“Hard Brexit” for judicial cooperation in civil and commercial matters - what does it mean for governing law and dispute resolution clauses in international commercial contracts?
A combination of an English law clause with a London jurisdiction/arbitration clause is a popular choice for international commercial agreements. Should this choice be reviewed as a result of the end of the transition period, and the effective departure of the UK from the EU on 1 January 2021?
Absence of provisions on judicial cooperation in civil and commercial matters in the Trade and Cooperation Agreement
The EU-UK Trade and Cooperation Agreement (“TCA”), concluded on 24 December 2020 and provisionally applicable since the end of the transition period on 1 January 2021, contains a Part III on judicial cooperation in criminal matters, covering among others exchange of information between criminal authorities, cooperation in anti-money laundering (AML) matters and mutual recognition of confiscations of property in the framework of criminal proceedings.
By contrast, the TCA is silent on judicial cooperation in civil and commercial matters. This means that, since 1 January 2021, the UK has become a third state for the application of the EU law instruments governing the recognition and enforcement of judgments and jurisdiction and applicable law clauses (mostly the Brussels I recast regulation, for jurisdiction, and the Rome I and Rome II regulations, for choice of law). What are the main consequences of this situation?
For legal proceedings started, and judgments rendered, before the end of the transition period on 31 December 2020, Brexit has barely any impact. By application of Title VI of the Withdrawal Agreement, the relevant EU law instruments remain applicable to the relationship between UK and EU parties, and the CJEU retains jurisdiction for the interpretation of these rules. The Rome I and Rome II regulations continue to apply, respectively, to contracts concluded before the end of the transition period and events giving rise to damage that occurred before the end of the transition period. By contrast, proceedings started after the transition period on the basis of jurisdiction clauses concluded before the end of this period will not be governed by the Brussels I recast.
As from 1 January 2021, the situation has become more complex since the EU and the UK did not agree on bespoke private international law provisions in replacement of the EU law rules.
Applicable law: keep calm and carry on?
English law clauses will continue to be recognised by EU courts, as the Rome I and Rome II regulations have a universal application (i.e. they must be applied by EU courts even when the law of a third State, such as the UK, is designated by choice of law clauses or the other rules set forth by the regulations). However, companies should assess on a case by case basis whether the impact of Brexit on substantive English law rules could justify the designation of another applicable law. If contract law is likely to remain mostly unaffected, this will be different for other areas (such as consumer protection, data protection, etc.). The UK only agreed in the TCA to maintain a “level playing field” in a number of areas, including labour, competition law, social, environmental and climate protection.
The UK has incorporated the rules provided for by the Rome I and Rome II regulations in its domestic law, which means that Brexit will not have any impact in the short term. However, in the longer term, divergent rules and/or interpretations of concepts between the CJEU and the UK courts may start to emerge.
Competent courts, recognition and enforcement of jurisdiction clauses and judgments: fog in channel?
Potential application of international conventions:
- 2005 Hague Choice of Court Convention: the UK joined this convention, but its scope of application is limited as it only applies to two-way exclusive jurisdiction clauses (i.e. it is not applicable to one-way asymmetric or optional clauses, which are frequent in finance agreements). In addition, the convention does not apply to clauses concluded before the accession of the state whose courts are designated. For the UK, the European Commission’s view is that this date is 1 January 2021, while the UK considers that there is a continuity of application since it joined the convention as a EU Member State on 1 October 2015.
- 2007 Lugano Convention: the UK has requested to re-access this convention, but the EU has refused its approval so far. Now that the EU and the UK have agreed on a trade deal, the EU may become more inclined to agree on the UK’s request. This convention reproduces the rules of the Brussels I regulation, without the improvement brought upon by the Brussels I recast (in particular the end of the exequatur of foreign judgments).
- Historic bilateral conventions with Member States (including the 1934 bilateral convention between Belgium and the UK): these conventions are generally considered to be not applicable, as the degree to which they were superseded by subsequent European legislation casts doubt on their continued scope of operation.
In the absence of applicable international conventions, the recognition and enforcement of jurisdiction clauses and judgments will be governed by the domestic private international law rules of each Member States. In Belgium, under Article 25 of the Code of Private International Law, English jurisdiction clauses, and the decision of English courts, should be recognised and enforced as a general rule (subject to enumerated grounds for refusal, such as the breach of Belgian public order or of the rights of defence, or the existence of prior proceedings in Belgium). However, as opposed to EU judgments that are directly enforceable, English judgments will have to obtain the exequatur of a Belgian court (this also holds true for UK judgments benefitting from the above-mentioned international conventions).
The default position is that the common law rules apply. Jurisdiction under the common law turns upon serving the claim form on the defendant. This will therefore depend on the ability to either serve the defendant in the UK or, where it is overseas, obtain permission to serve the claim form out of the UK. The grounds for permission to serve out of the UK are different from the jurisdictional grounds under the Brussels I recast regulation. Under the common law, the English courts also generally have a greater degree of discretion to decline jurisdiction (on the basis of an assessment of what the most natural forum for the dispute is – the so-called forum non conveniens test). The enforcement of foreign judgments will require a fresh action. The common law rules, amongst other matters, require a defendant to have been present in the foreign jurisdiction whose judgment is to be enforced, or to have made some other form of voluntary submission (including by concluding a jurisdiction clause designating the courts of this foreign jurisdiction).
International commercial arbitration: much ado about nothing?
The impact of Brexit on commercial arbitration will be limited, as this field relies on an international convention (the 1958 New York Convention) and is excluded from the main EU law instruments.
By contrast with other EU trade agreements, such as CETA (concluded with Canada), the TCA does not contain any mechanism of investor-state dispute settlement (ISDS) which would allow investors to file a claim with an arbitration tribunal in case of breach of the TCA by the UK or the EU. The application of the arbitration mechanism provided by the TCA is limited to state-to-state disputes.
It stems from this overview that the main areas of change concern (i) the jurisdiction of UK courts for proceedings started after 31 December 2020 and (ii) the enforcement across the channel of judgments rendered after 31 December 2020 (i.e. of UK judgments in the EU or of EU judgments in the UK), which is likely to entail increased costs and uncertainties.
Whether commercial parties should review their English jurisdiction/applicable law clauses in view of Brexit should be assessed on a case by case basis, taking into consideration criteria such as:
- Are the adjudicative benefits of the UK courts (e.g. specialisation, use of English and/or English law, etc.) fundamental to your particular type of contract such that this outweighs any “export” uncertainty?
- Is it you who are more likely to be sued (in which case any such uncertainty is more an issue for the other party)?
- Does the counterparty have assets in the UK (or another state where UK judgments are easily enforced)?
If this “export” uncertainty is not too much of a concern, this should not deter from continuing to choose the English courts. If, however, “Brexit-proofing” against this uncertainty does remain a concern, the two most straightforward solutions are either to take local advice on national law regarding the enforcement of a UK judgment in the relevant state or consider using arbitration. Another option would be to rely on an exclusive jurisdiction clause concluded after 31 December 2020, in order to benefit from the application of the 2005 Hague Choice of Court Convention.