SUPERIOR COURT OF JUSTICE - ONTARIO
COURT FILE NO.: CV-12-466897
DATE: 20131004
RE: MDG Computers Canada Inc., and Goran Varaklic, Applicants
And:
MDG Kingston Inc. and Ahmad Reza Khosravan, Respondents
BEFORE: Carole J. Brown J.
COUNSEL:
Timothy Pinos and Christopher Horkins, for the Applicants
Javad Heydary, for the Respondents
HEARD: August 23, 2013
ENDORSEMENT
[1] The applicants, MDG Computers Canada Inc. and Goran Varaklic ("the applicants"), bring this application to remove Steven H. Goldman ("Mr. Goldman") as the sole arbitrator in an ongoing arbitration commenced by the respondents, MDG Kingston Inc. and Ahmad Reza Khosravan ("the respondents"). The applicants argue that a reasonable apprehension of bias has arisen as a result of the simultaneous retainer of the same accounting expert by both Mr. Goldman, as counsel in another similar action and by the respondents in the arbitration which is adjudicated by Mr. Goldman in this matter. They argue that, similar to this arbitration, the other action in which Mr. Goldman is counsel involves a similar dispute between franchisee and franchisor regarding a purported rescission of a franchise agreement, in which the expert will have to opine on similar damages issues.
[2] The respondents argue that there is no reasonable apprehension of bias raised, on the basis of the facts in issue, that the arbitrator should remain as the adjudicator, and that this application should be dismissed.
The Facts
[3] On February 19, 2007, the respondents commenced an action against the applicants seeking rescission and damages based on the applicants’ alleged failure to provide a disclosure document upon the renewal of the franchise agreement between the parties dated February 17, 2005. On May 7, 2007, the applicants moved to stay the action on the basis that the applicable franchise agreement contained an arbitration clause with respect to determination of disputes. The respondents resisted the motion and brought a cross-motion for summary judgment. Summary judgment was initially granted on July 5, 2007 and, subsequently set aside by the Court of Appeal on April 1, 2008. Leave to appeal to the Supreme Court of Canada was denied on May 27, 2010.
[4] The respondents thereafter brought an application before the Superior Court of Justice for appointment of an arbitrator and the parties were subsequently able to agree with respect to the retaining of Mr. Goldman, who had expertise in the areas of commercial and franchise law. An arbitration agreement was entered into on October 7, 2010.
[5] Just prior to the scheduled commencement of the arbitration hearing on September 24, 2012, counsel for the respondents served an expert report, authored by Ephraim Stulberg, CA. ("Mr. Stulberg"). Commencement of the arbitration was rescheduled, and a timeline propounded.
[6] On October 3, 2012, counsel for the applicants was advised by a partner in his firm, Derek Ronde ("Mr. Ronde"), who represented a respondent in another similar action in which Mr. Goldman was applicant's counsel, that Mr. Goldman, on behalf of his client, had produced and was relying on an expert report also authored by Mr. Stulberg. Counsel for the applicants had previously learned that Mr. Goldman was involved in this other action as counsel, and that the action was very similar in terms of facts and issues to the arbitration which is the subject of this motion.
[7] The other action concerned a dispute between a franchisee, Mr. Goldman's client, and a franchisor, wherein Mr. Goldman's franchisee client sought rescission under s. 6(2) of the Wishart Act on the ground that a disclosure document had not been provided. The franchisor relied on a specific exemption provision set forth in s. 5(7)(a)(iv). Similarly, the arbitration in this matter relates to a dispute wherein the respondents are seeking rescission of their franchise agreement under s. 2(2) of the Wishart Act for the applicants alleged failure to provide a disclosure document. Thus, in both matters, the franchisee sought statutory rescission of the franchise agreement for failure to provide a disclosure document and both franchisors relied upon a statutory exemption, different in each action, as the reason why no disclosure document was necessary. Assuming liability against the franchisor, damages were to be statutorily determined in the same manner. Thus, the actions, while not the same, were substantially similar.
[8] The applicants, when they first learned of Mr. Goldman's involvement in the other action, were concerned that a reasonable apprehension of bias might exist, and approached Mr. Goldman in this regard. Mr. Goldman assured them that his involvement in the other action would not preclude his ability to adjudicate impartially or fairly in this arbitration.
[9] Upon learning that the respondent's expert for this arbitration was the same as retained by Mr. Goldman in the other action, the applicants took the position that a reasonable apprehension of bias had arisen, in that Mr. Goldman, who was relying on an expert in the other action with respect to his client's position, would, as arbitrator, be considering the evidence of the same expert in the arbitration, regarding similar issues, and would be called upon to determine the expert's qualifications, expertise and credibility, and to assess the expert evidence proffered in the proceeding.
[10] On October 16, 2012, applicant's counsel wrote to Mr. Goldman requesting his resignation as arbitrator, given all the circumstances. The letter stated, inter alia, as follows:
This request is based on the fact that the expert that the claimant is using is the same expert that you are using as counsel in a matter where you are acting on behalf of a franchisee against a client of our firm.
The expert report tendered by Mr. Stulberg in this arbitration creates issues that will require me to challenge his expertise and also his credibility. Therefore, I will be asking you as Arbitrator to disqualify him as a witness, and if he is accepted, to make adverse findings against his credibility.
The fact that you are using Mr. Stulberg as an expert in the other matter on behalf of your client creates a reasonable apprehension of bias on these issues.
[11] On October 17, 2012, the respondents advised of their refusal to consent to Mr. Goldman's removal as arbitrator. On October 23, 2012, Mr. Goldman provided his ruling that he would not recuse himself, finding that "a reasonable and right-minded person, informed of all circumstances, viewing the matter realistically and practically, would conclude that I could decide fairly upon the credibility or credentials of Ephraim Stulberg if and when he testifies on behalf of the Claimants”. On January 17, 2013, the other action was discontinued and, accordingly, Mr. Goldman no longer relies on Mr. Stulberg as his expert witness.
The Issue
[12] The issue to be determined on this application is whether a reasonable apprehension of bias has arisen with respect to the arbitrator, Mr. Goldman, and, if so, whether Mr. Goldman should be removed as arbitrator.
The Law
[13] The parties are in agreement regarding the statutory framework and applicable caselaw, but not with respect to their application to the facts of this case.
[14] The test for determining whether a reasonable apprehension of bias exists in an arbitrator is whether an informed person, viewing the matter realistically and practically, and having thought the matter through, would conclude that the arbitrator is seized with an attitude or predilection for bias, whereby the arbitrator must be taken to have prejudged the matter: Simcoe Condominium Corp. No. 78 v. Simcoe Condominium Corp Nos. 50, 52, 53, 56, 59, 63 & 64, 2006 CarswellOnt 909 (S. C. J); Szilard v. Szasz, 1954 4 (SCC), [1955] S. C. R. 3.
[15] This standard or test is objective and no actual or intended bias need be established. As stated by the Supreme Court of Canada in Szilard v. Szasz, supra, at pp. 6-7:
It is the probability or the reasoned suspicion of biased appraisal and judgment, unintended though it may be, that defeats the adjudication at its threshold. Each party [to an arbitration], acting reasonably, is entitled to a sustained confidence in the independence of mind of those who are to sit in judgment on him and his affairs.
Especially so is this the case where he has agreed to the person selected.
[16] Apprehension of bias must be based on substantial grounds. The courts will not entertain "mere suspicion" or take into account the subjective views of the parties in making such determination. Simcoe Condominium Corp. No. 78 v. Simcoe Condominium Corp Nos. 50, 52, 53, 56, 59, 63 & 64, supra.
[17] Pursuant to the Arbitration Act, 1991, S. O. 1991, c. 17, the duties of an arbitrator are set forth at s. 11. An arbitrator shall be independent of the parties and shall act impartially. Before accepting an appointment as arbitrator, a person must disclose to all parties to the arbitration any circumstances of which he or she is aware that may give rise to a reasonable apprehension of bias. During an arbitration, where an arbitrator becomes aware of circumstances that may give rise to a reasonable apprehension of bias, he or she shall promptly disclose them to all parties. Pursuant to s. 6 of the Act, the court may intervene in an arbitration proceeding "to prevent unequal or unfair treatment of parties to arbitration agreements". Section 13(1)(1) of the Arbitration Act provides that the court may remove an arbitrator upon the challenge of one of the parties where "circumstances exist that may give rise to a reasonable apprehension of bias". Further, pursuant to s. 15(1), a court may remove an arbitrator upon the application of a party where the arbitrator "does not conduct [the arbitration] in accordance with section 19 (equality and fairness)."
The Positions of The Parties
[18] The respondent argues that there can be no reasonable apprehension of bias based simply on the fact that Mr. Goldman has expertise and practices in the area of franchise law, nor on the fact that he has had carriage of actions and applications with similar fact patterns and issues involved. I do not disagree with that argument. In submissions before me, the applicant also acknowledged this. However, that is not the seminal issue for determination. The issue is, rather, whether in the context of this arbitration, Mr. Goldman's assessment of the opinions of the expert, Mr. Stulberg, may be prejudiced or biased, whether consciously or subconsciously, based on his past retainer and use of Mr. Stuberg as expert for his own clients.
[19] It is the position of the applicants that it is Mr. Goldman's connection as arbitrator sitting in judgment of the expert’s qualifications and credibility on the one hand and his use of the same expert in a substantially similar matter where he is counsel that creates the reasonable apprehension of bias.
[20] The applicants argue that, in the subject arbitration, they will be challenging the qualifications, expertise, credibility, and accuracy of Mr. Stulberg's opinions and report. In the other action, Mr. Goldman, as advocate, was in the position of promoting and supporting the qualifications, expertise, credibility and opinions of his expert, Mr. Stulberg, on behalf of his client. As arbitrator and trier of fact, Mr. Goldman would be called upon to make findings regarding the qualifications, credibility and opinions proffered by the same expert who he had retained as expert for his client in the other action. As a result, the applicants maintain that it cannot be said that Mr. Goldman will act with complete impartiality, thus giving rise to a reasonable apprehension of bias.
[21] While Mr. Goldman did not disclose, pursuant to s. 11(3) of the Act, the circumstances which may give rise to the reasonable apprehension of bias when he learned of Mr. Stulberg's involvement as expert in the arbitration, at a time when he was using Mr. Stulberg as his client’s expert in another matter, I do not find mala fides in his failure to disclose.
[22] The respondents argue that the other action was resolved and, as a result, the retainer with Mr. Stulberg ended on January 17, 2013, such that there is no ongoing relationship between Mr. Goldman and Mr. Stulberg and therefore, there can be no apprehension of bias in the present arbitration.
[23] The evidence indicates that Mr. Goldman, as counsel in franchise matters, has retained Mr. Stulberg on other occasions in the past year. The evidence also indicates that he has retained other experts in franchise matters. While there is no evidence to indicate that Mr. Goldman places reliance and confidence in Mr. Stulberg, it is reasonable to assume that, because he has retained Mr. Stulberg on several occasions to provide an expert opinion on behalf of his clients, he reposes confidence in the opinion and expertise of Mr. Stulberg. In my view, this is sufficient to raise an apprehension of bias, namely that Mr. Goldman may, in assessing the expert's expertise, reliability and credibility, bring a bias to the assessment in favour of Mr. Stulberg, given his past professional experience and association with Mr. Stulberg as an expert retained on behalf of his clients.
[24] With respect to the issue of Mr. Goldman's retainer of Mr. Stulberg, as stated above, while Mr. Heydary submitted that experts are generally "retained" by the client and not by counsel, I understood him to mean, in the end, that it is the client's responsibility to pay the expert. In any event, in Mr. Goldman's reasons dated October 23, 2012 on the recusal motion and as also set forth in the respondents' factum, Mr. Goldman confirmed that his firm had retained Mr. Stulberg's firm to prepare a quantification of damages report "during the past 6 to 8 months on a couple of matters under section 6 of the Wishart Act". Thus, it appears that there is no real issue as regards retainer of the expert, and that is not the real issue in this application.
[25] In any event, the issue is not simply the retainer, but the professional relationship that exists between expert and counsel, who is, in this case, also the arbitrator on this matter. Mr. Heydary submits that it is only in circumstances of a personal, intimate relationship or financial relationship that an apprehension of bias can arise. I am of the view that that is a narrow reading of the caselaw. Mr. Pinos submits that the professional relationship can also give rise to a situation in which an apprehension of bias may exist, and that the assessment thereof is fact-based.
[26] Mr. Heydary relies on the following passage from the unanimous judgment of Robertson J.A. in Rothesay Residents Assn. Inc. v. Rothesay Heritage Preservation & Review Board, 2006 NBCA 61, 269 D.L.R. (4th) 127, at para. 14:
It is important to recognize that allegations of bias can arise in one of several distinct contexts. The first category involves the decision-maker who has a financial interest in the outcome of the matter being decided. The second is tied to cases in which the decision-maker's impartiality is challenged because of a personal relationship with one or more of the parties or some other person who has a significant role in the case, such as legal counsel or an important witness. The third category consists of cases in which the decision-maker has acquired outside knowledge of or has been involved with the matter in some capacity other than his or her current capacity as a decision-maker. The fourth category is tied to the inappropriate behavior of the decision-maker, whether it comes in the form of words or actions. Cases within this category are sometimes described as "actual bias" cases. Parenthetically, note that the plea of waiver can have no application in cases where the bias allegation is tied to what is said or done during the decision-making process. Finally, the fifth category involves "institutional" arrangements that are said to give rise to a reasonable apprehension of bias. Bias in these cases is generated by the structure or operation of a decision-making body, rather than by the words or actions of an individual decision-maker … .
[27] Mr. Heydary submits that the professional relationship between Mr. Goldman and Mr. Stulberg cannot give rise to a reasonable apprehension of bias because it does not fall into one of the enumerated categories. However, Robertson J.A.’s reasons, read in their entirety, do not support that proposition. Robertson J.A. never suggests that, as a matter of law, the five types of cases he identifies are exhaustive or that an applicant must fit his complaint within one of the categories to be successful. The Rothesay case itself involved an allegation of bias founded in part on a recent professional relationship of an adjudicator. Robertson J.A. held that “[e]ven severed professional relationships are sufficient to trigger the duty to recuse oneself from the decision-making process” (at para. 21).
[28] Mr. Heydary argues that the arbitrator should not be removed, as this action has been ongoing since 2007 and should not be further delayed. While it has been ongoing for a considerable period of time, this was due to the parties' various proceedings, motions, challenges and appeals regarding the action commenced in this Court before the arbitration process began. While delay may be a consideration, the integrity and legitimacy of the adjudication is of primary importance, and must be seen to be fair, without apprehension of bias.
[29] In this case, I am mindful of the argument made by Mr. Heydary that the franchise area is small and specialized, with a small pool of experts, and that a finding of reasonable apprehension of bias in these circumstances may make it more difficult for future arbitrator-practitioners in specialized areas.
[30] However, I am of the view that a reasonable apprehension of bias does arise in the circumstances of this case. I find that the test as set forth in Simcoe Condominium Corp., supra, and Szilard v. Szasz, supra, is met. I am of the opinion that an informed person, viewing the matter realistically and practically, and having thought the matter through, would, on the facts as presented herein, conclude that the arbitrator may have an attitude or predilection for bias, based on his retainer of Mr. Stulberg as an expert to advance his clients' cases in the past. While no actual or intended bias is established, such is not required: Szilard v. Szasz, supra. It is the probability or the reasoned suspicion of biased appraisal and judgment by Mr. Goldman in assessing the opinions of both experts, including the qualifications, expertise, credibility and accuracy of the opinion of Mr. Stulberg, which gives rise to a reasonable apprehension of bias, whether conscious or subconscious.
[31] As indicated by the Supreme Court of Canada in Szilard v. Szasz, supra, it is the probability or the reasoned suspicion of biased appraisal and judgment, unintended though it may be, that defeats the adjudication at its threshold. Whether Mr. Goldman honestly believes that he has not prejudiced or will not prejudice the matter of the assessment of the experts' opinions, this is not determinative of the issue as to whether there is a reasonable apprehension of bias on an objective basis.
[32] Based on the above analysis and the powers of this Court, pursuant to the Arbitration Act, I order that Mr. Goldman be removed as arbitrator from the subject arbitration. The applicant proposed a list of arbitrators to replace Mr. Goldman, including Randy A. Pepper, Larry Banack or Peter Wardle in that order. There have been no discussions between the parties as regards the replacements proposed.
[33] I urge the parties to attempt, within 10 days of the release of this decision, to agree upon one of the proposed arbitrators, failing which, the first proposed arbitrator, Randy A. Pepper is to be appointed. In the event that he is unavailable to act as arbitrator, the next proposed arbitrator, Larry Banack will be the arbitrator, and if he is unavailable, Peter Wardle will be appointed.
Order
[34] Based on the foregoing, I order as follows:
There is a reasonable apprehension of bias on the part of Mr. Goldman as arbitrator in the arbitration between the applicant and respondents;
Mr. Goldman is removed as arbitrator in the within arbitration;
The parties are to attempt to agree upon one of the proposed arbitrators as set forth above at paragraph 33, above, failing which they are to follow the process set forth at paragraph 34, above.
Costs
[35] I would urge the parties to agree upon costs, failing which I would invite the parties to provide any costs submissions in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges’ Administration at 361 University Avenue, within thirty days of the release of this Endorsement.
Carole J. Brown J.
Date: October 4, 2013