Invalidity of Arbitration Clause for Disputes under European Union Law: Ruling of the English High Court in Accentuate v Asigra

An arbitration clause is void insofar as it submits to resolution by an arbitration court disputes concerning mandatorily applicable provisions of European Union law. This was the ruling by Sir Michael Tugendhat, Judge of the English High Court of Justice, Queen’s Bench Division, in the judgment dated 30 October 2009 in Accentuate Ltd v Asigra Inc ([2009] EWHC 2655 QB). The ruling made Judge Tugendhat one of the personages most often mentioned during the IBA Arbitration Day seminar held on 5 March 2010 in London. The question was openly raised during panel discussions and coffee breaks whether this ruling has brought to an end the English courts’ reputation for being arbitration-friendly.

The plaintiff, a UK company (the “Distributor”), entered into an agreement with the defendant, a Canadian company based in Ontario (the “Licensor”) under which the plaintiff would distribute the defendant’s software in the UK. The agreement contained a choice of law clause calling for application of Ontario law and Canadian federal law, as well as an arbitration clause calling for arbitration in Toronto.

The agreement was terminated by the Licensor. After termination the Distributor notified the Licensor that it intended to file claims against it, including claims for compensation for improper termination under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993. The regulations implemented, in the UK, Council Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed commercial agents.

Under Regulation 19 (which repeats the wording of Art. 19 of the directive), parties to an agreement cannot vary from the provisions of Regulation 17 to the detriment of a commercial agent prior to expiry of an agency agreement.

The Licensor issued a demand for arbitration, but a month later the Distributor filed a petition in the state court in the UK. Upon motion of the Licensor the proceeding was stayed because of the arbitration clause. This ruling was appealed by the Distributor, providing the basis for issuance of the ruling in question by the High Court.

In the meantime, in the arbitration proceeding the Licensor sought a declaration that the Distributor held no claim under the agreement under any basis. The Distributor argued that it is not possible to exclude application of Regulation 17, and that claims based on the Regulation are beyond the scope of the arbitration clause. The Distributor participated in the arbitration proceeding, however, and in the alternative sought an award of compensation under the Regulation. The arbitration court denied the Distributor’s defence that claims based on Regulation 17 are beyond the scope of the arbitration clause, held that the Regulation is not applicable because the parties chose Canadian law, and also awarded the Distributor damages for breach of contract but not in connection with the Regulation.

While the arbitration award did hold the Licensor liable for damages, at the core of the dispute it was in the Licensor’s favour, as it held that the Distributor had no claim under the Regulation. The award thus served the defendant as a shield in the lawsuit commenced by the Distributor in the UK.

In the proceeding before the English court, the Licensor argued that the plaintiff’s assertions go to the arbitration court’s failure to apply EU law and are not related to the validity of the arbitration clause. The Licensor also argued that the Distributor could avoid the arbitration award only by filing a petition to set aside the award in Canada, and as it did not do so the arbitration award has res judicata effect. The Distributor argued that the arbitration award is contrary to public policy and cannot be recognized in the case. It also argued that the arbitration clause, tending to submit the case for resolution under law that does not reflect mandatorily applicable European Union, is void.

The court held for the plaintiff, finding that the ruling by the European Court of Justice in Ingmar GB Ltd v Eaton Leonard Technologies Ltd (C-381/98) requires a court in the EU to give effect to mandatorily applicable provisions of European Union law, regardless of any contractual provisions purporting to exclude such effect. The court found that this principle also applies to an arbitration clause that provides for a place of arbitration outside the European Union and decision of the dispute under law that does not reflect the mandatorily applicable provisions of EU law. Thus, if the agreement between the parties was an agency agreement subject to the Regulation and the Directive (which was disputed between the parties), the arbitration clause was void and unenforceable insofar as it purported to submit to arbitration disputes concerning mandatorily applicable provisions of EU law.

Although this holding was worded broadly, it appears that what was crucial to the ruling was the connection between the arbitration clause and the choice of law from outside the EU, together with the place of arbitration outside the EU. In such case, EU law might not be applied either at the stage of the arbitration proceeding or at the stage of a petition to set aside the award. As a result, even though the arbitration award might not be recognized in the UK, if the arbitration clause were held to be effective the Distributor would be deprived of a forum to litigate its rights under the Regulation.

Summary of decision in Accentuate v Asigra: Mandatory EU regulations invalidate arbitration clause where parties chose non-EU law

According to a ruling by the English High Court, an arbitration clause in a commercial agreement will be void where the agreement also included a choice of substantive law of a non-EU member state but covered matters subject to mandatorily applicable EU regulations.

In Accentuate Ltd v Asigra Inc ([2009] EWHC 2655 QB), a Canadian software licensor had entered into a distributorship agreement with a UK distributor. The agreement contained a choice of Canadian law and an arbitration clause calling for arbitration in Toronto. In a fee dispute, the distributor sought to litigate before the English court but the licensor commenced arbitration in Canada. The distributor’s claims included compensation as a commercial agent under Council Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed commercial agents. 

The distributor participated under protest in the Canadian arbitration, where it was held that the parties had effectively chosen Canadian law. The licensor meanwhile successfully quashed service of process abroad in the English court case.

On appeal, the High Court of Justice, Queen’s Bench Division, reversed and held that if the distributor qualified for protection as a commercial agent (a point in dispute), then the arbitration clause would be void because the choice of law in the distribution agreement purported to apply Canadian law in violation of the mandatory applicability of the Commercial Agents Directive.

The court extended the holding of the ECJ in Ingmar GB Ltd v Eaton Leonard Technologies Ltd (Case No. C-381/98) [2000] (ECR I-9305).

Published in: e-Przegląd Arbitrażowy No. 1 (Spring) 2010