COURT FILE NO.: CV-22-679613-00CL

DATE: 20221101

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: AROMA FRANCHISE COMPANY, INC., SHEFA FRANCHISES LTD., AROMA ESPRESSO BAR LTD., YARIV SHEFA, AROMA USA, INC., OSHRAT KATRI and AROMA GLOBAL LTD., Applicants (Responding Parties)

AND:

AROMA ESPRESSO BAR CANADA INC., HALVA INVESTMENTS LIMITED, 6605702 CANADA INC. and EARL GORMAN, Respondents (Moving Parties)

BEFORE: Justice Cavanagh

COUNSEL: Allan D.J. Dick and Daniel Hamson, for the Respondents/Moving Parties

Matthew Latella and Ben Sakamoto, for the Applicants/Responding Parties

HEARD: October 11, 2022

ENDORSEMENT

Introduction

[1] This motion is brought in an application commenced in relation to a commercial arbitration that was conducted pursuant to the International Commercial Arbitration Act, 2017, S.O. 2017, c2, Sch 5 (the “Act”).

[2] In the underlying application, the Applicants seek an order (a) setting aside the Final Award of Arbitrator David McCutcheon (the “Arbitrator”) dated January 7, 2022 and received on January 11, 2022 in its entirety and declaring it a nullity; (b) setting aside any subsequent award of the Arbitrator including any awards regarding interest and costs; (c) declaring that the Arbitrator’s mandate is at an end; and (d) that the parties proceed to have the matters at issue in the arbitration be decided by different arbitrator.

[3] In the grounds for the application, the Applicants assert that the Arbitrator failed to disclose circumstances likely to give rise to doubts about his impartiality or possible bias and thereby failed to ensure that the parties were treated equally. The Applicants assert that the Arbitrator’s conduct gave rise to a reasonable apprehension of bias.

[4] The Respondents to the application bring this motion as moving parties pursuant to rules 21.01(1)(a) and 21.01(3)(a) of the Rules of Civil Procedure.

[5] On this motion, the Respondents seek an Order dismissing or staying the claim for relief contained at paragraphs (a) to (g) of the Applicants’ Notice of Application insofar as that relief relates to the Applicants’ allegation of a reasonable apprehension of bias on the part of the Arbitrator as a ground for setting aside the Arbitrator’s award dated January 7, 2022.

[6] For the following reasons, the Respondents’ motion is dismissed.

Factual Background

[7] The parties to the within application are parties to an arbitration commenced in 2019 before the Arbitrator.

[8] The subject matter of the Arbitration relates to the termination by the Applicant, Aroma Franchise Company Inc. (“Aroma Franchise”), of a master franchise agreement between it and the Respondent, Aroma Espresso Bar Canada Inc. (“Aroma Canada”).

[9] The hearing of the substantive issues occurred from July 12, 2021 to August 5, 2021, with closing arguments subsequently taking place on September 14 and September 17, 2021.

[10] On January 11, 2022, the Arbitrator delivered to the parties an award entitled “Final Award” dated January 7, 2022 in respect of the substantive issues to be decided in the Arbitration (the “January 2022 Award”). Pursuant to the January 2022 Award, Aroma Franchise was required to pay Aroma Canada the sum of $10 million in damages. Aroma Franchise and its related entity, the Applicant, Aroma USA, Inc., were also required to pay $200,000 in damages for breach of the statutory duty of fair dealing. All other claims by the Respondents were dismissed.

[11] The January 2022 Award directed that the issues of interest and costs be reserved for a further award after submissions by the parties on a schedule to be agreed upon by the parties or set by the Arbitrator.

[12] Upon release by email of the January 22 Award to counsel to the parties, the Arbitrator copied another lawyer at the Respondents’ counsel’s firm who is not otherwise involved in the Arbitration (“Mr. Hamson”).

[13] On January 13, 2022, counsel to the Applicants emailed the Arbitrator to inquire, among other things, why the January 2022 Award was sent to Mr. Hamson.

[14] The Arbitrator responded the same day with two successive emails, first advising that Mr. Hamson was copied on his January 11, 2022 email inadvertently, and secondly advising that the Respondents’ counsel’s law firm had retained the Arbitrator on another ongoing matter. Along with Mr. Dick (who was the Respondents’ lead counsel on the Arbitration), Mr. Hamson is counsel to one of the parties in the other arbitration.

[15] On January 14, 2022, counsel to the Applicants emailed the Arbitrator a list of questions relating to his involvement in the other arbitration. The Arbitrator responded to the list of questions by email the same day. The Arbitrator noted the following in response to counsel’s questions about the other arbitration:

In answer to your questions, Mr. Hamson has had day-to-day carriage on the other file but Mr. Dick has had involvement from time to time. I was retained on October 16, 2020. I understood that the parties agreed on my appointment. Mr. Hamson signed the terms of appointment for his client and I understand that he has full authority to act. I don’t think there is anyone else at Sotos who is acting for their client. I am the sole arbitrator. The issues in that case do not involve franchise law but there are contract issues in an industry completely unrelated to the Aroma business and in a different contractual relationship. I believe the contract issues are not in any way related to the contract issues in the Aroma case. I don’t believe there is any overlap in the issues between the two cases. I am not aware of any connection between the parties in that arbitration and the Aroma arbitration.

[16] Following the Arbitrator’s January 14, 2022 email, counsel to the Respondents emailed counsel to the Applicants to confirm that, “[a]s a matter of fact, there is no connection between our clients and the respective arbitrations.”

[17] On January 18, 2022, counsel to the Applicants emailed the Arbitrator another list of questions relating to his involvement in the other arbitration. The Arbitrator responded to the list of questions by email that day.

[18] On January 20, 2022, counsel to the Applicants emailed the Arbitrator and counsel to the Respondents to advise, among other things, that he had been instructed to apply to the Ontario Superior Court of Justice to seek an order setting aside the January 2022 Award “including on the basis of reasonable apprehension of bias”. The Applicants advised that this would “obviously impact on the appropriateness of any further steps in this arbitration”.

[19] The Respondents responded to this email and advised that they would be continuing to ask the Arbitrator to rule on interest and costs. The Applicants asserted that it would be inappropriate for the Arbitrator to take further steps.

[20] On February 15, 2022, the Arbitrator requested any additional submissions from counsel for the Respondents about whether the Arbitrator should proceed with the award of interest and costs. The Arbitrator requested submissions from counsel for the Applicants. Written submissions were made from both counsel.

[21] On March 14, 2022, the Arbitrator released an “Order on the Sequence of Submissions on Costs and Interest” that called for the Arbitration to proceed to the interest and costs phase. The parties made written submissions to the Arbitrator with respect to interest and costs.

[22] The Applicants commenced the within application on April 11, 2022. Among other things, the Applicants assert that a reasonable apprehension of bias exists resulting from the Arbitrator’s engagement by counsel for the Respondents in the other arbitration.

[23] As at the date of the hearing of this motion, the Arbitrator had not rendered a decision on the issues of interest and costs in the Arbitration.

Analysis

[24] The Respondents move pursuant to rules 21.01(1)(a) and 21.01(3) of the Rules of Civil Procedure which provide:

21.01(1) A party may move before a judge,

(a) for the determination, before trial, of a question of law raised by a pleading in an action where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial saving of costs;

21.01(3) A defendant may move before a judge to have an action stayed or dismissed on the ground that,

(a) the court has no jurisdiction over the subject matter of the action;

[25] The general rule for a motion under rule 21.01(1) of the Rules of Civil Procedure is that no evidence is admissible in support of the motion. The facts as alleged in the plaintiffs’ pleading are taken as proven unless they are patently ridiculous or incapable of proof. On a motion for leave to introduce evidence on such a motion, the court will consider whether the moving party has shown (i) that the evidence is relevant to the issues raised on the motion, and (ii) that the evidence will not be a matter of dispute and will not raise issues of credibility: CC&L Dedicated Enterprise Fund (Trustee of ) v. Fisherman, [2001] O.J. No. 598, at para. 11.

[26] I granted leave to the parties to file affidavit evidence on this motion. I was satisfied that some of the evidence was relevant to the issues on the motion and that the evidence that is relevant will not be a matter of dispute and will not raise issues of credibility.

[27] Although this motion is brought in an application, and not an action, rule 14.09 provides that an originating process that is not a pleading may be struck out or amended in the same manner as a pleading. In Martin v. Ontario, [2004] O.J. No. 2247, Nordheimer J. (as he then was) held that rule 14.09 clearly empowers the court to strike out a Notice of Application in the same manner as it could strike out a pleading and that rule 21.01 is, by virtue of rule 14.09 and by analogy, applicable to a Notice of Application.

[28] The Respondents’ motion is based on the Model Law on International Commercial Arbitration (“Model Law”) that, pursuant to Act, has force in Ontario and applies to international commercial arbitration agreements and awards made in international commercial arbitrations. The Model Law is set out in Schedule 2 of the Act.

[29] The Arbitration is not terminated under Article 32 of the Model Law because issues in respect of interest and costs remain to be decided.

[30] The Respondents submit that because the Arbitration is extant, the Applicants were required by Article 13(2) of the Model Law to submit their allegation of a reasonable apprehension of bias to the Arbitrator for his determination in the first instance. The Respondents submit that having failed to do so, the Applicants are now precluded from advancing the ground of a reasonable apprehension of bias as a basis for their application pursuant to article 34 of the Model Law for an order setting aside the January 2022 Award. The Respondents submit that the Court does not have jurisdiction on this application to decide whether the January 2022 Award should be set aside on the ground of a reasonable apprehension of bias on the part of the Arbitrator.

[31] In support of their submissions, the Respondents rely on Articles 12 and 13 of the Model Law.

[32] Article 12 of the Model Law provides:

Article 12. Grounds for challenge

(1) When a person is approached in connection with this possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justiciable doubts as to his impartiality or independence. In arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.

(2) An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

[33] Article 13 of the Model Law provides:

Article 13. Challenge procedure

(1) The parties are free to agree on a procedure for challenging an arbitrator, subject to the provisions of paragraph (3) of this article.

(2) Failing such agreement, a party who intends to challenge an arbitrator shall, within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstance referred to in article 12(2), send a written statement of the reasons for the challenge to the arbitral tribunal. Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

(3) If a challenge under any procedure agreed upon by the parties or under the procedure of paragraph (2) of this article is not successful, the challenging party may request, within thirty days after having received notice of the decision rejecting the challenge, the court or other authority specified in article 6 to decide on the challenge, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal, including the challenged arbitrator, may continue the arbitral proceedings and make an award.

[34] The Respondents also rely on Jacob Securities Inc. v. Typhoon Capital B.V., 2016 ONSC 604 in support of their submissions.

[35] In Jacob Securities, the unsuccessful party to a commercial arbitration brought an application to set aside the award on the ground that after the arbitrator’s final award was released and the arbitrator’s mandate was at an end, it became aware of circumstances that were such as to give rise to a reasonable apprehension of bias on the part of the arbitrator. The applicant’s application was brought pursuant to Articles 34 and 36 of the Model Law.

[36] The application judge addressed the court’s jurisdiction to decide the application. The application judge noted that bias is not expressly identified as a ground under either Articles 34 or 36, whereas Article 12(2) makes provision for challenging an arbitrator’s appointment where circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence and Article 13(2) contains the default process for challenging an arbitrator. The application judge, at para. 29, noted that Articles 12 and 13 address situations where the arbitration is extant and, ordinarily, the challenge is then submitted to the arbitral tribunal. In Jacob Securities, the arbitration was not extant because it was terminated by the final award.

[37] The application judge in Jacob Securities, at para. 31, addressed Articles 12 and 13 of the Model Law:

In my view, Articles 12 and 13, which form part of a series of provisions relating to the composition of the arbitral tribunal, have no application to a challenge of an award made after the final award has been released and the Arbitrator is functus officio. The only recourse then is to challenge the award or its enforcement.

[38] The application judge, at para. 34, concluded that the court has jurisdiction to consider the applicant’s challenge to the award based on reasonable apprehension of bias.

[39] The Respondents submit that Jacob Securities is authority for the proposition that where an arbitration is extant and there is an application to set aside an award under Article 34 of the Model Law based on reasonable apprehension of bias on the part of the arbitrator, the party raising this ground for the application must first submit a challenge on this ground to the arbitrator for his or her decision before seeking recourse to the court. I disagree that Jacobs Securities stands for this proposition.

[40] The question before the application judge in Jacobs Securities was whether, in circumstances where after an award is released (in respect of which the arbitrator is functus officio) there is an application to set aside the award based on reasonable apprehension of bias on the part of the arbitrator, the court has jurisdiction to set aside the award on this ground. The application judge held that in such circumstances, Articles 12 and 13 have no application and the only recourse is to challenge the award or its enforcement. The fact that in Jacobs Securities the arbitration was terminated through release of the final award was not, on my reading of the case, a significant consideration for the application judge. The decisive consideration was whether the challenge of the award was made after a final award had been released and the arbitrator was functus officio.

[41] Through the relief claimed on the application, the Applicants do not seek to challenge the Arbitrator’s ability to proceed to decide the substantive dispute that is the subject of the Arbitration. The substantive dispute was already decided by the Arbitrator in the January 2022 Award. The January 2022 Award was signed and delivered to the parties in accordance with Article 31 of the Model Law. The Arbitrator is now functus officio with respect to the January 2022 Award. In this regard, see Chandler v. Alberta Association of Architects, 1989 CanLII 41 (SCC), [1989] 2 S.C.R. 848, at p. 867.

[42] The Applicants seek recourse to the court against the January 2022 Award. They do so by their application for an order setting it aside. The Applicants also seek, as clearly corollary relief, an order declaring that the Arbitrator’s mandate is at an end and that the parties be directed to proceed to have the matters at issue in the Arbitration decided by a different arbitrator.

[43] Under Article 34(1) of the Model Law, recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of Article 34. The Applicants cannot obtain an order setting aside the January 2022 Award by proceeding under Articles 12 or 13 of the Model Law. The fact that the Arbitration is not terminated because issues of interest and costs have not been decided through an additional award does not affect the Applicant’s ability to have recourse to the court against the January 2022 Award under Article 34 of the Model Law.

[44] The Applicants were not required to follow the procedure in Article 13(2) of the Model Law for challenging an arbitrator on the ground that there are circumstances likely to give rise to reasonable doubts as to the Arbitrator’s impartiality before bringing an application to set aside the January 2022 Award on the ground that there is a reasonable apprehension of bias.

[45] The Applicants are entitled to rely on an available ground for recourse against the January 2022 Award in support of their application to set it aside. One of the available grounds for such recourse is that there is a reasonable apprehension of bias on the part of an arbitrator which amounts to a claim of unequal treatment contrary to Article 18 of the Model Law. See Jacob Securities, at para. 33.

Disposition

[46] For these reasons, the Respondents’ motion for an order to dismiss or stay the Applicants’ claim for relief in paragraphs a) to g) of the Notice of Application insofar as that relief relates to the Applicants assertion of a reasonable apprehension of bias on the part of the Arbitrator is dismissed.

[47] The Applicants seek costs of this motion on a substantial indemnity scale or, in the alternative, on a partial indemnity scale. The Respondents have not engaged in conduct that makes an award of costs on a substantial indemnity scale appropriate. Costs should be awarded on a partial indemnity scale.

[48] The Applicants provided a Bill of Costs in support of their costs submissions. They claim costs on a partial indemnity scale in the amount of $76,469.47 comprised of fees (including HST) of $74,695.71 and disbursements (including HST) of $1,773.76.

[49] The Respondents also provided a Bill of Costs to support a claim for costs if they were successful on this motion. If they had been successful, their claim for costs on a partial indemnity scale would have been $20,952.

[50] I accept that the motion was very important to the Applicants. However, the motion raised a narrow issue of jurisdiction and the merits of the Applicants’ position on the ground of reasonable apprehension of bias are not properly before me on this motion.

[51] In Boucher v. Public Accountants Council for the Province of Ontario, 2004 CanLII 14579 (ON CA), [2004] O.J. No. 2634, the Court of Appeal, at para. 26, confirmed that the fixing of costs is not a mechanical exercise and does not begin and end with a calculation of hours times rates. Overall, the objective is to fix an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding rather than an amount fixed by the actual costs incurred by the successful litigant.

[52] On this motion, the relevant facts were not contentious. The question of jurisdiction, a legal issue, was in dispute. When I consider the factors in rule 57.01 of the Rules of Civil Procedure and the principle in Boucher, I conclude that the amount that would be fair and reasonable for the Respondents to pay for costs of this motion is $40,000.

[53] Costs of this motion are fixed in the amount of $40,000 and are to be paid by the Respondents to the Applicants within 30 days.

Cavanagh J.

Date: November 1, 2022