British Court Guts Arbitration Clause for Judicial Remedies under an EU Directive
An English distributor, Accentuate Ltd, and Canadian licensor, Asigra Inc., entered into a software distribution agreement which contained clauses requiring arbitration and a choice of law provision providing that the laws of Ontario and Canada govern. When a breach of the agreement occurred, the distributor threatened to bring a claim in England under an EU Directive--Commercial Agents (Council Directive) Regulations 1993– which provides a self-employed commercial agent with indemnity or compensation upon termination of an agency contract.
In response to the threat of litigation, the licensor started arbitration in Canada for a declaration that the distributor had no claims against it. In the resulting awards, the tribunal stated that the laws of Ontario (and federal laws of Canada) applied to the dispute and that the regulations were irrelevant.
Rather than challenge the awards, the distributor applied to an English 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 on the grounds that the parties had agreed to refer disputes to arbitration in Toronto under Canadian law. The judge declared that the court had no jurisdiction, but granted the distributor permission to appeal. The distributor appealed to the High Court, arguing that the choice of law amounted to an evasion of EU law.
The appellate court reversed and found that the requirements of the regulations were mandatory; thus, an arbitration clause in favor 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.
This decision is troublesome. The concept behind both choice of law provisions and arbitration clauses is that the parties have the right to contractually agree on all terms of their business arrangement--including the remedies. This decision undercuts these rights. Anyone doing business in the European Union is forced to make sure that he is not falling into a trap of unintended consequences.
When international disputes are heard at the BCDR, where the parties involved agree to be bound by the outcome, the award will be guaranteed and not subject to challenge in Bahrain. This resolves an issue that has been a significant problem in many parts of the world, despite existing international conventions. Bahrain's arbitration "free zone" will, therefore, offer jurisdictional and legal certainty to the recognition of arbitration awards, an essential component of modern day commercial transactions.