Brexit: Disputes

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Summary

Whilst not bringing about an immediate change to the law, Thursday’s vote has ushered in a period of
negotiation and inherent uncertainty whilst new legislative arrangements are put in place to fill the voids that
will be left when the UK formally departs from the EU.

The principle areas where EU law currently sets out harmonised arrangements pertinent to the resolution of
disputes, which provide a relatively comprehensive framework for those litigating disputes with an EU
dimension, are:

(i) jurisdiction (where disputes are heard);

(ii) the law governing the contract;
(iii) the enforcement of judgments obtained in the courts of Member States against assets located in
another Member State;
(iv) the service of court documents on counter-parties in other Member States; and
(v) the taking of evidence in other Member States.

While Brexit will inevitably change that regime, the degree of change, and the timescale within which it will
take place, is unclear. It is likely to remain so for some time to come.

During the current period of uncertainty, commercial parties entering into contracts with EU parties would be
well advised to consider carefully their contractual dispute resolution provisions, including express choices of
law and jurisdiction and appointing agents for the service of process within the jurisdiction, to ensure that they
are fit for purpose to meet the challenges ahead.

An arbitration agreement providing for a London seat should not be affected and an arbitration award made in
the UK should continue to be recognised and enforced in EU Member States (and vice versa) under the New
York Convention. Therefore, depending on the nature of your contracts, you may wish to consider whether
arbitration would provide a better method of dispute resolution than court proceedings, given the certainty that
the lack of impact on this method of dispute resolution brings.

English, and Member State, courts currently give effect to parties’ express choice of law (subject to limited
exceptions). Whilst the underlying obligations are found in two EU Regulations at present (Rome I, for
contractual obligations, and Rome II, for non-contractual obligations), even when these Regulations no longer
apply to the UK, following formal withdrawal from the EU, the fundamental base position, namely respect for
an express choice, is unlikely to change significantly. The English courts would, under common law, be likely
to continue to respect party autonomy and a choice of law, and the remaining Member States would continue
to apply Rome I and II and so would continue to recognise and respect a choice of an express choice of law.
Where the parties have not chosen a governing law, the position is more uncertain, and, accordingly we
continue to recommend that, in all contracts, an express choice of law provision is included to minimise
uncertainty and risk of future costly satellite disputes regarding the proper law of the contract.

The harmonised rules which respect the parties’ express choice of jurisdiction are, again derived from an EU
Regulation, commonly known as Brussels Recast. In the event that Brussels Recast no longer forms part of
English law, following formal withdrawal from the EU, the English courts are highly likely to continue to respect
party autonomy and uphold a choice of jurisdiction under common law. The position, should a court in another
Member State be asked to consider the appropriate forum for resolution of a dispute is, however, less certain,
and there is a risk that, without new arrangements being put in place to replace or replicate Brussels Recast, a
Member State court may not defer to, or respect, a choice of English jurisdiction post the UK’s formal exit from
the EU.
Enforcement of court judgments within the EU is also facilitated by Brussels Recast. The UK government is
likely to seek to enter into alternative arrangements to replace Brussels Recast, such as the Lugano
Convention, which provides a similar, though not identical, regime. However, in the absence of alternative
arrangements, the enforceability of English court judgments in Member States would depend on the national
law of that individual state, varying between states and requiring local law advice, increasing the complexity,
and cost, of enforcement. EU Member State judgments would still be enforceable in England under English
law, although the procedure would be more cumbersome and, in all likelihood, more time consuming and
expensive. Parties in possession of a court judgment which needs to be enforced in a Member State should
take steps to enforce that judgment as soon as possible to take advantage of the current mechanism set out
in Brussels Recast.

The appointment of an agent for service of legal process within England remains best practice when
contracting with overseas counter-parties, irrespective of whether they are within or outside the EU, but its
benefits are heightened given that the more favourable service regime (which, amongst other advantages,
currently removes the requirement to obtain permission of the court to serve out of the jurisdiction for service
in other Member States) is, again, currently grounded in EU Regulation and how this will be dealt with on
Brexit remains uncertain.

Whilst being alive to the areas of risk and uncertainty that Brexit creates, parties should not, automatically, be
moving away from English law and jurisdiction in commercial contracts. All the reasons that make English
substantive law a good choice of governing law remain, as do the advantages of the English courts as a
dispute resolution mechanism. But, they should be particularly alive to instances where overseas enforcement
may be an issue and, in such circumstances, consider both commercial means of reducing their exposure and
risk and alternative jurisdiction options, such as an arbitration agreement.

As parties reflect and assess the changing landscape, many will be starting to review their existing obligations,
relationships and cost base, and whether any scope exists for avoiding pre-existing obligations, or obtaining
leverage to renegotiate on more favourable terms. We would suggest a review of existing commercial
relationships with an EU element, particularly those of a longer term and/or material nature, to enable your
business to be in the best position to respond to any challenges to your current arrangements that may be
ahead.

Governing Law

English law has long been a popular, if not the most popular, choice for commercial parties doing business
internationally. There are many reasons for this – the widespread acceptance that English law is certain,
stable, predictable and commercial, and the respect afforded to the parties freedom of contract – and those
reasons should not be impacted by Brexit.

The rules applied by the English, and other Member State (save for Denmark), courts to determine governing
law in civil and commercial matters are currently harmonised (in regulations commonly known as Rome I,
covering contractual arrangements, and Rome II, covering non-contractual arrangements) and are founded in
respect for party autonomy. EU Member State courts will uphold English governing law clauses (subject only
to very limited exceptions) in commercial contract, and that requirement applies irrespective of whether a party
is itself located in the EU, or whether the chosen law is that of an EU Member State. Whilst Rome I and II may
no longer be applied by the English courts in due course, they have always respected parties’ choice of law
and freedom of contract, and there is no reason for that approach to change.

It is unlikely, therefore, that Brexit will have any substantive impact on the enforceability of English governing
law clauses, whether at home or abroad and, as a result, the current period of uncertainty is unlikely to lead to
parties changing their approach to governing law provisions. The choice of English law remains a sound one.

Further, English contract law has been largely unaffected by EU law, certainly in the context of general
commercial contracts (albeit the position is more complex in other specialist spheres such as agency or
consumer contracts), and derives principally from English common law. The same is also broadly true in
relation to English tort (i.e. non-contractual obligations) law, save for certain statutory torts which have an EU
law basis. So, English substantive law as it applies to general commercial contracts will be largely unaffected
by the fallout from Brexit.

So, parties to commercial contracts should be able to continue to take the same approach to negotiating
governing law clauses although they will, of course, need to remain alive to, and be able to respond to,
concerns and queries raised by international counterparties.
Courts: Jurisdiction and Enforcement

The choice of forum is of critical importance in the event that a commercial dispute arises. Where the battle is
fought impacts, not only the time and cost involved, but, more fundamentally, the value and effectiveness of
any resulting judgment.

The harmonised rules applied by Member State courts in relation to jurisdiction and the enforcement of civil
court judgments are contained in EU Regulation, commonly known as Brussels Recast. Party autonomy in
commercial contracts – their ability to determine where, and how, any disputes are to be determined – is
generally respected. In the absence of an express choice of jurisdiction, Brussels Recast provides a general
rule that a defendant should be sued in the courts of the Member State where he is domiciled.

At present, the existing EU arrangements remain good law. However, as they are embodied in Regulation,
Brussels Recast will cease to have effect in the UK following formal exit from the EU. It is likely that the UK will
seek to reach a new form of agreement in relation to these matters, perhaps reflecting the arrangements
currently in place, or seek to join a pre-existing arrangement, such as the Lugano Convention (which governs
issues of jurisdiction and enforcement of judgments between EU Member States and Iceland, Switzerland and
Norway), or the Hague Convention (on choice of court agreements, to which the UK is currently a contracting
state by virtue of its EU membership).

The Lugano Convention was designed to provide a similar framework to the predecessor to Brussels Recast,
but there are key differences between the regimes. For instance, Brussels Recast contains specific provisions
designed to prevent a party from tactically commencing proceedings in a notoriously slow EU jurisdiction,
even though they believe jurisdiction there will ultimately be refused in an attempt to delay those proceedings
which would otherwise have proceeded more swiftly and efficiently in the courts of another Member State, a
tactic known as the “torpedo”. The Lugano Convention does not contain similar provisions and so, were the
UK to sign up to it in due course, whilst the jurisdictional consequences would be relatively limited, businesses
in the UK entering into EU contracts would again become exposed to the torpedo tactic. There is a
considerable risk that jurisdiction clauses in favour of the UK courts would be undermined by proceedings
commenced in other EU Member States. However, any relaxation from the current EU regime may enable
the English courts, in due course, to grant anti-suit injunctions to restrain foreign court proceedings brought in
breach of a jurisdiction or arbitration agreement (whilst an option outside the EU, at present the English Courts
do not favour anti-suit injunction applications relating to proceedings in the courts of other Member States).

The default back stop, in the event that the UK government does not put in place new arrangements with the
EU, is English law’s own domestic rules on jurisdiction and the enforcement of court judgments, which
currently apply in cases involving non-EU overseas parties, which would, in the absence of new
arrangements, fill the void left by the removal of the current EU arrangements. Importantly, the underlying
English law respects the ability of parties to choose themselves how their disputes should be resolved (subject
to limited exceptions). The position in other Member States will vary, depending on their local laws (Brussels
Recast will no longer apply when they are considering the question of whether proceedings brought in their
courts should properly have been brought in the English courts instead) leading to considerable risk,
uncertainty and the possibility of expensive satellite disputes and the requirement for local law advice on such
issues prior to entering into valuable contracts with an EU dimension.

Member State courts must recognise and enforce judgments of courts in other Member States (subject to
limited exceptions) as if they were given by their own courts. These harmonised rules provide certainty,
enabling parties to assess litigation risk and price and structure relationships accordingly. An English court
judgment should be enforced in any of the 27 Member States as if it was a judgment of that State.

Again, this regime is set out in Brussels Recast. At present, and until the UK formally exits the EU, this
remains good law. What replaces it depends, once again, on the approach adopted by the UK Government:
does it put in place new arrangements, accede to the Lugano Convention as a pre-existing alternative, or
default to the position under the domestic national law of the state of enforcement, which will vary from state
to state? Without Brussels Recast the enforcement of English court judgments in the EU, and of EU court
judgments in England, will inevitably become more cumbersome and costly and will force commercial parties
to consider at the outset the possible enforcement regime (taking local legal advice from the state of
enforcement) which they will encounter. As always, consideration should be given to other commercial means
of minimising credit and enforcement risk: avoiding deferred payment obligations, bonds, guarantees or
security within the jurisdiction etc.
Those who already hold court judgments which they are considering enforcing against assets in other EU
jurisdictions should consider commencing the enforcement process now to take advantage of the current
favourable regime.

Service

The EU Service Regulation (Regulation (EC) No. 1393/2007) relates to the service in EU Member States of
judicial documents in civil or commercial matters. This means that service of English court proceedings on
parties within other Member States does not require a prior application for permission from the English court
(which is required for service in the majority of non-EU jurisdictions). The Service Regulation also provides
specific mechanisms for physically effecting service which tend to be quicker, easier, and provide a route with
less risk of challenge, than effecting service overseas outside the EU.

A similar regime exists under the Lugano Convention (which regulates the position between the EU and
Norway, Switzerland and Iceland). However, if the UK leaves the EU and does not accede to the Lugano
Convention, parties would have to apply, in advance of physical service, for the court’s permission to serve
proceedings in Member States, rendering commencing proceedings against EU counter parties a more
complex, slower and more expensive process.

The appointment of an agent for service of legal process within England (which provides a contractually
agreed method of service, with a view to circumventing the difficulties of service overseas) therefore, whilst
always best practice, becomes more important when contracting with EU counterparties given the inherent
uncertainty as to the future position. This is a provision which we would always recommend in contracts with
overseas counter parties, irrespective of whether they were within, or outside, the EU, and so for many
commercial contracts there should be little potential impact in practice.

Arbitration

The enforcement of arbitration awards is governed by the New York Convention 1958. This is not connected
to EU membership and the reciprocal arrangements for the enforcement of arbitral awards between the 156
state parties, which include the UK and the other EU Member States, will be unaffected. The ability to enforce
arbitral awards in jurisdictions where the enforcement of court judgments is difficult, or impossible, is one of
the key attractions of arbitration as dispute resolution mechanism. This remains unchanged and arbitration
with a London seat and/or under the London Court of International Arbitration Rules, or the Arbitration Act
1996, should be unaffected. Similarly, the reasons which make London an attractive seat for arbitration: the
arbitral law (set out in the Arbitration Act 1996), the role and attitude of the courts in supporting and facilitating
arbitration, would remain unaffected.

Therefore, Brexit should not impact on arbitration proceedings in the UK. English arbitration law and practice
has flourished largely independently of the UK’s membership of the EU, and there is no legal reason for that
not to continue. Indeed, following the non-application of Brussels Recast, the English courts will once again be
able to grant anti-suit injunctions, which restrain proceedings brought in Member States in breach of a London
arbitration clause, a power currently prohibited by EU law, and which may be viewed as giving London an
edge as an arbitration seat over those which remain within the EU, such as Paris, Milan and Stockholm, in
due course.

London as a centre for dispute resolution

There are, of course, many reasons why parties elect to have their disputes heard by the English courts,
and/or make their contractual relationships subject to English law. This is often the case for commercial
parties in cross-border contracts who have little, or no, connection with England, or where only one party has
such a connection. The standing of the judiciary, particularly in the specialist and commercial courts, the
clarity in procedure and a system widely acknowledged as free of bias, corruption and political interference,
have attracted many overseas parties to bring their disputes to London. These are unaffected by EU
membership and should be largely unaffected by Brexit.

Whilst Brexit will inevitably lead to a degree of uncertainty, it should not fundamentally damage London’s
position as a premier dispute resolution centre. The real danger for London, as for the rest of the UK, is the
impact on perception, particularly amongst those overseas.
Brexit proofing commercial contracts?

Given that a period of uncertainty is inevitable, should you be “Brexit-proofing” new contracts, particularly
those of a longer term nature? Areas for careful consideration include a careful choice of dispute resolution
mechanism – arbitration agreements are likely to be unaffected by Brexit and, therefore, will appear more
attractive, certainly where there is potential for high value disputes requiring enforcement against overseas
assets to arise – but where court proceedings remain the preferred option, very careful consideration should
be given to where the assets against which enforcement would ultimately be carried out are located, whether
credit risk can be reduced, or security provided, etc. These are, of course, matters which should always be
considered when contracting overseas, but which are brought into sharp focus by the current climate of
uncertainty. There is, as always, however, no one size fits all approach, and such provisions should be
tailored to your own commercial circumstances and risk factors.

One option is a conditional jurisdiction clause, whereby disputes will be resolved by the English courts, unless
one of the parties is no longer domiciled within an EU Member State, or a party to Brussels Recast, in which
case disputes will be resolved by arbitration in London. Such a provision also has the advantage, particularly
for long term agreements, of accommodating any future fragmentation of the EU.

It is certainly advisable, where court jurisdiction is chosen and there are overseas counter parties, to include
provision for the appointment of an agent for service of process within England. This provides a contractually
agreed method which circumvents the difficulties, delays and additional cost inherent in service overseas,
whether the counter-party is domiciled in the EU (where the reciprocal arrangements render service easier
than for non-Member States, but still add an additional layer of process), or outside the EU.

Brexit related disputes

As commercial parties reflect and asses the changing landscape, and start to review their existing obligations,
relationships and cost base, they are more likely to consider the scope for avoiding unprofitable contractual
obligations, or for seeking to obtain leverage to renegotiate those arrangements. Material adverse change or
force majeure provisions may appear initially attractive, as may the principle of frustration, particularly in
contracts the operation of which is dependent on the operation of particular EU legislation. In considering
whether Brexit provides grounds for termination, the provisions of the contract itself, and the circumstances
within which it was made, will be key, there is no “one size fits all” answer to the question.

We would suggest a review of existing commercial relationships with an EU element, particularly those of a
longer term and/or material nature to asses any risk areas, prepare for any difficult discussions that may come
with EU partners, but also to consider whether the current turmoil may, perhaps, provide scope for you to seek
to terminate unprofitable relationships, or provide leverage for renegotiation on more favourable terms.

Lindsey Clegg is a partner in our Disputes Resolution Team specialising in complex cross-border disputes,
international and domestic arbitration, commercial and financial disputes. In addition to contentious work,
Lindsey uses her expertise to assist clients with contractual drafting, interpretation, enforcement, termination,
renegotiation and amendment, ongoing contract management and risk avoidance across a variety of sectors

For more information please contact:

Lindsey Clegg
Partner
+44(0)845 030 5793
lindsey.clegg@freeths.co.uk

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This is only a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist advice should
be sought from a member of Freeths Disputes Team in relation to any queries.

Answers not options…