COURT FILE NO.: CV-21-00680298

DATE: 20220520

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: AQUANTA GROUP INC. and FORTHSPACE CANNABIS INC., Applicants

– and –

LIGHTBOX ENTERPRISES LTD., DONNELLY HOSPITALITY MANAGEMENT LTD., JEFFREY DONNELLY, SCOTT ROWE, and REID OGDON, Respondents

BEFORE: Justice E.M. Morgan

COUNSEL: Adrienne Boudreau and Daniel Hamson, for the Applicants

David Altshuller, for the Respondents

HEARD: May 18, 2022

ENDORSEMENT – APPOINTMENT OF ARBITRATOR

[1] Is a repeat arbitrator necessarily the best arbitrator?

[2] The Respondents are the franchisor and its assignee of the “Dutch Love” franchise system of retail cannabis stores, and the Applicants are a franchisee and its assignee (and principals) of four Dutch Love stores. The Applicants operate their franchises under four separate license agreements (collectively, the “License Agreements”) and four separate services agreements (collectively, the “Services Agreements”) with the Respondents.

[3] The four License Agreements are substantially similar, and the four Services Agreements are substantially similar (collectively all eight agreements are the “Franchise Agreements”). Section 9.3 of each of the License Agreements and section 11.3 of each of the Services Agreements contain the following arbitration agreement:

(a) Any dispute, difference or question arising between the parties concerning the construction, meaning, effect or implementation of this Agreement (including any allegations or disputes regarding alleged breaches) shall be submitted to binding arbitration in accordance with the provisions of this Section. Notwithstanding the foregoing:

(i) a claim for indemnification pursuant to a third party claim may be pursued in conjunction with the action or proceeding relating to the third party claim and not by arbitration as contemplated in this Section; and

(ii) a party seeking injunctive relief, specific performance or any other equitable remedy shall be entitled to seek such remedy in a court of competent jurisdiction.

(b) Unless the parties agree otherwise, the venue for arbitration hereunder shall be the City of Toronto, in the Province of Ontario.

(c) The arbitration shall be heard by a single arbitrator, who is qualified and has the expertise necessary to hear the matter, as mutually agreed to by the parties. If the parties are unable to agree upon a single arbitrator, either party may apply to a court of competent jurisdiction for the appointment of a single arbitrator.

(d) The arbitration will be governed by the Arbitration Act, 1991 (Ontario), as amended from time to time.

(e) The arbitration shall be final and binding on the parties and no appeals shall lie therefrom.

(f) The parties’ costs relating to the arbitration, if not otherwise contemplated in the indemnity provisions or any other provision contained in this Agreement, shall be determined by the arbitrator.

(g) All meetings and hearings will be held in private, unless the parties agree otherwise.

(h) Judgment on the award or decision rendered by the arbitrator may be entered in a court of competent jurisdiction;

[4] In January 2022, the parties engaged in an arbitration proceeding (the “First Arbitration”) before The Honourable Frank Newbould (“Mr. Newbould”). The First Arbitration focused on the interpretation and enforceability of the Franchise Agreements. Mr. Newbould was appointed as arbitrator for that dispute on consent of both parties. The Respondents were successful in the First Arbitration. The Applicants are appealing that result; they seek to have the matter sent back to be re-heard by a new arbitrator. That appeal is pending.

[5] On November 24, 2021, the Applicants delivered four notices of rescission pursuant to sections 6(2) and (3) of the Arthur Wishart Act, 2000, SO 2000 c 3. These notices, which were then re-issued in revised and updated form on January 18, 2022, were not responded to by the Respondents. Despite the fact that they were issued prior to the First Arbitration and pertained to the same contracts whose interpretation and enforcement were in issue, the notices of recission were not a part of the First Arbitration.

[6] On February 14, 2022, after concluding the First Arbitration, the Applicants delivered a new Submission to Arbitration, invoking section 9.3 of each of the License Agreements and section 11.3 of each of the Services Agreements. The issues set out therein include: (i) a determination of whether the Franchise Agreements have been rescinded pursuant to section 6(2) of the Arthur Wishart Act; (ii) the amount, if any, of compensation due to the Applicants pursuant to section 6(6) of the Arthur Wishart Act; and (iii) whether any of the Respondents other than Lightbox Enterprises Ltd. meet the definition of “franchisor’s associates” within the meaning of section 1(1) of the Arthur Wishart Act.

[7] The Applicants have requested the Respondents’ consent to the appointment of any of several proposed arbitrators for the new arbitration, all of whom are highly competent and experienced and two of whom are retired judges of the Ontario Court of Appeal. For their part, the Respondents have proposed that Mr. Newbould arbitrate the dispute. The Applicants oppose this proposal.

[8] It is the Respondents’ position that Mr. Newbould is already up to speed on the franchise business at issue, and that appointing him will result in cost and time savings to the parties. They also submit that Mr. Newbould has substantial expertise in the commercial relationships and contracts in issue, and is familiar with these particular Franchise Agreements in a way which no other arbitrator can match.

[9] Counsel for the Applicants submit that the Court should not appoint Mr. Newbould as arbitrator for a number of reasons:

(i) he has knowledge of past dealings, communications and circumstances as between the parties, which he obtained in the course of acting as arbitrator for the parties in an unrelated proceeding, and has made findings, including findings of credibility against key witnesses, in respect of those matters;

(ii) the award he made in the earlier proceeding is the subject of an application before the Court, in which the applicants seek to set aside his award; and

(iii) he does not possess the same degree of franchise law experience and expertise as do the applicants’ proposed arbitrators, whose practices as counsel and as judiciary/arbitrators have resulted in them being recognized for their expertise in franchise law.

[10] The Applicants did not seriously press the third of these objections, and I would not take it seriously if they had done so. Mr. Newbould is an experienced and well-regarded commercial arbitrator who, if he were coming at this fresh, would certainly be up to the task of adjudicating the matter. Indeed, the Applicants themselves agreed to Mr. Newbould as arbitrator for the First Arbitration.

[11] The more forceful objection put forward by Applicants’ counsel is their first one. They contend that Mr. Newbould’s prior arbitration of the contract dispute between these same parties creates a reasonable apprehension of bias.

[12] In making this submission, Applicants’ counsel has referred me to ICP v. JCP, 2018 ONSC 40. That case dealt with an objection by one party to a highly experienced arbitrator who, like here, had been involved in a previous arbitration among the parties and made findings of credibility adverse to one side. Justice Wilton-Siegel indicated, at para 43, that the arbitrator would no doubt approach the matter objectively, but that a reasonable apprehension of bias existed because of the perception of non-objectivity. That is, the findings of credibility unfavorable to one party suggest that the previous arbitration may influence the credibility determinations in the subsequent arbitration.

[13] Applicants’ counsel submit that is precisely the problem here. In the First Arbitration, Mr. Newbould found that the Applicants’ main witness was not credible and had acted illegally by violating regulations pertinent to the cannabis industry. It is the Applicants’ view that under the circumstances, a reasonably informed person could conclude that he would not be able to approach the case with an objective mind.

[14] Applicants’ counsel also submit that their objection to Mr. Newbould is, in a sense, self-fulfilling – that is, the objection alone is reason enough to appoint someone else to the arbitrator’s role. They rely on Axa Insurance v. Belair Direct, 2003 CarswellOnt 2992, at para 4, where the court indicated that an arbitrator should not be appointed over the public objection of one of the parties, as this risks injecting an element of hostility into the ongoing process.

[15] I do not agree that an objection necessarly injects hostility into the process. Judges and arbitrators are accustomed to taking disagreement in stride. I have no doubt that an arbitrator with Mr. Newbould’s experience would approach opposition by counsel or reversal by an appellate court philosophically as part of the law’s intellectual exchange. However, I do agree that arbitration is designed as a consensual process. While agreement cannot always be reached on selecting an arbitraor, a party’s vocal objection to one arbitrator in particular should be taken seriously in determining who will ultimately play the adjudicative role.

[16] That said, the most important set of arguments for and against the appointment of Mr. Newbould here comes out of Respondents’ counsel’s response to the new arbitration itself. It is apparently the Respondents’ intention to challenge the upcoming arbitration on the grounds that it is res judicata. They contend that the issue of recission and the Arthur Wishart Act cannot now be the subject of a new arbitration, as it could have been raised in the First Arbitration, and in any case was, in fact, dealt with implicitly by Mr. Newbould in that proceeding.

[17] Respondents’ counsel points out that although Mr. Newbould produced reasons for judgment that go on for some 30 pages, there are no transcripts from the First Arbitration that can now be used to show what was argued and what was not. Counsel for the Respondents is of the view that Mr. Newbould will be in a position – and is the only one who will be in a position – to make reference to his own notes of the First Arbitration in coming to grips with what went on there and in making a determination on the res judicata issue. In the Respondents’ view, this makes him uniquely qualified for the upcoming arbitral role.

[18] With respect, Respondents’ argument leads to the exact opposite conclusion; it provides a strong reason not to appoint the same arbitrator to a subsequent arbitration dealing with the same parties and the same contracts. The expectation that Mr. Newbould will make use of his notes of the previous preceeding is problematic on a number of fronts.

[19] It stands to reason that if Mr. Newbould were going to make use in the upcoming arbitration of his personal notes from the First Arbitration, he would have to have the copied and produce them to the parties and their counsel. This obligation would be in direct contradiction to the governing principle of deliberative secrecy. That principle is mandatory in the judicial setting, where a judge’s notes are considered strictly confidential: Commission scolaire de Laval v Syndicat de l’enseignement de la région de Laval, 2016 SCC 8, [2016] 1 SCR 29, at para 64.

[20] In the arbitral setting deliberative secrecy is a generally accepted principle as well, as the reasons for its existence apply equally to arbitrators as they do to judges. Like judges, arbitrators are expected to decide cases on the basis of the record before them that was open and accessible to all parties, and at the same time must be free to allow their minds to explore various avenues that may or may ultimately find their way into the decision at hand.

[21] Moreover, the notion that a judge or arbitrator maintains continued authority over their own decision is contrary to the way that case law works. The question of res judicata that Respondents’ counsel proposes to raise will turn on a determination of what it is that Mr. Newbould decided in his reasons for judgment. That, of course, is an exercise in interpretation that any subsequent arbitrator can engage in on an objective basis. It should not, and will not, be decided subjectively by the first decision-maker on the basis of his private notes of matters not currently before him.

[22] The commitment to limiting a decision-maker’s reference to the open and transparent evidentiary record is fundamental to due process. As the Nova Scotia Court of Appeal said in Cherubini Metal Works Ltd v Nova Scotia (Attorney General), 2007 NSCA 37, at para 14, it is also “necessary to help preserve the independence of decision-makers, to promote consistency and finality of decisions and to prevent decision-makers from having to spend more time testifying about their decisions than making them.”

[23] Once an adjudicative decision is rendered and the decision-maker is functus, the decision must stand, and be interpreted, on its own strength. That approach is essential to the finality and applicability of decisions: Reekie v Messervey, 1990 CanLII 158 (SCC), [1990] 1 SCR 219, 222-23. It is contrary to our legal system’s understanding of reasoned adjudication to elevate the authority of a decision-maker above others in the way suggested by the Respondent’s approach. A repeat adjudicator may sound like an efficient way to go, but not if the parties perceive the repetition as giving that adjudicator unique, and thus virtually infallible, authority.

[24] Since the parties cannot agree on the appointment of an arbitrator, it is necessary for the court to step in. The jurisdiction to do so is made explicit in section 9.3(c) of each of the License Agreements and section 11.3(c) of each of the Services Agreements. Those sections all provide that the parties may apply to court for the appointment of an arbitrator in case they are unable to agree on an appointment.

[25] Respondents’ counsel submits that if I were to decide not to appoint Mr. Newbould as arbitrator, I should appoint one of the retired judges that Applicants’ counsel has proposed. Counsel for the Respondent makes the point that the res judicata argument centers not only on a legal principle, but on a principle that engages issues of judicial process. Althought the underlying dispute is a commercial one and all of the proposed arbitrators are experienced in commercial matters, the issues that arise here are of a special nature. That is, they are more suited for an arbitrator chosen for their judicial experience than for an arbitrator chosen for their commercial experience.

[26] The two former judges proposed by Applicants’ counsel are The Honourable Gloria Epstein (“Ms. Epstein”) and The Honorable Warren Winkler (“Mr. Winkler”). Both are excellent choices. Frankly, I have no principled way of chosing between two former members of the Court of Appeal and two first rate jurists. I will therefore resort to the entirely arbitrary approach of going in alphabetical order.

[27] The parties are to approach Ms. Epstein first, and if she is unable or unwilling to be arbitrator then they shall approach Mr. Winkler. If neither of them is available, they shall make every effort to agree on another former member of the judiciary to appoint as arbitrator. Given that the disagreement here was limited to the particular role played by Mr. Newbould, identifying another retired judge to arbitrate this case should be something on which the parties here can ultimately agree.

[28] The parties may make written submissions on costs. I would ask counsel for the Applicants to email brief submissions to my assistant within two weeks of today, and counsel for the Respondents to email brief submissions to my assistant within two weeks thereafter.

Date: May 20, 2022 _____________________________

Morgan J.