreed, to conduct the Second Arbitration.
Upon learning of the Arbitrator’s involvement in the Second Arbitration, Aroma Franchise brought an application to the Superior Court to set aside the Final Award, as well as ancillary awards of interest and costs the Arbitrator made in October 2022, on the basis that there was a reasonable apprehension of bias on the part of the Arbitrator, the Arbitrator had exceeded his jurisdiction, and the Arbitrator gave inadequate reasons.
The Ontario Superior Court’s Decision
In March 2023, the Ontario Superior Court of Justice granted Aroma Franchise’s application to set aside the Final Award and costs and interest awards and directed a new arbitration be conducted before a different arbitrator.
The application judge concluded that the Arbitrator was required to disclose that he had been engaged for the Second Arbitration and hat the Arbitrator’s failure to provide such disclosure gave rise to a reasonable apprehension of bias, fatally tainting the result of the Arbitration.
In reaching these conclusions, the application judge placed considerable emphasis on the parties’ expectations regarding disclosure derived from the correspondence exchanged between counsel for the parties before the Arbitrator was approached and then appointed. In that correspondence, counsel explained their own relationships with potential arbitrators and asked certain questions about opposing counsel’s relationships. This correspondence between the parties was never provided to the Arbitrator nor was he ever made aware of the expectations said to flow from it. Nevertheless, the application judge found that, based on this correspondence as well as the provisions of the arbitration agreement between the parties, it was clearly important to both parties that the selected arbitrator be neutral and not have a professional or personal relationship with either party or their counsel and that this would remain important throughout the Arbitration.
Although the parties did not adopt them to govern the disclosure regime for the Arbitration, the application judge cited and heavily relied on the IBA Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), which sets out lists of specific situations which may warrant disclosure or disqualification of an arbitrator, including potentially disclosing appointments made by the same party or the same counsel appearing before an arbitrator while the case is ongoing.
In concluding that a reasonable apprehension of bias had tainted the Arbitration, the application judge emphasized the expectations of the parties and the relevant circumstances – including that the Second Arbitration was hidden from Aroma Franchise for approximately 15 months while the Arbitration was ongoing and that the Second Arbitration was only discovered due to the inadvertent copying of unrelated counsel on an email by the Arbitrator.
Aroma Canada appealed the decision to the Ontario Court of Appeal, challenging the finding that disclosure was required by the Arbitrator and that a reasonable apprehension of bias arose as a result of the Arbitrator’s non-disclosure. In the meantime, the decision by the Ontario Superior Court of Justice was significant to the arbitration sphere by signalling that increased disclosure by arbitrators for unrelated mandates for the same lawyers or law firms may be necessary.
The Court of Appeal Decision
In a unanimous decision, the Court of Appeal set aside the decision and found that the application judge had erred in law in finding that the Arbitrator had breached his duty to disclose that he was appointed to the Second Arbitration and that a reasonable apprehension of bias arose in the circumstances. In doing so, the Court of Appeal first considered the issue of whether disclosure was warranted, followed by an analysis of whether a reasonable apprehension of bias could be established.
The Duty to Disclose
In considering the issue of whether the Arbitrator should have disclosed the existence of the Second Arbitration, the Court of Appeal confirmed that required disclosure turns on the legal regime that governs the arbitration. The Court considered the specific regime governing the Arbitration, being the Model Law. In particular, Article 12(1) of the Model Law sets out the applicable duty of disclosure by an arbitrator as follows:
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 through the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.
The Court agreed with persuasive UK common law authority that the Model Law test dictating when an arbitrator must make disclosure is an objective one – like the test for disclosure prescribed by the common law. The question is whether relevant circumstances would likely give rise to justifiable doubts about the impartiality of the arbitrator from the perspective of a “fair-minded and informed observer”, rather than the subjective perspective of the parties.
The Court reasoned that, unlike the Model Law, the IBA Guidelines are not a legal standard, and while the parties easily could have, the parties did not adopt the IBA Guidelines as the governing disclosure regime for the Arbitration. While recognizing that the standard for disclosure in the IBA Guidelines may be instructive, the Court clarified that the IBA Guidelines are not determinative, and in fact, they differed from the Model Law by implementing a subjective framework.
The Court of Appeal determined that the application judge failed to apply an objective test, as required by the Model Law, and instead erroneously applied a subjective test pursuant to the IBA Guidelines. In doing so, the application judge improperly relied upon the parties’ subjective expectations as derived from their pre-appointment correspondence, although such correspondence was never shared with the Arbitrator. The Court confirmed that the unshared expectations and views of the parties could not inform the question of whether the Arbitrator had a duty to disclose, as the applicable test is an objective one which requires consideration of what was communicated to and known by the Arbitrator.
In applying an objective test, the Court held that the Arbitrator did not have a duty to disclose the existence of the Second Arbitration given that the Second Arbitration did not involve either of the parties to the Arbitration nor did it have any meaningful overlap of issues. Accordingly, the Arbitrator had not breached the legal duty of disclosure.
It should be noted that in reaching this conclusion, the Court of Appeal also distinguished the circumstances from the UK decisions relied on by Aroma Franchise where the impugned arbitrators had accepted multiple appointments from the same party in relation to multiple claims concerning the same or overlapping subject matter, or where the arbitrator had accepted but not disclosed multiple appointments as arbitrator and multiple retainers as an expert or co-counsel to the law firm.
Reasonable Apprehension of Bias
The Court of Appeal then turned to the issue of bias and found that the application judge had erred in determining that a reasonable apprehension of bias existed in the circumstances.
The Court of Appeal first discussed the relationship between a failure to disclose and reasonable apprehension of bias, holding that a finding that there was a breach of the legal duty of disclosure is germane to, although not determinative of, the inquiry of whether there is a reasonable apprehension of bias. The Court of Appeal observed that the test for disqualifying an arbitrator on grounds of bias imposed a higher threshold than the test for disclosure under the Model Law, given that Article 12(2) is limited to circumstances which “do” give rise to justifiable doubts, while the duty of disclosure under Article 12(1) of the Model Law applies to circumstances that are “likely” to give rise to justifiable doubts. The legal duty to disclose was said to cover a wider array of circumstances than those that, in the end, will justify disqualification of an arbitrator or setting aside an award for reasonable apprehension of bias. In the present case, given that the Court had determined that the Arbitrator’s failure to disclose his appointment in the Second Arbitration did not breach the duty of disclosure, the path from the Arbitrator’s non-disclosure to a reasonable apprehension of bias on the part of the Arbitrator was said to disappear.
The Court then considered whether any other basis could be established for finding a reasonable apprehension of bias, and in doing so, helpfully discussed the relevant tests and principles governing reasonable apprehension of bias. The Court emphasized that the test for disqualification of an arbitrator on the grounds of a reasonable apprehension of bias is an objective one and considers the relevant circumstances from the standpoint of a fair-minded and informed observer. The Court recognized that Article 12(2) of the Model Law permits a challenge to an arbitrator or an award that was made “if circumstances exist that give rise to justifiable doubts as to [the arbitrator’s] impartiality or independence”. The Court reasoned that “justifiable doubts” regarding an arbitrator’s impartiality under Article 12(2) of the Model Law is equivalent to a reasonable apprehension of bias under the common law. The Court recognized that the appropriate test is: “what 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 [arbitrator], whether consciously or unconsciously, would not decide fairly” (paras 128-129).
The Court further determined that arbitrators benefitted from the same strong presumption of impartiality as judges in Canada. The Court recognized that failing to impose this presumption to privately appointed arbitrators would undermine the integrity of the arbitration system. Accordingly, it was held that the objective test for reasonable apprehension of bias must be applied against the backdrop of a strong presumption of impartiality.
The Court recognized that the objective nature of the test is context sensitive and fact specific and reasoned that a fair-minded and informed person would consider the facts and circumstances which were objectively known, and would therefore focus on what was communicated to the Arbitrator. In the circumstances, given that the correspondence between counsel for the parties regarding the selection of arbitrators was not shared with the Arbitrator, such information comprised the subjective views of the parties and was improper to consider. The Court determined that the application judge had erred in taking into account expectations of the parties which had not been shared with the Arbitrator in her analysis of reasonable apprehension of bias. In the Court’s view, the application judge not only treated the parties’ subjective views as relevant, but as determinative, which was a change to the objective test and an error of law.
The Court confirmed that a failure of an arbitrator to disclose according to an expectation of the parties that was not shared with the arbitrator does not raise or confirm the existence of a reasonable apprehension of bias. The Arbitrator’s failure to disclose his selection in a subsequent matter therefore did not give rise to bias on his part. The Court concluded that, applying the standard of a reasonable apprehension of bias objectively, the presumption of impartiality on the part of the Arbitrator was not displaced by his acceptance of a retainer to arbitrate a second matter that did not involve any of the parties to the Arbitration nor any overlapping issues of significance. As a result, the Court of Appeal concluded there was no reasonable apprehension of bias in the circumstances.
The Court of Appeal therefore allowed the appeal and set aside the judgment of the application judge quashing the Arbitrator’s award on the basis of a reasonable apprehension of bias.
Takeaways
The Court of Appeal’s decision in Aroma clarifies that multiple appointments of an arbitrator may not automatically give rise to a reasonable apprehension of bias nor will it necessarily mandate disclosure by the arbitrator. The Court’s conclusion is likely to be well-received by arbitrators and counsel in the construction law sphere, where a limited number of arbitrators with necessary expertise and experience may be able to adjudicate certain disputes and where multiple appointments of sought-after arbitrators by law firms is not uncommon. As aptly stated by the Court of Appeal: “High stakes arbitrations often involve arbitrators who are in high demand, sophisticated parties, and experienced lawyers. This gives rise to the prospect that an arbitrator might have had prior engagements or be asked to undertake future ones, in which the parties or lawyers have some involvement” (para 4).
The Ontario Court of Appeal’s decision illustrates that the choice of rules governing the arbitration will inform the scope of the disclosure obligations. For international arbitrations using the Model Law, the Court of Appeal’s decision can be relied on to ensure an objective test for disclosure and bias is implemented, thereby avoiding the problems and potential unfairness associated with relying on correspondence and expectations which are not communicated and are unknown to an arbitrator. A different result, such as the one reached by the application judge, may be determined where parties select the IBA Guidelines as the legal regime governing disclosure obligations for an arbitration.
It is cautioned that, even where objective tests are applied, the Court of Appeal’s decision in Aroma does not establish that an arbitrator’s failure to disclose subsequent appointments will never give rise to breach of the duty to disclose or to a reasonable apprehension of bias. Rather, the Court of Appeal’s reasoning indicates that the facts and circumstances objectively known, including what is communicated to arbitrators, will inform the respective tests. Accordingly, if a party is concerned that an arbitrator may take on subsequent matters with one of the parties during the course of the arbitration, those concerns should be disclosed to the arbitrator and opposing counsel prior to the potential engagement, so as to objectively inform the duty to disclose and potentially give rise to a reasonable apprehension of bias in the absence of such disclosure. Practically, arbitrators may also remain well-advised to err on the side of disclosure, particularly where there are overlapping parties and issues.
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