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Arbitration - International Commercial Arbitration Act (Ontario) (2). Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc.
In Aroma Franchise Company, Inc. v. Aroma Espresso Bar Canada Inc. (Ont CA, 2024) the Ontario Court of Appeal allowed an appeal, here in an international arbitration bias context.
Here the court considers international arbitration in Ontario, and duties of an arbitrator to disclose issues of bias and conflicts of interest:[1] Arbitration is an important, statutorily sanctioned, mode of dispute resolution. Undergirding its acceptability is the core principle that an arbitrator must be impartial. An arbitrator must not actually be biased, nor can there be a reasonable apprehension that the arbitrator is biased.
[2] An international commercial arbitration seated in Ontario is governed by the UNCITRAL Model Law on International Arbitration (the “Model Law”), adopted in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5. The Model Law contains provisions that promote the core principle of arbitral impartiality. Article 12(1) imposes a duty on an arbitrator to disclose – before appointment and as the arbitration proceeds – any circumstance likely to give rise to justifiable doubts about the arbitrator’s impartiality. Article 12(2) permits a challenge to the arbitrator or the award that was made if circumstances exist that give rise to justifiable doubts about the arbitrator’s impartiality, as long as the person making the challenge was unaware of the circumstances when they participated in the arbitrator’s appointment. Justifiable doubts about impartiality is an equivalent phrase to reasonable apprehension of bias.
[3] Although the duty to disclose and the test for a successful challenge are easy to articulate, their interaction and application in differently nuanced cases can be more challenging.
[4] High 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 some involvement. How the duty to disclose, and the right to successfully challenge an arbitral outcome, apply based on different versions of this potential scenario have recently been extensively canvassed by courts in the United Kingdom: Halliburton Company v. Chubb Bermuda Insurance Ltd., [2020] UKSC 48, [2021] 2 All E.R. 1175, and Aiteo Eastern E & P Company Ltd. v. Shell Western Supply and Trading Ltd. & Ors, [2024] EWHC 1993 (Comm). This case requires those issues to be considered in yet another variation of this potential scenario.
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[11] The Model Law’s test that dictates when an arbitrator must make disclosure is an objective one. It considers whether relevant circumstances would likely give rise to justifiable doubts about impartiality from the standpoint of a fair-minded and informed observer, rather than through the eyes of the parties. The application judge erred in law in the way she articulated and applied the test for disclosure and by taking into account subjective considerations that the parties did not make known to the Arbitrator. Her approach essentially converted the objective test into a subjective one. Under the objective test, the Arbitrator’s failure to disclose his engagement in what the application judge herself termed a second unrelated arbitration – one which, vis-à-vis the ongoing MFA Arbitration, had no common party or overlapping issues of significance – was not a breach of the legal duty of disclosure.
[12] A finding that there was a breach of the legal duty of disclosure is germane to, although not determinative of, whether an arbitral award should be set aside for reasonable apprehension of bias. A failure to make legally required disclosure may indicate a lack of concern about matters that likely raise justifiable doubts about impartiality in a way that confirms the existence of those justifiable doubts. But a failure of an arbitrator to disclose according to an expectation of the parties that was not shared with the arbitrator does not have a similar effect. The application judge erred in taking into account this kind of failure to disclose in her analysis of reasonable apprehension of bias.
[13] The test for a reasonable apprehension of bias on the part of an arbitrator is objective – like the legal test for disclosure, it considers the relevant circumstances from the standpoint of a fair-minded and informed observer, applied against the backdrop of a strong presumption that an arbitrator is impartial. The application judge erred in law in the way she applied that test, in effect changing the test to one particularly attuned to unshared subjective views. The circumstances she considered to determine that a reasonable apprehension of bias was present went outside of those properly considered in applying the test objectively.
[14] Applying the standard of reasonable apprehension of bias objectively, the presumption of impartiality on the part of the Arbitrator was not displaced by his acceptance of a retainer to arbitrate a second matter that did not involve any of the parties to the MFA Arbitration nor any overlapping issues of significance.
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(1) The Legal Duty of Disclosure
[69] What disclosure is required turns on the legal regime that governs the arbitration. The MFA Arbitration was governed by the Model Law. Article 12(1) of the Model Law sets out the legally mandated duty of disclosure of an arbitrator: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 throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.[3] [70] In Halliburton, the Supreme Court of the United Kingdom endorsed the view that English common law on an arbitrator’s duty to disclose should develop consistently with the Model Law: at paras. 113-15. Halliburton is therefore germane to the interpretation of the legal requirement to make disclosure applicable in this case.
[71] Article 12(1) is best understood in relation to its purposes. The purposes of disclosure by an arbitrator are intertwined: disclosure allows the arbitrator to avoid the appearance of bias and the parties to consider disclosed matters and take steps if so advised. As Lord Hodge said in Halliburton, at para. 70:One way in which an arbitrator can avoid the appearance of bias is by disclosing matters which could arguably be said to give rise to a real possibility of bias. Such disclosure allows parties to consider the disclosed circumstances, obtain necessary advice, and decide whether there is a problem with the involvement of the arbitrator in the reference and, if so, whether to object or otherwise to act to mitigate or remove the problem [citations omitted]. [72] Article 12(1) is thus aimed at surfacing matters that could justify challenging the arbitrator for bias. Article 12(2) of the Model Law provides that an arbitrator may be challenged “if circumstances exist that give rise to justifiable doubts as to [the arbitrator’s] impartiality or independence”. The key difference between the two subsections is that disclosure is required for a circumstance that is likely to give rise to justifiable doubts, while a challenge may be brought only where the circumstances give rise to justifiable doubts. The word “likely” means that the obligation to disclose arises if the “circumstances could reasonably give rise to justifiable doubts.” Thus “the obligation to disclose extends … to matters which may not ultimately prove to be sufficient to establish justifiable doubts as to the arbitrator’s impartiality”: Halliburton, at paras. 113, 117.
[73] As explained in Halliburton, at paras. 113-15, like the test for disclosure prescribed by the English common law, Article 12(1) of the Model Law sets out an objective test. Circumstances “likely to give rise to justifiable doubts as to [the proposed arbitrator’s] impartiality or independence” are to be assessed from the standpoint of a fair-minded and informed observer.
[74] Unlike the Model Law, the IBA Guidelines are not a legal standard. As explained in Halliburton, the IBA Guidelines “set out good arbitral practice which is recognised internationally … [and] can assist the court in identifying … what matters may require disclosure…. But the IBA Guidelines do not of themselves give rise to legal obligations or override national law or the arbitral rules chosen by the parties”: at para. 71. The parties could have, but did not, adopt the IBA Guidelines as the governing disclosure regime for their arbitration.[4]
[75] This distinction is especially important in this case, because the objective standard for disclosure in Article 12(1) of the Model Law differs from the IBA Guidelines which propose, in General Standard 3(a), a different rule for disclosure by an arbitrator. It provides that “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 parties … prior to accepting his or her appointment or, if thereafter, as soon as the arbitrator learns of them” (emphasis added).
[76] In other words, as Halliburton explained, the IBA Guidelines use a “subjective approach to the duty of disclosure … [that] addresses the perception of parties to an arbitration who are … involved in a stressful and often expensive dispute. English law, by contrast, adopts an objective test by looking to the judgement of the fair-minded and informed observer”: at para. 72.
[77] At para. 116, the court in Halliburton reinforced this distinction:In summary, the arbitrator’s legal obligation of disclosure imposes an objective test. This differs from the rules of many arbitral institutions which look to the perceptions of the parties to the particular arbitration and ask whether they might have justifiable doubts as to the arbitrator’s impartiality. [78] This does not mean that other parts of the IBA Guidelines, which provide practical guidance about disclosure, are not useful even when the legal requirement for disclosure is the objective test in the Model Law, rather than the subjective test in General Standard 3(a). The “Practical Application” guidance in Part II of the IBA Guidelines (the stop-light system and the commentary about it) can be used to “assist the court in identifying … what matters may require disclosure”: Halliburton, at para. 71. They can be viewed as “an authoritative source of information as to how the international arbitration community may regard particular fact situations in reasonable apprehension of bias cases”: Jacob Securities Inc. v. Typhoon Capital B.V., 2016 ONSC 604, at para. 41. But care must always be taken to use that guidance through the lens of the legal requirement of disclosure that governs the arbitration, rather than changing the requirement. At paras 79-95 the court explains the application judge's errors, and then applies the 'objective test' for disclosure at paras 96-119.
. China Yantai Friction Co. Ltd. v. Novalex Inc.
In China Yantai Friction Co. Ltd. v. Novalex Inc. (Div Ct, 2021) the Divisional Court considered a motion for leave to appeal involving the International Commercial Arbitration Act (Ontario). I include it here to give an example of how this infrequently used statute operates.
. Uber Technologies Inc. v. Heller
In Uber Technologies Inc. v. Heller (SCC, 2020) the Supreme Court of Canada considers a conflict between Ontario's International Commercial Arbitration Act and it's Arbitration Act:[20] The ICAA and AA are exclusive. If the ICAA governs this agreement, the AA does not, and vice versa (AA, s. 2(1)(b)). As the Superior Court correctly identified, whether the ICAA governs depends on whether the arbitration agreement is “international” and “commercial”. That the agreement here is international is not in dispute. Whether the agreement is commercial is contested. To answer this question, one must understand the legislative scheme of the ICAA.
[21] The ICAA implements two international instruments: the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Can. T.S. 1986 No. 43, adopted by the United Nations Conference on International Commercial Arbitration in New York on June 10, 1958 (“Convention”) and the UNCITRAL Model Law on International Commercial Arbitration, U.N. Doc. A/40/17, Ann. I adopted by the United Nations Commission on International Trade Law on June 21, 1985, as amended by the United Nations Commission on International Trade Law on July 7, 2006 (“Model Law”). Only the Model Law is relevant here.
[22] Section 5(3) of the ICAA states that the Model Law applies to “international commercial arbitration agreements and awards made in international commercial arbitrations”. The meaning of “commercial” in this section of the ICAA must be the same as the meaning of “commercial” under the Model Law, as the latter states that it “applies to international commercial arbitration” (art. 1(1)).
[23] While the Model Law does not define the term “commercial”, a footnote to art. 1(1) provides some guidance:The term “commercial” should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.
(Model Law, art. 1(1), fn. 2) [24] The Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration: Report of the Secretary-General further explains that “labour or employment disputes” are not covered by the term “commercial”, “despite their relation to business”:Although the examples listed include almost all types of contexts known to have given rise to disputes dealt with in international commercial arbitrations, the list is expressly not exhaustive. Therefore, also covered as commercial would be transactions such as supply of electric energy, transport of liquified gas via pipeline and even “non-transactions” such as claims for damages arising in a commercial context. Not covered are, for example, labour or employment disputes and ordinary consumer claims, despite their relation to business.
(United Nations Commission on International Trade Law, Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration: Report of the Secretary-General, U.N. Doc. A/CN.9/264, March 25, 1985, at p. 10 (emphasis added); see also p. 11.) [25] Two points emerge from this commentary. First, a court must determine whether the ICAA applies by examining the nature of the parties’ dispute, not by making findings about their relationship. A court can more readily decide whether the ICAA applies (or an arbitrator can more readily decide whether the Model Law applies) by analysing pleadings than by making findings of fact as to the nature of the relationship. Characterising a dispute requires the decision-maker to examine only the pleadings; characterising a relationship requires the decision-maker to consider a variety of circumstances in order to make findings of fact. If an intensive fact-finding inquiry were needed to decide if the ICAA or the Model Law applies, it would slow the wheels of an arbitration, if not grind them to a halt.
[26] The second point to draw is that an employment dispute is not covered by the word “commercial”. The question of whether someone is an employee is the most fundamental of employment disputes. It follows that if an employment dispute is excluded from the application of the Model Law, then a dispute over whether Mr. Heller is an employee is similarly excluded. This is not the type of dispute that the Model Law is intended to govern, and thus it is not the type of dispute that the ICAA is intended to govern.
[27] This result is consistent with what courts have held (Patel v. Kanbay International Inc., 2008 ONCA 867, 93 O.R. (3d) 588, at paras. 11-13; Borowski v. Fiedler (Heinrich) Perforiertechnik GmbH (1994), 1994 CanLII 9026 (AB QB), 158 A.R. 213 (Q.B.); Rhinehart v. Legend 3D Canada Inc., 2019 ONSC 3296, 56 C.C.E.L. (4th) 125, at para. 27; Ross v. Christian & Timbers Inc. (2002), 2002 CanLII 49619 (ON SC), 23 B.L.R. (3d) 297 (Ont. S.C.J.), at para. 11). It is also consistent with the Model Law’s reference to “trade” transactions, which, as Gary B. Born observes, “arguably connot[es] involvement by traders or merchants, as distinguished from consumers or employees” (International Commercial Arbitration, vol. I, International Arbitration Agreements (2nd ed. 2014), at p. 309). Further, one could draw a negative inference from the definition’s omission of “employment” relations (p. 309, fn. 454). It seems unlikely to us that the drafters of the Model Law would have included such a thorough list of included commercial relationships and not considered whether to include “employment”.
[28] Employment disputes, in sum, are not covered by the ICAA. The AA therefore governs.
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