We consider the impact on the rules governing choice of law, jurisdiction clauses and enforcement of judgments if the UK leaves the EU with no transitional arrangements.
- in the event that a Withdrawal Agreement is not agreed or the Article 50 process is not extended prior to 29 March 2019 the UK will exit the European Union on 29 March 2019 with “no deal”
- whilst a Withdrawal Agreement would retain the status quo throughout a transition period, a No Deal Brexit will lead to the loss of the reciprocal arrangements under the current regime, so will have an immediate impact upon the rules governing choice of law, the recognition of jurisdiction clauses and the enforcement of English court judgments, and
- changes to the current regime will increase legal complexity to some extent, but the key area of commercial risk is the uncertainty as to how and to what the extent EU member state courts will recognise English jurisdiction clauses post-Brexit.
Jurisdiction and governing law have always been complex areas for in-house lawyers, many of whom continually receive questions from internal stakeholders on such matters. Currently, the principal instruments governing choice of law, the recognition of choice of court agreements and the enforcement of English court judgments all emanate from the EU.
It is now well known that one of the many significant complicating effects Brexit will have upon legal services in the UK is on the determination of such civil jurisdictional issues. Such uncertainty has rendered this an area that is critical for Brexit contingency planning. Our experience is that the time and cost spent on this analysis has been significant but is, for many clients, incomplete.
With a No Deal Brexit looking ever more likely, and the UK government having recently set out a number of statutory instruments pertaining to civil jurisdictional issues, now appears to be a timely moment to provide a full recap the current state of play and the legal position in the event of no deal.
In both contractual and non-contractual matters choice of governing law is currently determined principally by EU Regulations 593/2008 and 864/2007, more commonly known respectively as Rome I and Rome II (the Rome Regulations).1
These instruments provide standard rules that apply across the EU in cross border civil and commercial disputes. Their effect is, put very summarily, that the courts of an EU member state will accept (at least in most commercial circumstances) the parties’ choice of governing law.
This position will be largely unaffected by Brexit (including in the event of a No Deal Brexit). Unlike the European instruments that relate to the recognition and enforcement of jurisdiction clauses and judgments, the Rome Regulations do not require reciprocity between states. The result is twofold:
The UK government is able to legislate for the unilateral retention of Rome I and Rome II such that they will apply, post-Brexit, essentially as before. The UK government has long indicated that this was its intention. It has now published a draft statutory instrument to that effect - the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc) (EU Exit) Regulations 2018 (the Applicable Law SI) – which would come into force on Exit Day2 retaining the Rome Regulations3.
EU Member State Courts
The Rome Regulations require the courts in all EU member states to recognise commercial parties’ choice of governing law regardless of where that law emanates from. As such, a choice of English governing law will be recognised in much the same circumstances by EU member state courts as they are now. As such, most market participants with European business are maintaining their decision to use English law for the time being except in certain limited scenarios.
The principal additional risk post-Brexit as regards choice of law is that courts of an EU27 state may be increasingly likely to hold that there are certain mandatory provisions of local law that apply regardless of the choice of English law to resolve the dispute. This is particularly likely to be the case where two (or more) counterparties have opted for English law to apply but are resident in the same EU27 state in which the proceedings have been brought. Where, for instance, a German court were to hear a dispute pursuant to English law it may determine that non-derogable principles of local law apply in such a manner that key commercial provisions (for instance limitation of liability clauses) operate in a very different manner than they would under English law, or in certain circumstances even strike the clause out entirely. Such non-derogable provisions of local law could therefore fundamentally change the shape of established commercial bargains.
This is a pre-existing risk, as where they deem it appropriate courts in a EU member state have applied non-derogable provisions of local law to English law contracts. However, the risk of this occurring may well increase post-Brexit given:
- an increased likelihood of challenges to English choice of jurisdiction clauses, leading to an increasing number of English law contracts being adjudicated before EU27 courts, and
- the prospect that UK law may diverge from the European standard in various areas post-Brexit.
Recognition of Jurisdiction Clauses and the Enforcement of Judgments
The principal international instruments currently governing the recognition and enforcement of jurisdiction clauses and judgments within the EU are EU Regulation 1215/2012, or Brussels Recast, and, as between EU Member States and EFTA states, the Lugano Convention 2007.
Both instruments set out a similar4 and comprehensive set of jurisdictional rules that apply such that a chosen court is required to accept jurisdiction and, in the face of an exclusive jurisdiction courts, non-chosen courts are required to decline jurisdiction. The result is that, currently, jurisdiction clauses are recognised across Europe on the basis of a single, reliable and relatively simple regime.
The Hague Convention on Choice of Court Agreements (the Hague Convention) provides a similar, though significantly less extensive, body of rules that ensure the recognition of exclusive jurisdiction clauses and the enforcement of judgments obtained pursuant to the same. Currently contracting states to the Hague Convention are limited to the EU, Mexico, Singapore and Montenegro. The Hague Convention’s rules dictate that where Brussels Recast or the Lugano Convention apply those instruments will take precedence. As such it currently only applies in limited cases, being in particular those involving exclusive choice of court agreements between a party based in the EU (including the UK) and a party based in Mexico, Singapore and Montenegro, and judgments made pursuant to such.
All three instruments provide a regime that secures relative ease of enforcement of court judgments as between the states which are party to them, although the regime under the Hague Convention is largely untested and may be slower and less reliable than that under Brussels Recast and the Lugano Convention.
Unlike choice of law clauses, it has long been apparent that the rules governing jurisdiction clauses and the enforcement of judgments will change significantly post-Brexit and particularly so in the event of a No Deal Brexit.
The UK Courts
The UK government has recently set out two statutory instruments, both of which will come into force on Exit Day, which will govern how courts in the UK will determine such issues. These are:
- The Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 (the Jurisdiction SI), which remains in draft. This revokes the effect of Brussels Recast and the Lugano Convention following Brexit recognising that the legal reciprocity that is required for them to function properly will fall away. As such, from Exit Day courts in the UK will not apply the provisions of these instruments except to (i) proceedings that are ongoing on Exit Day where those instruments would have applied immediately prior to Exit Day; and, (ii) judgments given either prior to Exit Day or in respect of proceedings begun prior to Exit Day5, and
- Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulations 2018) (the Hague SI). This provides that the courts in the UK will treat the Hague Convention as having applied continuously in the UK since 1 October 2015 (despite the UK not in and of its own capacity being a contracting state to the Hague Convention until 1 April 2019)6 . The Hague SI states that, in relation to a Hague compliant jurisdiction clause agreed between 1 October 2015 and Exit Day, the courts will apply the Hague Convention following Brexit as if the UK had remained a member of the EU.
The language of the Hague SI is not without uncertainty, however; the effect appears to be that the Hague Convention will not apply to any jurisdiction clauses agreed prior to Exit Day (or judgments made on the basis of such jurisdiction clauses) if Brussels Recast would have applied to that clause (i.e. all jurisdiction clauses agreed between parties based in the EU, including the UK prior to Exit Day). This is notwithstanding the fact that post-Brexit, as set out in the Jurisdiction SI, courts in the UK will not be able to apply Brussels Recast except in certain transitional circumstances.
The net result is that the UK courts will apply the common law to questions of jurisdiction and the enforcement of foreign judgments pursuant to a jurisdiction clause unless:
- there are ongoing proceedings on Exit Day to which Brussels Recast or the Lugano Convention applied immediately prior to the Exit Day, in which case the relevant instrument will continue to apply to those proceedings,
- there is a Hague-compliant exclusive jurisdiction clause agreed between 1 October 2015 and Exit Day between parties resident in the EU and Mexico, Singapore or Montenegro, in which case the Hague Convention will apply, or
- there is a Hague-compliant exclusive jurisdiction clause agreed at any time after Exit Day between a party resident in the UK and any other Hague Contracting State, in which case the Hague Convention will apply.
This result sounds complex in law, but the practical effect is easy to overestimate. In reality, irrespective of the terms of any Brexit deal, the English Court will uphold the parties’ choice of English court jurisdiction, regardless as to whether the parties are domiciled in the EU or UK and regardless of which rules strictly apply.
The risk to English jurisdiction clauses (and judgments) principally lies with what approach might be taken by EU27 state courts.
EU27 State Courts
- the applicable law in EU member state courts is entirely unaffected by any British legislation
- the most recent guidance published by the European Commission indicates, in the event of a No Deal Brexit, that where proceedings involving a UK domiciled party are pending prior to Exit Day in an EU27 state court, the relevant EU rules for international jurisdiction (being in most cases Brussels Recast) will continue to apply. However, where proceedings are initiated after Exit Day, jurisdiction will instead be governed by local law in the relevant EU27 state unless the Hague Convention applies, and
- the Hague Convention will apply to an exclusive jurisdiction clause between a UK domiciled counterparty and an EU domiciled counterparty agreed on or after 1 April 2019.
The result is that exclusive jurisdiction clauses in favour of the English courts agreed post-Brexit between UK and European counterparties should be automatically recognised by EU member state courts pursuant to Hague. Where two European counterparties agree such a clause Brussels Recast or local law is likely to apply, and the court may refuse to recognise the jurisdiction of the English courts and as such accept its own jurisdiction.
The Hague Convention does not assist where parties have agreed non-exclusive jurisdiction clauses, including asymmetric jurisdiction clauses.
There can be a measure of certainty for parties going forward, but unfortunately no guidance has been provided at the European level as to whether EU27 state courts will treat the Hague Convention as applying to English domiciled parties who agreed jurisdiction clauses prior to 1 April 2019. In the absence of such guidance, the question of whether the Hague Convention has such retrospective effect will be determined according to a local law interpretation of the Hague Convention in each EU27 state.
In such circumstances, all companies facing the prospect of litigation following Brexit pursuant to contracts agreed pre-Brexit must assume that EU27 state courts will look to their local law when considering jurisdiction and the enforceability of English court judgments.
It is thought likely that in many European jurisdictions the courts will recognise an English jurisdiction clause and enforce an English court judgment. However, post-Brexit there can be no certainty of this.
Practical Risks and Mitigating Steps
- parties need not have significant concerns about choosing English law for their contracts, as such a choice will continue to be recognised across the EU. There is some increased risk of non-derogable provisions of local law being applied, but for most commercial counterparties this will be outweighed by the benefits of retaining an English choice of law
- there is a greater risk in relation to the recognition of English jurisdiction clauses. In relation to commercial agreements to be entered into post-Brexit, parties who wish any disputes with an EU27 connection to be heard by courts in the UK would be well advised to use an exclusive jurisdiction clause in order to benefit from the provisions of the Hague Convention, and
- the Hague Convention is unlikely to be applied to agreements entered into prior to 01 April 2019. Firms that have historically entered into significant numbers of non-exclusive and asymmetric jurisdiction clauses are particularly advised to consider the risks faced. It may be unrealistic to revisit all agreements, but businesses may want to consider restating jurisdiction agreements in relation to key business relationships or those contracts deemed to be of highest risk.
For further analysis and assistance in relation to the impact of Brexit on governing law, jurisdiction clauses and the enforcement of judgments across EU member states you may be interested in our Disputes Aviator online product.
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1 The Convention on the Law Applicable to Contractual Obligations 1980 (the “Rome Convention”) continued to apply to contracts agreed from 1 April 1991 to 17 December 2009 (being the date from which Rome I applies).
2 In the event of a No Deal Brexit “Exit Day” will be 29 March 2019.
3The Rome Convention has previously been incorporated into domestic UK law by virtue of the Contracts (Applicable Law) Act 1990. The Applicable Law SI makes such limited amendments to that Act as are required for it to operate post-Brexit but essentially retains its current effect.
4 The applicable rules under Brussels Recast and the Lugano Convention are not identical, however they are in practice highly similar. The principal differences between the applicable rules are that the Lugano Convention reflects the provisions of the predecessor to Brussels Recast, namely Council Regulation (EC) No 44/2001 of 22 December 2000 or “Brussels 2000”, which included a less comprehensive suite of protections. Of particular relevance is that the Lugano Convention lacks the “lis pendens” protections present in Brussels Recast that prevent what became known as the “Italian Torpedo” whereby it was possible to very significantly delay proceedings being brought against you by yourself first bringing a claim in another jurisdiction (in particular one with a slow civil justice system). In such circumstances, under the Lugano Convention and Brussels 2000, any court other than the first seized is required to stay its proceedings pending the determination of jurisdiction by the first seized court.
5 The Jurisdiction SI’s effect is not limited to these two points. Significantly the Jurisdiction SI also retains, by way of amendment to the Civil Jurisdiction and Judgments Act 1982, the rules embodied in Brussels Recast in respect of consumer rights (in relation to consumer contracts where the consumer is based in the UK), employment rights (where the employee or employer is domiciled in the UK or the work habitually takes place in the UK).
6 On 28 December 2018 the UK Government lodged an Instrument of Accession with the Ministry of Foreign Affairs of the Kingdom of the Netherlands to bring the Hague Convention on Choice of Court Agreements into effect for the UK from 01 April 2019.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.