Out-Law Analysis 13 min. read
30 Sep 2021, 11:46 am
But the scale of these issues should not be overstated. They will not arise in every case and there are strategies for tackling them.
Many businesses have long chosen the law and courts of England and Wales or another UK jurisdiction for the resolution of disputes arising from cross-border commercial deals. They do so because of the calibre of judiciary; familiarity of language; predictability of outcomes due to precedent; and respect for freedom of contract. Most of this is unaffected by Brexit.
However, in cases with a European dimension, Brexit does affect the rules on the law applicable to disputes and which courts will have jurisdiction over them. It also affects the cross-border recognition and enforcement of judgments.
Businesses should know what Brexit means for contractual clauses specifying the law and courts of England and Wales and for judgments of UK courts.
While the 2019 EU-UK Withdrawal Agreement contained certain transitional arrangements on these issues, essentially for proceedings started by the end of the implementation period, 31 December 2020, the EU-UK Trade and Cooperation Agreement (TCA) agreed on 24 December 2020 did not make any longer-term provision in these areas. We examine the resulting position and long-term alternatives to the previous regime which the UK has put in place or is pursuing. These include accession to the Lugano Convention, which the UK is still pursuing, but it remains unclear what will be achievable.
Given the potential for there to be no overarching international agreement with the EU on these issues, businesses should be aware of the existing post-Brexit framework and consider this carefully when entering into cross-border contracts with EU counterparties or when cross-border disputes with EU parties arise.
Arbitration, including enforcement of arbitral awards, is unaffected by Brexit; as a result, businesses which resolve their disputes through arbitration do not have similar cause for concern.
There is no substantial change to the rules on applicable law. Parties who have traditionally chosen English law to govern their contracts can feel reasonably comfortable in continuing to do so.
The English courts retain many of their existing attractions. However, there is likely to be an increased risk of disputes about jurisdiction and a less straightforward process for the enforcement of UK judgments in EU member states and Lugano Convention states, with enforcement being the biggest concern.
Businesses should take steps in order to mitigate these risks. The shape of those steps will depend upon the precise circumstances, the jurisdictions involved and the commercial objectives of the business.
Parties entering into contracts who are concerned about these issues should seek legal advice upfront on the risks involved and potential means of avoiding them. Dispute resolution clauses should not be treated as boilerplate. Local law advice may well be needed about, for example, how easy it would be to enforce a UK judgment in a particular country - generally where the counterparty's assets are located - in the "worst case scenario" that the UK is unable to reach any long-term arrangement with the EU on these issues or if any relevant international instrument were not to apply in the particular circumstances. It may in some cases be appropriate to make jurisdiction clauses exclusive, so as to maximise the chances that the protections offered in this area by the Hague Convention on Choice of Court Agreements, to which the UK has acceded in its own right, will be available, although such a decision again requires specialist advice.
Parties should take early legal advice on any dispute, to enable litigation strategy to be formulated. Strategy can be determined in view of any risks on, for example, enforcement, and local law advice taken as needed.
Parties with an unenforced judgment which they may need to enforce in an EU member state or Lugano Convention contracting state should take advice on their options.
Parties concerned about enforcement should give consideration to whether arbitration would be a suitable method for resolving disputes, assuming they are not already bound by clauses referring disputes to litigation. The ready enforceability of arbitral awards under the New York Convention is unaffected by Brexit. This will involve weighing up the various attractions and drawbacks of court litigation and arbitration respectively.
Businesses which have not already reviewed their existing dispute resolution provisions should do so now. For example, in light of ongoing uncertainty about whether the UK's accession to the Hague Convention in its own right will assist in cases where there are pre-1 January 2021 exclusive jurisdiction clauses, parties who wish to continue to rely on existing exclusive jurisdiction clauses should consider 're-papering' those clauses, perhaps by way of a supplemental agreement. Specialist advice is needed on the drafting of any such agreement.
The pre-Brexit rules on which country's laws apply to a dispute are found in the Rome I Regulation for contractual obligations and the Rome II Regulation for non-contractual obligations. Amongst other things, these contain provisions requiring courts of EU member states, in general, to respect parties' contractual choices of applicable law. As a result, a clause in a contract specifying that the law of England and Wales shall govern that contract and any dispute arising from it would generally be upheld by any EU member state court dealing with such a dispute.
These continued to apply in respect of the UK during the implementation period, so until 31 December 2020.
Under the Withdrawal Agreement, the pre-Brexit rules will continue to apply to contracts agreed, or harmful events occurring, before the end of the implementation period. This provided particular comfort to businesses entering into contracts with applicable law clauses in the run-up to 31 December 2020 that those clauses would continue to be respected into the future.
However, even now the implementation period has come to an end with no further deal on these issues in place, the position on applicable law will not be significantly affected. This is because the relevant provisions of the Rome I and II Regulations, which will continue in force in EU member states, do not depend on mutual reciprocity and are of 'universal' application. In the context of applicable law clauses, this means that EU member states must generally respect such clauses regardless of whether the law chosen is that of an EU member state or of a 'third country' such as, say, a US jurisdiction or the UK post-Brexit. Likewise, the provisions of Rome I and II have been incorporated into UK national law as retained EU law, with a statutory instrument making necessary textual changes to implement this now in force. As a result, EU member state and UK courts alike will generally continue to uphold English and other UK applicable law clauses in the same way as previously.
Within the EU, the rules on which country's courts have jurisdiction over a dispute are found principally in the Brussels I Recast Regulation. This sets out an effective scheme for determining jurisdiction issues and avoiding multiple proceedings in different EU countries. In general, where parties have agreed that the courts of a particular EU member state should have jurisdiction, that court will have jurisdiction. Unless agreed otherwise, that jurisdiction will be exclusive, meaning no other court will have jurisdiction.
The Recast Regulation addresses the problem of the 'Italian torpedo', a tactical manoeuvre whereby a party to an exclusive jurisdiction agreement used to be able to cause delay and inconvenience to their opponent by commencing proceedings in a court other than that specified in the agreement, which, under the old rules, would then have priority as the court 'first seised' of the dispute. Under the Recast Regulation, the non-chosen court must stay its proceedings unless and until the chosen court declares that it does not have jurisdiction. The English courts have held that for this purpose an exclusive jurisdiction clause includes an 'asymmetric' clause, common in finance agreements, obliging one party to sue in a particular court while the other may choose.
Denmark has a standalone agreement with the EU broadly on the terms of the Brussels I Recast Regulation. The position between EU member states - including, pre-Brexit, the UK - and Iceland, Norway and Switzerland is governed in similar terms by the Lugano Convention of 2007. This does not, however, contain the innovations introduced in the Brussels I Recast Regulation, for example, to address the 'Italian torpedo' issue.
These rules continued to apply in respect of the UK until the end of the implementation period, 31 December 2020.
Under the Withdrawal Agreement, the Brussels I Recast Regulation rules on jurisdiction as between EU member states, and the agreement by Denmark to apply these, will continue to apply in respect of the UK to proceedings which began before the end of the implementation period.
It is unclear whether the same is true in relation to Iceland, Norway and Switzerland, as the Withdrawal Agreement does not include similar transitional provision for the Lugano Convention as for the Brussels I Recast Regulation. The UK has passed a statutory instrument which provides that, for its part, it will continue to apply the Lugano Convention rules to proceedings begun before the end of the implementation period, but it cannot dictate the approach of other Convention parties.
Beyond the transitional arrangements, as there is no agreement on these issues in the TCA, the starting point is that these international arrangements will no longer apply to the UK. Unlike the Rome I and Rome II Regulations on applicable law, the Brussels I Recast Regulation and Lugano Convention do operate on the basis of mutual reciprocity between states. As a result, these instruments will no longer assist if, for example, a party to an English jurisdiction clause finds that its counterparty has issued proceedings in breach of that clause in an EU member state. There is therefore now an increased risk of disputes about which country's courts have jurisdiction to hear a case.
The UK has been pursuing a range of options to address this issue. These include applying to join the Lugano Convention in its own right, which is widely considered to be the 'next best' option in the absence of a new agreement mirroring the Brussels I Recast Regulation and which is necessary in any event to protect the position in relation to Iceland, Norway and Switzerland. However, this requires consent of all contracting parties, including the EU. While Iceland, Norway and Switzerland have stated that they support the UK in its application to rejoin Lugano, and some other member states are also understood to be amenable to this, the European Commission has formally stated that it is not currently in a position to consent to inviting the UK to re-join. As a result, there is considerable uncertainty as to whether the UK will be able to re-join Lugano, and businesses are better advised at present to assume that this will not take place.
Importantly, the UK has acceded in its own right to the Hague Convention – something it was entitled to do unilaterally. This took effect from 1 January 2021.
The Hague Convention, to which all EU member states are party, requires the court designated in an exclusive jurisdiction agreement to hear the case and generally prevents courts of other contracting states from hearing parallel proceedings. It will therefore go some of the way to plugging the gap left by the Brussels I Recast Regulation. Accession was also necessary to preserve the UK's position in relation to the non-EU Hague Convention parties: Mexico, Montenegro and Singapore.
As a result, parties may now consider preferring exclusive jurisdiction clauses in their contracts. We can advise on whether such a clause is likely to be suitable for a particular transaction. For example, it needs to be taken into account that the protection offered by the Hague Convention is inferior to Brussels I Recast in a number of respects. Just one of these is its restriction to exclusive jurisdiction clauses - and for these purposes, an 'asymmetric' jurisdiction agreement of the type discussed above is not included. Hague may also not assist in certain circumstances where none of the parties are domiciled in the UK or another non-EU Hague contracting state (Mexico, Montenegro or Singapore).
There is an ongoing debate about whether the UK being party to the Hague Convention in its own right from 1 January 2021 provides protection in relation to exclusive jurisdiction clauses which were entered before that date but since 1 October 2015, while the UK was a party to the Hague Convention or treated as such by way of its (former) EU membership, or whether the Hague Convention will only assist in relation to exclusive jurisdiction clauses agreed on or after 1 January 2021. Businesses which have existing exclusive jurisdiction clauses which they would like to continue to rely upon may consider re-agreeing those clauses now, perhaps by way of a supplemental agreement, assuming all counterparties are amenable to this. Specialist advice should be sought on how to draft any such agreement to maximise the chances that it will be effective.
It should also be remembered that, even in the absence of protection under international instruments, many EU member states, such as France, Spain and Germany, have national laws which respect parties' freedom to choose which courts should hear their disputes - as is the position under English law. Businesses with concerns, either at transactional stage or when a dispute arises, about whether an English jurisdiction clause will be respected in another jurisdiction in which a claim may be brought, should seek local law advice about the approach of that jurisdiction.
Under the pre-Brexit system, the English courts were prevented by EU law from granting anti-suit injunctions to stop a party from breaching an English jurisdiction agreement by bringing proceedings in another member state court. It is likely that the English courts will now regain this power, which may further mitigate some of the risks in this area.
As with jurisdiction, the key pre-Brexit instruments in this area were the Brussels I Recast Regulation and the Lugano Convention. The Brussels I Recast Regulation in particular has established an effective, streamlined procedure for the mutual recognition and enforcement of judgments between EU member states.
There is also a European Enforcement Order (EEO) regime for the easy enforcement of uncontested money judgments, such as default judgments, across the EU, except in Denmark.
These rules continued to apply in respect of the UK until 31 December 2020.
The Brussels I Recast regime will continue to apply to enforcement of judgments given in proceedings which began before 1 January 2021, although the position regarding the application of the Lugano Convention enforcement provisions to judgments given in such proceedings is unclear.
Any party who currently has the benefit of an unenforced judgment which they may need to enforce in an EU member state or Lugano Convention contracting state should take advice on their options. In the EU27, it will generally continue to be possible to enforce such a judgment, and judgments given for some time yet to come in proceedings which are already ongoing, under the Brussels I Recast regime, as the proceedings giving rise to the judgment will have started before 31 December 2020. However, as noted above, there is uncertainty as regards the position in some of the Lugano states. It will only be possible to continue to use the EEO regime, for example for enforcing a default judgment, where an EEO certificate was applied for by 31 December 2020, because the Withdrawal Act transitional arrangements for the EEO regime required that application to have been made by the end of the implementation period.
Beyond the transitional arrangements, the starting point is that these mechanisms have now fallen away for the UK. Enforcement of UK judgments in the EU27 and Lugano Convention contracting states will therefore become more complicated than before.
The UK's accession to the Hague Convention will, again, provide some measure of protection. The Convention generally requires any judgment granted by the court specified in an exclusive jurisdiction clause to be recognised and enforced in other contracting states. However, as has been noted, there are a number of limitations and uncertainties regarding the protection offered by the Hague Convention. In addition to those already discussed, it should, for example, be noted that the Convention does not provide for the enforcement of protective measures such as interim injunctions or freezing orders.
In addition, parties looking to enforce a UK judgment cross-border may sometimes be able to rely on bilateral treaties with specific EU member states and Lugano contracting states. The UK has recently concluded a bilateral treaty on enforcement of judgments with Norway. In addition, there are some old, pre-EU bilateral enforcement treaties with a small number of EU member states. Specific advice should be sought on whether any such treaty exists in relation to a particular jurisdiction of concern and, if so, whether that treaty might now revive. It should be noted that no new bilateral enforcement treaties with individual EU member states should be expected, as the EU has 'exclusive competence' to reach agreements on these issues on behalf of its member states.
Many EU member states do, however, enforce foreign judgments under their national laws, regardless of international arrangements. This is the case in the UK, where it has long been possible to enforce foreign judgments under the common law where there is no reciprocal enforcement agreement in place, as is the case for judgments from the US, for example. However, there may be additional procedural hurdles, and therefore time and cost, involved. In addition, in some jurisdictions, such as some Scandinavian jurisdictions, there may be more substantive issues with enforcement. Again, local law advice from the likely jurisdiction for enforcement may well be critical, both when deciding upon dispute resolution provisions or when formulating a litigation strategy, and we can provide or facilitate this.
We have seen increased interest in international arbitration as a means of dispute resolution in light of Brexit, since enforcement of arbitral awards under the New York Convention – and arbitration generally - is unaffected by Brexit. Arbitration may therefore be a relatively low-risk option which parties may wish to consider, either when negotiating dispute resolution provisions in new contracts or if a dispute arises. In the latter case regard will have to be had to any existing dispute resolution provisions, which may or may not be capable of renegotiation.