Dispute resolution: what now?

In this update to our earlier briefings, we look at the impact that Brexit may have on dispute resolution and dispute resolution clauses, in particular. We conclude with a comparison of the key clauses.

On 29 March 2017, the UK Prime Minister wrote to European Council President Donald Tusk to notify him of the UK's intention to leave the European Union. The following day, the Government published its White Paper on the Great Repeal Bill, setting out its approach to converting existing EU law into domestic law following our departure from the EU. The Great Repeal Bill received Royal Assent in June 2018 and is now the European Union (Withdrawal) Act 2018 (EUWA). 

One of the many issues under negotiation with the EU was the extent to which judicial cooperation in civil and commercial matters would continue post-Brexit, i.e. what impact Brexit would have on choice of law, jurisdiction and enforcement of judgments. The EU set out its position on civil judicial cooperation in July 2017 and the UK Government published its response in August 2017. The UK's 'Future Partnership Paper' looked beyond transitional arrangements to a future relationship, while the EU's paper did not.

In June 2018 , the UK and EU published a joint statement on a draft EU Withdrawal Agreement, which confirmed that agreement in principle had been reached on the provisions relating to choice of law, jurisdiction and enforcement of judgments. On 14 November 2018, the EU and UK negotiators agreed the entire text of that draft Withdrawal Agreement (with little change to these provisions), together with a political declaration for the future relationship. However, the UK Parliament refused to give the necessary approval to that Withdrawal Agreement, leading to a change in Prime Minister and a renegotiation of the Withdrawal Agreement and Political Declaration (again with little change to the civil judicial cooperation provisions). Following a general election in the UK, the Withdrawal Agreement and Political Declaration received the necessary approvals from both the UK and the EU.

Pursuant to the Withdrawal Agreement, the UK left the EU on 31 January 2020. This departure was followed by an implementation period until 31 December 2020 (Implementation Period), during which EU law  continued to apply and the UK was treated as if it were still an EU Member State. Negotiations continued to determine the future relationship between the parties and on 24 December 2020 the Trade and Cooperation Agreement between the EU and the UK (TCA) was announced.  The TCA came into force provisionally on 1 January 2021 with formal approval expected to follow in due course.

Here we look at the impact that Brexit and the TCA may have on dispute resolution and dispute resolution clauses, in particular. We conclude with a comparison of the key clauses.

Impact of Brexit on EU instruments

There are various EU instruments that govern the interaction between the different EU legal systems in cross-border situations. These include the Rome I and Rome II Regulations, and the Brussels Regulations and the Lugano Convention (Brussels and Lugano together being the "Brussels Regime") (see Notes). They ensure that each EU Member State and Lugano State applies the same rules to determine governing law, and which court shall have jurisdiction to hear the case, and also ensure ease of recognition and enforcement in one EU Member State or Lugano State of a judgment obtained in another. As such, they provide certainty and avoid litigation in the courts of more than one State.

However, following the completion of the Implementation Period on 31 December 2020 (Completion), these EU instruments no longer apply in the UK. While the Government has taken steps to enshrine some of these agreements with the EU into domestic law, the reciprocal nature of others means that wholesale adoption is not possible. Furthermore, the TCA does not include any provisions relating to choice of law, jurisdiction or enforcement of judgments, so where are we now? 

Will the approach to choice of law clauses change? 

The short answer is no. The English courts formerly applied the Rome I Regulation on choice of law in contractual disputes and the Rome II Regulation on choice of law in non-contractual disputes (such as claims in tort). These Regulations do not require reciprocity, and so the position has not changed post-Completion, as both have been incorporated into domestic law as part of the EUWA (and accompanying Statutory Instruments).

Likewise, the rest of the EU should continue to give effect to English governing law clauses because the Rome I Regulation requires Member States to give effect to the governing law chosen by the contracting parties, irrespective of whether it is the law of a Member State , or whether the parties are from outside the EU.

In addition, the reasons for choosing English law – such as certainty and respect for party autonomy – will not change as a result of Brexit. It remains just as good a choice of governing law post-Brexit as it does now. Brexit should therefore not deter contracting parties from choosing English law.

Does the choice of English law remain a good one?

Yes. English law encompasses UK legislation, case law and EU law. The EUWA confirmed that, to the extent possible, all existing EU law would be incorporated into UK law on Completion . So, wherever possible, the same rules and laws applied on the day after Completion as before. This achieved certainty in the short term, but Parliament is now able to amend and cancel any unwanted aspects of EU law.

The only fly in the ointment is the role of the European Court of Justice (CJEU) post-Brexit. The EUWA states that historic CJEU case law will have the same precedent status as decisions of the UK Supreme Court. As such, the UK courts will interpret EU-derived law by reference to the CJEU's case law as it stood on Completion. Going forward, however, the CJEU no longer has direct jurisdiction in the UK. This means that we could see a divergence in approach develop between the CJEU and the UK courts. However, the UK has acknowledged the role of the CJEU as "the ultimate arbiter of EU law within the EU”, and it is likely that the UK courts will have regard to decisions of the CJEU when applying EU law principles. 

Contracting parties will therefore need to consider what impact EU law has on their contracts, particularly those drafted to reflect, rely upon, or fall within, certain EU laws or "safe harbours", and whether future proofing/Brexit clauses are required. Long term agreements such as commercial agency agreements and distribution agreements are obvious examples.

Is the choice of English courts affected by Brexit?

Here the position is more complicated. The Brussels Regime determines the rules which are applied by EU Member State and Lugano State courts when giving effect to jurisdiction clauses and the enforcement of judgments within the Member/Lugano States. These rules mean that:

1. EU and Lugano courts will uphold jurisdiction clauses that confer jurisdiction on the courts of Member/Lugano States, and  
2. enforcement of a judgment of one Member/Lugano State in another is straightforward. 

Pursuant to the Withdrawal Agreement, the Brussels Regime will continue to apply to questions of jurisdiction and enforcement of judgments in any disputes where proceedings were started before Completion.

However, because of its reciprocal nature, the Brussels Regime could not simply be retained after Completion by importing it wholesale into UK law. The Government confirmed that it would seek to agree similar arrangements and applied for the UK to accede to the Lugano Convention in its own right.  But such accession requires the consent of all parties to the Lugano Convention, including the EU, and as yet, the EU has not given such consent. 

The UK has now also acceded in its own right to the Hague Convention on Choice of Court Agreements, with such accession taking effect on 1 January 2021. The Convention operates in a similar way to the New York Convention for arbitration awards by giving effect to exclusive jurisdiction clauses and enforcement of any resulting judgment. It only came into force on 1 October 2015 and as such remains largely untested. Its application is also limited as explained in more detail below. Although better than nothing, it is not a complete substitute for the Brussels Regime.

The Hague Convention

The Hague Convention on Choice of Court Agreements currently has been ratified by the EU (including Denmark), Mexico, Montenegro and Singapore, but not by any other Lugano State.

To date little attention has been given to the Convention given its limited application. However, now that the Brussels Regime no longer applies, and unless/until the EU consents to the UK's accession to the Lugano Convention, the Hague Convention provides a means by which English judgments can be enforced within the EU. However, there are potential issues:

• It only applies to the establishment of jurisdiction and the enforcement of a judgment that results from an exclusive jurisdiction agreement (and judgment does not cover interim measures of protection such as freezing orders). It can be extended to apply to judgments flowing from a non-exclusive jurisdiction clause, but as yet no contracting states have exercised that option.
• The Convention arguably does not apply to asymmetric clauses (where one party is required to bring proceedings in one jurisdiction exclusively, while the other party has the option to bring proceedings in any competent jurisdiction). The definition states that it covers only those agreements that designate the courts of one contracting state to the exclusion of any other courts. The Explanatory Report (paragraph 105) confirms that in order to be covered by the Convention, the agreement must be exclusive irrespective of the party bringing the proceedings. Asymmetric clauses are therefore very likely to fall outside the definition of exclusive jurisdiction clause.
• The UK was previously a signatory via its membership of the EU, but has now become a signatory in its own right. There is, however, some uncertainty as to the date the Convention will be regarded as having entered into force in the UK: the date of EU ratification (1 October 2015), or the date on which it entered into force in the UK in its own right? This is an important distinction as Article 16 provides that the Convention applies only to jurisdiction agreements concluded after its entry into force in the state of the chosen court. In its accession declaration, the UK states that it considers that the Convention entered into force for the UK on 1 October 2015 and that the UK is a Contracting State without interruption from that date. However, the EU Commission appears to be taking the opposite position, stating that the Convention will only apply to exclusive jurisdiction agreements entered into on or after 1 January 2021. It is possible that the issue of the UK's status under the Hague Convention, so far as the EU courts are concerned at least, may have to be resolved by the CJEU.
• There is also some uncertainty as to whether, if there is no party domiciled in the UK or other non-EU Hague contracting state, the EU courts can stay proceedings or decline jurisdiction to give effect to an exclusive jurisdiction clause in favour of an English or other non-EU court, unless the non-EU proceedings are commenced first. In this situation, the Recast Brussels Regulation appears to takes precedence over the Hague Convention and case law on this issue under the Regulation is inconsistent.

Looking ahead

Looking ahead, the general approach of the English courts towards jurisdiction clauses should not change. Choice of jurisdiction will generally be upheld. We would also expect EU Member States to uphold English jurisdiction clauses either under the Hague Convention or, where Hague does not apply, under the Recast Brussels Regulation where the English courts are first seised.

The greater potential impact is on enforceability of English judgments as we have lost the automatic right to enforce judgments throughout the Member/Lugano States that we currently enjoy. Instead, unless proceedings are started before Completion or judgments can be enforced under the Hague Convention, the national law of each Member /Lugano State will determine the enforceability of English judgments. As such, if enforceability within a particular Member /Lugano State will be an issue, contracting parties should give careful thought as to whether their dispute resolution clause is fit for purpose and whether a re-papering exercise of existing contracts to amend or restate such clauses may be required. 

London's position as a disputes hub?

Although it is too early to say what the long term implications will be, the English courts may lose business to other EU courts in matters where EU law is concerned. Certain EU Regulations also provide that disputes should be heard by an EU Member State court or seated arbitration.

However, given London's position as a financial centre and the popularity of English law as the law to govern international business relations, we do not anticipate that Brexit will have that great an impact. Indeed, some have argued that the English courts will be a more attractive jurisdiction once the restrictions imposed by the Brussels Regime fall away.

The bigger threat to the English courts is international arbitration, which may become more attractive as a result of Brexit. The international arbitration regime is based on the New York Convention, and that provides for recognition by national courts of arbitration agreements, and broad international enforcement of arbitration awards. As such, international arbitration and the enforceability of awards is not affected by Brexit. Therefore, provided there are no other objections to arbitration, agreeing to English seated arbitration offers the simplest solution if enforcement of English judgments post-Brexit is a concern.

Notes:

The Rome I Regulation on the law applicable to contractual obligations ((EC) 593/2008) (Rome I), The Rome II Regulation on the law applicable to non-contractual obligations ((EC) 864/2007) (Rome II), Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the 2001 Brussels Regulation), Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the Recast Brussels Regulation), and the Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007 (the Lugano Convention).

Reference to the Brussels Regulations/Brussels Regime includes the 2001 Brussels Regulation and the Recast Brussels Regulation. Although the 2001 Brussels Regulation has largely been superseded by the Recast Brussels Regulation, it still applies to judgments given in proceedings instituted before 10 January 2015. The Lugano Convention applies between the EU Member States and the EFTA states, except Liechtenstein, so Iceland, Norway and Switzerland.

Dispute resolution clauses: the options

Whether a particular forum is appropriate will always be fact dependent. We highlight below the issues to take into account in making that choice and any impact Brexit may have.