ONTARIO – International Arbitration–Model Law- Reasonable apprehension of bias and duty to disclose a second appointment. A finding of a failure to disclose the second engagement is germane but not determinative of whether an arbitral award should be set aside for reasonable apprehension of bias.

Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc.
2024 ONCA839 (2024-11-19)
Ontario Court of Appeal (Fairburn A.C.J.O, van Rensburg and Zarnett JJ.A.)

Arbitrators and lawyers have been waiting for this decision from the ONCA. The application judge in the Ontario Superior Court set aside two international arbitral awards on the basis of a finding of reasonable apprehension of bias on the part of the arbitrator because the arbitrator failed to disclose a second appointment by the same firm during the ongoing arbitration. The SCJ decision was concerning to arbitrators in Canada who accept multiple appointments from the same law firms, especially in specialty fields or markets where there is a small number of qualified arbitrators.

The ONCA overturned the lower decision, finding no legal duty to disclose in the circumstances of the case. The ONCA also confirmed that a repeat appointment by the same firm did not trigger a duty to disclose because there were no overlapping parties or issues. The ONCA held that the duty to disclose is context specific and that factors like overlapping parties or issues, a close relationship between counsel and the arbitrator, or if the arbitrator had been repeat appointed to meet the critical mass of appointments may trigger the duty as set out in the IBA Guidelines “orange list”.

Background

The arbitration was seated in Ontario and governed by the UNICITRAL Model Law on International Arbitration (“Model Law”), which has been adopted in Ontario’s International Commercial Arbitration Act, 2017, S.O. 2017 c.2 Sched 5 (ICAA)

Article 12(1) of the Model Law imposes a duty on an arbitrator to disclose, before appointment and during the arbitration, any circumstances likely to give rise to justifiable doubts about the arbitrator’s impartiality. A challenge to the arbitrator or the award can be made pursuant to article 12(2) if the circumstances exist that give rise to justifiable doubts about the arbitrator’s impartiality as long as the person making the challenge was unaware of the circumstances when they participated in the arbitrator’s appointment. The ONCA held that justifiable doubts about impartiality is an equivalent phrase to reasonable apprehension of bias. (para. 2)

In the final award, the arbitrator found that the respondents had wrongfully terminated the Master Franchise Agreement (MFA) and awarded significant damages to Aroma Canada. (para. 5) Sotos LLP represented one of the parties.

The MFA set out the qualifications of the arbitrator: “a 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.” (para. 30)

Prior to appointment, the Arbitrator advised the parties: “I do not believe I have any conflicts” and confirmed no conflicts immediately after being appointed. (paras. 32–33)

Seventeen (17) months into the arbitration the arbitrator was asked to take on a second appointment as arbitrator by members of the Sotos LLP law firm for a different party with different issues. The arbitrator accepted the second appointment and did not disclose this to the other law firm in this arbitration. When releasing his decision, the arbitrator inadvertently copied a lawyer at Sotos LLP who was not involved in the Aroma arbitration. Upon questioning by the other law firm, the arbitrator disclosed the second appointment. (paras. 6–8)

The Respondents brought an application to set aside the Final Award and Costs Award on several grounds including bias on the arbitrator’s part.

Application Judge’s Decision

The application judge set aside the two awards and directed a new arbitration before a new arbitrator. The application judge held that the arbitrator was required to disclose the second appointment and by failing to do so, a reasonable apprehension of bias arose. The application judge relied upon communications between the lawyers before selecting the arbitrator that the Arbitrator was unaware of, the IBA Guidelines on Conflicts of Interest, and other reasons examined below.

Analysis

Issue 1: Did the application judge err in applying a subjective standard when determining if there was a duty to disclose the second appointment?

Issue 2: Are arbitrators entitled to a presumption of neutrality?

Issue 3: What is the relationship between the duty to disclose and its relationship to reasonable apprehension of bias?

The Standard

The ONCA held that the test or standard for a reasonable apprehension of bias is objective – like the legal test for disclosure, “it considers the relevant circumstances from the standpoint of a fair-minded and informed observer, against the backdrop of a strong presumption that an arbitrator is impartial.” (para. 13).

The ONCA held that the application judge erred in law in the way she applied the test and the circumstances she considered to determine that a reasonable apprehension of bias was present, which were outside those factors properly considered in applying the test objectively. (para. 13)

The ONCA found that the arbitrator had not been provided with any of the correspondence between the lawyers about the considerations that had gone into selecting an arbitrator. (para. 31)

Failure to disclose does not in itself necessitate setting aside an award; the award will only be set aside if the failure to disclose is indicative of bias.

The application judge referred to the Model Law Article 12 and the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines). The IBA Guidelines standard 3(a) states: “if facts or circumstances exist that may, in the eyes of the parties, give rise to doubts about the arbitrator’s impartiality or independence, the arbitrator shall disclose such facts or circumstances to the other parties, prior to accepting the appointment or, thereafter as soon as they learn of them.” (para. 51)

The IBA Guidelines are guidelines and have not been adopted in the ICAA legislation in Ontario.

The application judge held that there were circumstances that required disclosure arising as a result of the lawyers’ pre-arbitration communication and concluded that the circumstances required the arbitrator to disclose the second appointment despite not knowing about the pre-arbitration communications and that the second arbitration did not involve similar issues or any of the parties. (para. 54–56).

The application judge held that the presumption of arbitrator impartiality was displaced by the non-disclosure of the second appointment considering the pre-arbitration communication between the lawyers. (para. 57)

The application judge held that a reasonable apprehension of bias arose in the context of the circumstances and gave rise to a duty to disclose. (para. 60)

The ONCA referred to the UK case Haliburton Company v Chubb Bermuda Insurance Ltd (2020) UKSC 48 and held that the test for disclosure as set out in Article 12(2) of the Model Law is objective. Circumstances “likely to give rise to justifiable doubts as to the arbitrator’s impartiality or independence are to be assessed from the standpoint of a fair minded and informed observer.” (para. 73) The ONCA found that the IBA Guidelines are not a legal standard and use a subjective standard. (paras.74) and 76)

The MFA did not mandate disclose and did not adopt the IBA Guidelines. The ONCA held that the application judge erred in concluding that there was a legal duty to disclose based upon her view on the IBA Guidelines and the pre-arbitration communications between the lawyers. (paras. 82–83)

The ONCA held that the application judge erred in not applying the objective standard set out in Article 12(1) of the Model Law and failed to acknowledge the difference between the disclosure requirement pursuant to the Model Law and in the IBA Guidelines. (paras. 84–88)

The ONCA referred to its decision in Rando Drugs v. Scott 2007 ONCA 553, which referenced a UK case where the Court of Appeal asked: “ How can there be any real danger of bias , or any reasonable apprehension of bias or likelihood of bias if the judge does not know of the facts that… are relied upon as giving rise to the conflict of interest?” (para, 89)

The ONCA held that by applying the objective standard, the arbitrator had no legal duty to disclose the second appointment because it did not involve any party to the current arbitration or any overlap of issues. (para.96) In its analysis, the ONCA distinguished the Halliburton case in paragraphs 97-1100 and the Aiteo case in paragraphs 101–106.

The ONCA explained that the circumstances that would tilt the case toward disclosure are fact specific and could include overlapping parties and issues as in the Haliburton case or if the new appointment brings the total number of appointments to the “critical mass included in the IBA Guidelines orange list”. When those circumstances do not exist and a single appointment by counsel for a party in the ongoing arbitration, of the same arbitrator to another arbitration, which is unrelated, disclosure is not required. (para. 111)

The Presumption of Impartiality

The ONCA disagreed that the second appointment by Sotos LLP resulted in an income producing engagement that would benefit the arbitrator which would give rise to justifiable doubts about the arbitrator’s impartiality. (paras. 117–118) The ONCA held: “it is well understood that arbitrators are paid by the parties over whose arbitration they preside. Nomination as an arbitrator gives the arbitrator a financial benefit”. Yet arbitrators are expected to meet the same high standards of fairness and impartiality whether they are nominated by a party or chair of the tribunal. (paras. 113–115)

The ONCA held “The law requires and presumes impartiality” and referenced cases set out in paragraphs 133-137 of the decision. (para.115) The presumption may be overcome but the Court held that it was not overcome in this case where the second appointment was an unrelated arbitration with different parties and unrelated issues.

The ONCA held that the presumption of impartiality extends to privately appointed arbitrators because if it did not that would undermine the arbitration legislation that allows parties to resolve their disputes by arbitration and restricts recourse to the courts where the parties have agreed to resolve their disputes by arbitration.( para. 133–137)

Relationship Between Failure to Disclose and Reasonable Apprehension of Bias

The Court held that there was no breach in the duty to disclose the second arbitration on the Arbitrator’s part because there was no common party or overlapping issues. (para. 120)

A challenge to an arbitrator must be based on circumstances that do give rise to justifiable doubts about impartiality as set out in the Model Law Article 12(2), while the duty to disclose applies to matters “likely” to give rise to justifiable doubts about impartiality as set out in Article 12(1). The legal duty to disclose covers a wider range of circumstances than those that will disqualify an arbitrator on an application to set aside for bias. (para. 121)

Breaching the legal duty to disclose is thus “relevant” but not determinative in whether a reasonable apprehension of bias has been shown. (para.122)

In this case, the arbitrator’s failure to disclose on which the application judge relied to find a reasonable apprehension of bias was based on the arbitrator not meeting the parties’ expectations for disclosure. The Court held that the arbitrator did not know those expectations and therefore their non-disclosure could not lead to finding a reasonable apprehension of bias. (para. 124)

The ONCA held that the arbitrator’s failure to disclose in these circumstances was not indicative of bias. The circumstances (the second appointment) were not objectively likely to give rise to justifiable doubts about impartiality and independence so as to require disclosure. The ONCA held that the non-disclosure could not give rise to a reasonable apprehension of bias.

The ONCA held that the test as set out in the Model Law reasonable apprehension of bias is objective even though the Model Law does not expressly use the phrase “reasonable apprehension of bias” and instead uses the phrase “ if circumstances arise that give rise to justifiable doubts as to the arbitrator’s impartiality or independence”. (para 127– 131)

In the UK the common law test for reasonable apprehension of bias is also objective. (para.130)

While the objective test is “context sensitive and fact specific” , the context does not extend to the subjective views of the parties, these views are not relevant. A reasonable apprehension of bias is judged through the lens of an informed and reasonable observer.”(para.138-141)

The ONCA held that the application judge erred in treating the subjective views of the parties as relevant and determinative. This was an error of law. (para 142)

The judgment of the application judge was set aside and the arbitrator’s awards reinstated subject to the other grounds ( such as jurisdiction, improper finding about a party , failing to decide a key issue and inadequate reasons) attacking the awards being heard and considered by the SCJ and deciding the relief if any.