Authors: Emma Flett and Oliver Shepley
Earlier this year, the English Court of Appeal in Lifestyle Equities CV and another v Hornby Street (MCR) Ltd and others [2022] EWCA Civ 51 had to consider whether a non-party was bound by an arbitration agreement and which law applied to it. The Court of Appeal (by majority) upheld the decision of the first instance judge to stay trade mark infringement proceedings in favour of arbitration on the basis that the claimant was bound by the agreement containing an arbitration clause by virtue of being successors in title to the trademarks in issue.
Factual Background
The Claimant brought proceedings in the English courts alleging that the Defendant had infringed its UK and EU trademarks which protected its “Beverly Hills Logo” (“BHL”) (the “Claim”).
Prior to the trademarks being assigned to the Claimant, the BHL was originally used by BHPC Marketing Inc. (“BHPC”). BHPC became aware that another company, Santa Barbara Polo & Racket Club (“SBPC”) owned a similar logo to the BHL for their Santa Barbara polo club. To resolve the issue, in 1997 BHPC and SBPC entered into a co-existence agreement, whereby each party agreed they could continue to use their respective logos, consented to the other registering further logo’s and, finally, could use the co-existence agreement as “evidence worldwide to assist with trademark and/or service mark registration”.
Under the co-existence agreement (the “Agreement”), the parties also agreed that:
“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. […] This Agreement shall be construed and governed in accordance with the applicable laws in the State of California, without reference to its conflicts of law provisions.”
The trademarks were eventually assigned to the Claimant and Defendant. The Claimant was not aware of the Agreement when it took on the assignment of the BHL in 2009, but became aware of it a few years later and subsequently, in 2015, had dealings with the Defendant whereby the Claimant relied on the Agreement when trying to gain the Defendant’s consent to register the BHL in Mexico.
In 2020 the Claimant issued the Claim against the Defendant for infringing the BHL and passing off its own logo without the consent of the Claimant. The Claimant argued that it was not a party to the Agreement, did not know of the Agreement at the time of the assignment of the BHL and that the Agreement was not binding on the Claimant 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 Defendant applied for a stay of these proceedings pursuant to section 9 of the Arbitration Act 1996 (the “Act”). Supporting its application for the stay, the Defendant argued that under Californian law, the Claimant was bound to the Agreement and by relying on Agreement in 2015 to gain consent from the Defendant in Mexico, the Claimant was bound to the Agreement by the doctrine of equitable estoppel.
The Judge (Hacon J) allowed the Defendant’s application to stay the Claim and gave three reasons for doing so, which, summarily, were:
the Claimant had become a party to the Agreement through its dealings in 2015 with the Defendant as a matter of English law;
alternatively, under Californian law, the Agreement is a burden attaching to a trade mark and passes with its assignment to become an obligation binding on the Claimant, irrespective of whether the Claimant knew about the Agreement; and / or
alternatively, under the principles of equitable estoppel in Californian law, the Claimant could not deny they were bound to the Agreement.
The Claimant appealed to the Court of Appeal (the “Court”), arguing that this reasoning was wrong and so the Court had to engage in a contractual and conceptual analysis in order to determine whether the Claimant could be bound, or was a party, to the Agreement.
Decision of the Court of Appeal
The Court dismissed the Claimant’s appeal, granting the stay of proceedings under section 9 of the Act on the basis that the Claimant was bound by the arbitration agreement (even though the Court disagreed with the basis of Hacon J’s judgment). The Court held that Hacon J was wrong to hold that the Claimant became a party to the Agreement. However, there was no consensus as to which law should determine whether a non-party to an arbitration agreement is bound by it.
Snowden LJ distinguished the question from the interpretation of the terms of the Agreement, highlighting that no level of interpretation could find that the Claimant was contractually bound by any of the obligations in it. The correct characterisation, according to Snowden LJ, was whether the assignments of the trademarks to the Claimant had the effect of binding the Claimant by the Agreement. Therefore, the law governing the trademarks (i.e. UK or EU law) should apply to whether the Claimant is to be treated as bound by the Agreement.
Lewison and Macur LJJ disagreed, holding that Californian law, as the law which governed the original agreement and therefore the arbitration agreement, should determine whether the Claimant was bound by the Agreement. This was characterised as an aspect of the scope of the Agreement, rather than its interpretation.
The Court concluded that Hacon J was entitled to find that the Claimant, as a successor in title to the trademarks, was bound by the Agreement. However, under Californian law there were no justifiable reasons to apply equitable estoppel against them denying that it was a party to the original agreement.
Consequently, the Court found by a majority that the Claimant was bound by the Agreement as a matter of Californian law. The Court agreed that the Defendant was entitled to make the application against the Claimant, despite the Claimant not being a party to the Agreement itself, on the basis that there was nothing in section 9(1) of the Act which prevented them from doing so.
Key Takeaways and Comments
This case illustrates that a stay under section 9 of the Act can be made against non-parties to an arbitration agreement, provided that they are considered bound by it. The assignment of a trademark is an example of a situation where a third party can be bound by an arbitration agreement without having granted their express consent.
In such cases, it is a question of which law of contract applies to the agreement, rather than which law of trade marks applies; in this instance, Californian law, which governed the Agreement, determined who was bound by that Agreement and by the arbitration agreement.
However, the Court did not reach a unanimous view on the law. Snowden LJ, dissenting, considered that the applicable law of the trademarks should apply to determine whether the claimant was bound by the arbitration agreement, such in the instance case being English law or EU law. While parties may rely on the majority’s view for now, the strong and somewhat persuasive dissenting decision from Snowden LJ makes the case, and the legal principles which apply when binding a non-party to an arbitration agreement, suitable for clarification by the Supreme Court.
The decision also highlights the importance of explicitly stating which law governs an arbitration agreement when one is used in a commercial contract. The Court demonstrated that, when deciding the scope of an arbitration clauses, the courts will generally apply the law governing the agreement to arbitrate.
