The Court of Appeal for Ontario’s recent decision in Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc.[1] confirms that the legally mandated duty to disclose in Article 12(1) of the Model Law[2] is an objective standard.
The Court disagreed with the application judge, holding that in circumstances where counsel for one party to an ongoing arbitration appoints the same arbitrator for an unrelated arbitration, the arbitrator does not have a duty to disclose under Article 12(1).
Relevant facts
After a dispute arose under a Master Franchise Agreement (MFA), the appellants and respondents proceeded to an international commercial arbitration (the MFA Arbitration). The MFA provided that the arbitration would be governed by the Model Law.
In correspondence between counsel regarding the selection of an arbitrator, the respondents emphasized their preference for an arbitrator who did not have prior dealings with the appellants’ counsel. The parties ultimately selected and engaged Mr. McCutcheon as the Arbitrator. The parties’ expectations about other dealings with counsel were never communicated to the Arbitrator and he was unaware that this was an important factor in their choice of arbitrator.
While the MFA Arbitration was ongoing, the appellants’ counsel asked the Arbitrator to serve as arbitrator in a second, unrelated arbitration involving different parties and different issues (the Sotos Arbitration). The Arbitrator accepted the engagement. He did not disclose to the respondents that he had been approached or engaged in the Sotos Arbitration.
In January 2022, the Arbitrator released the Final Award in the MFA Arbitration, finding substantially in favour of the appellants. After the Final Award was released, the respondents learned of the Arbitrator’s involvement in the Sotos Arbitration. They subsequently brought an application to the Superior Court to set aside the Final Award.
The Superior Court’s decision
In March 2023, the application judge granted the respondents’ application and directed that a new arbitration take place before a different arbitrator. She found that the Arbitrator had a duty to disclose his engagement in the Sotos Arbitration and that this engagement gave rise to a reasonable apprehension of bias, fatally tainting the result of the MFA Arbitration.
The application judge reviewed the Model Law, the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the IBA Guidelines) and case law on the duty to disclose. Although not explicitly stated, the application judge found there was a duty to disclose by applying the subjective standard in the IBA Guidelines:
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 other parties, […] prior to accepting his or her appointment or, if thereafter, as soon as he or she learns of them.[3]
The application judge relied heavily on the parties’ correspondence when selecting an arbitrator (that the arbitrator was unaware of), particularly the respondents’ desire to select an arbitrator who did not have prior dealings with counsel. She found that, under those circumstances, the Arbitrator should have disclosed the Sotos Arbitration to the respondents.
When determining that there was a reasonable apprehension of bias, the application judge relied on the failure to meet the duty to disclose, and highlighted again the subjective expectations of the parties. She found that, under these circumstances, the presumption of impartiality was displaced.
The Court of Appeal’s decision
The Court of Appeal set aside the application judge’s decision. The Court held that the Arbitrator did not have a duty to disclose and that there was no reasonable apprehension of bias. Since the respondents had attacked the Final Award on other grounds not addressed by the application judge, the matter was remitted to the Superior Court to address those grounds.
The duty to disclose
The Court held that the application judge erred by applying the wrong legal test to determine whether the Arbitrator had a duty to disclose the Sotos Arbitration. The MFA was governed by the Model Law, not the IBA Guidelines. Unlike the IBA Guidelines, which the Court held were merely “good arbitral practice”,[4] Article 12(1) of the Model Law sets out a legally mandated duty to disclose:
When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and through the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.
The Court explained that Article 12(1) is aimed at surfacing matters that could justify challenging the arbitrator for bias. The Court confirmed that, in contrast to the IBA Guidelines, this is an objective test and that the obligation to disclose arises only if the circumstances “could reasonably give rise to justifiable doubts”.[5]
The Court held that a proper application of the objective standard in Article 12(1) would not have included a consideration of the parties’ subjective expectations. When asking whether the Arbitrator had failed to disclose a matter that would likely raise a justifiable doubt about his impartiality, “correspondence that the Arbitrator was not reasonably aware of cannot be germane.”[6]
Applying Article 12(1) to the circumstances, the Court held that the Arbitrator did not have a duty to disclose. The Sotos Arbitration did not involve any of the same parties and there was no meaningful overlap of issues. This distinguished the case from others where a duty to disclose had been found, as those cases involved multiple arbitral appointments concerning the same or overlapping subject matter, with a common party or arbitration governed by different rules where there was a failure to disclose a retainer for expert advice.[7]
In coming to this conclusion, the Court rejected concerns that, in this specific circumstance, counsel appointing the arbitrator benefits from additional time before the arbitrator, or that counsel is providing a financial benefit to the arbitrator.[8] The Court held that the former concern was baseless, as repeat appearances merely established familiarity, not bias. Regarding the latter concern, the law forbids partiality toward the party nominating the arbitrator and requires and presumes impartiality.
Reasonable apprehension of bias
The Court acknowledged that, since the legal duty to disclose is aimed at the same kinds of circumstances that can form the basis of a challenge for reasonable apprehension of bias, a finding that the arbitrator breached the legal duty to disclose is a relevant factor in deciding whether there is a reasonable apprehension of bias. However, in this case, since the Arbitrator’s failure to disclose was simply a failure to meet the parties’ expectations and not a breach of the duty to disclose, it should not have informed the reasonable apprehension of bias analysis.
The Court held that, like the duty to disclose, the test for reasonable apprehension of bias is an objective test applied against the backdrop of a strong presumption of impartiality. While the test is context and fact-specific, the subjective views of the parties are not relevant. Applying this test, the Court held that the appointment in the second arbitration was not objectively likely to give rise to a reasonable apprehension of bias.
Key takeaways
Parties to an arbitration should ensure their subjective disclosure expectations are clearly communicated to the arbitrator. The Court of Appeal’s decision emphasizes that the duty to disclose in Article 12(1) asks whether a reasonable person in the position of the arbitrator would view a matter as likely to give rise to justifiable doubts as to his or her impartiality or independence. If the Arbitrator had known about the parties’ correspondence and the importance they placed on the Arbitrator’s other dealings with counsel, that knowledge may have been relevant to the duty to disclose.[9]
Parties should also take care in choosing a legal regime to govern arbitration in their agreements. The Court noted that the parties in this case chose the Model Law to govern the arbitration in the MFA and that it had been open to them to select the IBA Guidelines. If they had done so, their subjective expectations would have been relevant.[10]
Finally, parties should consider the Court’s statement at the outset of its decision that “[h]igh stakes arbitrations often involve arbitrators who are in high demand, sophisticated parties, and experienced lawyers. This gives rise to the prospect that an arbitrator might have had prior engagements or be asked to undertake future ones, in which the parties or lawyers have the same involvement.”[11] Parties to an arbitration agreement can take comfort from the Court’s declarations that familiarity does not equate to bias, and that the law forbids partiality to the party nominating an arbitrator.
[1] 2024 ONCA 839.
[2] UNCITRAL Model Law on International Commercial Arbitration, in force in Ontario by virtue of section 5 of the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5.
[3] IBA Guidelines, General Standard 3(a) (emphasis added).
[4] Aroma, at para. 69.
[5] Aroma, at para. 72, citing Halliburton Company v. Chubb Bermuda Insurance Ltd., [2020] 2 All E.R. 1175.
[6] Aroma, at para. 89 (emphasis in original).
[7] See Halliburton and Aiteo Eastern E & P Company Ltd. v. Shell Western Supply and Trading Ltd. & Ors, [2024] EWHC 1993 (Comm).
[8] Aroma, at paras. 112–115.
[9] Aroma, at paras. 88–91.
[10] Aroma, at para. 91.
[11] Aroma, at para. 4.
