Parties negotiating and re-negotiating international contracts should continue to use English governing law and exclusive English jurisdiction clauses in those contracts after Brexit if suitable for their circumstances. Brexit does not mean a loss of ability to choose English law as the governing law of an agreement, or to ensure that English courts will have jurisdiction, or to enforce English court judgments (on such agreements) in EU Member States. Richard Eccles and Louise Lanzkron explain why.
The UK exited the EU on 31st January 2020. By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in and in relation to the UK only until the 31st December 2020. EU law will then cease to apply in relation to the UK, and prior EU regulations will only continue to apply in domestic law (by virtue of the European Union (Withdrawal) Act 2018) ("EUWA") insofar as they are not modified or revoked by regulations under the EUWA. This article, therefore, considers what the legal position will be at the end of the transition period in the event that the UK and the EU are unable to reach agreement on these areas in a future relationship agreement ("the Future Relationship Agreement").
Many contracting parties want English law to apply to and govern their contracts because of the certainty that the obligations in the agreement will be enforced as per the expressed intentions of the parties, without codified rules of law being applied and (other than in exceptional circumstances) without terms being implied into their agreements. If commercial parties have previously chosen English governing law to govern the law of a contract before Brexit it will still be the right choice after Brexit. This is because the law currently governing contractual obligations between EU member states is set out in the Rome I Regulation (and the law currently governing non-contractual obligations between member states is set out in the Rome II Regulation). Both Rome I and Rome II will continue to be binding on EU Member States in relation to the UK after Brexit. Both Regulations will disappear from the UK statute book at the end of the transition period, but will be re-incorporated into UK law under the terms of the EUWA.
In simple terms Rome I requires the governing law chosen by the parties to apply and this choice of law rule applies even where the law of a non-EU member state is chosen. This means there will be no change to the way governing law is considered by either the UK courts or the courts of the EU member states after Brexit. The provisions of Rome I and Rome II can be disapplied only in limited circumstances, most notably where, for example, the Commercial Agents Regulations or EU or UK competition law will apply in the relevant territories irrespective of the governing law of the contract.
English courts and enforcement of judgments – significant change
Whilst the rules relating to the application of governing law will be largely unaffected after Brexit, for purposes of the laws governing jurisdiction and the recognition and enforcement of judgments, at the end of the transition period the UK will be considered a third country and outside the current EU rules in the event that a Future Relationship Agreement cannot be agreed. Parties who have previously chosen the jurisdiction of the English courts should review such clauses to assess whether English jurisdiction will still be suitable in the event that a Future Relationship Agreement is not agreed.
The current rules governing jurisdiction and the recognition and enforcement of judgments are largely contained within the Brussels Recast Regulation and the Lugano Convention. These rules will no longer apply in the UK at the end of the transitional period and cannot be re- incorporated into UK statute law via the EUWA because they require reciprocity to operate (in contrast to the position with Rome I and Rome II).
The UK government has indicated that it would like to accede to the Lugano Convention as a party in its own right. Currently, it is a party by virtue of EU membership up to 31 January 2020 and the transition period under the Withdrawal Agreement from then until 31 December 2020. Accession would secure a reciprocal arrangement in the areas of jurisdiction and the enforcement of judgments on a broadly similar basis to that currently in operation between the UK and the EU, which would be welcome. There are some potential stumbling blocks to the UK's accession; the main one is that all contracting states will need to consent to the UK's accession and although Switzerland, Norway and Iceland have indicated that they are supportive of the UK's intention to accede, the EU would still need to agree.
The UK has been a party to The Hague Convention on Choice of Court Agreements 2005 ("The Hague Convention") as an EU Member State since 1 October 2015 and will continue to be so until the end of the transition period. At the end of the transition period the UK will probably accede, in its own right, to The Hague Convention in the event that a Future Relationship Agreement is not agreed. Accession to The Hague Convention is an advantage for parties who choose the exclusive jurisdiction of the English courts, at least in new agreements entered into after the end of the transition period.
The Hague Convention requires exclusive jurisdiction clauses in the signatory states to be upheld by the courts of those states and also provides in signatory states, for the enforcement of judgments concerning contracts containing such clauses. This means that an exclusive jurisdiction clause, drafted in accordance with The Hague Convention rules, in favour of the English courts, will be upheld by UK and EU courts if entered into after the end of the transition period and if a Future Relationship Agreement has not been agreed. Arguably the position will be the same for contracts entered into after 1 October 2015, the date that the UK acceded as an EU Member State. In addition, a UK judgment concerning a contract containing an exclusive jurisdiction clause will be enforceable in EU member states (and other contracting States) from the dates referred to above. This is a very important mechanism in maintaining the enforceability of English court judgments in EU member states after the end of the transition period.
An exclusive jurisdiction clause is appropriate where the parties have assets in the nominated jurisdiction as it allows for any resulting judgment to be enforced against the assets in that jurisdiction. Currently this means that if the exclusive jurisdiction of the English courts is chosen the resulting judgment will be enforced in any of the EU 27 member states as a result of the reciprocal arrangements in place. This position will remain unchanged for such agreements dated after the end of the transition period in light of the UK's accession to The Hague Convention in the event that a Future Relationship Agreement has not been agreed, provided that the exclusive jurisdiction clause is drafted in accordance with the rules laid down in The Hague Convention. So, on this basis, international parties who choose English law and the exclusive jurisdiction of the English courts will be able to resolve disputes in the English courts and enforce any judgment in any of the EU Member States where the counterparty holds assets, where the dispute concerns an agreement containing an exclusive jurisdiction clause for the English courts.
However, if the parties have drafted a non- exclusive English jurisdiction clause or an asymmetric jurisdiction clause, perhaps because one of them does not have assets in England and Wales, the reciprocity of the current enforcement regime will disappear at the end of the transition period and The Hague Convention will not apply to such arrangements. This will create uncertainty, at least in the absence of a Future Relationship Agreement. This may be of major concern and therefore, the parties in that situation should instead consider using arbitration as a method of resolving a dispute as the enforcement of arbitration awards will be unaffected by Brexit.
Non-exclusive English jurisdiction clauses and asymmetric jurisdiction clauses that appoint the English courts will not have the same level of protection after the end of the transition period in the courts of the remaining EU member States as exclusive English jurisdiction clauses and therefore, the rules which may apply to any issues concerning choice of jurisdiction and the enforcement of any judgment that may result from these clauses is uncertain. Disputes which concern issues relating to these clauses may be at an increased risk of parallel proceedings and the proceedings themselves will be at the mercy of local courts and national rules with probable delays and escalating costs unless a Future Relationship Agreement covering these issues is agreed. Enforcement of judgments on contracts containing such clauses will be possible but the process will take more time and will be more expensive than is currently the case.
The enforceability of international arbitration awards will continue unaffected by Brexit. Parties can therefore continue to agree to arbitrate their disputes on an agreement after Brexit in the same way as before. For example, the New York Convention is a multilateral treaty that is independent of EU law. The UK and all EU Member States are signatories to it. An arbitration award issued following an arbitration in a signatory country to the New York Convention is enforceable with minimum procedural difficulty in approximately 160 country signatory countries including the EU Member States.
The advantages of using English law as the governing law of a contract are undiminished by Brexit. It will still be possible as before to use exclusive jurisdiction clauses to confer binding jurisdiction on English courts and to ensure enforceability of resulting English court judgments in EU Member States, by virtue of The Hague Convention even in the event that the UK and EU are unable to agree a Future Relationship Agreement. Parties should continue to use English law in contracts and should continue to use exclusive English jurisdiction clauses, where this continues to be their preferred option.
Brexit will also not reduce the advantages of arbitration where this is the preferred method of dispute resolution. Again, English law can be selected as the governing law also of the agreement in circumstances where arbitration is the nominated method of dispute resolution, after Brexit in the same away as before Brexit.
This article is part of our Brexit series.