Out-Law Analysis | 27 Mar 2019 | 5:06 pm | 11 min. read
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 will be unaffected by any form of Brexit.
However, in cases with a European dimension, Brexit will affect the rules on the law applicable to disputes and which courts will have jurisdiction over them. It will also affect 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. We examine the impact if the UK leaves the EU without a deal, and if it leaves under the terms of the Withdrawal Agreement negotiated by the UK government and the EU.
The UK is also pursuing a range of long-term alternatives to the current regime, including a bespoke agreement with the EU and accession to the Lugano Convention, but it remains unclear what will be achievable. Given the potential for no-deal, businesses should prepare for this eventuality.
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.
Do not fear choosing English law: regardless of any Brexit deal, there will be 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.
Be aware of the risks: The English courts will retain many of their current attractions. However, in a no-deal scenario, 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.
If a deal is done on the terms of the current draft Withdrawal Agreement, there will be no change to the EU rules on jurisdiction or enforcement of judgments until the end of the transition period, and there are certain provisions for continuity of the existing rules after that time in ongoing proceedings. Beyond that, unless appropriate long-term international arrangements can be agreed, there will again be an increased risk of issues in relation to jurisdiction and enforcement in the EU.
Seek legal advice: Businesses should prepare in order to mitigate these risks. The shape of those preparations 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 be needed about, for example, how easy it would be to enforce a judgment in a particular country if the UK is unable to reach any, or any long-term, international agreement on these issues. It may 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 is acceding in its own right, will be available.
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. If the Withdrawal Agreement is approved, consideration can be given to whether it is appropriate to issue proceedings before the end of the transition period so as to benefit from the ongoing application of existing rules.
Parties with an unenforced judgment which they may need to enforce in an EU member state or Lugano Convention contracting state should take urgent advice on their options.
Consider arbitration: 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.
Review dispute resolution provisions: Businesses which have not already reviewed their existing dispute resolution provisions should do so now. For example, in light of uncertainty about whether the UK's accession to the Hague Convention in its own right will assist in cases where there are pre-Brexit 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.
The current 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 will generally be upheld by any EU member state court dealing with such a dispute.
The position on applicable law will not be significantly affected by any form of Brexit. This is because the relevant provisions of the Rome I and II Regulations, which will continue in force in EU member states after any Brexit, 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 UK government intends to incorporate the provisions of Rome I and II into UK national law and has prepared a draft statutory instrument to implement this. 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 at present, regardless of any future international arrangements.
Position under the draft Withdrawal Agreement
In addition, if the draft Withdrawal Agreement is approved, the current rules will continue to apply to contracts agreed, or harmful events occurring, before the end of the transition period, whether the current date of 31 December 2020 or a later date, the Agreement currently providing for a two-year extension. This would provide even more comfort to businesses entering into contracts with applicable law clauses now that those clauses will continue to be respected post-Brexit.
Within the EU the rules on which country's courts have jurisdiction over a dispute are found principally in the Brussels 1 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. Now, 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 1 Recast Regulation. The position between EU member states including, at present, 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 1 Recast Regulation to address the "Italian torpedo" issue.
In a no-deal scenario, 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 1 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. The European Commission has issued a notice which suggests that the UK, as a 'third country', may be treated differently even in relation to proceedings which are already underway on exit day. A no-deal Brexit would therefore increase the risk of disputes about which country's courts have jurisdiction to hear a case.
The UK is exploring a range of options to address this issue. These include seeking to join the Lugano Convention in its own right - which is necessary in any event to protect the position in relation to Iceland, Norway and Sweden - but this requires consent of all contracting parties, including the EU.
Importantly, the UK is acceding in its own right to the Hague Convention - something it is entitled to do unilaterally. This was expected to take effect from 1 April 2019, although in view of the recent delay to exit day it now seems likely that it will take effect at a later date to coincide with any ultimate exit date.
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 1 Recast Regulation in a no-deal scenario.
The protection offered by the Hague Convention is, however, inferior to Brussels 1 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. Nevertheless, since the Hague Convention is currently the UK's main 'back-up' mechanism for a no-deal scenario, parties may 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.
There is a debate about whether the UK being party to the Hague Convention in its own right from exit day will provide protection in relation to exclusive jurisdiction clauses entered before exit day, but since 1 October 2015, while the UK has been a party to the Hague Convention by way of its EU membership. The UK plans to legislate to achieve continuity of application in this regard but cannot control how the EU27 approach this issue. As a result, businesses which have existing exclusive jurisdiction clauses which they would like to continue to rely upon post-Brexit may consider re-agreeing those clauses after the Hague Convention comes into force for the UK in its own right, perhaps by way of a supplemental agreement, assuming all counterparties are amenable to this.
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. 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 current system the English courts are 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. In a no-deal scenario, it is likely that the English courts would regain this power, which may further mitigate some of the risks in this area.
Position under the draft Withdrawal Agreement
If the draft Withdrawal Agreement is approved, the current rules for determining which country's courts have jurisdiction to hear a dispute will continue to apply to court proceedings begun before the end of the transition period and actions related to such proceedings. In those circumstances, businesses with existing disputes involving EU counterparties may wish to take early legal advice about whether, for example, it would be advisable to issue proceedings before the end of the transition period so as to benefit from the ongoing application of the existing rules on jurisdiction.
As with jurisdiction, the key instruments in this area at present are the Brussels 1 Recast Regulation and the Lugano Convention. The Brussels 1 Recast Regulation in particular has established an effective, streamlined procedure for the mutual recognition and enforcement of judgments between member states.
The starting point in a no-deal scenario is that these mechanisms will fall away. This may be the case, as far as the EU27 are concerned, even where a judgment has been obtained and enforcement proceedings commenced before exit day. Enforcement of UK judgments in the EU27 and Lugano Convention contracting states will therefore become more complicated than at present.
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 to 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.
Many EU member states also enforce foreign judgments under their national laws, regardless of international arrangements. However, there may be additional procedural hurdles, and therefore time and cost, involved. In addition, in some 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.
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 particularly urgent advice on their options.
Position under the draft Withdrawal Agreement
If the draft Withdrawal Agreement is approved, the current Brussels 1 Recast regime for enforcing judgments of UK courts elsewhere in the EU will continue to apply to judgments given in proceedings which are begun before the end of the transition period. As with jurisdiction, there may, for example, be some international disputes involving European parties and/or assets, currently at an early stage, in which it would be beneficial to begin court proceedings before the end of any transition period, in order to benefit from the relative predictability and ease of the existing rules on enforcement of judgments. Early legal advice should therefore be sought on any dispute.
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.