Simmons & Simmons examine the existing European framework, the legal changes introduced by Brexit and practical points that parties will need to consider in the future when contemplating, or participating in, cross-border disputes between the UK and EU
Prior to Brexit, a robust legal framework existed which governed cross-border disputes between the UK and the EU. It provided for reciprocal enforcement of judgments, choice of governing law and jurisdiction clauses. However, following Brexit, this framework has fallen away and has not yet been replaced by any similar legislative arrangement such that many civil justice matters will now be governed by member states’ local law. As a result, and in the absence of any further agreement, Brexit may have significant practical implications
for how litigants conduct cross-border litigation.
In this article, we examine the existing European framework, the legal changes introduced by Brexit and practical points that parties will need to consider in the future when contemplating, or participating in, cross-border disputes between the UK and EU.
The European framework
Prior to the UK’s exit from the EU, the established framework for civil justice matters was based on a principle of mutual recognition and enforcement. The laws governing choice of law, jurisdiction and enforcement of judgments were consistent throughout the EU member states, including the UK.
The recognition of choice of law clauses was governed by the Rome I and II Regulations and the Rome Convention, which in essence recognised the freedom of contractual counterparties to select the governing law of their agreements. They provided for limited grounds on which parties could displace the chosen law of their agreements.
The primary objective of the European regime was to provide certainty to parties on where they could sue and be sued.
The rules on jurisdiction and, in particular, those relating to enforcement of choice of court clauses and corresponding judgments, were governed by the Recast Brussels Regulation, its predecessor the 2001 Brussels Regulation, and the 2007 Lugano Convention. The primary objective of the European regime was to provide certainty to parties on where they could sue and be sued. In general, it dictated that a defendant should be sued in the courts of their country of domicile subject to certain exceptions, the key exception being where there existed a jurisdiction agreement in favour of the courts of an EU member state. Further, the regime enabled mutual recognition and enforcement of judgments of one EU member state in another member state.
On 28 September 2020, the UK government deposited its instrument of accession to the Hague Convention on Choice of Court Agreements 2005, meaning the UK re-joined in its own right on 1 January 2021, having previously been a party to this only by virtue of its status as an EU member state. The Hague Convention requires courts of member states (the UK, the EU, Singapore, Mexico and Montenegro) to recognise and enforce a contractual choice of a court as the exclusive jurisdiction for disputes. It covers only exclusive choices of courts and so does not cover non-exclusive or asymmetrical jurisdiction clauses, such as those commonly found in finance agreements.
What is the position now?
The current position will be largely unaffected by the end of the transition period. Choice of law clauses were subject to the Rome I and Rome II Regulations, but these rules have been adopted as UK domestic law in broadly the same form following the end of the transition period. The principal increased risk is that courts of an EU27 state may be more likely to apply certain mandatory provisions of local law regardless of the choice of English law, in particular where two or more parties to proceedings are based in the same EU27 state. For example, where two German companies with a contract subject to English governing law have a dispute before the German courts, the court may be entitled to apply non-derogable provisions of German law. There is a risk that these provisions can cut across or otherwise alter the substance of English law contracts. Such risks existed pre-Brexit but could be exacerbated by UK companies setting up European branches and otherwise transferring operations to the EU in order to ease other cross-border trade issues.
Choice of jurisdiction and enforcement
In contrast to governing law, the rules governing jurisdiction clauses and the enforcement of judgments have changed significantly post-transition period (ie after 31 December 2020) and particularly so in the absence of the Lugano Convention.
The UK courts
The UK government has passed statutory instruments to address the implications of the end of the transition period, the net effect of which is that:
- where proceedings were ongoing on 31 December 2020 to which Brussels Recast Regulation or the Lugano Convention applied, the relevant instrument will continue to apply to those proceedings;
- where an exclusive jurisdiction clause was agreed between 1 October 2015 and 31 December 2020 between parties resident in the EU and Mexico, Singapore or Montenegro, the Hague Convention on Choice of Court Agreements will apply;
- where an exclusive jurisdiction clause is agreed at any time after 31 December 2020 between a party resident in the UK and any other Hague Contracting State, the Hague Convention will apply;
- otherwise, the UK courts will apply the common law to questions of jurisdiction and the enforcement of foreign judgments pursuant to a jurisdiction clause. This includes contracts containing an exclusive jurisdiction clause that were agreed between 1 October 2015 and 31 December 2020 and to which Brussels Recast Regulation or the Lugano Convention applied, as the Hague Convention will not have retrospective effect where the EU regime previously applied.
EU27 state courts
The EU Commission issued a Notice to Stakeholders on 18 January 2019, setting out the legal repercussions to be considered in the event of a ‘no-deal’ Brexit, when the UK would become a ‘third country’ and fall outside EU rules in
the field of civil justice and private international law. The key points were that:
- where proceedings involving a UK domiciled party are pending prior to 31 December 2020 in an EU27 state court, the relevant EU rules for international jurisdiction (being in most cases Brussels Recast Regulation) will continue to apply;
- where proceedings are initiated after 31 December 2020, jurisdiction will instead be governed by local law in the relevant EU27 state unless the Hague Convention applies; and
- the Hague Convention will apply to an exclusive jurisdiction clause between a UK domiciled counterparty and an EU domiciled counterparty agreed after
31 December 2020.
It is likely that the UK and EU will differ in their respective approach to the application of the Hague Convention. While the UK government has legislated to apply the Hague Convention continuously to all relevant contracts entered into since October 2015, when the UK joined by virtue of its EU membership, the EU Commission has stated that it considers the UK’s membership started to run again as at 1 January 2021. If EU member state courts adopt this interpretation, they will only apply the recognition principles contained in the Hague Convention to contractual choices of jurisdiction entered into on or after the start of this year.
In reality, as even the UK interpretation does not apply the Hague Convention to the vast majority of agreements that were previously covered by the Brussels Recast Regulation or the Lugano Convention, this may make little practical difference in disputes with EU counterparties. The Hague Convention will only assist in the recognition of exclusive choices of courts between UK and EU parties where the agreement was entered into on or after 1 January 2021.
The Hague Convention will only assist in the recognition of exclusive choices of courts between UK and EU parties where the agreement was entered into on or after 1 January 2021.
As a result of this, parties may wish to consider re-executing jurisdiction agreements in particularly significant agreements with counterparties based in the EU. For example, in the private negotiated derivatives market, the International Swaps and Derivatives Association (ISDA) industry body has published a bilateral amendment agreement allowing the insertion of an exclusive jurisdiction clause into pre-existing master agreements for this purpose.
Where the Hague Convention does not apply, the recognition and enforcement of jurisdiction clauses and foreign judgments is subject to the local law of the venue. The majority of European jurisdictions are expected to continue to enforce English court judgments where the English courts properly had jurisdiction pursuant to an English jurisdiction clause. However, in general, this process may now take longer, involve greater cost, and provide for more limited remedies.
Service of proceedings
The Civil Procedure Rules for England and Wales have previously contained streamlining provisions for service of proceedings on parties outside the jurisdiction but within the EU, based on the Brussels Recast Regulation. These have now fallen away for claims commenced on or after 1 January 2021, though they will continue to apply for claims commenced before that date. Where they do not apply, permission will be needed to serve out of the jurisdiction, requiring a separate application and the ‘full and frank’ disclosure to the court of all relevant information, including any which might weigh against the application.
Even though the court’s permission to serve out may not be required following the recent rule change, the process of serving parties outside the jurisdiction adds cost and
delay to commencing legal proceedings.
In December 2020 the Civil Procedure Rule Committee approved a change to the rules, which took effect from 6 April 2021. This has removed the requirement for a claimant to obtain permission to serve proceedings on a defendant outside the jurisdiction where there exists a contractual agreement to the effect that a UK court is to have jurisdiction over disputes.
Where possible, it remains sensible to require a counterparty outside the UK to appoint a process agent within the jurisdiction to avoid issues relating to service out. Even though the court’s permission to serve out may not be required following the recent rule change, the process of serving parties outside the jurisdiction adds cost and delay to commencing legal proceedings.
Expected impact on cross-border disputes
In the short term, we do not expect Brexit to lead to a significant move away from the English courts in in circumstances where an English choice of court clause has been the default position. The English courts remain the preferred forum across industry standard documents, and the predictability of the precedent driven nature of the common law and the scale of the professional services infrastructure supporting such cross-border litigation in London remain attractive to commercial parties. It is also possible that the English courts may be seen as an attractive ‘neutral’ venue for disputes between EU and non-EU parties.
However, given that there are pockets of enforceability risk in relation to English judgments and choice of court clauses in Europe following Brexit, parties should consider using alternatives such as arbitration or a local choice of court clause where these risks are significant. It will be interesting to see what trends may emerge as the post Brexit landscape becomes more certain and, in particular, when it becomes clear whether the UK’s accession to the Lugano Convention will be approved by the EU. To the extent it is approved, the pockets of risk which currently exist in its absence would be remedied, and the potential trends away from the use of English courts may be stopped in their tracks.
In the longer term, the UK and the EU are likely to accede to the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters. Whilst it currently only has three signatories (Israel, Ukraine, and Uruguay), it is expected that once this enters into force it could provide a straightforward, alternative avenue for the enforcement of UK court judgments abroad. However, the timing of accession is unknown, and based on previous experience it could be a number of years, if not a further decade, before the Convention enters into effect.
Elizabeth Williams is a litigation partner in the London office of Simmons & Simmons