With the end of the transition period for the UK’s departure from the EU approaching, the UK government’s negotiations to secure trade deals with our key trading partners are intensifying.
These negotiations include trying to secure a deal with the EU itself, which last year accounted for around 43% of the UK’s trade. As many businesses operating in international trade will know, the occurrence of commercial disputes is far from unusual. Where disputes cannot be resolved between the parties, most are dealt with by one of the two formal legal mechanisms for resolution of disputes, litigation and international arbitration.
Through its membership of the EU, the UK has benefitted from certain reciprocal arrangements in place concerning dispute resolution conducted through the English courts. With a large proportion of the UK’s trade conducted with the EU, will the position change in relation to these arrangements at the end of the transition period and what will the effect of any changes be?
Litigation
The resolution of international disputes plays a large role in the workload of the English commercial courts – where the courts have jurisdiction, generally the litigation will be dealt with even where the governing law of the agreement is not English law and the parties are based overseas. However once judgment has been obtained, the winning party has to enforce that judgment. In cases where the parties and their assets are based overseas, that may involve enforcing an English court judgment outside the jurisdiction. The ease with which a party might enforce an English court judgment overseas depends on the arrangements that the UK has in place with that jurisdiction and the local procedural laws. While by no means all-encompassing, the UK does have treaties in place for the recognition of English court judgments and reciprocal enforcement arrangements with just over 60 other jurisdictions (leaving aside the EU).
In addition, importantly for businesses operating within Europe, the UK has benefitted from alignment with the EU in respect of recognition and enforcement of judgments under the Recast Brussels Regulation (1215/2012). Under that Regulation, member states of the EU have agreed that the judgments of courts in other member states can be enforced in their jurisdiction without any review of substance. While the local procedural law of that member state may determine the means of enforcement permitted, this co-operation allows parties a level of certainty that judgments obtained from EU courts will be enforceable within EU countries.
Recognition of judgments and enforcement are not the only aspects of agreement between the EU member states that affords certainty to parties in litigation:
- Under the Recast Brussels Regulation and the Service Regulation (1393/2007):
- There is no requirement to obtain the court’s permission to serve proceedings on a party in the EU.
- The EU has agreed a regime for determining which courts have jurisdiction to decide a dispute – in particular, exclusive jurisdiction contractual clauses are upheld and other courts are required to decline jurisdiction in favour of the parties’ chosen court.
- In addition, the Rome I and Rome II Regulations (593/2008 and 864/2007) require all member states to apply the same principles to identify the relevant governing law of a dispute. Again, in commercial contracts, EU member states courts will generally uphold governing law clauses agreed between the parties.
All of these parallel provisions ensure a level of consistency across litigation conducted within the EU and avoid simultaneous proceedings continuing in more than one EU state in relation to the same dispute.
Taking each of these three considerations in turn, how will the position change after the transition period?
Governing law
This is, perhaps, the most straight-forward of the issues as the position, at least initially, is likely to be largely unaffected. In our recent article here, we discussed how the Withdrawal Act, the legislation that will come into force at 11pm on 31 December 2020 and implement the legal effects of Brexit, preserves existing EU law within the UK legal system. While new developments from the EU legislature will not automatically become binding in the UK after this time, most existing EU law will be retained. With this, the Rome Regulations that determine governing law will be incorporated into English law. Unlike the issues of service, jurisdiction and enforcement, the application of the Rome Regulations is purely a matter of legal interpretation for the individual courts that does not require any co-operation, or reciprocity, between the jurisdictions of the UK and EU member states.
Therefore, with no change to the legal position as between the UK and EU, the existing approach of both towards identifying the relevant governing law is not expected to change. The EU courts are likely to continue to recognise the parties’ choice of English governing law in the same manner, and vice versa. This is, of course, subject to the caveat that the position may change and, while it appears relatively unlikely, the UK may decide to adopt a different position to the EU in the future.
Jurisdiction and enforcement of judgments
The position here, in the absence of the legal effect of the Recast Brussels Regulation in the UK, is less clear and there are a couple of possibilities.
First the UK could accede to the Lugano Convention 2007 and the UK government signalled early in the process that this was its preferred option. The Lugano Convention is an international treaty negotiated between the EU and Norway, Switzerland and Iceland (the EFTA states) that provides which courts have jurisdiction to hear a dispute and ensures that the resulting judgment is recognised and enforced in the Convention states. The provisions of the Lugano Convention largely mirror the Brussels Recast Regulation in relation to those matters and if the UK were to accede to it, the position in relation to jurisdiction and recognition and enforcement would not change significantly. However there is currently a problem. All of the signatories to the Lugano Convention have to agree to the UK’s request to accede and, while the UK received statements of support from Norway, Switzerland and Iceland in January, the EU have so far refused their support. Many see this as the best option for the UK as it looks to afford minimal disruption. Indeed, it was reported last week that a consortium of cross-sector organisations, including The Law Societies of England and Wales, Scotland and Northern Ireland and The British Retail Consortium, had written to the president of the European Council urging the EU to allow the UK to accede to the Convention. However the question remains as to whether the EU can be persuaded.
If the UK does not accede to the Lugano Convention, it seems likely the UK will otherwise ratify the Hague Convention on Choice of Court Agreements 2005 (the Hague Convention). The Hague Convention also sets out rules which enforce exclusive jurisdiction clauses and allow for the enforcement of judgments obtained under these clauses. If it ratifies the Hague Convention the UK would be joining the EU member states, Singapore, Mexico and Montenegro who have also already done so. In addition China, the USA, the Republic of North Macedonia and Ukraine have also signed the Hague Convention but have not yet ratified it.
However the Hague Convention does have some limitations – it does not govern non-exclusive contractual clauses or tortious claims. Furthermore there are a number of exclusions that could be relevant in commercial dealings, including employment contracts, insolvency matters, carriage of passengers and goods and various maritime-specific types of claim. The UK government has also said it will not apply to insurance contracts.
To complicate matters further, there is some degree of confusion between the UK and the EU as to its application. The UK government has said that the Hague Convention will apply to contracts entered into after 1 October 2015 (the date that the UK acceded to the Convention as an EU member state) but the EU takes a different position, stating that the Hague Convention will only apply to contracts entered into from 1 January 2021 (the date the UK will accede to the Hague Convention in its own right). The position on this is unresolved.
Service
At the end of the transition period the Service Regulation, which regulates the way legal proceedings are served within the EU, will no longer apply to English court proceedings. Instead, the Hague Service Convention 1965, to which the UK and the EU are both parties, will apply. The Convention sets out how proceedings may be served and requires signatories to designate a Central Authority to receive and execute requests to serve out of the jurisdiction.
While the effect of the Hague Service Convention will be largely similar in practice, there are certain advantages under the EU Service Regulation, such as the ability to serve proceedings more quickly and easily than under the Convention. In addition, proceedings to which the Hague Convention does not apply may now, additionally, need permission to serve out of the jurisdiction within the EU.
Arbitration
Many parties dealing with cross-border transactions are already choosing to have disputes dealt with by arbitration and, in contrast to litigation, international arbitration is largely unaffected by the impact of Brexit.
On matters of jurisdiction, the parties’ election for arbitration is binding and post-Brexit, parties will be able to apply to the English courts for an anti-suit injunction to prevent any court proceedings commenced in another EU state.
Furthermore, arbitration is governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. With 166 signatories to the New York Convention, this far exceeds the countries with which UK has reciprocal enforcement treaties by a significant margin and signatories agree to enforce arbitral awards generally. There are only a few grounds upon which enforcement can be resisted and, broadly speaking, these are limited to procedural irregularities. In addition, enforcement can be resisted on the basis that recognition or enforcement of the award would be contrary to the public policy of that country and experience shows this can produce surprising outcomes in some jurisdictions (although there is no reason to believe that in such cases enforcement of a court judgment would have fared any better). However, generally speaking, arbitral awards are upheld and courts tend to be supportive of them.
Example
Taking into account the points above and considering the example of a dispute with a counterparty in France with its assets there, what are the options both before and after the end of the transition period?
The first option is to bring proceedings in England and enforce in France. Before the transition period ends, assuming the English court has jurisdiction, proceedings can be issued here and served on the counterparty in France under the Service Regulation without needing permission.
After the transition period ends, the position becomes more complicated. Assuming the dispute arises from a contract covered by the Hague Convention 2005 (bearing in mind the current disparity between the UK and EU on its applicability) that contains an exclusive jurisdiction clause and is not an excluded contract, proceedings can be served on the counterparty in France without permission. It would also be possible to obtain recognition and enforcement of the judgment in France and seek a stay of any simultaneous proceedings started there. However if it is not such a dispute, permission may be needed to serve the proceedings. There is also a risk of concurrent proceedings with potentially different outcomes and difficulty on enforcing; both aspects will depend on the approach of the French courts.
Steps can be taken to mitigate the position. First any party with a current dispute should consider issuing and serving English court proceedings before the end of the transition period. Additionally the inclusion of contractual service provisions requiring an address for service in England may also avoid some of the issues around service. Parties should also consider carefully the extent to which an exclusive jurisdiction clause is advisable in contracts where the Hague Convention 2005 is not applicable.
Otherwise, after the transition period ends, as they could have done previously with a non-exclusive jurisdiction clause, parties can instead issue court proceedings in France, according to French procedural law. Enforcement in France would be relatively easy with a French judgment.
International arbitration with a seat in London, where an arbitration agreement is in place is an option and unaffected by Brexit. The parties would have the benefit of English arbitral law and enforcement is relatively easy under the New York Convention.
Conclusion
The impact of Brexit on court proceedings against EU counter-parties, adding a layer of complexity and uncertainty, undoubtedly highlights some advantages of opting for arbitration as an alternative. The main arbitral bodies are also taking steps to revise their procedural rules to bring them up-to-date with modern arbitral practice; the LCIA’s revised rules came into force on 1 October 2020 and the ICC is updating its rules with effect from January 2021. It would be unsurprising and not unwise, therefore, if parties operating cross-border increasingly consider arbitration going forwards.
While the current uncertainty around litigation matters and Brexit may cause some concern for UK business, London continues to be very successful as an arbitration centre. The Supreme Court again highlighted the UK legal system’s support for arbitration in its recent judgment in Enka v Chubb (commentary by our firm about the decision can be found here) and the LCIA’s recent procedural update brings it to the forefront of arbitration. While nothing can be taken for granted and the UK must continue to maintain its status as an international dispute resolution centre, there is no sign yet that Brexit is having an impact on international disputes work here.
Michael Frisby
Lorna Sleave