The Ontario Superior Court of Justice recently confirmed its support for private international arbitration, indicating that it was prepared to award substantial indemnity costs against a disappointed party who launched a "baseless" challenge to the arbitrator's impartiality.

The Facts

Typhoon Capital B.V., a Dutch company, and its wholly-owned subsidiary, Typhoon Offshore B.V. ("Typhoon"), develop energy projects. Jacob Securities, a Canadian investment bank, introduced Typhoon to a prospective source of financing, Northland Power Inc. and Northland Capital Inc. ("Northland"). Northland ultimately invested in one of Typhoon's projects, Project Gemini.  Jacob Securities then claimed it was entitled to compensation from Typhoon for making the introduction.

In October 2013, Jacob Securities commenced an arbitration to recover the claimed compensation. When Thomas Heintzman, an experienced litigator, was nominated as arbitrator, he advised the parties that he had no previous dealings with the companies or with their individual principals. However, he did not undertake a conflict search with the law firm from which he had recently retired.

After the arbitrator issued an award dismissing the claim in October 2015, Jacob Securities hired new lawyers to challenge the award and discovered that the arbitrator’s former law firm had previously acted in a number of transactions involving Northland. In particular, while he was still senior counsel, the arbitrator's former firm had represented the underwriters in the Project Gemini transaction.

To challenge the award, Jacob Securities argued there was a reasonable apprehension of bias, given the arbitrator's former firm's involvement with the Project Gemini transaction.

Reasonable apprehension of bias

As an international arbitration the dispute was governed by the International Commercial Arbitration Act, which incorporates the UNCITRAL Model Law on International Arbitration. In Jacob Securities v. Typhoon Capital B.V.[1], Justice Graeme Mew determined that challenges to an arbitral award based on reasonable apprehension of bias amounted to claims of unequal treatment contrary to Article 18 of the Model Law and that he had jurisdiction to entertain the application under Articles 34 and 36.

There is a strong presumption that arbitrators, like judges, are impartial.  The same test applicable to a court is applicable to an arbitrator acting in a judicial capacity: "what would an informed person, viewing the matter realistically and practically – and having thought the matter through – conclude. Would he think that it is more likely than not that [the arbitrator], whether consciously or unconsciously, would not decide fairly"?

The Court noted that it was not uncommon for arbitrators to be members of law firms and that, in some circumstances, it was appropriate for arbitrators to be removed on the ground of a reasonable apprehension of bias because of work undertaken by lawyers in their firms.

However, in this case, the evidence was that the arbitrator was not personally associated with any of the work done by his former firm relating to Project Gemini. The Court rejected the proposition that the fact that the arbitrator had failed to disclose that his former firm had a relationship with one of the witnesses in the arbitration was sufficient to raise a reasonable apprehension of bias.

An arbitrator's duty to investigate

The Court also rejected Jacob Securities' argument that the arbitrator had failed to adequately investigate possible conflicts of interest. Jacob Securities' position was that he had an obligation to investigate possible conflicts with his former firm, which would include not only the parties but also (potential) witnesses.

While the Court accepted that an arbitrator who is a member of a law firm has a duty to investigate possible conflicts with their firm, the obligation does not extend to searching conflicts at their former law firm(s). The Court noted that arbitrators "cannot possibly know or be expected to know every client that their former firms acted for" and that it would be burdensome and wholly disproportionate to require an arbitrator to search for conflicts from their former firms, assuming that it were practically possible.

Cost consequences

Having rejected all of Jacob Securities' arguments, Justice Mew highlighted that one of the benefits of commercial arbitration is finality and that parties agree to arbitrate precisely because of the very limited grounds upon which to challenge an award.

In this case, the Court found that the application was a "thinly disguised attempt to avoid the consequences of an adverse decision of the merits" and that an award of substantial indemnity costs was likely appropriate to deter losing parties in international commercial arbitrations from launching baseless challenges to an arbitrator's impartiality.

Take away points

Litigants can expect that arbitrators will search for, and disclose, possible conflicts before accepting a nomination and Jacob Securities provides some guidance as to the scope of the conflict search. However, they should keep in mind that arbitrators are, ultimately, appointed by them and there is nothing to prohibit a party from requesting that the arbitrator undertake a more expansive conflict search if they think it is necessary in the circumstances of the case.

The Court's decision in Jacob Securities decision also highlights two of the often cited advantages of arbitration: (a) the ability to choose the decision maker and (b) certainty in the result given very limited appeal rights.

First, the decision highlights the importance of the selection of the decision maker. Litigants should ensure that they think carefully about proposed arbitrators and take the opportunity to investigate their experience and qualifications. In this case, it was notable that the alleged grounds for the reasonable apprehension of bias were discovered by an employee of Jacob Securities reviewing publically available documents. Assuming Jacob Securities' bias concern was legitimate, a thorough investigation of the arbitrator's background at the outset may have avoided the issue.

Second, parties considering arbitration should keep in mind that the "advantage" of certainty in the result cuts both ways. The jurisprudence is clear that the court is inclined to respect the arbitration process and is reluctant to interfere with arbitral awards. By indicating that it was prepared to award substantial indemnity costs, the Court in Jacob Securities reaffirmed that it respects the parties' right to engage in private dispute resolution and will not tolerate attempts to upset an arbitration process without good reason. Therefore, before agreeing to arbitrate, a party should seriously consider whether it is prepared to live with an unfavourable arbitral award or whether it would prefer to hedge its bets and proceed in court to better preserve the possibility of an appeal.