Summary and business impact

In the High Court case of Accentuate v Asigra, Mr Justice Tugendhat affirmed that even where parties choose a non-EU law to govern their agreement, mandatory EU law must be followed. An arbitration agreement that does not give effect to mandatory EU law where it is applicable would be ineffective and a resulting award unenforceable. Parties should therefore exercise caution when choosing a law to govern their agreement if mandatory EU law may be relevant.

Background

An English distributor and Canadian licensor had entered into a software distribution agreement with an arbitration agreement and a Canadian governing law clause. When a breach of that agreement occurred, the distributor threatened to bring a claim in England under the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations"). In giving effect to an EU Directive, the Regulations entitle a self-employed commercial agent to an indemnity or compensation upon termination of an agency contract. In response, the licensor commenced arbitration for a declaration that the distributor had no claims against it. In their resulting awards, the tribunal clearly stated that the laws of Ontario (and federal laws of Canada) applied to the dispute and that the Regulations were not relevant.

Rather than challenge the award, the distributor applied to an English District Court for permission to serve the licensor out of the jurisdiction in order to obtain compensation under the Regulations. The licensor applied to the Court to stay proceedings (pursuant to section 9 of the English Arbitration Act 1996 (the Act)) on the grounds that the parties had agreed to refer disputes to arbitration in Toronto under Canadian law. The district judge declared that it had no jurisdiction but granted permission to the distributor to appeal. The distributor duly appealed to the High Court, arguing that the choice of law amounted to an evasion of EU law.

Decision – the interplay between EU law and arbitration

Tugendhat J agreed with the distributor. He held that the requirements of the Regulations were mandatory such that an arbitration clause in favour of Canadian law was "null and void" and "inoperative" to the extent that it required the submission to arbitration of questions pertaining to mandatory provisions of EU law. Furthermore, recognition of any resulting awards would be refused on public policy grounds. As a result, the stay of proceedings was lifted and permission to serve the licensor out of the jurisdiction was confirmed.

The mandatory nature of EU law notwithstanding a choice of law (including a non-EU choice of law) is set out in the 2000 European Court of Justice ("ECJ") case of Ingmar GB Ltd v Eaton Leonard Technologies Ltd [2000] EUECJ C-381/98. However, Tugendhat J goes further to conclude that an arbitration agreement should be invalid on this basis and a resulting award unenforceable. It is particularly surprising given that this decision was not crucial to the application in issue: the Judge was simply required to rule on whether there was a sufficiently arguable case that the Regulations applied for the purposes of enabling the distributor to serve the licensor out of the jurisdiction.

The decision is also surprising as, in line with previous case law and practice, one would expect a tribunal, wherever it may be sitting, to apply mandatory EU law alongside the chosen law. This point was not decided here as the distributor chose to bring its case in the English Court rather than annul the awards in Canada on that basis. The Court held that England was the most appropriate forum to hear the claim and that it was obliged to give effect to mandatory EU law as implemented by English statute.

Effect of the decision

Arbitration as a private consensual process is undermined when a decision negates the parties’ choice of law. Whilst it is clear that an agreement as to choice of law should be displaced to the extent that there are mandatory EU law rights, the Act does not envisage that these rights should completely trump the arbitration agreement in favour of the national court. Rather English law takes the view that a tribunal can:

  1. rule on its own jurisdiction – the principle of "competence-competence"; and
  2. give effect to the chosen law alongside any mandatory law.

The facts of this case are extreme in the sense that the entire subject matter of the proceedings (entitlement of an agent to compensation) was governed by EU law, leaving nothing for Canadian jurisdiction. Nonetheless, the decision has potentially harmful consequences. It could give any recalcitrant respondent (or unhappy loser) the possibility of arguing the per se inarbitrability, as a matter of English law, of any dispute requiring the application of mandatory rules of the EU, whenever the chosen law of the contract is not the law of an EU Member State and where the seat of the arbitration is outside the EU.

As a result of this decision, parties would be advised to be cautious when entering into arbitration agreements with a non-EU choice of law where aspects of EU law are likely to play a significant role. Pending further clarification of this decision in future cases, they should be aware that such aspects could invalidate their clause.

(Accentuate Ltd v Asigra Inc [2009] EWHC 2655 (QB))