ARTICLE
27 December 2024

Smells Like Bias? The Ontario Court Of Appeal's Decision In Aroma Sets Out The Rules Regarding Arbitrator Bias

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In Aroma Franchise Company Inc. v Aroma Espresso Bar Canada Inc., 2024 ONCA 839, the Ontario Court of Appeal weighed in on the issue of arbitrator...
Canada Corporate/Commercial Law

In Aroma Franchise Company Inc. v Aroma Espresso Bar Canada Inc., 2024 ONCA 839, the Ontario Court of Appeal weighed in on the issue of arbitrator bias in the context of a tumultuous franchise dispute. The Court overturned a lower court ruling that set aside an arbitration award due to a reasonable apprehension of bias in respect of the arbitrator. This appellate decision provides helpful guidance to franchise (and, generally, all commercial) parties with respect to what legally constitutes bias in the Canadian arbitration context.

Facts

Aroma Espresso Bar Canada (the Appellant) and Aroma USA (the Respondent) were party to a Master Franchise Agreement (the MFA). The Respondent terminated the MFA and the Appellant took the position that the termination was unlawful. The dispute went to arbitration before an arbitrator jointly selected by the parties. Sometime after the commencement of the arbitration, but before the award was released, the Appellant's counsel approached and appointed the same arbitrator to determine another arbitration on an unrelated matter involving unrelated parties. The Respondent was not aware of the second appointment.

The Appellant ultimately prevailed in the arbitration. In the course of correspondence surrounding the arbitral award, the arbitrator inadvertently disclosed his involvement in the other arbitration. The Respondent applied to the Ontario Superior Court to set aside the award on the ground of "reasonable apprehension of bias."

The application judge found for the Respondent and set aside the award, relying on Article 12 of the Model Law governing international commercial arbitrations and the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines) and finding that the circumstances required the arbitrator to disclose his involvement in the other arbitration and gave rise to a reasonable apprehension of bias. The Appellant appealed.

Analysis

The Court of Appeal reversed the decision and upheld the arbitral award, emphasizing on the objective nature of the tests to find a duty to disclose and reasonable apprehension of bias. Although related, they are different in concepts and applications.

Under the Model Law, an arbitrator has a duty to disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence" at the time they are approached for an appointment. The test is objective, and considers whether a fair-minded and informed observer is likely to consider that the circumstances give rise to justifiable doubts as to the proposed arbitrator's impartiality or independence." The IBA Guidelines, on the other hand, impose a subjective element and consider whether facts or circumstances exist that may, in the eyes of the parties, give rise to doubts about an arbitrator's impartiality or independence.

The Court of Appeal found that the application judge had primarily grounded her determinations in her application of the IBA Guidelines and in other subjective considerations. However, those guidelines had not been adopted by the parties. While those guidelines provided useful information as to how the international arbitration community may address issues of this nature, they could not change the governing objective test prescribed by the Model Law.

Applying that test, the Court of Appeal found the circumstances of this case (where the two arbitrations involved no overlapping parties or meaningful overlap of issues) were insufficient to trigger the arbitrator's duty to disclose. The Court also observed that "the legal duty to disclose covers a wider array of circumstances than those in the end will justify disqualification for reasonable apprehension of bias." Therefore, a finding of a duty to disclose is relevant to, but not determinative of, a finding of reasonable apprehension of bias.

The Court then canvassed some key principles for the test for reasonable apprehension of bias in Canada (which is distinct from the test for a duty to disclose), noting that the test is objective; there is strong presumption of impartiality applied to the arbitrator; and the subjective views of the parties are not relevant. For the same reasons that there was no duty to disclose, there was also no reasonable apprehension of bias.

Takeaways

This case provides important clarification to the tests for reasonable apprehension of bias and duty to disclose a conflict of interest, confirming that the standards are objective and not easily met. If a party to a franchise agreement or other agreement with an arbitration clause would like to ensure a subjective standard is applied or that a specific level of disclosure is required, they should expressly adopt disclosure standards that would make that clear or make that disclosure a required term of the arbitrator's appointment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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