Article 50: what next for international contracts?

Article 50: what next for international contracts?

Brexit update - where are we now?

The UK government set the clock ticking as it served notice of departure from the European Union (EU) on 29 March, with negotiations likely to start in earnest soon after the general election on 8 June. As the nation braces itself for what could be a bumpy ride with no certainty on the ultimate terms of departure, businesses need to consider what steps might be taken to protect themselves and minimise the risks posed by Brexit in a number of areas. For those engaged in cross-border trade, exploring the impact on the resolution of potential disputes is vital.

A key consideration for businesses involved in cross-border trade is the need to ensure that their contracts are enforceable now and post Brexit. It is of vital importance for international trade that parties can be confident that they will be able to enforce rights and obligations arising under contract and have any disputes dealt with in a fair and timely manner, according to law. There is a choice available to contracting parties: they can choose to have disputes resolved by international arbitration. If they do not agree to do so, then the courts will decide the dispute. However, determining which court should decide, according to what law, and how easily any decision might be enforced, can raise complex issues and be uncertain.

In deciding whether to choose arbitration or litigation for the resolution of international disputes, a number of considerations come into play, with pros and cons on each side. For example, arbitration offers a neutral alternative to the courts of either party, a specialist tribunal, privacy and confidentiality, and finality (appeals are limited by statute under English law and often excluded by institutional rules). On the other hand, the costs of international arbitration are seen as a drawback, as an arbitral tribunal usually charges by reference to time spent or value of dispute and those costs will outweigh any court fees payable in litigation. Furthermore, multi-party disputes are more easily dealt with in litigation and an arbitral tribunal does not have the powers of a court, for example to compel attendance of witnesses and production of documents.

However, it is upon enforcement that the balance tends to shift firmly in favour of international arbitration over litigation. Indeed, a survey conducted by Queen Mary University with White & Case LLP in 2015 found 90 percent of respondents surveyed preferred international arbitration to litigation to resolve cross-border disputes. Enforcement of both is governed by international treaties. For arbitration, it is the New York convention to which 157 states are a party and agree to enforce arbitral awards. On the other hand, the UK’s arrangements for mutual recognition of court judgments are more limited.

In recent months, some of the world’s leading arbitral institutions have taken steps to speed up the arbitration process. For example the International Chamber of Commerce (ICC) Arbitration Rules were updated with effect from 1 March 2017, introducing a new expedited arbitration procedure, which will apply to cases where the amount in dispute does not exceed $2m, unless the parties decide to opt out. Similarly, the Stockholm Chamber of Commerce introduced its new arbitration rules and rules for expedited arbitrations on 1 January 2017. Both the Hong Kong International Arbitration Centre and Singapore International Arbitration Centre have also introduced expedited procedures. These are welcome initiatives to speed up the process and to save costs.

The enforcement of arbitral awards will be unaffected by Brexit. However, there will be a change for international litigation touching on EU jurisdictions.

Currently, EU members must recognise exclusive jurisdiction clauses favouring other member states, but this will be lost in departing from the EU. If these arrangements are not replaced, businesses are exposed to the threat of multiple proceedings with inconsistent results and additional costs and delay. Enforcement and recognition of judgments within EU member states is dealt with relatively quickly with simple procedures in place across the EU. If they are not replaced there is the risk of having to re-litigate a battle already won, with additional costs and delay and potential for inconsistent outcomes. Service of proceedings on EU domiciled parties is currently regulated by the EU and current arrangements will need to be replaced or lost. There are various options available to replace the current arrangements, but ultimately all will depend on the outcome of the negotiations with the EU.

The factors that influenced businesses to opt for international arbitration over litigation prior to Brexit remain true and the uncertainty of outcome of the Brexit negotiations would make it sensible to consider arbitration in trading agreements with international counterparties, including those based in EU jurisdictions. International arbitration is likely to continue to present the most reliable option and businesses would do well to review their contracts to ensure appropriate clauses are included.

Article first published in Financier Worldwide, July 2017

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