ENGLISH COURT OF APPEAL SAYS LAW GOVERNING ARBITRATION AGREEMENT DETERMINES IF NON-PARTIES ARE BOUND BY IT

In the context of an appeal of a stay application, the English Court of Appeal has considered which law should determine whether a non-party is bound by an arbitration agreement. In Lifestyle Equities CV and another v Hornby Street (MCR) Ltd and others [2022] EWCA Civ 51, the Court upheld the stay of proceedings, finding that the appellants were bound by the arbitration agreement as successors in title to the trademarks, having applied Californian law, which was the governing law of the arbitration agreement.

 Background

The claimants, Lifestyle, were the registered proprietors and licensees of a Beverly Hills polo club logo (the "BH Logo") registered in the UK and the EU (the "Trademarks"), which were originally used by a Californian company BHPC Marketing ("BHPC"). The respondents ("SB") were the owners and licensees of a similar logo for the Santa Barbara polo club logo (the "SB Logo").

In 1997, BHPC and Santa Barbara Polo & Racket Club ("SBPC") had entered into a "co-existence agreement" following a dispute regarding the use of their respective logos and ownership of several US trademarks (the "Agreement"). In the Agreement, SBPC and BHPC consented to the worldwide use and registration by the other party of its respective logos. The parties agreed to resolve their disputes by arbitration in California, in accordance with the rules of the American Arbitration Association (the "Arbitration Agreement"). In 2009, following several assignments by BHPC, the Trademarks were eventually assigned to Lifestyle Equities. In 2015, Lifestyle Equities applied to register the BH Logo in Mexico relying on a consent letter whereby SBPC consented to the registration with reference to the Agreement (the "Consent Letter").

 Lifestyle's claim and SB's stay application

Lifestyle brought a claim in the English courts in 2020. They complained about the infringement of the Trademarks and passing off, by SB having used the SB Logo on goods sold in the UK and the EU. Among other things, Lifestyle asserted that it was not a party to the Agreement, and that it was not bound by it.

SB applied for a stay of the claim pursuant to section 9 of the Arbitration Act 1996 (the "Act"), which provides, in relevant part, that:

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) 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 the stay application, SB argued that Lifestyle was bound by the Agreement under Californian law (i) as an assignee of the Trademarks; and (ii) by virtue of equitable estoppel following its reliance on the Agreement to obtain the Consent Letter.

 Hacon J judgment

Hacon J stayed the claim for the following alternative reasons:

1. under English law, Lifestyle had become a party to the Agreement as a result of its dealings in 2015, when it applied for the registration of the BH Logo in Mexico; or
2. under Californian law, as a matter of interpretation, Lifestyle was bound by the Agreement as it was a burden attaching to the Trademarks which passed with their assignment. Alternatively, under Californian law it was precluded from denying it was bound by the Agreement under the principles of equitable estoppel.

Lifestyle appealed the stay, contending that these reasons were wrong.

 The decision of the Court of Appeal

The Court of Appeal dismissed Lifestyle's appeal, granting the stay of proceedings under section 9 of the Act on the basis that Lifestyle was bound by the Arbitration Agreement (even though the Court disagreed with the basis of Hacon J's judgment).

 Applicable law

The Court of Appeal held that Hacon J was wrong to hold that Lifestyle became a party to the Agreement. However, there was no consensus as to which law should determine whether a non-party to the Arbitration Agreement is bound by it.

 Snowden's LJ dissenting opinion

Snowden LJ distinguished this question from the interpretation of the terms of the Arbitration Agreement, noting that no amount of interpretation could result in Lifestyle being contractually bound by any of the obligations in it. According to Snowden LJ, the correct characterisation of the issue was whether the assignments of the Trademarks to Lifestyle had the effect that Lifestyle became bound by the Arbitration Agreement. Accordingly, the law governing the Trademarks (i.e. UK or EU law, as the case may be) should apply to the question of whether Lifestyle is to be treated as bound by the Arbitration Agreement.

 The majority's view

Lewison and Macur LJJ disagreed with Snowden LJ, holding that Californian law, as the governing law of the Agreement and therefore the Arbitration Agreement, should determine whether Lifestyle was bound by the Arbitration Agreement. The majority characterised this question as an aspect of the scope of the Arbitration Agreement rather than its interpretation.

 Was Lifestyle bound by the Arbitration Agreement under Californian law?

The Court of Appeal concluded that Hacon J was entitled to find, from a reasonable evaluation of the expert evidence, that in accordance with Californian law, Lifestyle, as successor in title to the Trademarks, were bound by the Arbitration Agreement. However, under Californian law there were no justifiable reasons to apply equitable estoppel against Lifestyle.

Accordingly, the Court of Appeal found by a majority that Lifestyle was bound by the Arbitration Agreement as a matter of Californian law. The Court of Appeal agreed that SB was entitled to make the application against Lifestyle despite the fact that Lifestyle was not a party to the Arbitration Agreement itself, on the basis that there was nothing in section 9(1) of the Act preventing SB from doing do.

 Comment

The judgment illustrates that a stay under section 9 of the Act can be made against non-parties to an arbitration agreement, provided that they are 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.

The Court of Appeal did not reach a unanimous view on the law determining whether a non-party is bound by an arbitration agreement. Although parties may, for the time being, rely on the majority's view that the law governing the arbitration agreement will determine this question, the dissenting opinion of Snowden LJ suggests that this complex issue may eventually reach the Supreme Court.

For more information, please contact Craig Tevendale, Partner, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.