Canada: Ontario Court Dismisses Application To Set Aside Award, Then Punishes Applicant With Indemnity Costs For "Baseless" Challenge To Arbitrator's Impartiality

In Jacob Securities v Typhoon Capital, 2016 ONSC 604 ("Jacob 1") the Ontario Superior Court dismissed an application challenging the legitimacy of an international arbitration Final Award and the awarding arbitrator's impartiality.

The Court then, in Jacob Securities v Typhoon Capital, 2016 ONSC 1478 ("Jacob 2"), ordered the unsuccessful applicant to pay partial indemnity costs for what the Court called a "baseless" application.

Background

The applicant, Jacob Securities Inc. ("Jacob") was a Canadian investment bank specializing in providing financial advisory services to renewable energy companies. The respondent, Typhoon Capital B.V. ("Typhoon Capital"), was a company based in Amsterdam, Netherlands that carried on business in the renewable energy sector. Its wholly-owned subsidiary, Typhoon Offshore B.V. ("Typhoon Offshore"), developed offshore wind projects in the North Sea (Typhoon Capital and Typhoon Offshore will be collectively referred to as "Typhoon").

A dispute arose between the parties relating to the applicant's entitlement to compensation under an Engagement Agreement entered into by the parties for equity project financing provided by Northland Power Inc. and Northland Capital Inc. ("Northland") to Typhoon Offshore for a wind energy project ("Project Gemini"). Jacob claimed it was entitled to compensation for its role in introducing Northland to Typhoon, and Northland's subsequent investment and financial participation in Project Gemini. The applicant submitted a Notice of Request to Arbitrate pursuant to the arbitration clause in the Engagement Agreement in October 2013.

The arbitration was governed by Ontario's International Commercial Arbitration Act, RSO 1990, c I-9 (the "Act").

Upon his nomination, the arbitrator advised the parties that he had had no previous dealings with either of them and, accordingly, had no conflict. He further offered to check for conflicts with the principals of all of the corporations involved in the dispute and, after doing so, revealed that no conflicts were found.

The arbitration hearing was held on June 23-25, 2014.

On September 26, 2014, the arbitrator released his reasons and order, dismissing Jacob's claims against Typhoon, and retaining jurisdiction to deal with any submissions related to costs or arising from the Reasons for Decision. The arbitrator's Final Award was released on October 20, 2014, again dismissing Jacob's claim, and confirming the parties' agreement regarding costs.

For over 40 years, until his retirement on December 31, 2012, the arbitrator had worked at McCarthy Tetrault LLP ("McCarthys") as a litigator. Although he had withdrawn from the partnership in 2008, he continued in practice as Senior Counsel until he retired.

After the Final Award was issued, Jacob learned that McCarthys had acted in five previous transactions involving Northland on behalf of certain underwriters and in one transaction acting directly for Northland. Specifically, in 2012, while the arbitrator was senior counsel at McCarthys, his firm represented underwriters in the Project Gemini transaction, including in the filing of a Short Form Base Shelf Prospectus and a Prospectus Supplement.

Jacob brought its application to challenge the Final Award on January 20, 2015 pursuant to Articles 12, 13, 18, 34, and 36 of Schedule 1 (the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on June 21, 1985) of the Act (the "Model Law").

Jacob's main argument was that there was a reasonable apprehension of bias given (a) the arbitrator's connection to McCarthys for many years, (b) the firm's involvement with the Project Gemini transaction, and (c) that the arbitrator did not properly investigate the possibility of a conflict with McCarthys.

At the application, evidence was provided by McCarthys that:

  1. Former lawyers of McCarthys (partners, former associates, counsel) are not able to search for conflicts at the firm;
  2. The arbitrator contacted McCarthys only after the allegation of reasonable apprehension of bias was made;
  3. McCarthy's only acted for Northland once, and that was from 2003 to 2005 (there was one docket entry for 30 minutes in 2007);
  4. McCarthys acted for certain underwriters in various offerings of securities issued by Northland Power Income Fund between 2003 and 2006;
  5. McCarthys acted for certain underwriters in four offerings of securities issued by Northland Power Inc. between 2012 and 2015, including Project Gemini; and
  6. The arbitrator was not personally associated with any of the work done by McCarthys in respect of Project Gemini or for Northland.

Decision

The Court's Jurisdiction

The Court noted that issues of bias are properly addressed under Articles 12 and 13 of the Model Law, which provide that an arbitrator may be challenged if circumstances exist that give rise to justifiable doubts regarding an arbitrator's independence and impartiality. However, Article 13(2) provides that a party who intends to challenge an arbitrator following his appointment must do so within 15 days of becoming aware of circumstances giving rise to doubts about his or her impartiality.

The Court held that the applicant failed to bring a timely challenge but that, had it done so, the arbitrator would have had an opportunity to respond, and had the arbitrator not responded to the applicant's satisfaction, the applicant could have applied to the Court at that time.

The Court ultimately determined, however, that it had jurisdiction under Article 34 of the Model Law to hear the application challenging the Final Award as a claim of reasonable apprehension of bias could also be framed as a claim of unequal treatment contrary to Article 18 of the Model Law.

Reasonable Apprehension of Bias

The Court noted that it was not unusual for arbitrators to be members of law firms and that it was sometimes appropriate for arbitrators to be removed on the ground of a reasonable apprehension of bias because of work undertaken by lawyers in their firms.

In this case, however, the Court found that the evidence was clear that the arbitrator was not personally involved with any of the work done by his former firm relating to Project Gemini.

The Court determined that the arbitrator's failure to disclose that his former firm had a relationship with one of the witnesses (Northland's Chief Financial Officer) in the arbitration was also not sufficient to raise a reasonable apprehension of bias or suggest unequal treatment.

The Duty to Investigate

The Court explained that although an arbitrator who is a practicing member of a law firm has a duty to investigate possible conflicts at that firm, this duty does not extend to searching for conflicts at former law firms.

The Court noted that arbitrators "cannot possibly know or be expected to know every client that their former firms acted for" and that it would be inappropriate for arbitrators to be required to search for conflicts at their former firms, even in cases where it was theoretically possible.

The Court also noted that law firms owe an obligation to their clients not to disclose confidential information to third parties, which would include former partners and lawyers. Furthermore, parties to a private arbitration might have confidentiality concerns of their own about their names being run through the conflict search system of a firm that an arbitrator is no longer a member of.

The Costs Award

In Jacob 2, Jacob argued that, while unsuccessful, its application raised an important and novel issue as to the obligation of an arbitrator to determine potential conflicts that might arise in the course of arbitration proceedings where the arbitrator's past firm or firms had acted for parties or potential witnesses in the arbitration proceeding.

The Court reasoned that while the case may have been on the dividing line between a speculative claim and one that raised bona fide untested issues, "the fact remains that the applicant purposefully went out looking for some reason to be able to challenge an award which, because it was an international arbitral award, was not susceptible to appeal".

The Court, having already determined that the application was a "thinly disguised attempt to avoid the consequences of an adverse decision of the merits" held that a partial indemnity costs award (CDN $55,000.00) was appropriate to deter losing parties in international commercial arbitrations from launching "baseless . . . challenges to an arbitrator's impartiality".

Comment

Two commonly recognized advantages of arbitration are (a) the ability of parties to choose an arbitrator and (b) certainty and finality in the final result subject to very limited appeal rights.

The Court recognized both of these advantages and noted that parties to an international arbitration, particularly under the Act and the Model Law, can expect potential arbitrators to search for and disclose any possible conflicts before accepting a nomination but that this expectation must be realistic, particularly considering the duty of confidentiality law firms have to their clients.

Additionally, the Court's decisions confirmed that, subject to very rare exceptions, once an arbitration award has been handed down, the ability of a party to challenge either the award or the arbitrator that provided it is extremely limited. Doing so on the ground of disappointment without merit can have costly consequences.

Neither of the Court's decisions have been challenged and the appeal deadline has passed.

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