Brexit: Implications for Dispute Resolution
- Brexit has officially arrived and brings with it changes to a number of important areas concerning cross-border litigation between the United Kingdom and European Union.
- This Holland & Knight alert gives an outline of the possible implications of Brexit in this field, primarily from an English law perspective and with a focus on commercial contractual matters.
- It is more important than ever that the points and issues discussed below are considered carefully at the negotiating and drafting stages of contracts.
Brexit has well and truly arrived, and while the trade agreement that was reached on Christmas Eve 2020 is undoubtedly a very significant development in terms of the future relationship between the United Kingdom and European Union, there is, of course, a great deal more to Brexit than that.
This Holland & Knight alert gives an outline of the implications of Brexit on certain issues in the dispute resolution field, primarily from an English law perspective and with a focus on commercial contractual matters. The points addressed will be relevant to parties who are involved in cross-border litigation involving UK and EU aspects, although given their importance, they should be considered carefully at the negotiating and drafting stages of contracts. They were the subject of much discussion at the time when everyone was wondering if the UK would leave the EU having concluded a withdrawal agreement, or whether there would be "no deal." As things transpired, the withdrawal agreement that was reached did address them for the purposes of the transition period, which ran from the date when the UK left the EU (Dec. 31, 2019) until 11 p.m. (UK time) on Dec. 31, 2020. During that time, it was very much a case of "as you were" and, by and large, the rules that were in place when the UK was in the EU continued to apply. However, so far as the future is concerned, apart from certain transitional arrangements, no agreement has been reached in this particular area and so, as regards the matters that are discussed in this article, it is very much a "no-deal" scenario.
In Short, What Has Changed?
There is a suite of rules which apply between EU Member States concerning judicial cooperation in civil and commercial matters. The rules cover, inter alia, agreements regarding the law that governs parties' contractual and non-contractual obligations and the courts where disputes arising between them should be determined; the enforcement in a EU Member State of court judgments that are given in another Member State; and the service of documents relating to court proceedings in Member States other than in the state where the proceedings were commenced.
The basic position is that those rules have ceased to apply as between the EU and the UK, although they continue to apply between the remaining EU Member States. As a result, there is greater uncertainty, at least in some situations, concerning jurisdictional matters and the enforcement of judgments. However, the rules relating to choice of law will, for all practical purposes, be unchanged. There are also certain transitional arrangements when the pre-Brexit rules will continue to apply.
Should I Still Choose English Law to Govern a Commercial Transaction?
The short answer is that if English law was suitable for it prior to Brexit, then there is no good reason to depart from that view now. The features that have made English law a popular choice – for both English and non-English parties – for a very long time remain. For all intents and purposes, it will be applied in the same way as before, by the same judges in the same courts.
Is a Choice of Law Clause in Favour of English Law Likely to Be Respected in the English Courts and in the Courts of EU Member States?
Essentially yes, because the EU rules on the applicable law for contractual and non-contractual obligations that applied before the UK left the EU, and which continued to apply during the transition period, (the Rome I and II Regulations) have been incorporated into UK domestic law. Of course they continue to apply in the EU as well. Unlike the EU rules that govern jurisdictional matters and the enforcement of judgments, there is no requirement for reciprocity to enable them to function in the same way as they did prior to Brexit.
The word "essentially" is used because a choice of English law may be subject to any mandatory laws of another country where, for example, there is effectively a domestic contract but the parties have agreed that it should be governed by a law of a different country. Further, parties cannot select a governing law of a non-EU Member State in order to avoid mandatory EU law provisions. These are provisions that apply in any event, though, and are not a consequence of Brexit.
What About Jurisdiction Agreements / Choice of Forum Clauses?
The position is more complex than in relation to choice of law clauses. What is clear is that, subject to certain transitional arrangements, the rules which applied in the UK until the end of the transition period (namely, the Recast Brussels Regulation for proceedings commenced after Jan. 10, 2015, and judgments given in such proceedings) will not apply in the UK going forward. The general position under the Recast Brussels Regulation is that each EU Member State must uphold a jurisdiction agreement in favour of the courts of another EU Member State. Those rules will continue to apply in the EU, but clearly the UK will not be treated as an EU Member State for those purposes. Unlike the Rome I and II Regulations, the rules require reciprocity for them to work in a sensible way. No agreement has been reached between the UK and EU in that regard, and clearly there is no sense in the UK deciding to apply the rules unilaterally.
This is a very important area, as parties want to be sure that if they set out in a contract the particular forum in which their legal battles are to be fought, that choice will be respected so that proceedings cannot be brought in a jurisdiction other than as intended. The costs and time that can be spent dealing with a jurisdictional dispute can be very significant.
Where proceedings have been commenced before the end of the transition period, the Recast Brussels Regulation continues to apply in both the UK and EU to jurisdiction agreements.
Exclusive or Non-Exclusive Agreements: Hague Convention
For proceedings that have been commenced after the end of the transition period, the position depends on whether or not the jurisdiction agreement in question amounts to an exclusive jurisdiction agreement. If it is exclusive, then the Hague Convention on Choice of Court Agreements of 2005 (Hague 2005) will apply, as the UK has acceded to that Convention in its own right, having been party to it previously – since Oct. 1, 2015 – as a EU Member State. The remaining EU Member States remain bound by it, as do Mexico, Montenegro and Singapore. Under Hague 2005, the courts of contracting states are required to respect exclusive jurisdiction agreements and to enforce judgments given by each other's courts. So, for example, a court of a EU Member State should stay or dismiss parallel proceedings brought in that state where there is an exclusive jurisdiction clause in favour of the English courts (and vice versa).
There are two provisos though. First, it is not clear what the position in the EU will be if all the parties to proceedings are domiciled there. The existing EU rules may well have priority over Hague 2005. That could mean, for example, that even if proceedings between parties domiciled in the EU are commenced in a German court in breach of a jurisdiction agreement in favour of the English courts, the German court might not stay the German proceedings.
Second, the EU and UK do not agree about the point from which Hague 2005 applies. The UK's position is that it applies to all exclusive jurisdiction agreements that have been entered into since Oct. 1, 2015. It seems that the EU takes the view that it applies only to agreements entered into on or after Jan. 1, 2021, the date when the UK acceded to the Convention in its own right.
It is important to note that Hague 2005 does not apply to non-exclusive jurisdiction agreements unless a declaration has been made under the Convention. No such declarations have been made by the UK or EU. Nor does it apply to the three members of the European Free Trade Association (EFTA) – Iceland, Norway and Switzerland – who are party to the Lugano Convention of 2007 (see more below).
Asymmetric Jurisdiction Agreements
The question of whether an asymmetric jurisdiction agreement (where one party is restricted from bringing proceedings other than in the courts of a specified jurisdiction but the other party is under no such restriction) is regarded as an exclusive jurisdiction clause for the purposes of Hague 2005 has not been determined by the English courts. The point has been considered, but in the cases concerned, it was unnecessary for the court to make a ruling on it. Of course, what the English courts may consider the answer to be is only part of the picture. Where there is a asymmetric jurisdiction agreement where one party must bring proceedings in the English courts but the other does not have to, the key question is whether an EU court would regard it as within the scope of Hague 2005 for the purposes of whether it would be required to stay proceedings that were brought in the EU court. Appropriate local law advice should be sought (including on the question of whether such clauses are valid in the first place – in England, they are). For the time being at least, it is probably safest to assume that asymmetric jurisdiction agreements fall outside the scope of Hague 2005.
Non-Hague 2005 Situations
Where Hague 2005 does not apply (which, so far as the scope of this article is concerned, means in the case of non-exclusive jurisdiction agreements), whether a jurisdiction agreement will be upheld is a question for the relevant national law. The following points are worth noting:
- The very fact that a non-exclusive jurisdiction agreement has been chosen means that the parties must have contemplated the possibility of parallel proceedings and the consequences arising therefrom.
- An English court might grant an anti-suit injunction in respect of parallel proceedings brought in the EU, but most likely only if those proceedings were found to be vexatious or abusive.
- An English court is not required to stay proceedings brought before it if there are parallel proceedings in the courts of an EU Member State, even if the EU proceedings had been commenced first.
- It is not clear whether a court of an EU Member State would stay proceedings brought before it if there are parallel proceedings in the English courts, even if the English proceedings had been commenced first.
- Be mindful of forum non-conveniens issues (where proceedings may be stayed because there is another forum, having competent jurisdiction, which is the appropriate forum for a case to be determined). So far as English courts are concerned, absent exceptional and unforeseen grounds, proceedings brought in England will not be stayed, nor will jurisdiction be declined, where there is a forum non conveniens waiver provision in conjunction with a non-exclusive jurisdiction clause.
There are of course other issues relating to jurisdiction (such as how jurisdiction is determined when there is no agreement), which are beyond the scope of this article. Suffice it to say that in proceedings which are commenced after the end of the transition period, questions pertaining to jurisdiction in situations where the EU regime applied previously will be determined by the English courts in accordance with the existing rules and principles that apply where non-EU countries are involved.
What About Enforcement of Judgments of English Courts in the EU (and Vice Versa)?
As with jurisdiction agreements, subject to transitional arrangements, the rules that applied until the end of the transition period (the Recast Brussels Regulation – where the general position was that each EU Member State would recognize and enforce judgments given by the courts of other Member States, including the UK) have ceased to apply as between the UK and EU Member States. The rules will continue to apply as between the remaining EU Member States.
For judgments given in proceedings that were commenced in the courts of the UK or EU Member States prior to the end of the transition period, the pre-Brexit regime continues to apply. In other words, a judgment of an English court (and other UK courts) will be enforceable in the EU under the Recast Brussels Regulation and a judgment of a court in an EU Member State will be enforceable in the UK under the same regime.
For proceedings commenced after the end of the transition period, the enforceability of EU judgments in English and other UK courts (and vice versa) will be governed by the relevant national rules on the enforcement of judgments made in third countries and, if it applies (see the section above regarding jurisdiction agreements), Hague 2005.
One consequence of the new arrangements is that the type of judgment that can be enforced will be narrower in scope, particularly where Hague 2005 does not apply. Certainly, so far as enforcement of an EU judgment in England is concerned, the procedure will be different too, and will take longer, again, particularly where Hague 2005 does not apply. That said, in a non-Hague situation, the process ought to be no different to what happens when steps are taken to enforce a judgment given by, for example, a New York court, in accordance with the well-established rules that apply in that instance.
How Have the Rules About Service of Documents Changed?
In short, subject to transitional arrangements, the EU rules governing the service of documents relating to civil and commercial proceedings have ceased to apply between the EU and UK. Those rules provide a reasonably efficient procedure for the service of documents within the EU using a variety of methods of service. Instead, the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of 1965 (Hague 1965) will apply, as well as relevant domestic laws and procedures.
So far as documents relating to proceedings in the English courts are concerned, for the moment at least, where Hague 2005 does not apply, the permission of the English court will be required in order to serve them on a party in the EU. Previously, no such permission was required. That position is expected to change, though, so that there will be no requirement to obtain permission in cases where there is a jurisdiction agreement in favour of the English courts (including non-exclusive and asymmetric agreements).
Parties who have to follow the new procedures are likely to find them to be more cumbersome, lengthy and costly than the pre-Brexit position. Although Hague 1965 has some similarities to the EU rules, it is more dated and some of the methods of service permitted by the EU rules are not available at all (or because states have made declarations under the Convention that they are not available).
On a practical level, well-advised parties to contractual arrangements should not be affected by these changes as their contracts will have required their counterparts to appoint an agent for service of process in the relevant jurisdiction to receive service of proceedings that are commenced in the courts of that jurisdiction. The changes only reinforce the arguments in favour of including such provisions.
The Potential Relevance of Lugano Convention 2007
The Lugano Convention governs jurisdictional matters and the enforcement of judgments as between EU Member States and three members of EFTA – Iceland, Norway and Switzerland. It applied in the UK until the end of the transition period, including to proceedings that were commenced during the transition period (although it is unclear whether Iceland, Norway and Switzerland will apply it in respect of proceedings commenced in the UK before the end of the transition period). It very largely follows the principles relating to jurisdiction and enforcement of judgment set out in the predecessor of the Recast Brussels Regulation. Although it does not go as far as the Recast Brussels Regulation – for example, it does not provide as comprehensive a solution to the prevention of parallel proceedings – it provides for the reciprocal enforcement of judgments, and jurisdiction agreements are respected.
The UK has made it clear that it would like its future relationship with the EU to include a common set of rules governing jurisdiction and the enforcement of judgments. It sees accession to the Lugano Convention in its own right as a ready-made solution. It has therefore deposited an instrument of accession. However, the unanimous consent of all states is required for the UK to join. Thus far, the EFTA states have indicated their support. Perhaps not surprisingly, the position of the EU 27 is not clear at present. The current contracting parties were notified of the UK's request to accede to the Convention in April 2020. Under the terms of the Convention, those parties "shall endeavour to give their consent at the latest within one year" of the notification, so there might be some news soon.
Should I Choose Arbitration Instead?
Arbitration is unaffected by Brexit and the changes outlined above. As a result, it has been suggested that more parties may choose it as their method of dispute resolution. Of course, it takes two to tango, and so arbitration will be an option only if all parties agree to it.
It is not the purpose of this briefing to debate the pros and cons of arbitration. A key reason for choosing arbitration over court proceedings is the ability to enforce an arbitral award in states that are party to the New York Convention, particularly where enforcement of a foreign court judgment in a state that is party to that convention may be problematic. It remains to be seen if arbitration will become more popular as a result of Brexit. Each individual situation should be considered carefully on its own merits. It will not necessarily follow that arbitration should become the preferable option just because of the changes introduced as a consequence of Brexit. If, for example, there are adequate procedures in place in a particular EU jurisdiction for the enforcement of judgments made in the English courts, even if it might take longer than it used to, there may well still be advantages in choosing court proceedings over arbitration.
Judicial cooperation between the UK and EU has certainly not disappeared as a result of Brexit, but in a number of important respects it has changed. While the changes to the rules that govern jurisdiction and enforcement of judgments may lead to outcomes that would not have occurred while the UK was a member of the EU, in certain situations at least there are options available to parties that will not result in any material difference to the pre-Brexit position. However, in transactions involving EU and UK elements, it is important that parties pay the same level of attention to the dispute resolution provisions of their contracts as in their dealings with non-EU situations. As always, where contractual relationships are concerned, the importance of giving careful consideration to these issues at the outset – and on a multijurisdictional level – cannot be overstated.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.