By Maria Cole and Michelle Rubaduka
A company that acquired the Beverly Hills Polo Club trade mark was found by the English Court of Appeal to be bound by an arbitration clause in an agreement entered into by its predecessor owner of the trade mark.[1] The appeal involved issues of conflict of laws in relation to arbitration agreements and the assignment of trade marks.
Background
In 1997, a “co-existence agreement” was entered into to resolve a dispute over the “Beverly Hills Polo Club” and “Santa Barbara Polo & Racquet Club” trade marks (the logos).[2] The logos were registered for a variety of goods, mainly clothing. The agreement covered use of the logos worldwide. It provided for any future dispute to be resolved by arbitration in Los Angeles under Californian law and without reference to California’s conflicts of law provisions. The agreement was binding on the parties and, relevantly, their assignees.
In 2009, Lifestyle Equities CV (Lifestyle) was assigned the EU and UK logos for the Beverly Hills Polo Club. It was unaware of the 1997 agreement at the time but was provided a copy in 2013. In 2015, it applied to register a trade mark in the Mexican Trade Mark Office and wanted to show it had the support and consent of the Santa Barbara Polo Club (SBPC). A consent letter was signed by both Lifestyle and SPBC which acknowledged they were parties to a worldwide coexistence agreement and annexed a copy of the 1997 agreement to prove this.
2020 proceedings filed in England
In 2020, Lifestyle brought trade mark infringement and passing off proceedings against SBPC in the Intellectual Property Enterprise Court in London over the use of the Santa Barbara logo on goods sold in the UK and EU. As part of its pleadings, Lifestyle said it wasn’t a party to the 1997 agreement; it didn’t know about it when it took assignment over the logos; and, by reason of the trade mark laws of England and the EU, the 1997 agreement was not binding on it when the assignment occurred.
To support its arguments, Lifestyle relied on rule 135(2) in Dicey, Morris & Collins on the Conflict of Laws[3] (rule 135(2)). This rule provides that the validity and effect of an assignment may be governed by the law with which the right assigned has its most significant connection. In this case, UK and EU laws.
SBPC applied for a stay, arguing that court proceedings breached the arbitration clause in the co-existence agreement. To do so it relied on section 9 of the Arbitration Act 1996 (of England and Wales), which provides:[4]
(1) A party to an arbitration agreement against whom legal proceedings are brought … in respect of a matter which under the agreement is to be referred to arbitration may … apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.
…
(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.
In support of its application, SBPC also relied on Dicey, Morris & Collins on the Conflict of Laws, but on rule 64 (rule 64). Rule 64 provides that the validity, scope and interpretation of an arbitration agreement is governed by its applicable law. In this case, the law of California.
SBPC advanced two arguments under Californian law. First, it said that Lifestyle was bound by the 1997 agreement as assignee of the logos. Second, that Lifestyle was bound by the 1997 agreement because it had relied on it to get the letter of consent in support of its Mexican trade mark application (an equitable estoppel argument).
The Court granted the stay. The Judge said the question before him was to decide whether the arbitration clause in the 1997 agreement could be enforced against Lifestyle. In finding it could be, he said, in summary:
- that as a matter of English law, Lifestyle had become a party to the 1997 agreement as a result of its dealings with SBPC over the Mexican trade mark application;
- in the alternative, that the question whether Lifestyle was bound by the arbitration clause in the 1997 agreement should be determined by Californian law; and that under Californian law, a settlement or co-existence agreement is a burden attaching to a trade mark and passes with its assignment to become an obligation binding on the assignee, irrespective of whether the assignee knows about the agreement; and
- in the further alternative, that Lifestyle was precluded from denying that it was bound by the 1997 agreement under Californian law principles of equitable estoppel.
Lifestyle appealed, saying all three reasons were wrong.
Court of Appeal decision
The Court of Appeal was united in rejecting the reasoning of the first instance Judge for ordering the stay. It found that Lifestyle was neither a party to the co-existence agreement containing the arbitration clause nor was it prevented from denying that it was a party to it. However, the Court was split when it came to deciding whether Lifestyle was bound by the arbitration agreement, even though not a party to it.
Lord Justice Snowden considered that rule 135(2) was relevant and that it would be incorrect to apply Californian law to decide whether Lifestyle was bound. His view was that it was not an issue of contract law at all. He concluded:
The question is whether a non-party is bound by an arbitration agreement between two other persons. The question is only being asked because the first person is not a party to the arbitration agreement as a matter of the law of contract. It is therefore difficult to see any logical reason, when addressing the issue as a matter of English conflict rules … to characterise it as a matter of contract.
Lady Justice Macur and Lord Justice Lewison disagreed. They found that the question of whether Lifestyle was bound by the arbitration clause, which they viewed as a question concerning the scope or effect of the arbitration rather than the substance of the dispute, was a contractual question. They considered that the same law should apply to the issue of who is bound by the arbitration agreement as applies to the question of who is a party to the agreement.
Expert evidence had indicated that under Californian contract law Lifestyle was bound by the arbitration clause in the 1997 agreement, even though it was not a party to the agreement. This resulted in a finding that the arbitration clause was operative, which meant that the stay of proceedings was upheld and the appeal was dismissed.
Practical implications
This decision illustrates the importance of including an explicit clause addressing which law governs an agreement to arbitrate clause in a commercial contract, and future-proofing contractual arrangements. It also shows that it pays to do due diligence thoroughly when taking an assignment as it’s possible to be bound to an agreement to arbitrate even when not a party to it, despite the consensual nature of arbitration.
[1] Lifestyle Equities CV & Anor v Hornby Street (MCR) Ltd & Ors [2022] EWCA Civ 51.
[2] There were various other parties to the 1997 agreement and numerous parties to the 2020 proceedings but they are not relevant to this article.
[3] Dicey, Morris & Collins, The Conflict of Laws, 15th ed (2012).
[4] Under section 2(2) of the Arbitration Act, section 9 applied despite the designated seat of arbitration being outside England and Wales.