English lawyers have grown accustomed to working within a harmonised EU legal system that includes cross-border overarching frameworks dealing with issues of jurisdiction and enforcement. Whilst EU law will continue to apply for at least the next two years as the UK negotiates its departure after its vote to leave the European Union, sooner or later Brexit will inevitably disrupt that status quo.
It would be in the interests of both the EU and the UK to agree effective replacements through either a continuation of existing legislation or substitutes which make sense in a post-Brexit environment, but the nature of these changes is at present wholly unclear.
This briefing seeks to untangle some of the issues facing English disputes lawyers in the light of Brexit and to assess its potential impact on English dispute resolution.
Whilst the parties' choice of English law as the law governing commercial agreements is unlikely to change as a result of Brexit (indeed, English common law gives primacy to the parties' choice of law in the same way that Rome I does), the basis upon which many agreements are predicated may well be affected. For example, parties may seek to argue that their contract no longer operates as intended because it relies on EU-based concepts such as the free movement of goods or labour which may no-longer apply.
While reliance upon the English common law principles of frustration to avoid performance of the contract (on the basis that Brexit has rendered such performance impossible) may be difficult given the narrow scope of that doctrine, arguments based upon force majeure or material adverse change provisions are also a foreseeable outcome of Brexit. The scope of any such arguments will almost certainly require clarification by the courts in the relatively short term.
Some contracts entered into in recent months have incorporated a "Brexit clause", specifying what will happen in the event of Brexit. It is likely that this trend will continue in the interregnum between now and the UK's departure from the EU. There is scope for concern, however, as to whether it is possible to draft an effective "Brexit clause" without triggering unintended consequences. Cautious drafting based on the local laws of a Member State might, for example, be more certain in the short-term, but have the undesirable long-term effect of excluding parties from more favourable enforcement regimes negotiated between the UK and EU as part of any post-Brexit settlement.
English courts have a long-standing reputation for independence, commercial sophistication and dependability. They benefit from the three pillars of a large body of relatively predictable and reliable English common law, London's deep well of legal and commercial expertise, and a convenient language, none of which will be significantly diminished as a result of Brexit.
Indeed, the re-establishment of the Supreme Court as the English court of final appeal may well provide welcome certainty: whilst a question of EU law outside the jurisdiction of an English court may currently be referred to the Court of Justice of the European Union ("CJEU"), in a post-Brexit world, such referrals will disappear.
Absent this, the English system may well become even more appealing to businesses seeking a swift and efficient resolution of their disputes. Those businesses are unlikely to mourn the loss of the CJEU which in recent times (hysterical tabloid stories of misshapen fruit aside), has come under increasing criticism in the UK.
One critical question relates to the efficacy of an English jurisdiction clause, both in terms of conferring jurisdiction on the English courts and in ensuring that the remaining EU Member States decline jurisdiction in favour of an English forum election. English common law has long sought to uphold the parties' choice of jurisdiction, whether English or otherwise, and that is unlikely to change as a result of Brexit. Less certain is the stance to be taken by the courts of the remaining Member States.
The current position under EU Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the "Brussels Regulation Recast") is that, subject to various exceptions, the parties' choice of jurisdiction will be respected, and the absence of an express preference is generally resolved in favour of the defendant's Member State of domicile. Post-Brexit, the risk is that without the Brussels Regulation Recast (or similar arrangement), these rules will fall away, and there is some uncertainty about what rules will then apply.
That risk is amplified by the possibility that the rules on jurisdiction and enforcement are unlikely, given the plethora of other issues to be resolved, to be at the forefront of EU-UK negotiations. That said, the UK will not be negotiating in a vacuum. There are various existing options which render such an uncertain and undesirable scenario unlikely.
The UK may join Iceland, Liechtenstein, Norway and Switzerland in the European Free Trade Association and so become a party to the 2007 Lugano Convention, the provisions of which are similar in many respects to the Brussels Regulation Recast relating to jurisdiction and enforcement. Failing that, the Hague Convention on Choice of Court Agreements establishes a number of jurisdiction and enforcement arrangements between EU Member States (except Denmark) and Mexico, with Singapore to follow in October of this year, and it may be that the UK will seek to ratify that convention.
Given the volume of EU-UK trade, it is clearly in all parties' interests to agree a harmonised system post-Brexit, but no negotiation is without risk. Some Member States may hope for a situation which weakens London's position as Europe's dominant judicial forum. The volume of other important issues that will need to be considered may also push certain legislation down the political agenda.
Commentators have noted, for example, that EU financial services regulation MiFIR (Regulation 600/2014) would seem to block certain exclusive English jurisdiction clauses, with UK firms becoming "third-country firms offering services" and therefore being required to "offer to submit any disputes relating to those services… to the jurisdiction of a court or arbitral tribunal in a Member State" (Article 46(6)). It will be for the English judiciary, English businesses and law firms to ensure that all key dispute resolution legislation receives proper attention during the coming Brexit negotiations.
Currently, and for at least the next two years, the Brussels Regulation Recast will continue to apply to the enforcement of an English judgment across the EU. When the UK leaves the EU, there may be greater risk around the enforceability of such a judgment in the EU (depending on what alternative arrangements are put in place). The process may therefore prove more lengthy and difficult.
That fact may cause the courts of England to be a less attractive choice for disputes with European counterparties or which require enforcement action in the EU. Again, however, given the inextricable trade links between the UK and the EU it is in both parties' interests to agree simple and effective reciprocal mechanisms for enforcement.
Arbitration is expected to be less sensitive to the effects of Brexit than litigation. This is largely because the UK and the remaining EU Member States are signatories to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
More generally, London's position as a leading arbitration centre rests not just on the dominance of the City of London as a global financial centre (which is unlikely drastically to change as a result of Brexit), but also its reputation for impartiality, the English language and the ease of enforcement of arbitral awards. Hong Kong and Singapore are two examples of increasingly popular arbitral seats flourishing outside of an EU-style trading block.
That said, neither Hong Kong nor Singapore has the level of competition that exists on London's doorstep, and it remains to be seen whether Paris, the home of the ICC, will benefit from its position within the EU at London's expense. Again, however, Brexit may bring distinct advantages to London arbitrations such as a new freedom for English courts - no longer bound by the European Court of Justice's decision in West Tankers - to issue anti-suit injunctions against proceedings in Member States.
Whilst there is potential for significant change in the mechanisms of English dispute resolution, particularly in the areas of jurisdiction and enforcement, the most dramatic are by no means the most likely results of the upcoming Brexit negotiations. The common interests of all parties and the existence of structures such as the Lugano and Hague conventions make the implementation of a comparable regime which neutralises such issues almost certain.
Even the worst-case scenario, in which the UK is left in matters of dispute resolution to deal with each Member State individually, would be well within the competence of an English legal system whose development and success has always been as an explicitly global, and not simply European, forum. The qualities which give rise to that success do not evaporate on Brexit. Indeed, English lawyers should embrace the coming changes as an opportunity to demonstrate and exploit their deep, wide-ranging and internationally focused expertise.
What should parties do now?
- Ensure that all contracts include a choice of governing law and a jurisdiction clause with appropriate waivers included.
- Ensure that any contract that includes a party based in a remaining Member State includes an agent for service of process clause, so that if England loses the benefit of EU rules on service this has no impact.
- Check contracts for the definition and effect of a force majeure or other termination event.
- If you are already holding or expecting an English judgment which will need to be enforced in the EU, act quickly in order to avoid future uncertainty.