The Impact Of Brexit On Commercial Disputes

There has been much discussion about the impact of a no-deal Brexit on commercial transactions but what will it mean for commercial disputes and litigation given the widespread choice of English and Welsh law and English and Welsh courts in cross-border commercial contracts?

Background

The UK’s status as an EU member state means that it has been party to a streamlined framework of EU rules. This framework of rules provides legal certainty and predictability. It sets out the rules that courts in EU member states must apply in order to determine their jurisdiction over a dispute and the law governing the dispute. It also provides the procedure for serving court proceedings on parties in different member states and the mechanism for enforcing court judgments throughout the EU.

Below is a summary of the replacement regime that will apply in the event of a no-deal Brexit.

Court Proceedings Issued Before 1 January 2021

The good news is that the current framework of EU rules will continue to apply to court proceedings which were issued before the end of the transition period. These provisions apply in both directions, so that, for example, the English and Welsh courts will continue to apply the current framework of EU rules to enforce French judgments where the court proceedings leading to that judgment were issued on or before 31 December 2020, and the French courts will do likewise in respect of English & Welsh judgments where the court proceedings were issued on or before that date.

Court Proceedings Issued From 1 January 2021

Governing law

Again, the good news is that very little will change in relation to this issue. The current EU instruments concerning contractual and non-contractual obligations are the Rome I and Rome II Regulations. Both of these regulations will be incorporated into UK domestic law in broadly the same form from 1 January 2021. This means that the English & Welsh courts will apply the same rules as currently to determine governing law, and the courts of the EU member states will continue to apply Rome I and II so will give effect to a choice of English and Welsh law to the same extent as currently.

Jurisdiction and the enforcement of judgments

Unfortunately, the position is less straightforward in relation to matters of jurisdiction and the enforceability of court judgments. The current rules on these issues are set out in two key instruments, the Recast Brussels Regulation and the Lugano Convention. Both of these instruments operate on the basis of reciprocity and that reciprocity will cease at the end of the transition period on 31 December 2020.

Hague Convention on Choice of Court Agreements 2005

The Hague Convention provides a framework of rules relating to jurisdiction and the enforcement of judgments where there is an exclusive jurisdiction clause in the contract. The EU acceded to the Hague Convention on behalf of its member states on 1 October 2015, and the UK will accede in its own right from 1 January 2021, a process which does not require EU consent.

The Hague Convention will provide parties with some certainty that courts in England and Wales and in the EU will respect their choice of court to determine any dispute and that the resulting judgment will be readily enforceable. However, it does have some significant limitations:

• It only applies where there is an exclusive jurisdiction clause in favour of one of the contracting states. It is unlikely to apply where another type of jurisdiction clause has been agreed or in the absence of party choice.
• It only applies where the exclusive jurisdiction clause was entered into after the Hague Convention entered into force for the country of the chosen court

There is some uncertainty as to whether EU member states will treat the date of entry into force for the UK as 1 October 2015, when it became party to the Hague Convention by virtue of its EU membership, or 1 January 2021, when it accedes in its own right. The European Commission has taken the view that it is the latter, but that view will not be binding on the courts that will decide this question in future, and arguably the better view is that the Hague Convention should apply to contracts entered into from 1 October 2015 as it unquestionably entered into force for the UK on that date.

In view of this uncertainty, there is a risk that the Hague Convention may only apply to contracts entered into from 1 January 2021 which contain exclusive English and Welsh jurisdiction clauses, and not to existing contracts.

Common law rules

If the Hague Convention does not apply, the courts in England and Wales and in the EU will apply their own national rules to determine whether they have jurisdiction over a dispute.

So far as the enforceability of judgments is concerned, the courts of most EU member states will enforce a judgment of the English and Welsh courts, even without a specific reciprocal regime, although the type of judgment enforced may be more limited and the procedures may be more cumbersome and more expensive. The English and Welsh courts will do likewise in respect of most EU member state judgments.

Conclusion

The Hague Convention and the common law rules have limitations and uncertainties compared to the current framework of EU rules.

A more straightforward solution would be if the UK were to accede to the Lugano Convention in its own right. The Lugano Convention is materially similar to the Recast Brussels Regulation and therefore UK accession to it would provide commercial parties with a lot more certainty on matters of jurisdiction and the enforcement of judgments. The UK has formally applied to accede to the Lugano Convention, and it has received statements of support from countries such as Iceland, Norway and Switzerland, however, EU consent is required, and that consent has not been forthcoming to date.

We will have to see if further comfort is provided to commercial parties on these issues either by the EU consenting to the UK’s accession to the Lugano Convention or the UK and the EU reaching some other deal before the end of the transition period.

Arbitration is not affected by any of the uncertainty surrounding Brexit. Arbitration awards can be easily enforced under the New York Convention, which now has 166 signatory states – over 80% of the countries in the world, and there are only limited grounds on which to challenge an arbitral award. Arbitration therefore provides an alternative to court proceedings for UK-EU cross-border disputes.

If you would like advice on cross-border commercial disputes and litigation, please speak to a member of our team below.