Requiring Arbitrators To "Strictly Enforce" An Agreement Does Not Limit Their Jurisdiction To Interpret It

Applications to set aside international arbitral awards often raise a familiar tension. As no appeal on the merits is allowed in such cases, the applicant will often claim the arbitral tribunal exceeded its jurisdiction by not applying the terms of the contract or that it failed to give adequate reasons for its award. The respondent will often answer that the application is an appeal in disguise. Courts must exercise their limited supervisory role to limit jurisdiction and preserve procedural fairness while protecting the core advantages of arbitration, including expert decision-making, finality and efficiency.

In a recent Ontario decision arising from the long running Aroma franchise dispute, the applicant seized on a clause in the franchise agreement providing that the "arbitrator shall be bound by, and shall strictly enforce the terms of this Agreement and shall not limit, expand or otherwise modify its terms".¹ It argued that the arbitrator's decision was a failure to apply the terms of the agreement, resulting in an excess of jurisdiction. It also argued that the arbitrator's reasoning was deficient, leading to a lack of procedural fairness.

The Ontario Superior Court of Justice declined to set aside the award, holding that arbitrator had engaged in contractual interpretation and not a modification of the agreement.² It also held that alleged deficiencies in reasoning must identify a genuine failure to address material issues rather than an error in the arbitrator's analysis.³

Background

The dispute arose from a Master Franchise Agreement governing the operation of an international coffee shop brand in Canada. After disagreements concerning sourcing and termination rights, the franchisee commenced an arbitration seated in Ontario under theInternational Commercial Arbitration Act, 2017, which implements the widely adopted UNCITRAL Model Law on International Commercial Arbitration (the "Model Law"). Following a lengthy evidentiary hearing, the arbitrator concluded that the termination of the Master Franchise Agreement was wrongful and awarded substantial damages, together with statutory damages. The arbitrator a later rendered a separate award on interest and costs.4

During the arbitration, the arbitrator accepted a separate appointment in an unrelated matter involving the same law firm acting for the franchisor. The appointment was not disclosed when it was accepted and came to light shortly before the Final Award was released, following correspondence concerning a draft of the award. The franchisor applied to set aside the awards under Article 34 of the Model Law, alleging reasonable apprehension of bias, excess of jurisdiction, and inadequate reasons.

In 2023, the Superior Court set aside the awards on the basis of reasonable apprehension of bias.⁵ The Court of Appeal reversed that decision in 2024 and reinstated the awards, holding that, from the standpoint of a fair minded and informed observer, the unrelated appointment did not give rise to justifiable doubts as to impartiality. Because the awards had been set aside solely on the bias ground, the Court of Appeal remitted the remaining issues to the Superior Court, including the excess of jurisdiction and reasons challenges.⁶

No Excess of Jurisdiction

Article 34(2)(a)(iii) of the Model Law permits a court to set aside an award where it "deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration." Relying on the clause requiring strict enforcement of the agreement and prohibiting modification of its terms, the applicants argued that, by finding the franchisee's cancellation of supply orders to be a breach while also concluding that the franchisor's termination was wrongful, the arbitrator had effectively rewritten the contractual bargain.

The Court emphasized that, although jurisdictional questions are reviewed for correctness, courts must intervene only in "rare circumstances where there is a true question of jurisdiction," and must take a narrow view of what qualifies as such a question.⁷ Jurisdiction is engaged only where a tribunal decides a dispute not submitted to it or grants relief beyond the scope of the arbitration. It is not engaged merely because a party contends that the tribunal misinterpreted the contract or misapplied the law – notwithstanding the clause directing the arbitrator to strictly enforce the agreement and not modify it. The inquiry is therefore whether the award strayed beyond the submission to arbitration, not whether it decided a submitted issue correctly.

Here, the arbitration had been convened to determine whether the agreement had been breached and whether termination was justified under the termination clause. The arbitrator addressed those questions directly. He interpreted the scope of the termination right in light of the parties' contractual language, their course of dealings, and the statutory duty of fair dealing, and concluded that termination was exercised arbitrarily and in bad faith. That conclusion did not reflect a modification of the agreement, but an interpretation of it in context.

Reading the award as a whole, the Court held that the arbitrator decided the very issues the parties had submitted to him. The applicants' complaint therefore went to the correctness of the interpretation reached, not to jurisdiction, and did not engage Article 34(2)(a)(iii).

No Inadequacy of Reasons

Article 34(2)(a)(iv) of the Model Law permits a court to set aside an award where the arbitral procedure was not in accordance with the Model Law, including the requirement in Article 31(2) that the award state the reasons upon which it is based. The applicants contended that this requirement was not satisfied. They argued that the arbitrator failed to properly engage with the evidentiary record, did not adequately address their confidentiality allegations, provided insufficient analysis to support findings of bad faith, and offered inadequate explanation for the damages and costs determinations.

The governing question, however, was not whether the reasons resemble appellate judicial analysis or respond to every submission in detail. Instead, the Court held that the inquiry was whether the award demonstrated that the tribunal understood the issues before it and explained, in a manner intelligible to the parties, why it reached the result it did.⁸ Article 34 does not permit a party to relitigate the merits under the guise of procedural insufficiency.

The Final Award identified the central issues, summarized the contractual and statutory framework, and made detailed factual findings concerning the parties' relationship and the termination decision. The arbitrator explained why the termination right was exercised arbitrarily and in bad faith, addressed the competing damages theories, and gave reasons for preferring one expert approach over another. Although the applicants pointed to alleged omissions and inconsistencies, those criticisms concerned the persuasiveness of the analysis rather than the existence of reasons.

The Court concluded that the awards satisfied the Model Law standard. Disagreement with the conclusions reached did not amount to a failure to provide reasons, and Article 34(2)(a)(iv) was not engaged.

Practical Implications

Contracting parties desiring commercial certainty may hope to achieve that result by adding clauses requiring an arbitral tribunal to strictly enforce, and not modify, the terms of an agreement. These clauses may be intended to restrain arbitrators from liberal interpretation of contract language or from searching for an equitable result. The latest decision in the Aroma saga, however, demonstrates that courts will not use these clauses as grounds to reconsider the merits of arbitral decision-making.

In arbitrations involving parties within the same Canadian province, domestic arbitration legislation allows parties wishing to preserve their rights of appeal on questions of law or mixed fact and law to provide for such an appeal in their contract. No such right is available in international contracts providing for arbitration under the Model Law. Where a tribunal acts within its mandate and addresses the parties' arguments, its award will stand, irrespective of the merits of its reasoning. Parties to international contracts wishing to ensure greater commercial certainty may wish to provide for a three-person arbitral tribunal, if the amounts in dispute are likely to be sufficiently large, to minimize the risk of a poorly reasoned decision that remains within the arbitral tribunal's jurisdiction.

Footnotes

1. Aroma Franchise Company, Inc. et al v. Aroma Espresso Bar Canada Inc. et al, 2026 ONSC 768 at para 44

2. 2026 ONSC 768 at para 47.

3. 2026 ONSC 768 at para 64.

4. Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al., 2023 ONSC 1827at paras 6-19.

5. 2023 ONSC 1827at paras 90-91.

6. Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839.

7. 2026 ONSC 768 at para 43.

8. 2026 ONSC 768 at paras 53-56.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025