Brexit: Cross-border dispute resolution implications

02 October 2017

Jeremy Sharman, Louise Lanzkron, Bryony Hurst

On 29 March 2017, the UK government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership).  Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect on 29 March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period).  The Prime Minister has suggested that an agreement on future partnership with the EU will require a two year implementation period and negotiation of a new trade agreement with the EU could take several years beyond 2019.

This briefing note advises readers on the immediate considerations and anticipates how Brexit will impact on both the UK and more widely.

Practical Steps to take right now

Following the triggering of Article 50 negotiations have started to take place to address the legislative uncertainty regarding what the decision to leave actually means. The UK government and the European Commission are in the process of issuing future partnership papers setting out their respective visions as to how the relationship between them will work following withdrawal. The UK government's future partnership paper regarding cross-border dispute resolution ("Future Partnership Paper") was published in August 2017[1]. This briefing note addresses those proposals where they indicate the UK government's intended direction.

Current EU rules will continue to apply until the negotiations are finalised and may continue to apply if the government's proposed European Union Withdrawal Bill ("EUW Bill") is enacted. The EUW Bill (formally known as the Great Repeal Bill) proposes the repeal of the European Communities Act 1972 and the enshrinement of EU law into UK law on the day that the UK actually leaves the EU. The aim is prevent a legal lacuna once Brexit occurs although, as discussed later, this will depend on the outcome of the negotiations. The EUW Bill will be the subject of parliamentary debate and amendment over the next few months.

The main body of this briefing discusses the current EU rules which apply to cross border disputes in detail and how this could change depending on the result of the negotiations.

In the meantime listed below are some of the practical steps you can take now to help reduce the risks that the decision to leave could give rise to in relation to cross border disputes: 

  • Parties who are negotiating contracts should think carefully about their dispute resolution and governing law clauses; these clauses should be drafted to make clear which courts are to have jurisdiction in the event of a dispute and which law is to govern the contract.  Rules which address these issues are currently contained in the Brussels Regulation (which address issues of jurisdiction and enforcement) and the Rome I and Rome II Regulations (which address contractual and non-contractual obligations). The UK government has proposed to incorporate Rome I and Rome II into UK domestic legislation via the EUW Bill[2] and therefore this area of law should remain largely unchanged on withdrawal. Arbitration will not be affected by the vote to leave and consideration should therefore also be given as to whether arbitration would be a better method of dispute resolution.
  • Parties who are in possession of a court judgment which needs to be enforced in another EU state should take steps to enforce it as soon as practicable. This will ensure that they are able to take advantage of the enforcement mechanism set out in the Brussels Regulation. If the enforcement mechanism under the Brussels Regulation ceases to be available then this could affect the way future English court judgments are enforced in EU member states. Parties should consider taking advice as to how the enforcement of judgments will be dealt with in EU member states where they have a presence or exposure if the Brussels Regulation ceases to apply as between the UK and those member states.  
  • Proceedings issued with an EU element in the coming months are also unlikely to be affected by the vote to leave, at least in the short to medium term, as the relevant EU rules will continue to apply. There may, however, be increased uncertainty in relation to particular types of claims (for example, those based on the EU competition regime) which are based on rules which become part of the Brexit negotiations.  However, the UK government and the European Commission have in principle proposed[3] that on the date of withdrawal EU rules on jurisdiction and recognition and enforcement of judgments should continue to govern any pending judicial proceedings and procedures. Likewise, judicial cooperation procedures that are on-going on the withdrawal date should continue to be governed by the relevant provisions of EU law applicable on the withdrawal date.[4] If these proposals are agreed parties will have some certainty regarding litigation that has already commenced at the date of the UK's withdrawal.

To what extent is EU Law relevant to disputes with a cross-border element?

In order to facilitate access to justice and judicial cooperation between member states, EU law has laid down rules which apply to parties in member states litigating disputes with cross-border elements. The cross-border element may exist, for example, because the dispute arises between parties domiciled in different member states, or because the subject matter of the dispute has a particular connection with a member state, for example, because it is the place where contractual obligations are to be performed.

The four principal areas relevant to parties litigating disputes dealt with by EU rules concern:

  • The courts which are to have jurisdiction over the dispute;
  • The law which is to govern the parties obligations (both contractual and non-contractual);
  • The recognition and enforcement of court judgments; and
  • The service of court documents and the taking of evidence. 

Current position

Jurisdiction

On the issue of jurisdiction, EU rules lay down detailed provisions that determine which courts are to have jurisdiction and these are now largely contained in the Brussels Regulation[5]. The general rule is that the defendant should be sued in the courts of the member state where it is domiciled. If, therefore, the claimant is domiciled in England but the defendant is domiciled in Italy, the presumption is that the defendant should be sued in its home state, Italy. The parties are, however, free to agree that the courts of a particular country are to have jurisdiction (and the rules give effect to that choice) subject to various qualifications, for example in relation to disputes about real property or concerning the constitution of companies.

Recognition and Enforcement of Judgments

On the issue of the recognition and enforcement of judgments[6], the EU rules provide a framework which enables a judgment given in one member state to be registered and enforced in another member state, as if it were a judgment of that member state. There are only very limited grounds on which registration and enforcement can be resisted.

Governing law

With regard to the law governing parties' obligations, the EU rules set out in Rome I[7] and Rome II[8] provide a framework to harmonise the rules which apply to contractual and non-contractual obligations with the aim of ensuring that member states apply the same law to the same dispute. Broadly, in matters concerning contractual obligations, Rome I gives effect to the parties' choice of law and provides rules to determine the applicable law where no choice has been made. Rome II provides a similar mechanism for ascertaining the applicable law for disputes arising out of non-contractual obligations, for example, claims in tort.   

Service of documents and taking of evidence

The procedure for service of judicial and extra-judicial documents between member states (including Denmark) is also governed by EU rules[9], as is the taking of evidence[10]. The aim of these rules is to improve and expedite the transmission of judicial and extra-judicial documents between member states, and to simplify and accelerate cooperation between member states with regard to the taking of evidence in one member state for use in proceedings in another member state.

Position post Brexit

For those seeking to commence litigation post-Brexit with a European dimension, the current rules provide a relatively comprehensive framework setting out how issues relating to jurisdiction, the recognition and enforcement of judgments, governing law and the service of documents and the taking of evidence will be dealt with by the courts of member states. While Brexit will change this, the extent of the change is unclear. It all depends on the arrangements entered into between the UK and EU member states, now that notice has been served. However, the current rules will remain in force for the present and any sudden change could be mitigated to some extent if the EUW Bill is enacted as currently planned, although, this will depend on the outcome of the negotiations.  

Whilst the government has indicated that it will proceed with a 'hard' Brexit and that the UK will not be entering into a relationship model already enjoyed by other countries, the Future Partnership Paper published in August 2017 seeks to negotiate an agreement with the EU that allows for 'close and comprehensive cross-border civil judicial cooperation on a reciprocal basis, which reflects closely the substantive principles of cooperation under the current EU framework'.[11]   From the perspective of cross border disputes, this means that the UK will probably be relying on a mixture of current EU law (such as Rome I and Rome II) as well as alternatives to the Regulations discussed in the paragraphs above.

Jurisdiction and the recognition and enforcement of judgments

Most commentators agree that there are a range of possible scenarios regarding the UK's future relationship with the EU and these will be determined by the negotiations which will now take place. If the UK government proceeds with a 'hard' Brexit it is unlikely that the UK will become a member of the European Free Trade Association (along with Norway, Iceland, Liechtenstein and Switzerland (EFTA). However, in the Future Partnership Paper the UK government has said that it would like to continue to participate in the Lugano Convention 2007 which is very similar to the Brussels Regulation and which governs jurisdiction and enforcement of judgments between EU member states and EFTA countries (other than Liechtenstein). If that were to happen the position in relation to jurisdiction and the enforcement of judgments would remain largely unchanged between the UK and the EFTA countries (other than Liechtenstein). It is not clear from the Future Partnership Paper if the UK government is proposing complete participation in the Lugano Convention or simply replicating what is already in place between the UK and the EFTA member states (other than Liechtenstein)[12] (although the latter position is more likely). If full participation is proposed the UK would lose some of the improvements contained in the Brussels Regulation which have not, as yet, been replicated within the Lugano Convention. It is also unclear how the EUW Bill would deal with this situation or what would happen if the UK wanted to be part of the Brussels Regulation rather than the Lugano Convention, and if EFTA, would in fact allow it.

If the UK was unable to reach agreement with the EU on this issue there is a strong view that, as the UK is already a signatory to the Brussels Convention 1968, as it was never repealed in any way, and as there is wording in its Recitals to support its continued applicability post-Brexit, it could be relied upon to uphold exclusive UK jurisdiction clauses and to support an enforcement application in Europe. At present it covers the enforcement of judgments from Gibraltar and certain dependent territories of EU member states. Following Brexit it would only apply, in addition, to those EU member states which had signed it as members of the EEC, and therefore it will not cover all 27 remaining EU member states. The UK government did not refer to it in its Future Partnership Paper and therefore the government's position in relation to its future applicability is unknown at this stage.

An alternative scenario would be for the UK to revert to negotiated bilateral and multilateral agreements with other countries.  The UK could also decide to ratify the Hague Convention on Choice of Court Agreements which provides an optional worldwide framework of rules in relation to exclusive jurisdiction clauses and the recognition and enforcement of judgments in civil and commercial matters. The EU (along with Mexico and Singapore) has recently ratified the Hague Convention, so there is a framework in place regulating these issues which the UK could sign up to.  The UK government has indicated its intention to ratify this Convention in its Future Partnership Paper.  

Governing law

On the issue of the law governing parties' contractual and non-contractual obligations, Brexit will mean uncertainty as the framework under Rome I and II for determining the applicable law will no longer apply. There is no Lugano –style Convention similar to Rome I and Rome II and therefore, if the UK did decide to apply for EFTA membership, the UK's existing conflict of law rules would apply. However, the UK government has proposed that it will incorporate Rome I and Rome II into domestic law under the mechanism set out in the EUW Bill. This will create certainty and continuity between the current EU and UK legal frameworks in this area on withdrawal[13].

The courts of member states will continue to apply the rules set out in Rome I and Rome II to disputes which may have a UK element, as Article 2 of Rome I and Article 3 of Rome II, provide that the law specified by either Rome I or Rome II shall be applied whether or not it is the law of a Member State. This means that if a Spanish court was considering the governing law of a contractual obligation, and the other party was located in England, Rome I would still be applied by the Spanish courts.

It is important to note that the EU rules on jurisdiction[14] and governing law[15] do not extend to arbitration, and therefore, Brexit will have little immediate impact on this area of dispute resolution. This is also the case with regard to the enforcement of arbitration awards which is governed by the New York Convention and not by the Brussels Recast Regulation.

Service of documents and taking of evidence

The Regulations covering the service of documents and the taking of evidence will no longer apply to the UK following Brexit.  For service of documents, the UK is likely to rely on the Hague Service Convention (which it became a signatory to before the Service Regulation[16] came into effect) for service of documents on member states if they are signatories to the Convention. If not, bi-lateral or multi-lateral agreements will need to be made.

So far as the taking of evidence is concerned, the position will depend on where the evidence is to be taken and used. There are a number of statutes and Conventions which could apply including the Evidence (Proceedings in Other Jurisdictions) Act 1975 and the Hague Convention on the Taking of Evidence Abroad, as well as other bi-lateral conventions. In the absence of existing reciprocal arrangements, bi-lateral or multi-lateral agreements will need to be put in place.

As with jurisdiction and governing law, if the EUW Bill is enacted, the UK may adopt the current provisions in both the Service and taking of Evidence Regulations. However, this still may leave the UK in a partial 'no man's land' if existing EU member states do not apply principles of mutual recognition and deal with the UK as if it were still an existing member state.

What will be the effect on civil justice cross-border measures?

The civil justice co-operation measures in relation to jurisdiction and enforcement of judgments that presently exist between EU and EFTA member states provide a degree of certainty on important issues that often arise between parties litigating disputes with a cross-border element.  Brexit will undermine that certainty although the extent to which it will do so will depend on the steps taken by the UK Government to address the position and the speed with which it is able to do so.

Generally, disputes between parties who are both based in EU member states, where the subject matter of the dispute 'relates' to an EU member state, are unlikely to be affected by the vote to leave. The Brussels Regulation and Rome I and Rome II will continue to apply to these disputes where relevant, as will the relevant Regulations relating to service of documents and the taking of evidence.

Disputes between parties outside the EU, where the subject matter of the dispute has no connection with a member state, are unlikely to be affected by Brexit. Where relevant, existing common law principles, statutes, agreements and / or Conventions concerning these disputes will continue to apply.

However, disputes where one party is based in the UK and the other party is based in an EU member state, or the dispute itself has some connection to an EU member state, may be affected by Brexit. Much depends on the specific facts of the dispute, where the proceedings are issued, and more importantly on the arrangements entered into by the UK on any withdrawal. Even if the UK adopts all EU legislation relevant to cross border disputes as envisaged by the EUW Bill, it will not be known what status the existing EU member states will give the UK. For example in relation to jurisdiction will they consider the UK a member state for the purpose of the Brussels Regulation or will they treat the UK as a third state? At the time of writing it seems likely that Rome I and Rome II will be incorporated into UK domestic legislation providing continuity in the area of governing and applicable law, and in its Future Partnership Paper, the UK government has 'mirrored' the European Commission's proposals that on the date of withdrawal applicable EU law should apply to matters which are on-going as of that date. This will provide much needed clarity for the parties involved in these matters if agreement can be reached on this issue with the other EU member states.  

Overall, the picture remains one of uncertainty at this stage. Although the UK has voted to leave the EU and Article 50 has been triggered, it will still be some time before there is likely to be any clarity on how civil justice cooperation measures currently in place with EU member states will be affected.     

We intend to update our guidance in this area as the implications become clearer.

Who to contact for further guidance

If you would like more information on the implications of a Brexit please contact Jeremy Sharman, Bryony Hurst or Louise Lanzkron



[1] Providing a cross-border civil judicial cooperation framework: A Future Partnership Paper

[2] Paragraph 19 of the Future Partnership Paper

[3] Contained in Annex A of the Future Partnership Paper and in 'Position Paper transmitted to EU27 on Judicial Cooperation in Civil and Commercial Matters' published by the European Commission, Task Force for the Preparation and Conduct of the Negotiations with the UK under Article 50 TEU, 28 June 2017

[4] These are the principle areas which the UK government and the EU agree upon. The Future Partnership Paper contains some additional proposals which the European Commission is yet to respond to.

[5] Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Recast Brussels Regulation)

[6] Recast Brussels Regulation

[7] Regulation 593/2008 on the law applicable to contractual obligations (Rome I)

[8] Regulation 864/2007 on the law applicable to non-contractual obligations (Rome II)

[9] Regulation 1393/2007 on the service in the member states of judicial and extra-judicial documents

[10] Regulation 1206/2001 on cooperation between the courts of the member states in the taking of evidence

[11] Paragraph19 of the Future Partnership Paper

[12] Paragraph 22 of the Future Partnership Paper

[13] If an issue arose relating to governing law before the English courts, at least in respect of contractual obligations, it is unlikely that the existing position will change to any degree if Rome I was not enacted into English law. This is because the English courts will revert to English common law principles under the Rome Convention which are similar to those found in Rome I. However, the position is not so clear with regard to the governing law in respect of non-contractual obligations if Rome II was not enacted into English law, as Rome II does not reflect the English common law so closely. It is likely that the English courts would apply the Private International Law (Miscellaneous Provisions) Act 1995, and this, unlike Rome II, does not give the parties the right to choose the law which governs the non-contractual relations between them. 

[14] Article 1(2)(d) and Recital 12 of the Recast Brussels Regulation

[15] Article 1(2)(e) of Rome I

[16] Regulation 1393/2007 on the service in the member states of judicial and extra-judicial documents

Authors

Louise Lanzkron

DR Knowledge & Development Lawyer
UK

Call me on: +44 (0)20 7415 6000