Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839
Introduction
The interesting case of Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc, et al.[1], 2023 ONSC 1827 addressed the standard used by courts to determine an arbitrator’s impartiality over a dispute, as well as their requirement to make disclosure.
In 2024, the Court of Appeal in Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc.[2], 2024 ONCA 839 overturned the lower court decision on the basis that the lower court incorrectly applied the standard to determine an arbitrator’s requirements for disclosure, apprehension of bias, as well disqualification.
Facts
In 2020, a dispute arose amongst the applicants, Aroma Bar Canada Inc., (the “Applicants”) and the Respondents, Aroma Franchise Company Inc., (the “Respondents”) over a franchise Agreement.
While searching for an arbitrator, the parties sought and emphasized the need for a neutral arbitrator to settle their dispute. Fifteen months later, while the arbitration was well underway, the arbitrator emailed the parties his final decision, but inadvertently copied a lawyer from Sotos LLP (“Sotos”), the law firm of the Respondent’s counsel. The lawyer who had been inadvertently mentioned in the email chain had not taken part in the arbitration in any capacity.[3]
After being questioned by the Applicants, the arbitrator admitted he had been retained by the Respondents counsel in his capacity as an arbitrator in a separate and ongoing dispute, which I will refer to as the Sotos Dispute.
The Applicants found this to be a major issue and filed an application to set aside the decision on the basis that they were not provided a reasonable apprehension of bias.[4]
The Issue
The issue to be determined by the court was whether the final award should be set aside due to the lack of impartiality of the arbitrator.[5]
The Court’s Analysis:
According to the UNCITRAL Model Law on International Arbitration, otherwise known as Model law, an arbitral award may be set aside by the court according to Section 34 if:
The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law (Model Law);[6]
The Applicant’s contended that according to the Model Law, if an arbitrator’s conduct led to a reasonable apprehension of bias, the arbitral award may be set aside.
The court analysed whether there was a reasonable apprehension of bias when the Arbitrator failed to disclose to the Applicants that he had been retained in the Sotos Dispute.
In its analysis, the court referenced Article 12 of the Model law which states:
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.[7]
The IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”) provide that arbitrators should make available any conflicts that in the eyes of the parties may give rise to doubts on the arbitrator’s independence.[8]
The IBA guidelines created a system of practical application and scenarios to better understand what an arbitrator must disclose. The system is broken down into three different lists:[9]
- Red is for no-go (subject to a potential waiver for items on the waivable red list),
- Orange for potentially a problem; and
- Green for go.
The orange list is a non-exhaustive list which states It is vital that an arbitrator evaluate on a case-by-case basis what must be disclosed by an arbitrator.
The Court noted that within the orange level, an arbitrator must, “disclose an appointment made by the same party or the same counsel appearing before an arbitrator, while the case is ongoing… depending on the circumstances…”[10]
Based on such reasoning, the applicants contended that the arbitrator had a duty to discuss the Sotos Dispute since the Sotos engagement was agreed upon while the Aroma matter was ongoing.
During cross-examination, the court reviewed the correspondence of the applicants, which emphasized the requirement of retaining an arbitrator that did not have a prior relationship with counsel to the parties.
The court also referenced the ADR Institute of Canada Code of Ethics which states at Section 6 that a “member shall disclose any interest or relationship likely to affect impartiality or which might create an appearance of partiality or bias”.[11]
Considering these factors, the court determined that there was a reasonable apprehension of bias by the Arbitrator for failing to disclose the Sotos Dispute.
The court concluded by stating that a reasonable, fair minded and informed person in the “applicant’s position would lose confidence in the fairness of the proceeding giving rise to a reasonable apprehension of bias.”[12]
For these reasons the court set aside the arbitration award.
The Appeal:
The Respondents, now referred to as the Appellants, appealed the lower court’s decision.
On Appeal, the court overturned the lower court’s decision on the basis that the judge erred in her application of the reasonable apprehension of bias test. The lower court judge misapplied this test subjectively for impartiality, rather than objectively. [13]
The court’s analysis included the following:
“Article 12(1) of the Model Law sets out an objective test” as it says, “likely to give rise to justifiable doubts as to [the proposed arbitrator’s] impartiality or independence” are to be assessed from the standpoint of a fair-minded and informed”[14]
Whereas the IBA guidelines, which is not a legal standard, uses a subjective test as follows:
“If facts or circumstances exist that may, in 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 parties.”[15]
This demonstrates the subjective test that is present within the IBA Guidelines.
The Appeal court stated that the Orange List within the IPA Guidelines does not outline what a fair minded and informed observer would consider adequate disclosure.[16]
Additionally, as mentioned by the lower court judge, situations not outlined in the ‘Orange’ list do not require disclosure. The court goes on to state that since the “single appointment of the Arbitrator by counsel for one party for a different, unrelated arbitration – is not included in the ‘Orange List’ disclosure was not required by the arbitrator”.[17]
Additionally, the lower court incorrectly applied the decision found in Halliburton Company v Chubb Bermuda Insurance Ltd., which stated that disclosure was “legally required where an arbitrator accepts appointments in multiple arbitrations concerning overlapping subject matter with a common party”. [18]
In the lower court decision, the judge explicitly stated that there were no overlapping issues or common parties. Additionally, there were no common parties between the Aroma arbitration and the Sotos Dispute. As the court stated, the Sotos Dispute did not involve a franchise nor the same incident as the Aroma arbitration.
The Court of Appeal went on to address the lower court’s confusion with the failure to disclose a reasonable apprehension of bias.
The court stated that there was not a reasonable apprehension of bias on behalf of the arbitrator, rather, the parties failed to inform the arbitrator of their expectation for disclosure. The court stated “this is simply not a situation of the Arbitrator ignoring obligations to disclose imposed by the objective test, by which he was bound, or even ignoring the parties’ desired level of disclosure” the parties merely never informed the arbitrator of their disclosure expectations.[19]
The court concluded that the reasonable apprehension of bias in Canadian law is determined on an objective standard. As stated before, the objective test is that the apprehension of bias must be a reasonable one, held by reasonable and right-minded persons.[20] In paragraphs 133-144 of this decision, the court discusses the details of this objective test.
Concluding Comments
The Court of Appeal found that the incorrect subjective test was applied by the lower court Judge. The Court of Appeal decision clarified that arbitrator disclosures and disqualification are evaluated on an objective standard.
—
[1] Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc, et al. , 2023 ONSC 1827 [“Aroma 2023”]
[2] Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839 [“Aroma Appeal 2024”]
[3] Aroma 2023 at para 11.
[4] Ibid at para 17.
[5] Ibid at para 21.
[6] Ibid at para 22.
[7] Ibid at para 31.
[8] Ibid at para 35.
[9] Ibid at para 36.
[10] Ibid at para 37.
[11] Ibid at para 59.
[12] Ibid at para 64.
[13] Aroma Appeal at para 10.
[14] Ibid at para 2.
[15] Ibid at para 50.
[16] Ibid at para 53.
[17] Ibid at para 107.
[18] Ibid at para 81.
[19] Ibid at para 124.
[20] Ibid at para 139.
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Written by: Gabriella Banhara
Posted on: December 30, 2024
Categories: Commentary, Mediation
Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839
Introduction
The interesting case of Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc, et al.[1], 2023 ONSC 1827 addressed the standard used by courts to determine an arbitrator’s impartiality over a dispute, as well as their requirement to make disclosure.
In 2024, the Court of Appeal in Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc.[2], 2024 ONCA 839 overturned the lower court decision on the basis that the lower court incorrectly applied the standard to determine an arbitrator’s requirements for disclosure, apprehension of bias, as well disqualification.
Facts
In 2020, a dispute arose amongst the applicants, Aroma Bar Canada Inc., (the “Applicants”) and the Respondents, Aroma Franchise Company Inc., (the “Respondents”) over a franchise Agreement.
While searching for an arbitrator, the parties sought and emphasized the need for a neutral arbitrator to settle their dispute. Fifteen months later, while the arbitration was well underway, the arbitrator emailed the parties his final decision, but inadvertently copied a lawyer from Sotos LLP (“Sotos”), the law firm of the Respondent’s counsel. The lawyer who had been inadvertently mentioned in the email chain had not taken part in the arbitration in any capacity.[3]
After being questioned by the Applicants, the arbitrator admitted he had been retained by the Respondents counsel in his capacity as an arbitrator in a separate and ongoing dispute, which I will refer to as the Sotos Dispute.
The Applicants found this to be a major issue and filed an application to set aside the decision on the basis that they were not provided a reasonable apprehension of bias.[4]
The Issue
The issue to be determined by the court was whether the final award should be set aside due to the lack of impartiality of the arbitrator.[5]
The Court’s Analysis:
According to the UNCITRAL Model Law on International Arbitration, otherwise known as Model law, an arbitral award may be set aside by the court according to Section 34 if:
The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law (Model Law);[6]
The Applicant’s contended that according to the Model Law, if an arbitrator’s conduct led to a reasonable apprehension of bias, the arbitral award may be set aside.
The court analysed whether there was a reasonable apprehension of bias when the Arbitrator failed to disclose to the Applicants that he had been retained in the Sotos Dispute.
In its analysis, the court referenced Article 12 of the Model law which states:
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.[7]
The IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”) provide that arbitrators should make available any conflicts that in the eyes of the parties may give rise to doubts on the arbitrator’s independence.[8]
The IBA guidelines created a system of practical application and scenarios to better understand what an arbitrator must disclose. The system is broken down into three different lists:[9]
The orange list is a non-exhaustive list which states It is vital that an arbitrator evaluate on a case-by-case basis what must be disclosed by an arbitrator.
The Court noted that within the orange level, an arbitrator must, “disclose an appointment made by the same party or the same counsel appearing before an arbitrator, while the case is ongoing… depending on the circumstances…”[10]
Based on such reasoning, the applicants contended that the arbitrator had a duty to discuss the Sotos Dispute since the Sotos engagement was agreed upon while the Aroma matter was ongoing.
During cross-examination, the court reviewed the correspondence of the applicants, which emphasized the requirement of retaining an arbitrator that did not have a prior relationship with counsel to the parties.
The court also referenced the ADR Institute of Canada Code of Ethics which states at Section 6 that a “member shall disclose any interest or relationship likely to affect impartiality or which might create an appearance of partiality or bias”.[11]
Considering these factors, the court determined that there was a reasonable apprehension of bias by the Arbitrator for failing to disclose the Sotos Dispute.
The court concluded by stating that a reasonable, fair minded and informed person in the “applicant’s position would lose confidence in the fairness of the proceeding giving rise to a reasonable apprehension of bias.”[12]
For these reasons the court set aside the arbitration award.
The Appeal:
The Respondents, now referred to as the Appellants, appealed the lower court’s decision.
On Appeal, the court overturned the lower court’s decision on the basis that the judge erred in her application of the reasonable apprehension of bias test. The lower court judge misapplied this test subjectively for impartiality, rather than objectively. [13]
The court’s analysis included the following:
“Article 12(1) of the Model Law sets out an objective test” as it says, “likely to give rise to justifiable doubts as to [the proposed arbitrator’s] impartiality or independence” are to be assessed from the standpoint of a fair-minded and informed”[14]
Whereas the IBA guidelines, which is not a legal standard, uses a subjective test as follows:
“If facts or circumstances exist that may, in 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 parties.”[15]
This demonstrates the subjective test that is present within the IBA Guidelines.
The Appeal court stated that the Orange List within the IPA Guidelines does not outline what a fair minded and informed observer would consider adequate disclosure.[16]
Additionally, as mentioned by the lower court judge, situations not outlined in the ‘Orange’ list do not require disclosure. The court goes on to state that since the “single appointment of the Arbitrator by counsel for one party for a different, unrelated arbitration – is not included in the ‘Orange List’ disclosure was not required by the arbitrator”.[17]
Additionally, the lower court incorrectly applied the decision found in Halliburton Company v Chubb Bermuda Insurance Ltd., which stated that disclosure was “legally required where an arbitrator accepts appointments in multiple arbitrations concerning overlapping subject matter with a common party”. [18]
In the lower court decision, the judge explicitly stated that there were no overlapping issues or common parties. Additionally, there were no common parties between the Aroma arbitration and the Sotos Dispute. As the court stated, the Sotos Dispute did not involve a franchise nor the same incident as the Aroma arbitration.
The Court of Appeal went on to address the lower court’s confusion with the failure to disclose a reasonable apprehension of bias.
The court stated that there was not a reasonable apprehension of bias on behalf of the arbitrator, rather, the parties failed to inform the arbitrator of their expectation for disclosure. The court stated “this is simply not a situation of the Arbitrator ignoring obligations to disclose imposed by the objective test, by which he was bound, or even ignoring the parties’ desired level of disclosure” the parties merely never informed the arbitrator of their disclosure expectations.[19]
The court concluded that the reasonable apprehension of bias in Canadian law is determined on an objective standard. As stated before, the objective test is that the apprehension of bias must be a reasonable one, held by reasonable and right-minded persons.[20] In paragraphs 133-144 of this decision, the court discusses the details of this objective test.
Concluding Comments
The Court of Appeal found that the incorrect subjective test was applied by the lower court Judge. The Court of Appeal decision clarified that arbitrator disclosures and disqualification are evaluated on an objective standard.
—
[1] Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc, et al. , 2023 ONSC 1827 [“Aroma 2023”]
[2] Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839 [“Aroma Appeal 2024”]
[3] Aroma 2023 at para 11.
[4] Ibid at para 17.
[5] Ibid at para 21.
[6] Ibid at para 22.
[7] Ibid at para 31.
[8] Ibid at para 35.
[9] Ibid at para 36.
[10] Ibid at para 37.
[11] Ibid at para 59.
[12] Ibid at para 64.
[13] Aroma Appeal at para 10.
[14] Ibid at para 2.
[15] Ibid at para 50.
[16] Ibid at para 53.
[17] Ibid at para 107.
[18] Ibid at para 81.
[19] Ibid at para 124.
[20] Ibid at para 139.
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