Written By Alison FitzGerald and Adam Walji

In Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc., 2024 ONCA 839, the Court of Appeal for Ontario confirmed that arbitrator disclosures and arbitrator disqualification under Article 12(1) of the UNCITRAL Model Law on International Commercial Arbitration (Model Law) are to be determined according to an objective standard. The Model Law is incorporated into Ontario’s International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5, as well as in the international commercial arbitration acts of all other provinces and territories in Canada. Accordingly, it can be expected that the objective standard for determining disclosure by, and disqualification of arbitrators will be applied consistently in international commercial arbitrations across Canada except where, as acknowledged by the Court of Appeal, the parties to an arbitration agreement or procedure agree to the application of a different standard.

Key Takeaways

• The test for disclosure of a potential conflict under Article 12(1) of the Model Law is an objective one. Disclosure of “circumstances likely to give rise to justifiable doubts” as to an arbitrator’s impartiality or independence implies an objective assessment. While parties can choose to adopt a different disclosure regime, such as that in the IBA Guidelines (as defined below), in the absence of such adoption, the IBA Guidelines are not a legal standard and do not give rise to legal obligations or override national law.
• The test for disqualification of an arbitrator under Article 12(2) of the Model Law is an objective one. An arbitrator may only be disqualified where circumstances do in fact give rise to justifiable doubts as to their impartiality or independence. Accordingly, the same strong presumption of impartiality that applies to judges in Canada also applies to arbitrators.
• The objective standard does not admit consideration of the parties’ subjective perspectives. “The parties are entitled to confidence in the independence of mind of the arbitrator when the context is viewed through the eyes of an informed observer, not through their own eyes… A reasonable apprehension of bias is judged through the lens of an informed and reasonable observer.”
• “Justifiable doubts” about impartiality and independence are equivalent to “reasonable apprehension of bias”. The language of Article 12(1) of the Model Law regarding justifiable doubts as to an arbitrator’s impartiality or independence can be equated to the concept of reasonable apprehension of bias in Canadian common law.

Facts

In 2007, the respondent, Aroma USA, Inc., as franchisor, and the appellant, Aroma Canada, as master franchisee, entered into a Master Franchise Agreement (MFA). In May 2019, the respondent terminated the MFA and stepped into a direct relationship with the unit franchisees across Canada, assigning its rights in relation to these franchisees to its subsidiary. Shortly thereafter and in accordance with the dispute resolution provision of the MFA, the appellants commenced arbitration proceedings for wrongful termination of the MFA (MFA Arbitration). In January 2022, the sole arbitrator appointed to decide the dispute (Arbitrator) issued a Final Award finding largely in favour of the appellants.

After the MFA Arbitration had been commenced, but before the Final Award was released, one of the appellants’ lawyers engaged the Arbitrator in another arbitration involving different parties and different issues (Other Arbitration). The Arbitrator did not disclose this second engagement to the respondents in the MFA Arbitration, who learned about it following the release of the Final Award. The respondents brought an application to set aside the Final Award on the basis that the Arbitrator’s failure to disclose his engagement in the Other Arbitration gave rise to a reasonable apprehension of bias.

The application judge granted the respondents’ application, placing substantial weight on correspondence exchanged between counsel for the parties regarding arbitrator selection that was never shared with the Arbitrator. The application judge also relied on the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines), which impose a subjective standard for arbitrator disclosure by requiring that an arbitrator disclose facts or circumstances that may give rise to doubts about his or her independence or impartiality in the eyes of the parties.

Court of Appeal’s Analysis

The central issues on appeal were whether the application judge erred (1) in finding the Arbitrator was required to disclose his engagement for the Other Arbitration to the parties in the MFA Arbitration and (2) in finding that there was a reasonable apprehension of bias in respect of the Arbitrator. The Court found the application judge erred in both respects and allowed the appeal.

The Court began its analysis by noting that the applicable standard for disclosure depends on the legal regime governing the arbitration—in this case, the Model Law governed the MFA Arbitration. The Court held that, by contrast to the IBA Guidelines, under the Model Law, the standard for whether an arbitrator must make a disclosure is an objective one that requires an arbitrator to consider, from the perspective of a fair-minded and informed observer, whether any circumstances likely give rise to justifiable doubts about the arbitrator’s impartiality or independence. The Court emphasized that the IBA Guidelines are not a legal standard and therefore do not give rise to legal obligations or override national law unless they are specifically adopted by the parties to apply to their arbitration. This was not the case in the MFA Arbitration. The Court found that the application judge therefore erred in applying the IBA Guidelines’ subjective test rather than the objective test required by the Model Law, as well as in considering correspondence exchanged between the parties’ counsel that had never been shared with the Arbitrator. Applying the Model Law’s objective standard, the Arbitrator did not have a legal duty to disclose that he was engaged in the Other Arbitration.

The Court further determined that the standard for disqualification of an arbitrator on grounds of justifiable doubts as to the arbitrator’s impartiality or independence under the Model Law is also an objective one. The Court reasoned that this aligns with the disclosure standard that applies at common law to adjudicators where there are circumstances that could lead a reasonable and fair-minded person, having knowledge of the relevant facts and circumstances, to have a reasonable apprehension of bias. It followed, in the Court’s view, that arbitrators benefit from the same strong presumption of impartiality as judges in Canada, and that while context is relevant to assessing reasonable apprehension of bias (or justifiable doubts), the subjective views of the parties are not.

The Court also clarified that, in applying the Model Law’s objective standard, the scope of circumstances likely to give rise to justifiable doubts about impartiality or independence so as to require a disclosure is broader than the scope of circumstances that actually give rise to such doubts. Consequently, a finding that an arbitrator breached the legal duty to disclose is relevant but is not a determinative factor in deciding whether a reasonable apprehension of bias exists. The Court ultimately found that a fair-minded and informed person would consider the facts and circumstances objectively known and would focus on what the Arbitrator was told. As the correspondence between counsel for the parties regarding arbitrator selection was never shared with the Arbitrator, such information fell within the category of the parties’ subjective views and was improper to consider.

Next Steps

The Court set aside the judgment of the application judge and reinstated the Final Award. The Court also remitted a separate matter that had been decided by the application judge, but without any relief specified, to the Superior Court to determine the relief, if any, and directed that any other issues that had been before the application judge and not resolved be finally adjudicated.

The above reinforces the importance of obtaining expert advice both when drafting dispute resolution clauses for commercial agreements and when involved in an arbitration proceeding. To discuss your specific needs and to receive tailor-made advice, please contact the authors or a member of the Bennett Jones International Arbitration group.

Alison FitzGerald, a partner in our International Arbitration group, represented the appellants in this appeal.

Download PDF