Much has been written about Aroma Franchise Company Inc. et al v Aroma Espresso Bar Canada Inc. et al, 2023 ONSC 1827 ("Aroma") since its release in March of 2023, including by these authors in our previous article (available here).
As noted in our article, the Superior Court set aside certain arbitral awards on the basis of a reasonable apprehension of bias by the arbitrator, stemming from non-disclosure of an additional appointment by the same counsel in an unrelated matter. In our view, this was an important decision that called for further guidance by an appellate court, not least due to the fact that the Superior Court's decision represented a divergence from the direction taken by other, senior courts from other jurisdictions. In practice, it increased the level and frequency of disclosure by arbitrators and counsel in arbitrations in Ontario. As a result, we, like many others in the construction and arbitral community, have been eagerly awaiting the outcome of the appeal.
The wait is now over, with the Ontario Court of Appeal releasing its judgment and allowing the appeal (available at 2024 ONCA 839). Among other things, the Court of Appeal's decision explores the standard for disclosure and for consideration as to whether there exists a reasonable apprehension of bias (an objective test), the relationship between disclosure and bias (the former is relevant to, but not determinative of, the latter), and the limitations of the IBA Guidelines as a tool for assessing bias and disclosure obligations.
Below, we review Aroma's key takeaways.
Brief Factual Background
In our article on the Superior Court decision, we reviewed the factual background in some detail. For purposes of this case comment, the relevant facts can be summarized as follows.
Aroma Espresso Bar Canada Inc. ("Aroma Canada") was the master Canadian franchisee of Aroma Franchise Company Inc. ("Aroma Franchisor"). A dispute arose between the two parties regarding their master franchise agreement, which resulted in an arbitration run by a sole arbitrator (the "First Arbitration") under the International Commercial Arbitration Act, 2017 (given that the Aroma Franchisor was not a Canadian entity) seated in Ontario.
Notably, in preliminary discussions between the parties' counsel regarding who to select as arbitrator, Aroma Franchisor's counsel rejected one proposed candidate on the basis that the candidate's history of prior appointments by the firm of Aroma Canada's counsel constituted a "long-standing business relationship". Counsel for Aroma Canada rejected that characterization, but the parties in any event moved on to consider other candidates. Importantly, none of the correspondence associated with these discussions was provided to the arbitrator who was ultimately selected.
After considering and rejecting certain other candidates, the parties' counsel eventually arrived at consideration of the arbitrator who would later be selected (the "Arbitrator"). Counsel for Aroma Franchisor recommended the Arbitrator for consideration by Aroma Canada. Upon receiving and considering this recommendation, counsel for Aroma Canada advised that Aroma Canada agreed to the appointment on the condition that counsel for Aroma Franchisor provide details as to the source of the recommendation. Counsel responded to (and seemingly satisfied) this condition, resulting in the parties' ultimate appointment of the Arbitrator. Notably, the parties did not conduct a pre-appointment meeting with the Arbitrator before retaining him.
Seventeen months after the First Arbitration began, the Arbitrator was retained by counsel for Aroma Franchisor as a sole arbitrator on another, entirely separate dispute (the "Second Arbitration"). Neither Aroma Canada nor Aroma Franchisor was a party to the Second Arbitration, nor did the Second Arbitration involve any issues that meaningfully overlapped with the First Arbitration. The Arbitrator did not disclose his engagement on the Second Arbitration to the participants of the First Arbitration.
Just prior to releasing his final award for the First Arbitration, the Arbitrator emailed counsel for both parties. In his email, the arbitrator inadvertently copied a lawyer from the same firm as counsel for Aroma Canada (which lawyer was working on the Second Arbitration and not the First Arbitration). This inadvertent inclusion raised the concern of Aroma Franchisor's counsel.
Through subsequent correspondence, the Arbitrator disclosed that he had been retained as arbitrator in respect of the Second Arbitration after the First Arbitration was underway. The Arbitrator further noted that counsel for Aroma Canada in the First Arbitration had "involvement from time to time" in the Second Arbitration, rather than day-to-day carriage. The Arbitrator also expressed the view that there was no overlap in the issues presented by the First Arbitration and the Second Arbitration, and that he was unaware of any connection between the parties in the two arbitrations.
Aroma Franchisor applied to set aside the Arbitrator's final award, as well as his costs award, on the basis of a reasonable apprehension of bias stemming from his engagement in (and just as importantly, his non-disclosure) of the Second Arbitration.
Decision of the Court Below
The application judge found in favour of Aroma Franchisor, concluding that the final award and cost awards should be set aside. In reaching this conclusion, the application judge concluded that (1) the Arbitrator should have disclosed the existence of the Second Arbitration (and his related retainer) to Aroma Franchisor, and (2) that this lack of disclosure, when considered in the full context of this matter, resulted in a reasonable apprehension of bias.
On the first issue, the application judge first reviewed the applicable section of the Model Law (being Article 12), as well as the IBA Guidelines on Conflicts of Interest, before reviewing the particular circumstances of this case. She considered the parties' correspondence regarding arbitrator selection (including Aroma Franchisor's concern about a "business relationship" between any potential arbitrator and the firm of Aroma Canada's counsel), and accepted evidence from Aroma Franchisor's CEO that had he known of any other engagement of the Arbitrator by Aroma Canada's counsel, he would not have supported the Arbitrator's appointment in the First Arbitration. As a result, the application judge concluded that the disclosure of the Second Arbitration engagement was warranted.
On the second issue, the application judge acknowledged that the presumption of impartiality applies to arbitrators, and that the simple fact of the Arbitrator accepting another, unrelated appointment from the same law firm did not in and of itself give rise to an apprehension of bias. However, she concluded that on the facts of this case, the presumption had been displaced and that a reasonable apprehension of bias had arisen in the circumstances. In that regard, she referred to the evidence of Aroma Franchisor's CEO (noted above), as well as the fact that the Arbitrator would be earning additional compensation as a result of the Second Arbitration.
Ultimately, the application judge emphasized the importance of the parties' pre-appointment correspondence on any prior dealings with any prospective arbitrator, as well as the fact that the Second Arbitration remained undisclosed for over a year, concluding that a reasonable apprehension of bias would exist in the mind of a fair-minded and informed person. Accordingly, she set aside the final award and cost award in the First Arbitration and directed that a new arbitration be conducted by a new arbitrator.
Aroma Canada appealed the decision to the Court of Appeal.
The Court of Appeal
On appeal, the Court of Appeal analyzed the matter according to essentially the same structure as the application judge (i.e. whether disclosure was warranted, followed by whether a reasonable apprehension of bias had arisen).
On the first issue, the Court of Appeal began by confirming that the analysis centers on the legal regime that governs the arbitration – in this case, the Model Law. In that context, Article 12(1) requires the arbitrator to "disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence." By contrast, Article 12(2) permits challenges to the arbitrator "if circumstances exist that give rise to justifiable doubts as to his impartiality or independence". In that regard, the Court highlighted that Article 12(1) presents a lower threshold insofar as it extends to circumstances that are likely to give rise to justifiable doubts (whereas Article 12(2) is limited to circumstances that do give rise to justifiable doubts).
The Court of Appeal recognized the UKSC's decision in Chubb v Halliburton, [2020] UKSC 48 as persuasive authority in this regard, given the UKSC's finding in Halliburton that English common law on an arbitrator's duty to disclose should develop consistently with the Model Law. With that in mind, the Court of Appeal agreed with the UKSC in Halliburton that Article 12(1) of the Model Law sets out an objective test (i.e. to be assessed from the perspective of a "fair-minded and informed" third party), rather than a subjective one.
By contrast, the Court of Appeal observed that the IBA Guidelines are not a legal standard, do not give rise to legal obligations, and do not override national law or the arbitral rules chosen by the parties. This distinction was particularly important in light of the fact that the objective standard for disclosure in Article 12(1) differs from the IBA Guidelines insofar as the latter provides a subjective test to the effect that "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" (emphasis added). In other words, the Model Law relies upon the perspective of a third-party observer, while the IBA Guidelines – perhaps out of an laudable abundance of caution – rely upon the subjective perspective(s) of the parties.
That being said, the Court of Appeal did not discount the IBA Guidelines entirely, affirming instead that their red/orange/green 'stop-light' system remained valuable so long as they were interpreted through the lens of the Model Law's objective test.
On the facts of this case, the Court of Appeal concluded that the application judge did not apply an objective test, but rather applied the subject test of the IBA Guidelines. This reliance on the subjective test in turn led the application judge to improperly rely upon the parties' pre-appointment correspondence and the evidence of Aroma Franchisor's CEO, with the former never having been shared with the Arbitrator.
On the latter point, the Court of Appeal confirmed that correspondence of which the Arbitrator was not reasonably aware could not be germane to the question of whether disclosure was warranted; the analysis needed to consider what the parties actually communicated to the Arbitrator, and what they chose not to communicate to him (a point that is critical to a number of issues related to arbitration practice generally, and is further discussed below).
In addition, the Court of Appeal rejected Aroma Franchisor's reliance on General Standards 7(b) and (d) of the IBA Guidelines, which respectively dictate that (1) each party is required to perform reasonable inquiries and provide all relevant information available to it in order to facilitate the disclosure process, and (2) an arbitrator is obligated to make similar inquiries, such that failure to disclose a conflict is not excused by lack of knowledge where the arbitrator fails to make such inquiries.
Applying the objective test, the Court of Appeal concluded that the Arbitrator had no duty to disclose the Second Arbitration, since it did not involve any party to the First Arbitration and there was no meaningful overlap of issues. The overlap of counsel was not sufficient to trigger a duty to disclose.
Furthermore, the Court of Appeal distinguished this case from Halliburton (where the arbitrator had accepted multiple appointments from the same party in relation to claims arising from the same incident and involving the same form of insurance policy) and the more recent decision of Aiteo Eastern E & P Company Ltd. v. Shell Western Supply and Trading Ltd. & Ors, [2024] EWHC 1993 which had been raised by Aroma Franchisor in the appeal in support of its position. In this latter case, the arbitrator had accepted but not disclosed multiple appointments by the same firm and had also accepted multiple retainers to act as an expert or quasi-co-counsel to that firm.
With respect to the IBA Guidelines, the Court of Appeal similarly concluded that neither the Guidelines nor their associated commentary led to the conclusion that disclosure was required in this case. The Orange List suggests disclosure if the same counsel or law firm has appointed the same arbitrator three or more times within the past three years, as opposed to the single appointment following the First Arbitration. The commentary similarly evinces a theme of what the Court of Appeal identified as a "critical mass of appointments", such that the Court of Appeal was not persuaded by one germane section of the commentary which stated that "an appointment made by the same party or the same counsel appearing before an arbitrator, while the case is ongoing, may also have to be disclosed, depending on the circumstances". Read in context, this referred to situations more similar to Halliburton, with overlapping parties and/or issues.
Similarly, the Court of Appeal denied that there was anything untoward arising simply by virtue of two appointments in unrelated matters, rejecting the propositions that (1) counsel appointing the arbitrator will have the benefit of additional time before the arbitrator and (2) counsel is arranging for an income-producing engagement that would benefit the arbitrator personally. On the latter point, it is well-accepted that arbitrators are paid for their services.
On the second issue (reasonable apprehension of bias), the Court of Appeal repeated its observation that the threshold for challenging an arbitrator on grounds of bias is higher than the test for disclosure, because the latter extends to circumstances likely to give rise to justifiable doubts while the former is limited to circumstances that do give rise to such doubts. As a result, a finding that an arbitrator failed to disclose is a relevant, but not determinative factor to the bias inquiry.
This analysis applies even where the parties have adopted a different standard for disclosure than that set out in the Model Law, so long as the arbitrator has been made aware of the modified standard and is aware of the facts that would be relevant to that modified standard. In this case, even if one were to accept the subjective test for disclosure, the Arbitrator was never informed of the parties' expectations and therefore could not be said to have ignored those expectations – he was never aware of them.
Accordingly, the Court of Appeal allowed the appeal and reinstated the Arbitrator's awards, subject to remitting back to the Superior Court a narrower set of issues pertaining to procedural fairness and an improper finding by the Arbitrator that one of the appellants was not a proper party to the arbitration.
As a result of the foregoing, the Court of Appeal concluded that there was no reasonable apprehension of bias in this case.
The Court did affirm, however, that unlike the issue of disclosure, the bias inquiry will always entail an objective test (which fact is also affirmed in the IBA Guidelines), and will not admit of the parties' subjective views.
Conversely, the Court rejected Aroma Franchisor's argument on appeal that privately-appointed arbitrators do not benefit from same presumption of impartiality as judges and other adjudicators whose mandate is derived from statute, noting that this argument would undermine the integrity of a dispute resolution system that is endorsed by the legislature.
Analysis and Commentary
The Court of Appeal's decision in Aroma will be welcomed by many arbitration practitioners – particularly those in specialized practice areas (like construction law) where the subject matter is highly specialized and the small pool of arbitrators with relevant expertise results in repeat appointments being not uncommon, as well as a general acquaintance with both parties and counsel.
The decision is also welcome for the clarification that it provides regarding (1) the standard for disclosure and reasonable apprehension of bias (objective test), (2) the relationship between the latter two (the former is relevant to, but not determinative of, the latter), and (3) the limitations of the IBA Guidelines.
That being said, some readers may lament the fact that the Court of Appeal did not provide a more definitive defence of repeat appointments, for precisely the reasons noted above – i.e., that specialized industries rely upon a fairly narrow pool of arbitrators and therefore engage in repeat appointments for entirely legitimate reasons. While the Court of Appeal's analysis was undoubtedly consistent with the relevant authorities (including, for example, the IBA Guidelines' caution against three or more appointments by counsel within a three-year period), the decision nevertheless gives rise to a residual concern that parties may employ what the Court in Halliburton referred to as "opportunistic or tactical challenges" for strategic purposes (e.g., to eliminate qualified arbitrators in favour of ones less familiar with the subject matter of the dispute).
On balance, Aroma continues to underline the importance of continuous disclosure by arbitrators, which issue remains equally important (and top of mind) notwithstanding that the Court of Appeal's decision has seemingly relaxed the applicable standard to some extent. Ultimately, it remains incumbent upon parties to be clear about whether they expect a level of disclosure that diverges from the applicable authorities.
In any event, Aroma still raises certain interesting issues.
First, with respect to objective versus subjective tests, the Court's discussion raises the age-old question of how to specifically characterize and contextualize a reasonable third-party observer. In this case, and for good reason, the Court of Appeal appears to have characterized the "fair-minded observer" as someone who takes into account the perspectives of both the parties and the arbitrator.
However, it is worth raising the question of whether the "fair-minded observer" could still be construed as "objective" if they were to only consider the explicitly-stated (e.g., in written correspondence) expectations of the parties, without consideration of the arbitrator's perspective. On the one hand, this seems intuitively unfair for the reasons articulated by the Court of Appeal; on the other hand, however, this approach would not require any attempt to gaze into the parties' minds, given that both parties have explicitly stated their expectations to one another (but not the Arbitrator). In such circumstances, the parties' expectations and views are, at least arguably, objectively stated; with that in mind, it is perhaps debatable that Aroma Franchisor's views were entirely "subjective considerations" (insofar as they had been shared with their opposing party).
Second, the Court of Appeal's reference to – and distinction of – Aiteo is an interesting one since it is somewhat debatable as to how the arbitrator's expert advisory retainer(s) in that case ought to be characterized. As we have discussed in a previous article (available here), it was not entirely clear in that case whether the arbitrator was acting as a testifying expert or a consulting expert, although as the Court of Appeal in Aroma observed, the UK Court described her role as somewhat akin to "co-counsel". This question is of particular importance since, presumably, a testifying expert could be presumed to be independent and impartial, subject to being challenged by an opposing party on those bases; by contrast, a consulting expert would likely not be afforded the same deference. Accordingly, it is worth querying the extent to which Aiteo was distinguished in this case.
Third and finally, it is noteworthy that the Court of Appeal concluded (somewhat summarily) that privately-appointed arbitrators are entitled to a strong presumption of impartiality, notwithstanding that their mandate is distinct from those adjudicators whose mandate flows from statute. While this makes good sense from the practical perspective of preserving the integrity of arbitration as a separate dispute resolution system – a point observed by the Court of Appeal – it is worth considering how this presumption interacts with the standard for proving a reasonable apprehension of bias. Presumably, these are two sides of the same coin, and simply affirms the fact that the burden of proof rests with the challenging party to rebut the presumption. However, it will be interesting to see if counsel in future cases devise any creative arguments to explore this potential ambiguity.
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.
