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Aroma Franchise Company Inc. v. Aroma Espresso Bar Canada Inc.: Disclosure by the Arbitrator and Reasonable Apprehension of Bias

In the Ontario Superior Court of Justice decision of Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al.,[1] Steele J. considered whether an arbitrator ought to have disclosed a subsequent retainer from the same lawyer in a second arbitration while the first arbitration was ongoing, and whether the arbitrator’s failure to disclose would give rise to a reasonable apprehension of bias.

Background

Aroma Espresso Bar Canada Inc. (“AC”) was the master Canadian franchisee of Aroma Franchise Company Inc. (“AF”). AC essentially acted as a middle person between AF and the individual coffee shop owners in Canada. The Master Franchise Agreement between AF and AC (the “MFA”) provided for binding arbitration of any disputes.

A dispute arose regarding the cancellation by AC of supply orders from the coffee supplier, and AF, the franchisor, took steps to terminate the MFA and assume AC’s role vis-à-vis the individual franchisees.

A sole arbitrator was appointed and the dispute was arbitrated under the Ontario International Commercial Arbitration Act, 2017,[2] which adopts the UNCITRAL Model Law[3] in Ontario.

Unbeknownst to the Applicants, approximately 17 months into the arbitration, the Arbitrator was retained as the sole arbitrator on another matter by the lawyers for the Respondents.

Just prior to releasing his decision, which held that AF had wrongfully terminated the MFA and ordered AF to pay $10 million in damages, the Arbitrator emailed counsel for the parties to advise that his Final Award was completed and to request an additional payment. In this email, the Arbitrator inadvertently copied another lawyer at the Respondents’ law firm. This prompted the Applicants to ask a series of questions by email, which led to the revelation that the Arbitrator was appointed on an unrelated matter by another counsel at the Respondents’ firm.

The Arbitrator made a costs and interest award subsequent to the bringing of this Application.

The court’s decision

Application allowed. The arbitration awards were set aside and the matters at issue in the arbitration were to be decided by a different arbitrator.

Steele J. considered the limited circumstances in which an arbitral award may be set aside under the ICAA and the Model Law. Consideration was also given to the IBA Guidelines.[4]

The evidence in this case indicated that had the Arbitrator disclosed any other engagements with Respondents’ counsel, the Applicants would not have supported his appointment as arbitrator.[5] In pre-appointment correspondence, there was considerable emphasis placed on whether there had been any prior dealings with the chosen arbitrator by the parties, their lawyers, or law firms.[6]

A reasonable person in the Applicants’ position would lose confidence in the fairness of the proceeding and, in particular, the equal treatment of the parties. A fair-minded and informed person, considering the facts and circumstances of this matter, would conclude that circumstances exist that give rise to a reasonable apprehension of bias.[7]

Conclusion

An arbitrator can have two ongoing arbitrations from the same lawyer or law firm at the same time, and the determination of whether a reasonable apprehension of bias exists is extremely fact specific. This case therefore makes quite clear that arbitrators should always err on the side of disclosure, both prior to and throughout their appointment.