Determining the Applicable Law: Case of Non-Signatory to Arbitration Agreement

[By Tanish Gupta and Shubham Gandhi]

The authors are students at the National Law University, Jabalpur.

In an intriguing case of Lifestyle Equities CV v Hornby Streets (MCR) Ltd., the English Court of Appeal, in addition to other issues, was called upon to decide the applicable law in determining the binding effect of the arbitration agreement on a non-signatory, arising out of a trademark assignment,  viz. the law governing the arbitration agreement or the law governing the assignment of the trademark.

While the majority ruled in favour of the former, Snowden LJ, in his dissent, found the latter to be the applicable law since the contractual consensus of the parties to the agreement does not answer the issue raised.

In this article, the authors aim to elucidate the controversy, the cogent dissent of Snowden LJ, and the inadequate analysis provided in the majority opinion.

Facts of the Case

The present suit has been instituted against the alleged infringement of the registered trademark by Santa Barbara Polo & Racquet Club (“Respondent”). Lifestyle Equities C.V. (“First Appellant”) and Lifestyle Licensing B.V. (“Second Appellant”) is the registered proprietor and licensee, respectively, of the concerned trademarks, which include the figurative mark – the “Beverly Hills Logo” and a wordmark – “Beverly Hills Polo Club” in the UK and the EU.

The above-stated trademarks were originally owned by a California-based company, BHPC Marketing Inc. After many assignments in 2007 and 2008, the concerned trademarks were ultimately assigned to the first appellant in 2009. The respondent owns and uses the “Santa Barbara Logo,” similar to the appellants.

Given the similarity between the two logos, a dispute arose between the original owner and the respondent in 1997, and to resolve the same, both parties entered into a co-existence agreement. The agreement, in its Clause 7, provided for an arbitration clause and laid out the Californian law as the governing law:

“Any controversy, dispute or claim with regard to, arising out of, or relating to this Agreement, including but not limited to its scope or meaning, breach, or the existence of a curable breach, shall be resolved by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association. Any judgment upon an arbitration award may be entered in any court having jurisdiction over the parties.”

In 2015, the first appellant obtained a consent letter from the respondent to register the concerned trademarks in Mexico.

The Reasoning of Lower Court

The Appellants, earlier reached the courts of the United Kingdom and the European Union, praying for relief for infringement of their trademarks by the respondents. The arguments advanced by the appellants in support of their claim were that they were not parties to the 1997 Agreement, that they were not aware of its existence at the time of undertaking assignments of trademarks, and that they were not bound by the arbitration agreement by virtue of Article 27(1) of Regulation 2017/1001 on the EU Trade Mark, and Section 25(3)(a) of the Trade Marks Act 1994. The provisions state that until the agreement is registered, it would remain “ineffective as against a person acquiring a conflicting interest in or under the registered trademark in ignorance of it.”

On the other hand, the respondent presented an application for a stay and referred the matter to arbitration, pursuant to Section 9 of the Arbitration Act, 1996. The respondent, while relying on Californian law and the doctrine of equitable estoppel in regard to the 1997 Agreement to obtain the consent letter in 2015, contended that the 1997 Agreement bound the appellants as assignees of the trademarks.

In light of the arguments of both parties, Hacon J, who delivered the Lower Court’s judgment, decided to stay the claim and reasoned that under English law, the appellants had become parties to the 1997 agreement by virtue of having dealt with the respondent in 2015. Alternatively, with the application of the governing law, i.e., the Californian law, the parties were bound by the 1997 agreement as it was a burden attached to the trademark assignment and thus passed with it. Lastly, the doctrine of equitable estoppel precluded the appellants from disputing the binding effect of the 1997 Agreement on them.

The Judgment of the Court of Appeal

The three-judge Bench, though while granting a stay, disapproved of the reasoning of Hacon J. with regard to the first issue. The Bench affirmed that since neither party had argued on the matter of the appellants being parties to the 1997 Agreement under English law, the Judge should not have decided on the same. On the issue of equitable estoppel, the Bench agreed that reliance on the doctrine was misplaced since the appellants did not rely on the 1997 agreement but rather on the consent letter, and their conduct was not inextricably intertwined with the obligations imposed by the 1997 Agreement.

The second issue pertained to whether the parties were bound by the 1997 Agreement on account of the applicability of Californian law. It is at this point that the Bench had divergent opinions. Though the Bench agreed that the issue was not of ‘interpretation’ of the arbitration agreement, the majority characterized the issue of whether a non-signatory is bound by the arbitration agreement “as an aspect of the scope of the agreement.” Referring to Kabab-Ji SAL v Kout Food Group (“Kabab-Ji”), wherein the U.S Supreme Court held that the governing law of arbitration agreement also governs the question of who are parties to the agreement, the majority opined that the logical corollary would be that the question of who is bound by the arbitration agreement is governed by the governing law as well.

The Compelling Dissent of Snowden LJ

Snowden LJ’s dissent is premised on the distinction between the issues, namely, who is a party to an arbitration agreement and who is bound by it. The questions pertaining to ‘interpretation’ and ‘scope’, which deal with matters covered under the arbitration agreement, are to be resolved based on consensus between the parties to the agreement. The parties’ consensus can, in no way, bind the non-signatory to the arbitration agreement.

In the Kebab-Ji case, while the Supreme Court held the governing law of the arbitration agreement to be the applicable law, in deciding whether the agreement extends to a third party, the party was initiated through accession or novation, which are contractual mechanisms. In the present case, the parties did not seek to be bound through any contractual mechanism.

Thus, in the authors’ opinion, Snowden LJ rightly observed, “where it is sought to treat a person who is not a party to an arbitration agreement as bound by it, the contractual consensus between the existing parties cannot provide an answer. There must be some other relevant factor to justify that conclusion.” The ‘relevant factor’ should have a connecting effect on appellants as parties to the arbitration agreement. The correct characterisation, as per him, is “whether the assignments of the trademarks to the appellants had the effect that the appellants became bound by the arbitration clause in the 1997 Agreement.”

While referring to the case of Egiazaryan v OJSC OEK Finance, he went on to rule that law, i.e., English law, other than the governing law of the arbitration agreement, i.e., Californian law, shall be the applicable law in this case since the assignment of trademarks is governed by English law. In the Egiazaryan case, the Court had opined:

“if the question is one as to whether a non-signatory of the agreement can be joined by virtue of a concept such as agency or, in this case, a principle that shareholders or parents are obliged to arbitrate on contracts entered into by the signatory, then it is not the proper law of the contract which gives the answer, but English conflicts rules would look to another law, in this case, the law of incorporation of the signatory.”

Therefore, despite arbitration being seated in London and English law being the governing law, the Court applied Russian law to adjoin the non-signatory, the parent company to the party to the arbitration agreement, to the arbitration proceedings. At this juncture, the majority observed that the Egiazaryan case only showcased that it was permissible to look beyond the governing law of arbitration. Such an opinion is unconvincing and vague and fails to justify why the application of a law, which is not the governing law of the arbitration agreement, should be precluded.

Conclusion

Section 9(4) of the Arbitration Act 1996 provides for granting of stay unless “the arbitration agreement is null and void, inoperative, or incapable of being performed.” On finding that the arbitration agreement did not bind the appellants, the stay could be granted by virtue of the agreement being ‘inoperative’ in the present case. However, the agreement was ruled to be operative, thus, calling for a mandatory injunction under Section 9, the threshold being that the provision can be invoked to bind the non-parties.

Further, the thought-provoking dissent of Snowden LJ limits the applicability of choice of law to govern the arbitration agreement with regard to holding the non-signatory bound by it. However, his opinion completely forgoes the possibility of the governing law offering a viable alternative to bind the non-signatories to the arbitration agreement. Given the complication of hunting for ‘other relevant factors’, and in light of the pro-arbitration approach, it is unlikely that the Supreme Court, when faced with a similar issue, would endorse Snowden LJ’s approach.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in