Aroma Arbitration: Brewing Bias?

by Allan Dick and Sara Ray Ramesh

The Ontario Court of Appeal’s recent decision in Aroma Franchise Company, Inc. v Aroma Espresso Bar Canada Inc. (the “Aroma Decision”)[1] explored the grounds of arbitrator impartiality and disclosure obligations under 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 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.^[2]

So, What Happened?

The franchisor, Aroma Franchise Company Inc. (the “Franchisor”) and its affiliates alleged that their Canadian master franchisee, Aroma Espresso Bar Canada Inc. (the “Franchisee”) breached an exclusive coffee supply arrangement. As a result of the breach, in May of 2019, the Franchisor sent a notice to the Franchisee terminating the Master Franchise Agreement (“MFA”). The Franchisee, in turn, argued the termination was unlawful. Following a lengthy arbitration over the termination of the MFA, substantial damages were awarded to the Franchisee. After the arbitration had concluded, the Franchisor discovered the arbitrator had accepted another arbitration appointment on an unrelated matter from counsel for the Franchisee during the proceedings. The arbitrator did not disclose this to the Franchisor, arguing the two cases had no overlapping parties or issues.

This non-disclosure led to claims of bias, prompting the Franchisor to successfully have the award set aside by the Ontario Superior Court of Justice. The decision was rooted in a finding of reasonable apprehension of bias, due to the arbitrator’s silence regarding his other engagement. However, the Court of Appeal disagreed, restored the award relating to this issue, and clarified the threshold for bias in arbitration.

The Appeal

The Court of Appeal corrected the lower court judge’s fundamental error in failing to address the fact that the arbitrator was not made aware (and deliberately so by Franchisor’s counsel) of the communications between counsel for the parties which predated counsel’s approach to the arbitrator. The Court of Appeal found that the arbitrator could not have known of any potential concerns which the Franchisor had about other relationships with the arbitrator because Franchisor’s counsel deliberately chose not to so inform the arbitrator.

The Court of Appeal confirmed that the threshold for disclosure under Article 12(1) of the Model Law is an objective one and relied on the objective test for reasonable apprehension of bias – what would a fair-minded and informed observer think?

1. Disclosure ≠ Determinative

The Court acknowledged that while arbitrators must disclose any circumstances that are likely to raise justifiable doubts about impartiality, failure to disclose does not automatically indicate bias. In this case, the Court emphasized that the two arbitrations were entirely unrelated, involving different parties, industries, and issues. This lack of a meaningful connection diminished the likelihood that the arbitrator’s impartiality could reasonably be called into question, ultimately tipping the scales in favour of upholding the award.

2. International Decisions

The Court leaned heavily on UK precedent, including Halliburton Company v Chubb Bermuda Insurance Ltd., (“Halliburton”)[3] and Aiteo Eastern E & P Company Ltd. v Shell Western Supply and Trading Ltd., & Ors (“Aiteo”)[4] emphasizing that disclosure obligations in international arbitrations are context-specific and guided by the Model Law. These cases underscored the principle that multiple appointments by the same counsel does not inherently give rise to bias.

3. Objective Test Prevails

A fair-minded observer, the Court concluded, would not find the arbitrator’s undisclosed second appointment sufficient to displace the presumption of impartiality. The decision underscored that Canadian courts apply a strong presumption of arbitrator impartiality, even when disclosure lapses occur.

Key Takeaways for Coffee (and Arbitration) Enthusiasts:

• Disclosure Duties Are Not Black and White

While the Model Law sets a high standard for disclosure, it’s not a free pass to challenge awards where an arbitrator does not disclose something. Context matters and parties must assess the potential overlap of issues and parties objectively.

• Precedent Percolates Across Borders

Canadian courts are aligning their approach with international best practices, as seen in Halliburton and Aiteo. Practitioners should familiarize themselves with these decisions to better anticipate disclosure risks.

• “Reasonable Apprehension of Bias” Is Not a Catch-All

Bias remains a high bar to prove. Parties seeking to challenge arbitrators must go beyond subjective discomfort and belief and demonstrate objectively justifiable doubts about impartiality.

• Toward a Global Trend

This decision hints toward greater alignment in how arbitrator disclosure and disqualification are approached globally. While it does not supplant the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”), it signals a move toward consistency for cases where the IBA Guidelines are not adopted. This could help standardize outcomes and strengthen confidence in arbitration as a fair and predictable dispute resolution method.

Final Sip…

The Aroma Decision reaffirms the importance of maintaining impartiality in arbitration while recognizing that non-disclosure alone does not automatically indicate bias. By emphasizing the objective standard of a fair-minded and informed observer, the Court of Appeal clarified that disclosure obligations must be assessed in each specific context. This ruling aligns Canadian arbitration practices with international standards and reinforces the principle that arbitration should balance transparency with practicality, to preserve its integrity and efficiency. Additionally, its influence may extend beyond Canada, contributing to greater global consistency in arbitrator disclosure and disqualification approaches.

NOTE: Allan D.J. Dick and his team at Sotos LLP acted as counsel to the Franchisee in the arbitration and in the court proceedings and, with co-counsel, Alison FitzGerald, on the appeal.

[1] 2024 ONCA 839.
[2] Ibid, para 2.
[3] [2020] UKSC 48, [2021] 2 All E.R. 1175.
[4] [2024] EWHC 1993 (Comm).