Introduction
A recent decision from the Court of Appeal for Ontario (2024 ONCA 839) has clarified the test for determining whether there is a reasonable apprehension of bias on the part of an arbitrator, as well as the test for determining whether circumstances have given rise to justifiable doubts in the arbitrator’s impartiality.
The court held that failure on the part of an arbitrator to disclose a circumstance which may give rise to a reasonable apprehension of bias is a relevant but not a determinative factor indicating bias.
The Facts
In 2007, Aroma Espresso Bar Canada Inc. (“AE”) and Aroma USA, Inc. entered into a Master Franchise Agreement, which Aroma USA, Inc. subsequently assigned to Aroma Franchise Company Inc. (“AF”). AE was the master Canadian franchisee, acting as a “middleman” between AF and the individual Aroma franchise owners in Canada.
A dispute arose when AE cancelled supply orders from its sole supplier for the last 12 years, and AF took steps under the Master Franchise Agreement to terminate the agreement and assume AE’s role itself. AE also alleged that AF had breached the agreement prior to delivery the notice of default to AC.
The Master Franchise Agreement contained an arbitration clause which provided, among other things, that, “[t]he arbitrator must be either a retired judge, or a lawyer experienced in the practice of franchise law, who has no prior social, business or professional relationship with either party.”
After terminating the agreement, the parties began discussions around arbitration and selecting an arbitrator. There was significant correspondence regarding the selection of an arbitrator, as counsel for AE wanted the arbitrator to have no prior relationship not only with either party, but also with counsel for either party.
Eventually, the parties selected an arbitrator with no relationship with either party, counsel, or counsel’s firm. The arbitration took place and went on in the normal course. However, issues arose shortly before the release of the Final Award. The arbitrator emailed the parties to advise them there were some costs to be paid before the Final Award could be released; in this email, he mistakenly added another lawyer to the email chain. This lawyer was at the firm representing AF, but was not part of the arbitration between the parties.
When counsel for AE asked about this new individual on the email thread, it was revealed that 17 months into the arbitration, the firm representing AF engaged the arbitrator as an arbitrator in another matter. The arbitrator explained to counsel that the two arbitrations contained completely different parties and were in regard to completely unrelated events and contractual relationships.
Despite this, counsel for AE advised, after receipt of the Final Award, that they would be applying to set aside the Final Award on multiple bases, including a reasonable apprehension of bias.
The Application Judge’s Decision and Errors
Justice Steele of the Ontario Superior Court of Justice heard the application to set aside on January 11-13, 2023, and released Her Honour’s decision on March 20, 2023.
In coming to the decision, Justice Steele applied article 12(1) of the UNCITRAL Model Law on International Arbitration, which provides that “[the arbitrator] shall disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence,” and article 12(2), which permits a challenge to an arbitrator or to an award “if circumstances exist that give rise to justifiable doubts about the arbitrator’s impartiality.”
The first question before the court was whether there was a duty to disclose the subsequent appointment. In answering this question, Justice Steele also relied upon the International Bar Association Guidelines on Conflicts of Interest in International Arbitration; specifically, she quoted General Standard 3(a), which provides that, “[i]f 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 other parties…” [emphasis added].
Because Justice Steele applied this standard, Her Honour looked at the email correspondence between the two parties while they were in the process of selecting an arbitrator. Her Honour found that since the two parties were very clear about not only not wanting the arbitrator to have any relationship with the parties, but also with counsel, the arbitrator did have a duty to disclose the second arbitration.
The second question before the court was whether the arbitrator’s failure to disclose the other arbitration amounted to justifiable doubts about his impartiality. Justice Steele made her finding on this issue based on the same circumstances of her finding on the first question: that, because of the parties’ insistence on an arbitrator unknown to the parties or their counsel, and the arbitrator’s failure to disclose his subsequent relationship with counsel for AF, that a reasonable person in the respondents’ position would have lost confidence in the fairness of the arbitrator, and that there were justifiable doubts about his impartiality which allowed Her Honour to set aside the Final Award of the arbitrator.
In the result, Justice Steele granted the application to set aside the Arbitrator’s awards.
The Court of Appeal's Analysis
The decision of Justice Steele was appealed to the Court of Appeal for Ontario. The two issues on appeal were the same as on the application:
- Was there a duty to disclose the arbitrator’s subsequent appointment?
- Did the circumstances give rise to justifiable doubts / a reasonable apprehension of bias?
In answering the first question, the court looked at the correspondence between the parties and the arbitrator, not the correspondence between the parties to which the arbitrator was not privy. The court found that Justice Steele erred in relying upon correspondence between the two parties where there was no way for the arbitrator to have known about such correspondence. The court noted that in the instructing letter to the arbitrator there was no mention of the parties’ desire to have an arbitrator who had no relationship with the parties, their counsel, or the firms of their counsel.
The test for disclosure under article 12(1) of the Model Law is an objective test, not a subjective one. The language in article 12(1) provides that an arbitrator has a duty to disclose any circumstances likely to give rise to justifiable doubts, rather than the General Standard applied by Justice Steele, which requires circumstances that in the eyes of the party give rise to justifiable doubts.
The language clearly provides for an objective test which does not look at the subjective opinions of what the parties believe would give rise to justifiable doubts, but what a fair-minded and informed observer would believe would give rise to justifiable doubts.
In this case, the court found that there was no duty to disclose the subsequent appointment, since the two arbitrations had completely separate issues, parties, and counsel, and the parties had not communicated to the arbitrator that such a circumstance would require disclosure.
The next question the court had to answer was whether the circumstances gave rise to justifiable doubts about the impartiality of the arbitrator. In answering this question, the court clarified that a failure to disclose does not automatically amount to justifiable doubts about impartiality. The question to be asked is, “What would a fair-minded and informed observer think in the circumstances?” The Court of Appeal found that a fair-minded and informed person would consider the facts and circumstances that were objectively known, none of which, in this case, gave rise to justifiable doubts of the impartiality of the arbitrator.
Conclusion