The Aroma Franchise Case: Takeaways and Practical Considerations
The possibility of fairness challenges to arbitral awards arising from repeat appointments of an arbitrator by the same party or counsel has been a much-discussed topic since the Ontario Superior Court’s 2023 decision in the Aroma Franchise case. Following the Ontario Court of Appeal’s reversal of that decision, which has largely been welcomed by the arbitration community, this article discusses some takeaways and potential strategies to mitigate the risk of such challenges.
Overview
In early 2023, the Ontario Superior Court decided, in the Aroma case, that the arbitrator’s failure to disclose a second appointment by a lawyer for one of the parties to arbitrate an unrelated dispute gave rise to a reasonable apprehension of bias.
In December 2024, the Ontario Court of Appeal held that no duty to disclose or reasonable apprehension of bias arose in those circumstances and clarified the applicable test under the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). While no duty to disclose arose in Aroma, the Court of Appeal’s decision highlights other common situations in which the duty may arise. This article discusses the court’s reasoning in Aroma and potential strategies to minimize the risk of bias challenges arising from repeat appointments.
Background
The Aroma arbitration arose from the termination of a Master Franchise Agreement (“MFA) between Aroma Franchise Company (“AFC”), the global franchisor of Aroma Espresso Bars, and its Canadian master franchisee, Aroma Canada. The parties appointed a sole arbitrator after confirming the extent of any prior relationship that either party’s lawyers had with the arbitrator. The MFA’s arbitration clause required only that the arbitrator not have any prior social, business or professional relationship with either party and was silent about relationships with the lawyers.
While the arbitration was underway, Aroma Canada’s lead lawyer appointed the same arbitrator for another dispute involving unrelated parties in a different industry. This appointment came to light only when, in an email sent on the eve of releasing the award, the arbitrator inadvertently copied a lawyer involved in the subsequent arbitration who was not involved in the Aroma arbitration. The arbitrator was unaware that the parties had previously expressed concerns about any prior relationships their lawyers had with potential arbitrators and had rejected other candidates on that basis.
The Superior Court found a reasonable apprehension of bias
The Superior Court set aside the award, holding that the arbitrator should have disclosed the subsequent appointment and that its non-disclosure gave rise to a reasonable apprehension of bias.[1]
Among the circumstances the Court considered were the parties’ expectations of ongoing disclosure about the arbitrator’s relationships with counsel, the MFA’s criteria for arbitrators, the absence of evidence about the circumstances surrounding the arbitrator’s subsequent appointment, including the source of the recommendation and the arbitrator’s fees, and the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”).
The Court of Appeal reversed the Superior Court’s decision
The Court of Appeal held that by considering the parties’ subjective concerns and expectations, which were unknown to the arbitrator, the Superior Court erroneously applied the subjective “eyes of the parties” test for disclosure set out in the IBA Guidelines instead of the objective test under Article 12 of the Model Law, which governed the arbitration under the International Commercial Arbitration Act, 2017. [2]
The Court reasoned that to a “fair-minded and informed observer”, any concerns that Aroma Canada’s counsel would benefit from additional time before the arbitrator or that the subsequent appointment conferred a financial benefit would not, on their own, give rise to justifiable doubts about the arbitrator’s impartiality.[3] Given the absence of a common party or significant overlapping issues between the two arbitrations, or multiple repeat appointments by the same lawyer, or a prior co-counsel relationship with one of the lawyers, no duty to disclose arose.
The Court affirmed that arbitrators enjoy a strong presumption of impartiality that can be rebutted by showing a reasonable apprehension of bias. The test is context-specific, but objective. The Court held that while an arbitrator’s failure to disclose may be relevant in some circumstances, the Superior Court’s finding on disclosure was based on irrelevant subjective considerations and could not support a reasonable apprehension of bias.
Discussion
The Aroma saga illustrates that multiple appointments by the same lawyer or law firm can cause an award to be vulnerable to challenge. While the Court of Appeal held that a single subsequent appointment by counsel involved in an ongoing arbitration, without more, does not trigger the duty to disclose or support an impartiality challenge, a slightly different situation may well change the result.
For example, had the parties’ expectations about the disclosure of relationships between the arbitrator and counsel been shared with the arbitrator or expressly adopted in the arbitral procedure, the outcome in Aroma arguably might have been different.
Similarly, the Court of Appeal’s comments suggest that a duty to disclose may arise if the subsequent arbitration involves significantly overlapping issues or common parties or if the total number of repeat appointments rises above a “critical mass”.[4] Given the likelihood of such scenarios arising in specialized industries or practice areas or locations where the pool of potential arbitrators is limited, parties and counsel should proactively consider and address these issues throughout the arbitration.
One way to address this is for parties to communicate any concerns about prior or subsequent relationships directly to the arbitrator and include such criteria in their arbitration clause where desired. Parties should also consider actively disclosing any circumstances that could potentially trigger an impartiality challenge and address any concerns upfront. Based on the scenarios discussed in Aroma, prior or subsequent appointments by the lawyers involved in the arbitration, or other lawyers in the same law firm, may need to be actively disclosed, having regard to applicable confidentiality obligations. It would then be up to the arbitrator to make appropriate disclosure, thereby minimizing the potential for a successful fairness challenge.
To this end, the new ADR Institute of Canada (ADRIC) Arbitration Rules require parties to disclose information that would enable the arbitrator to assess whether a duty to disclose arises and require the arbitrator to disclose the relevant circumstances if it does.[5] Parties and arbitrators should consider incorporating similar rules or requiring such disclosure under procedural orders to avoid claims of bias arising at the end of potentially long and costly arbitrations.
[1] Aroma Franchise Company Inc. et al v. Aroma Espresso Bar Canada Inc. et al, 2023 ONSC 1827, para. 63, 91. (“Aroma Superior Court”)
[2] Aroma Franchise Company Inc. v. Aroma Espresso Bar Canada Inc., 2024 ONCA 839, at paras. 83-88 (Aroma ONCA).
[3] Aroma ONCA, at paras. 73, 96, 112-114 (“Aroma ONCA”).
[4] Aroma ONCA, at paras. 107-111.
[5] See William G. Horton, Emily McMurtry, Lisa C. Munro, The New ADRIC Arbitration Rules: An Updated Approach to Commercial Arbitration in Canada – Part 1, ADR Perspectives, Vol. 11 No. 4. December 2024.
Sanjit Rajayer is a litigation associate at Blake, Cassels & Graydon LLP in Toronto. He has a broad commercial litigation and arbitration practice with experience in IP disputes. For a more detailed bio, please see Sanjit Rajayer, Toronto | Blakes.
