Brexit: Cross-border dispute resolution implications

24 June 2016

Jeremy Sharman, Louise Lanzkron

On 23 June 2016, the UK public voted to leave the EU. Under Article 50 of the Lisbon Treaty, the EU Treaties shall cease to apply to the UK:
  • from the date of entry into force of the withdrawal agreement that the UK negotiates with the Union, acting through the Council; or 
  • two years after the UK has notified the European Council of its intention to withdraw, unless the European Council, in agreement with the UK, unanimously decides to extend this period. 
Therefore, in practice the British exit (Brexit) date cannot be before July 2018, or September 2018 assuming that notification is not given before September 2016. This briefing note advises readers on the immediate considerations and anticipates how a Brexit will impact on cross border disputes both in the UK and more widely.
Practical Steps to take right now

The vote to leave ushers in a notice period of at least two years before the UK actually exits the EU. During this period negotiations will take place to address the legislative uncertainty regarding what the decision to leave actually means.  Current EU rules will continue to apply until the negotiations are finalised. 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 addresses issues of jurisdiction and enforcement) and the Rome I and Rome II Conventions (which address contractual and non-contractual obligations). 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 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. 
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 which determine which courts are to have jurisdiction and these are now largely contained in the Brussels Regulation[1]. 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[2], 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[3] and Rome II[4] 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[5], as is the taking of evidence[6]. 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 a Brexit

For those litigating disputes 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 taking of evidence will be dealt with by the courts of member states. While a Brexit will change this, the extent of the change is currently unclear. It all depends on the arrangements entered into between the UK and EU member states, now that a vote to leave has occurred. However, the current rules will remain in force for the present.

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 Europe and these will be determined by the negotiations which will now take place. A Brexit could result in the UK becoming a member of the European Free Trade Association (along with Norway, Iceland, Liechtenstein and Switzerland (EFTA[7])), and, through EFTA becoming a party to the Lugano Convention which is very similar to the Brussels Regulation and which governs jurisdiction and the 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. The alternative 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 on jurisdiction 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.   

Governing law

On the issue of the law governing parties' contractual and non-contractual obligations,  a 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 laws rules would apply.

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. 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 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.

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[8] and governing law[9] do not extend to arbitration, and therefore, a 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 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 a 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[10] 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.

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.  A 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. On matters concerning jurisdiction and the recognition and enforcement of judgments there is likely to be little change in practice if the UK becomes a party to the Lugano Convention even if it is not prepared, like Switzerland, to become a member of the EEA.

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.

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 a 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.

Disputes between parties outside the EU, where the subject matter of the dispute has no connection with a member state, will not be affected by a Brexit. Where relevant, existing common law principles, statutes, agreements and / or Conventions concerning these disputes will continue to apply.

Overall, the picture remains one of uncertainty at this stage. Although the UK has voted to leave the EU it will still be some time before there is likely to be any clarity on how civil justice co-operation 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 or Louise Lanzkron.

This article is part of our Brexit series.


[1] Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Recast Brussels Regulation)
[2] Recast Brussels Regulation
[3] Regulation 593/2008 on the law applicable to contractual obligations (Rome I)
[4] Regulation 864/2007 on the law applicable to non-contractual obligations (Rome II)
[5] Regulation 1348/2000 on the service in the member states of judicial and extra-judicial documents
[6] Regulation 1206/2001 on cooperation between the courts of the member states in the taking of evidence
[7] Three EFTA members (Norway, Iceland and Lichtenstein) have signed the European Economic Area Agreement (EEA) and as a result have access to the EU's internal market. Switzerland is not a signatory to the EEA. Some commentators think that on a Brexit the UK could adopt a similar model to Switzerland meaning it would be a party to the Lugano Convention but not a party to the EEA.
[8] Article 1(2)(d) and Recital 12 of the Recast Brussels Regulation
[9] Article 1(2)(e) of Rome I
[10] Regulation 1348/2000 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