No-deal Brexit and commercial disputes

04.10.18

Perhaps not surprisingly, the publication in September of the UK Government’s ‘no-deal’ technical notice on civil judicial cooperation didn’t generate many headlines in the press.  But there’s no getting away from the fact that the consequences outlined in  “Handling civil legal cases that involve EU countries if there’s no Brexit deal” would impact on clients who are already in or about to enter cross-border commercial contracts and those providing them with legal advice. Although many deals contain contractual mechanisms for resolving disputes, some do not. This leaves the parties to a contract, absent agreement to the contrary, to air their grievances in court.

Currently, a complex web of EU instruments and international agreements govern rules in relation to (amongst other things) jurisdiction, applicable law, recognition and enforcement of judgments, and the taking of evidence outwith the UK. In addition, there are separate specialist rules relating to insolvency and family law.

EU rules govern which country’s courts should deal with a cross-border dispute within the EU, the national law that the court should apply, and the procedure for recognising and enforcing judgments. In addition, the UK is a party to some international conventions by virtue of its membership of the EU.

Although there was considerable legal debate following the referendum as to how best to recreate those rules post-Brexit, that tended to proceed on the assumption that agreement could be reached prior to exit day. In a no-deal scenario there will be no agreement.

The UK Government’s technical notice confirms that, following a no-deal Brexit, many of the current rules would no longer apply. Instead, Scots law, like the law of other parts of the UK, would be heavily reliant on pre-existing common law and statutory rules. These would be supplemented by relevant international conventions, which currently are only relied upon to govern UK judicial cooperation with non-EU states.

Since existing commercial contracts will have been drafted with the well-understood EU rules in mind, the UK Government warns:

“Any party to a cross-border legal dispute, including businesses, consumers and families, would need to consider the effect that these changes would have on any existing or future cases involving parties in EU countries. Where appropriate you may wish to seek professional legal advice on the implications of these changes for your individual circumstances.”

Put bluntly, in the event of a no-deal departure from the EU on 29 March 2019, there would be “…no agreed EU framework for ongoing civil judicial cooperation between the UK and EU countries.”

In deciding how best to deal with the possibility of removal of the familiar EU framework, the UK Government has distinguished EU rules that rely on reciprocity (i.e. most of them) from those that do not.

 

Reciprocal rules

The notice is clear that the UK Government would not keep in place any EU rules which operate on the basis of reciprocity between EU countries. The UK would automatically become a “third country” as far as EU members are concerned, so UK citizens and businesses would not be getting the reciprocal benefit of such rules when applied by the courts in EU Member States.

As a result the following rules which rely on reciprocity would no longer apply:

  • Brussels Ia (also commonly referred to as Brussels I Recast) on jurisdiction and the recognition/enforcement of civil judgments between EU countries
  • The EU Enforcement Order, Order for Payment and Small Claims Regulations, which establish EU procedures for dealing with, respectively, uncontested debts and claims worth less than EUR5,000
  • The EU/Denmark Agreement on jurisdiction and the recognition/enforcement of civil and commercial judgments between the EU and Denmark
  • The Lugano Convention, which governs the EU’s civil judicial relationship with Norway, Iceland and Switzerland:
  • The EU Service Regulation
  • The EU Taking of Evidence Regulation

Domestic legislation implementing the Mediation Directive and the Legal Aid Directive would also be repealed.

The notice accepts that having to rely on domestic law in these areas may cause problems, since interaction of the UK rules with the domestic law of individual EU counties - particularly in relation to jurisdiction and recognition/enforcement of judgments - may not be clear.

 

Non-reciprocal rules

After all that, it comes as something of a relief that the UK Government has confirmed that the existing Rome I and Rome II rules on applicable law in contractual and non-contractual matters would be retained. Neither require reciprocity and as a result courts would continue to determine the national law to be applied in cross-border disputes in the same way that they do now.

 

Choice of courts agreements and enforcement of judgments

The issue of contractual choice of court agreements has been the focus of considerable debate over the past 18 months. Cross-border commercial contracts can provide that disputes arising out of the contract are to be resolved in the courts of a particular country. Provided the necessary international agreements are in place this has the advantage of giving parties the comfort of knowing that any court proceedings will be raised in the chosen location. Historically, the enforceability of choice of court agreements has been of particular significance to the English legal markets since London has been a popular choice of venue for international litigation.

The fall-back position in the event of no-deal would be the Hague Convention on Choice of Court Agreements 2005, which has been in force in most EU Member States since October 2015 and is now also in force in Denmark, Singapore and Mexico.

The Convention is not as wide-ranging in effect as Brussels Ia (for example, it focuses only on exclusive jurisdiction clauses and excludes significant non-commercial areas of litigation) but it would provide a ready-made alternative to the EU regime. It would help improve the prospect of parties continuing to choose a UK jurisdiction to litigate disputes.

The UK is currently only bound by the Convention through membership of the EU but the intention is that the UK will accede to the Convention following departure from the EU. Draft legislation has been prepared (The Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulation 2018) to deal with agreements entered into both before and after the UK accedes to the 2005 Convention. The UK Government does, however, warn that there would be a gap in Convention coverage between 29 March and 1 April 2019.

Registration and enforcement of judgments under the Convention is procedurally more onerous than the streamlined Brussels Ia procedures. As a result it would inevitably prove more troublesome and expensive to enforce a Scottish or English decree in an EU Member State. Equally, EU-based pursuers would have additional hoops to jump through to enforce their own domestic decree in the UK.

So, for existing contracts with no dispute resolution mechanism in play, there could be trouble ahead. For those about to enter into contracts where, for example, the parties are based in different jurisdictions – say, the UK and Germany – they would be well advised to seek some careful legal guidance on ensuring that an appropriate alternative dispute resolution mechanism is incorporated into the contract. In particular, well drafted international arbitration clauses including amongst other things provision for the choice of law to apply and seat of the arbitration, should provide parties with some certainty on the dispute process to be followed if they fall out. Both Germany and the UK are also (along with many other EU countries) signatories in their own right to the 1958 New York Convention (The Convention on the Recognition and Enforcement of Foreign Arbitral Awards) under which, following the decision of an arbitrator, there are well recognised routes to enforcement. Therefore, we might well see a rise in clients relying on such agreements to avoid some of the difficulties that could be caused by a no-deal Brexit.