ONTARIO – Arbitration – Where the Arbitrator was “functus officio” with respect to the Final Award, the court refused a motion to dismiss an application to set aside an arbitrator’s final award that alleged bias.  Allegations of arbitrator bias can be raised as a ground to set aside an award pursuant to Article 34 of the Model Law, if the bias amounts to the parties not being treated equally.

Aroma Franchise Company Inc. v Aroma Espresso Bar Canada Inc.
2022 ONSC 6188 (Nov.1 2022)
Superior Court of Justice (J. Cavanagh)

The parties were involved in an arbitration as to the termination of the Applicant’s Aroma Franchise Company Inc. (“Aroma Franchise”) master franchise agreement with the Respondent, Aroma Espresso Bar Canada Inc. (“Aroma Canada”).

The Arbitrator delivered a final award in January 2022 by which Aroma Franchise was ordered to pay Aroma Canada $10 million in damages. The Arbitrator also directed that costs and interest, be reserved to a further order. (para. 8)

In an email to counsel, the Arbitrator copied another lawyer at the Respondent’s firm, which prompted the Applicant to ask the Arbitrator a series of questions by email. On January 14, 2022, the Arbitrator responded that that the Respondent’s firm had appointed him on another arbitration not involving these parties or franchise law issues after the hearing of this arbitration. ( para. 15)

The Applicant advised the Arbitrator and Respondent’s Counsel on January 20, 2022 that they would be bringing a court application to set aside the award on the basis of “a reasonable apprehension of bias.”

The Arbitrator requested that the parties deliver submissions on whether or not he should proceed with the costs and interest award. Counsel for both parties made submissions and on March 14, 2022, the Arbitrator made an Order on the sequence of submissions on costs and interest.

The Respondent brought a Rule 21 (Ontario Rules of Civil Procedure) motion for determination of a question of law based upon the Model Law on International Commercial Arbitration (“Model Law”), which is incorporated as Schedule 2 to the Ontario International Commercial Arbitration Act. (para. 28) The Judge granted leave to the parties to file affidavit evidence on the motion.

The Respondent’s position was that the arbitration was not terminated because the award on costs and interest had not been made at the time of the motion. The Applicant did not submit its allegations of bias to the Arbitrator for his determination before bringing their court application.

Article 12 of the Model Law requires an arbitrator before and after being appointed to “disclose circumstances that are likely to give rise to justifiable doubts as to his impartiality or independence”. (para. 32)

Article 13 of the Model Law sets out the challenge procedure, which requires a party intending to challenge an arbitrator to send a written statement of the reasons for the challenge to the arbitrator within 15 days of becoming aware of the circumstances, and that the arbitrator shall decide on the challenge. If the challenge is not successful, the party has 30 days after receipt of the arbitrator’s challenge decision to bring an application to court to decide the issue. (para. 33)

The Court reviewed Jacob Securities Inc. v. Typhoon Capital B.V., 2016 ONSC 604 in which the court held that Articles 12 and 13 of the Model law do not apply to a challenge of an award after the final award has been released and the Arbitrator is “functus officio”. (para. 34-40) If that is the case, the only option is to challenge the award or its enforcement, not the arbitrator.(para.40)

In this case, the Court held that the Arbitrator was “functus officio” with respect to the January 2022 award. (para.41)  Cavanagh J. held that the Applicant cannot obtain an order to set aside the January 2022 award pursuant to Articles 12 and 13 of the Model Law, even though the costs and interest award has not yet been made. The Court further held that the Applicant’s recourse against the January 2022 award would be to bring an application to set aside the award pursuant to Article 34 of the Model Law. (para. 43)

The Court dismissed the Respondent’s motion and held that the Applicant was not required to follow the challenge procedure in Article 13 before bringing an application to set aside the Award.

Further, the Court held that the Applicant could rely on available grounds in support of the application to set aside the arbitrator’s award, namely, that there was a reasonable apprehension of bias by the Arbitrator that amounted to a claim of unequal treatment of the parties contrary to Article 18 of the Model Law. (para. 45)