Jurisdiction Clauses vs Mandatory EU Regulations
London & Bermuda Newsletter
Companies from outside the European Union (“EU”) doing business in the EU cannot be completely confident that their choice of law and jurisdiction clause will always be honoured by English courts.
The EU Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) are among a growing number of regulations and directives which prohibit parties to whom they apply from “contracting out” of the legislation. They regulate trade and business within the EU. Regulations of this type are known as “Mandatory EU Regulations”.
In Accentuate Limited v Asigra Inc (a company incorporated in Canada)  EWHC 2655 (QB), Asigra, Inc. is a software company incorporated in Canada, which licensed Accentuate Ltd. to resell Asigra’s software in the United Kingdom. The agreement provided for arbitration in Canada and stated that the contract was to be governed by Canadian law. On 13 November 2006, Asigra terminated the agreement.
Accentuate sought to rely on the Regulations, which provide for compensation of an agent upon termination of an agency agreement carried on within the EU. In a letter before action of 5 June 2007, Accentuate set out its claim for £1.75 million.
On 21 June 2007, Asigra commenced arbitration in Canada for a declaration that Accentuate had no claims under the agreement or otherwise. The thrust of the arbitration was for a ruling that the Regulations would not apply, although the questions for the arbitration were more general. The arbitration clause in the licensing agreement provided for Canadian arbitration and Canadian law. Canada not being a member of the EU, Asigra argued, a Canadian arbitrator was not required to apply the Regulation.
On 4 August 2008, the English High Court gave Accentuate permission to serve Asigra out of the jurisdiction with proceedings invoking the Regulations. Asigra successfully applied to have the permission set aside and stayed on the basis that the licensing contract required disputes to be submitted to arbitration. Accentuate appealed.
In the meantime, the Canadian arbitration proceedings had found that the Canadian choice of law clause in the contract trumped the Regulations, in spite of the fact that the agency contract was carried out within the EU. Accordingly, the arbitrator made an award confirming that the Regulations did not apply and therefore Accentuate was not entitled to compensation for termination.
These facts presented the Judge with a dilemma. By allowing service on Asigra in Canada, the Court would be extending its jurisdiction over disputes which were subject to a mandatory arbitration agreement. The UK Arbitration Act 1996 requires the Court to stay proceedings in breach of an arbitration clause, unless satisfied that the clause is void or inoperable. Additionally, the Court must recognize arbitration awards, provided they are not contrary to public policy. Accordingly, the Court would ostensibly be bound to recognize the Canadian arbitration award.
On the other hand, the Court is required to apply and enforce EU law, under section 3 of the European Communities Act 1972. The Regulations apply to all agency contracts carried on within the EU, and cannot be excluded by agreement or otherwise. Giving effect to the arbitration clause by refusing permission to serve overseas and staying proceedings, and separately enforcing the Canadian award, was tantamount to side-stepping the application of a Mandatory EU Regulation. In a previous case before the European Court of Justice (binding on the English court, in respect of questions of EU law), a choice of law clause was found to be unenforceable because it allowed the evasion of mandatory EU obligations.
If the arbitration clause (and choice of law clause) applied, then a Mandatory EU Regulation was ousted. There was therefore a conflict between the Regulations and the arbitration clause.
The High Court in London granted the appeal, thereby allowing service of the English proceedings for compensation and lifting the stay. By so doing, the Court effectively decided that:
an arbitration clause which submits disputes to a place and law that fail to give effect to the Regulations is null and void or inoperative, and so: (a) the Arbitration Act does not require the Court to stay proceedings which appear to be in breach; and (b) the Court was not required to give effect to the choice of Canadian law; and furthermore
recognition of the Canadian award should be refused on the basis that it failed to give effect to a Mandatory EU Regulation.
Checking which Mandatory EU Regulations may affect your business transaction is now a must do for every non-EU company doing business with an EU entity. They cannot rely on the English courts to give comprehensive effect to choice of law clauses, arbitration clauses or other jurisdiction provisions. Although the Regulations do not apply to insurance companies or brokers (it only applies to agency agreements involving “goods” and not “services”), some back-office outsourcing arrangements may be within their scope. The trend is also apparent from incursions by the “Judgments Regulation” on the powers of the English court to stay proceedings in breach of arbitration agreements and grant anti-suit injunctions. Consideration should be given to this issue, and legal advice obtained where appropriate, when entering into contracts with an EU / non-EU cross-border dimension. What you contract for may not actually be what you will get.