Introduction

Mr. Justice Tugendhat in the recent case of Accentuate Ltd v Asigra Inc [2009] EWHC 2655 (QB), held that a claimant had a good arguable case that a Canadian arbitration and jurisdiction clause, was not enforceable because that clause would result in EU Regulations not being taken into account.  This finding occurred despite the contract in dispute citing Ontario as the jurisdiction and there being a clear arbitration clause.  If European judges will not uphold arbitration clauses where under lying contractual relations fail to take account of European legislation, where does this leave arbitration clauses?

Background

The claimant in the case was English and entered into a master reseller agreement with the Canadian defendant.  The agreement contained a clause applying the laws of Ontario with federal Canadian law as the governing law of the agreement, and additionally providing for arbitration in Toronto.  When relations between the parties soured the claimant brought claims for compensation under the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (‘the Regulations’).

The Regulations were introduced into English law to give effect to EC Directive 86/653/EEC a measure aimed at co-ordination of member states regarding self-employed commercial agents. Regulation 17 entitles a commercial agent to an indemnity or compensation upon termination of the agency contract, and Regulation 19 provides that: The parties may not derogate from Regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires.  The European Court of Justice had already found in Ingar GB Ltd. v Eaton Leonard Technologies [2000] EUECJ C-381/98 that a choice of law clause could not be used to evade liabilities under these Regulations, and that any clause which derogated from the Regulations was unenforceable.  The claimant therefore submitted that they need not accept the Ontario jurisdiction clause as the agreement was attempting to derogate from the Regulations.

In response the defendant invoked the arbitration clause and commenced arbitration proceedings, claiming a declaration that the claimant had no valid claims against it.  The claimant entered the arbitration and submitted that any claim under the Regulations fell outside the scope of the arbitration clause, but also submitting a counterclaim for compensation under the Regulations.

The arbitrators issued a number of awards:

  • December 2007 - denying the claimant’s request for a declaration that the Regulations fell outside the scope of the arbitration agreement.
  • March 2008 – finding that the Regulations did not apply when determining the parties’ rights and liabilities, and that Ontario law applied.
  • February 2009 – finding that the defendant was liable to the claimant for certain losses unrelated to the Regulations.

The claimant did not apply to the Canadian court to challenge the awards, but commenced proceedings in England claiming compensation under the Regulations. The defendant obtained an order setting aside permission to serve out of the jurisdiction and also obtained a stay of proceedings pursuant to section 9 of the English Arbitration Act.

The Applicable Legislation

Section 9 of the Arbitration Act 1996 requires the court to stay proceedings that have been brought in respect of a matter which, under an arbitration agreement, is to be referred to arbitration. Section 9(4) provides that the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.  English courts may refuse to recognise or enforce a New York Convention award only where to enforce would be contrary to public policy per section 103.  Further, recognition or enforcement of an award may be refused under section 103 where it would have the result of derogating from mandatory rules of EU law per the decision in Eco Swiss China Time Ltd v Benetton International BV (C-126/97)).

The Issue for Decision

The claimant appealed the decision to stay in England submitting that the choice of law and arbitration agreement amounted to an evasion of the Regulations and was therefore unenforceable, and contrary to public policy.  In addition the claimant submitted that permission to serve out of the jurisdiction should be granted pursuant to CPR 6.20(5) on the ground that the contract was governed by English law because the purported choice of Canadian law and the arbitration clause derogated from the mandatory provisions of the Regulations and were therefore ineffective. Alternatively, the failure to pay compensation under the Regulations was a breach of an implied term which occurred in England for the purposes of CPR 6.20(6).[1]  The defendant responded that the claims fell within the remit of the Canadian arbitration and that any challenge to the award should take place in the Canadian courts and that the English proceedings should be stayed; alternatively the claimant was not an agent for the purposes of the Regulations.

The Decision of the English High Court

Tugendhat J. accepted the claimant’s submissions, and upheld the grant of permission to serve out of the jurisdiction.   Tugendhat J. considered the issue of whether the claimant was an agent for the purposes of the Regulations, and found there was a sufficiently arguable case that the claimant was an agent, rather than a distributor, and therefore the Regulations applied.  In consequence regarding the arbitration and the awards:

(1) The court was obliged to give effect to the claimant’s mandatory rights under the Regulations. Insofar as the arbitration and choice of law clause had the effect of derogating from the Regulations by requiring the submission to arbitration of questions pertaining to mandatory provisions under the Regulations, it would be ‘null and void’ or ‘inoperative’ for the purposes of section 9 of the Arbitration Act.

(2) Assuming that the Regulations applied, recognition of the awards would be refused on public policy grounds because the awards failed to recognise mandatory principles of European law.

Tugendhat J. found that Ingmar (which was concerned with a jurisdiction clause contrary to EU law) applied equally to arbitration agreements which provided for a place and a law which did not give effect to the Regulations.  If the Regulations applied, then the choice of Ontario law could not be applied to the claimant’s claim for compensation under the Regulations. The only other candidate for the applicable law was English law.  It followed that the claimant had a good arguable case that the claim fell within CPR 6.20(5)(c).  Alternatively, there was a good arguable case that the failure to pay compensation occurred in England for the purposes of CPR 6.20(6).  It also followed that the stay should not have been granted. If the claimant succeeded in establishing that the Regulations applied, then it would follow that there could be no stay and the defendant would not be entitled to rely on the award as a defence.

Comment

Whilst it is important to realise that the views of Tugendhat J. on these issues were only reached on an interim basis addressing service, in order to decide whether the claimant had an arguable case entitling it to serve out of the jurisdiction, but it is nonetheless a disappointing decision for international arbitration.  Tugendhat J.’s view of the effect of the Regulations has the result of invalidating the arbitration and jurisdiction aspects of the agreement as far as they relate to matters covered by EU law, and potentially means recognition of the arbitral award would be refused on public policy grounds.  Tugendhat J.’s extension of the Ingmar decision to ‘an arbitration clause providing for both a place and a law other than a law that would give effect to the Directive’[2] is consistent with the reasoning and principles outlined in that case, but it is not a welcome development even if taken as only affecting narrowed issues of EU law upon the wider agreement.

Most common law and civil law systems respect the rights of parties to determine for themselves what agreements they enter and how to resolve disputes within certain basic limitations.  The agreement to arbitrate is the foundation of all arbitrations and where an agreement freely entered into can be undone by application of laws outside the jurisdiction of the agreement we risk undermining the entire international approach to arbitration.  Although the Regulations at the heart of this case originate in Europe, continental European jurists have traditionally attached great importance to the wishes of the parties.[3]  Worryingly, as practitioners will know arbitration clauses are often the last part of contractual negotiations and they are not always given the fullest thought they deserve.  As this case demonstrates, failure to give full thought to European legislation that might impact on the relations between the parties could lead to an inadvertent loss of the arbitration clause in the agreement.  This decision therefore presents a dilemma for practitioners preparing contracts with jurisdiction and arbitration clauses that do not consider whether European legislation might impact upon the parties and their relations.  The long term damage to arbitration confidence might be significant.  If an agreement to arbitrate freely entered into will not be enforced then it is nothing more than a statement of intent.  It serves no purpose to be able to enforce arbitration agreements in some jurisdictions and not others, as the ability to evade the agreement by commencing proceedings undermines the international framework, a framework that the international community has supported since the Geneva Protocol in 1933, and has been well established since the New York Arbitration Convention 1958.  For now arbitration remains a useful tool in international commence but if European law undermines the effectiveness of its clauses we may see a considerable reduction in its use.  Consequently, those drafting arbitration clauses and jurisdiction clauses now need to keep a closer eye on EU legal developments that might undermine such clauses.