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This article, written by Ben Hanuka, originally appeared in the April 19, 2023, issue of Law360 Canada, part of LexisNexis Canada Inc.
By Ben Hanuka
The recent decision of the Ontario Superior Court of Justice in Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al. (released on March 20), has laid out a forthright analysis about factors that may give rise to reasonable apprehension of bias, or justifiable doubts about an arbitrator’s impartiality or independence. The court’s analysis may have enough pull to bring out of the closet other potentially related issues that this article seeks to probe.
While the underlying arbitration in Aroma Franchise was about a franchise dispute, the court’s decision has of course little or nothing to do with franchise law or franchising. It is a decision about reasonable apprehension of bias in arbitration. The court’s reasoning and decision are predicated on concerns about the impartiality or independence of the arbitrator who ultimately bears the responsibility, and rightly so. But it takes two to tango. Circumstances that can give rise to a reasonable apprehension of bias on the part of an arbitrator can be sometimes precipitated by a party that is seen to stack the odds in its favour.
This article seeks to air out potential areas of concern about the impartiality or independence of an arbitration institution where the arbitration agreement uniformly designates the institution or its arbitration rules as mandatory to all disputes across its system or network.
The mandatory imposition of an arbitration institution or its rules is found in standard form franchise arbitration agreements drafted by some franchisors. While a standard arbitration agreement is commonly found in franchise agreements, this type of a requirement – designating an arbitration institution or its rules – is not common to all franchisors but happens with sufficient frequency in Canadian franchising to warrant serious scrutiny.
Those franchise arbitration agreements designate an arbitration institution for the conduct of an arbitration, and in some cases (directly or indirectly through its rules) for the selection of an arbitrator. Perhaps this is also a feature found in other niche commercial areas where one party uses a standard form contract to designate an arbitration institution to apply to all disputes with another class of contracting parties.
The circumstances outlined in this article are unrelated in any way to the fact scenario in the Aroma Franchise decision, other than the mere coincidence that the Aroma Franchise case involved a franchise dispute. Rather, this article relies on the court’s reasoning in Aroma Franchise as a compass and guide for the relevant legal principles. As expressly noted by the court in Aroma Franchise, an analysis of reasonable apprehension of bias in arbitration is fact-specific. It is technically possible that none of the possibilities raised in this article ever evolves to concerns about lack of independence or impartiality. These determinations are fact specific.
While the Aroma Franchise arbitration concerned an international arbitration under the Model Law on International Commercial Arbitration, in Ontario’s International Commercial Arbitration Act, 2017, an analysis about whether there may be reasonable apprehension of bias (or justifiable doubts about the impartiality or independence of an arbitration body), and the requirement that parties be treated equally, is substantially similar to the analysis under the domestic arbitration statute in Ontario, the Arbitration Act, 1991.
Designation of arbitration institution in standard form agreement
Arbitration bodies may have various degrees of involvement in arbitration. They can be limited to setting out procedural rules, coordinating communications between the arbitrator and the parties and processing payments. But arbitration bodies may also provide a roster of arbitrators from whom the parties are required to choose an arbitrator. Where the parties cannot agree on an arbitrator, the arbitral body may have a process for appointing an arbitrator or panel of arbitrators from its roster of arbitrators.
Two broad areas of concern arise.
First, in designating the arbitral institution in its standard form franchise agreement, the franchisor is doing so unilaterally.
Second, the intention of the franchisor is to designate that arbitration institution in all its disputes with its franchisees. It is possible that the designated institution will thus be appointed in more than one arbitration involving the franchisor party.
Areas of potential concern about the independence or impartiality of the arbitration body may come up in the arbitration selection process and in the institution’s nomination and appointment of an arbitrator.
It is open for the parties to agree to disregard these requirements, or sufficient elements of these requirements, to neutralize any potential negative implications from these procedures; in effect bringing the arbitration closer on a spectrum to an ad hoc arbitration.
The franchisor’s original designation of the institution in its franchise agreement
Issues may arise about potential outside communications between the institution and the franchisor who drafted the franchise agreement. These may have come up before the present dispute arose, or, where the franchisor is contractually entitled to unilaterally designate the institution, after the dispute arose.
Arbitrator selection process
Depending on its procedural rules, designating an arbitration institution, or the rules of that institution, may impose a requirement that the arbitrator be selected from the institution’s roster of arbitrators. This may limit the pool of potential arbitrators – whether for the parties to choose from, or, where they cannot agree, for the institution to appoint based on its rules.
It may also give the franchisor an insider’s knowledge about the selection of an arbitrator. After one or more arbitrations, the franchisor may start developing an inside knowledge about the differences among arbitrators on that institution’s roster; their nuanced procedural preferences and possibly how they have ruled in the past about similar disputes. This inside knowledge can play a role in who the franchisor nominates as arbitrator. The franchisor may endeavour to include or exclude him from the list of proposed arbitrators, either during the initial negotiations with the franchisee, or, if the parties are unable to agree on an arbitrator, during the official appointment process by the institution.
More to fairness than bias, if there is a fee structure charged by the institution, it may play a factor in assessing equal treatment to the extent that the franchisee was not involved in the original selection of the institution.
Where the institution appoints the arbitrator
Depending on the institution and its rules, the institution may be privy to arbitration awards made under its auspices. While arbitrations and arbitration awards are typically confidential as between different arbitrators, even if appointed by the same institution, the same may not necessarily be said about the institution itself. Where the institution is involved in more than one arbitration involving the same franchisor, even if different arbitrators are involved, it may be privy to all arbitration awards. Thus, it may know the results of each arbitration.
It is in the economic interests of the institution for it or its rules to be designated as mandatory in a franchisor’s standard franchise agreements. Should the arbitrator consider ruling against the franchisor, doing so could be at odds with his and the institution’s financial interests. A franchisor who is not successful in one or more arbitrations may at some point change the institution that it designates in its franchise agreements. If there is a risk of that happening, the institution may possibly hesitate to appoint that arbitrator in future arbitrations involving this franchisor. Thus, the institution may potentially develop an interest or preference in who it appoints as arbitrator in those circumstances.
It is possible for the parties to agree, with the consent of the institution, to appoint an arbitrator from outside the institution’s roster. Whether the institution appoints an arbitrator from within or outside its roster may not make a difference – the arbitrator is appointed by the institution. At the very least, the arbitrator is appointed because of the requirement in the franchise agreement for the arbitration to be held through the institution or its rules.
It is in the arbitrator’s interest to be appointed by the institution. An arbitrator may be sensitive to who the institution will prefer to appoint in the future. He can assume that the institution may be called on to appoint an arbitrator in another matter involving the same franchisor party. Since there is the potential for reasonable apprehension of bias by an institution in favour of the party appointing it through its standard-form franchise agreement, the same can be said about the arbitrator, if appointed by the institution, who may have an interest in future appointments by the institution.
There are also potential areas of concerns relating to impartiality or independence of the person at the institution who nominates or appoints the arbitrator (or members of the nominating committee, if applicable), along similar lines of scrutiny as those generally applicable to individual arbitrators (such as prior dealings with the franchisor, etc.).
After more than one or several arbitrations, sooner or later a line may be potentially crossed where neither the institution, nor possibly the arbitrator appointed by it, can be said to be genuinely impartial or independent of the franchisor party.
This is the first in a two-part series.
Table of Contents
Ben Hanuka
JD, LLM, CS (Civ Lit), FCIArb, of the Ontario and BC Bars
Highlights:
- JD, LLM (Osgoode '96, '15), C.S. in Civ Lit (LSO), Fellow of CIArb, member of the Bars of Ontario ('98) and BC ('17)
- Principal of Law Works PC (Ontario)/LC (British Columbia)
- Acted as counsel in many leading franchise court decisions in Ontario over the past twenty-five years, including appellate decisions.
- Provided expert opinions in and outside Ontario
- Presented at and chaired numerous franchise and civil litigation CPD programs for over 20 years
- Chair of OBA Professional Development (2005-2006) - overseeing all PD programs
- Chair of Civil Litigation Section, OBA (2004-2005)
Notable Cases:
Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471
1159607 Ontario v. Country Style Food Services, 2012 ONSC 881 (SCJ)
1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (2006), 150 A.C.W.S. (3d) 93 (SCJ, Commercial List)
Bekah v. Three for One Pizza (2003), 67 O.R. (3d) 305, [2003] O.J. No. 4002 (SCJ)
