As the 31 December 2020 rapidly approaches, marking the end of the transition period for the UK's departure from the European Union (EU), we look at some of the issues around choice of law and jurisdiction clauses for commercial parties contracting with entities in EU member states.
When considering choice of law and jurisdiction clauses you are looking at the law that is going to govern a contract and the jurisdiction for disputes, ie which courts are entitled to hear a dispute and, most importantly, considerations around the effective enforcement of judgments obtained in the courts of one country in the courts of another.
Bear in mind the mischief that you are trying to avoid, namely lengthy and costly disputes over which court should determine a dispute arising out of a contract, and which substantive law will be applied to determine the parties' rights and obligations under the contract. Such disputes may lead to delay and additional costs. Contracting parties are looking for certainty regarding these issues, and to avoid the possibility of multiple proceedings, in different jurisdictions, producing conflicting judgments.
Choice of law
It is unlikely that Brexit will materially affect the approach to determining governing law, or drafting governing law clauses.
The instruments that currently determine governing law, Rome 1 (Regulation (EC) No 593/2008 on the law applicable to contractual obligations) and Rome II (Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations) will be implemented in UK domestic law as 'retained law' and will continue to apply post-Brexit. EU member state courts will continue to respect an express choice of English law, and equally English courts will continue to respect an express choice of the law of an EU member state.
Parties often choose English law because of the perceived benefits of English law, flexibility/respect for the parties' bargain. Such benefits will not be affected by Brexit. Therefore, the reasons to choose English law remain. It is helpful, though not necessary, to avoid English law being applied by non-English courts and this is where your choice of court clause considerations come into play.
The current law on choice of court/jurisdiction is the Regulation (EU) No.1215/2012 (Recast) (Brussels Recast Regulation) and applies to the UK and EU member states, with respect to choice of courts/jurisdiction and subsequent enforcement of judgments. It provides a regime where the courts of EU member states are generally obliged to respect jurisdiction clauses in favour of a court in another EU member state, and to enforce any resulting judgment. It will cease to apply to the UK on 31 December 2020.
What will apply after that date?
The UK has applied to become a signatory of the 2007 Lugano Convention (Lugano Convention) in its own right, although it is still waiting to hear if the other contracting parties (including the EU) agree to the UK joining it. The Lugano Convention provides a similar, but not identical, regime to the Brussels Recast Regulation, but still allows for easy enforcement of judgments around the EU and EFTA. While there are some differences, there is very little between the Lugano and Recast Brussels that would make you change any previous position adopted in respect of jurisdiction clauses. In anticipation of a positive response, the Lugano Convention has already been laid before parliament with the explanatory memorandum. This step has been taken in order that the Lugano Convention can enter into force as soon as possible, after the end of the transition period (should the UK's application for accession to the Convention receive a positive response). In the absence of confirmation that the UK may accede to the Lugano Convention, there are two options (i) The Hague Convention on Choice of Court Agreements 2005 (2005 Hague Convention) may apply or (ii) the national laws of the UK and EU member states will apply.
The 2005 Hague Convention
The EU (including the UK) signed up to this convention with effect from 1 October 2015. The 2005 Hague Convention contains rules that require contracting states (EU, Mexico, Montenegro and Singapore) to respect exclusive jurisdiction clauses in favour of other contracting states and to related judgments. The UK has already acceded to this in its own right from 1 January 2021 (unlike Lugano, the consent of other states is not required).
There are a few important points to note about the 2005 Hague Convention:
- It only applies to exclusive jurisdiction clauses choosing a contracting state. It does not apply to asymmetric/unilateral clauses, ie where one party must bring proceedings in a designated court but the other party has a choice of where to sue
- It provides for the enforcement of judgments arising from such jurisdiction clauses, but it does not contain any rules for allocating jurisdiction in the absence of an exclusive choice of court agreement
- Only applies to clauses concluded after its ratification by a state
- Does not apply to insurance contracts as against EU, which have been excluded
The latest UK government guidance says that the 2005 Hague Convention will continue to apply to the UK (without interruption) from its original entry into force date of 1 October 2015 (the date the EU signed). There is a some uncertainty around its application as the EU's view is that the 2005 Hague Convention will not apply in the UK to contracts signed before 1 January 2021 as the UK was not a signatory in its own right.
How could this play out in practice? If you bear in mind that the 2005 Hague Convention only applies to exclusive jurisdiction clauses agreed after it comes into force in a country (which could be either 1 October 2015 or 1 January 2021 - see above). If you had an exclusive jurisdiction clause in favour of the English courts in a contract dated 2019, and if the EU is right and the 2005 Hague Convention does not apply, proceedings could be commenced in another court in the EU contrary to the English jurisdiction clause, and that court may decline to stay those proceedings or defer to the English courts. This all means that there may be a real a risk of multiple proceedings, irreconcilable judgments and corresponding difficulties with attempts at enforcement.
For exclusive jurisdiction clauses entered into after 1 January 2020 when UK will have acceded to the 2005 Hague Convention in its own right, the rules are in fact similar to the Brussels Recast Regulation.
Where the Hague Convention 2005 does not apply, because for example the clause is not an exclusive jurisdiction clause, or it was agreed before 1 October 2015, then jurisdiction will be determined by the domestic rules in UK or the individual EU member state. As far as the English courts are concerned, they will generally respect an exclusive jurisdiction clause in favour of another country and will generally enforce money judgments given in other countries, subject to limited exceptions. In respect of other individual EU member states, in the main, these are likely to respect an English jurisdiction clause but local laws will need to be checked as this is not universally the case or there may be additional formalities required. A much more patchwork system will undoubtedly operate and apply.
What about arbitration? Is it now an increasingly more advantageous option? It is certainly the case that Brexit will not significantly affect arbitration as a choice of dispute resolution forum. The advantages of a London arbitration do not derive from EU law or from UK membership of EU. Importantly, Brexit has no impact on the enforcement of arbitration awards in EU or elsewhere, which is governed by the New York Convention 1958, of which the UK is a signatory in its own right and therefore is unaffected by Brexit. Given this, London based arbitration may well be more attractive until things settle down between UK and EU.
In summary, there are a few key points to bear in mind:
- The UK's accession to the 2007 Lugano Convention (if this can be agreed) is likely to produce a result that is least disruptive to the considerations applied by commercial parties when considering jurisdiction and enforcement. Unfortunately, it is not clear whether this is likely to be agreed in the short or even longer term
- Consider your jurisdiction clauses - are they exclusive? Asymmetric or unilateral jurisdiction clauses are not caught by the Hague Convention 2005
- Consider the date of any exclusive jurisdiction clause - was it entered into after the UK had ratified the 2005 Hague Convention?
- Is arbitration and enforcement under the New York Convention 1958 going to be a better option?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.