Brexit: What does it mean for cross-border disputes?

United Kingdom

On 23 June 2016, the British public voted to leave the European Union. The BREXIT process first requires notice to be given under Article 50 of the Treaty of Lisbon, following which the UK has at least two years to negotiate its withdrawal from the EU. In the meantime, existing EU rules will continue to apply.

The current EU rules provide a framework to be applied in disputes with a cross-border element. These rules assist parties and the courts in determining which court or courts have jurisdiction to hear a dispute and the law which governs a dispute. The framework also provides a regime for the recognition and enforcement of judgments given by the court/s of one EU member state in other EU member states.

There is the potential that these rules will no longer apply post-BREXIT. As the UK’s withdrawal has not yet been negotiated, the rules which will replace the current system are unknown. Understandably, this may cause some anxiety for parties that could be affected by these changes. Key concerns are likely to be (a) whether or not the new regime will complicate the recognition and enforcement of English court judgments in EU member states; and (b) the effect of the new regime on the rules for determining jurisdiction.

This note sets out a brief overview of the existing rules, and the post-BREXIT position which may be adopted as part of the withdrawal process.

Jurisdiction – Current Position

The EU rules in relation to jurisdiction are largely contained in the Recast Brussels Regulation, which applies to almost all civil and commercial disputes. This regulation applies to all EU member states in relation to proceedings commenced on or after 10 January 2015. The 2001 Brussels Regulation, which came into force on 1 March 2002, applies to proceedings commenced before 10 January 2015.

The default rule under the Recast Brussels Regulation provides that a party should be sued in the member state in which it is domiciled. Subject to some exceptions, the Regulation also gives effect to parties’ autonomy to agree that the courts of a specific member state will have jurisdiction to settle any dispute arising between the parties.

Jurisdiction – Post-BREXIT

After BREXIT, it is likely that the Recast Brussels Regulation will no longer apply to the UK.

In those circumstances, the UK may elect to follow the approach adopted by EFTA member states Iceland, Norway and Switzerland and accede (in its own right) to the 2007 Lugano Convention, which is similar to the 2001 Brussels Regulation. It is worth noting, however, that the Lugano Convention was not affected by the Recast Brussels Regulation and has not benefited from the changes which that Regulation introduced. As the UK is not currently an EFTA member state, it would first need to negotiate with the other contracting parties (of which the EU is one) in order to obtain the unanimous agreement required to become an EFTA member state.

Alternatively, the UK could accede (in its own right) to the Hague Convention on Choice of Court Agreements, the benefit here being that the EU has already agreed to the Convention. However, the Convention does not provide a comprehensive regime regarding jurisdiction, as it only applies to exclusive choice of court agreements.

The UK could also elect to negotiate bilateral and/or multilateral treaties with EU member states, an option that would likely lead to significant uncertainty both during the time that the agreements were being negotiated and in the period following their implementation, whilst countries adjusted to the new arrangements.

Recognition and Enforcement of Judgments – Current Position

The Recast Brussels Regulation provides a simplified and efficient mechanism to facilitate the recognition and enforcement of judgments across EU member states. This streamlined process, combined with very limited circumstances in which enforcement of a judgment may be refused, has given parties greater confidence that a judgmentobtained from the court of one EU member state may be easily enforced in other EU member states.

Recognition and Enforcement of Judgments – Post-BREXIT

As with the issue of jurisdiction, it is possible that the Recast Brussels Regulation will no longer apply post-BREXIT. The most obvious way forward would be for the UK to accede to the Lugano Convention, however, the enforcement regime under this convention is less straightforward than that provided for under the Recast Brussels Regulation. The UK could also accede to the Hague Convention on Choice of Court Agreements, however, enforcement under the Hague Convention is quite limited in scope, applying only to judgments given by a court of a contracting state designated in an exclusive jurisdiction agreement.

Alternatively, the UK may seek to negotiate bilateral and multilateral treaties with EU member states. Again, this option introduces the greatest degree of uncertainty for contracting parties.

Governing law – Current Position

The English courts currently apply Rome I and Rome II regulations to determine the law governing a dispute. Rome I applies to contractual obligations (in respect of contracts concluded after 17 December 2009), and Rome II applies in relation to non-contractual obligations (e.g. tortious obligations). Rome I gives effect to the parties’ choice of law (subject to certain exceptions) where expressly stated, or provides rules to ascertain the governing law where this has not been agreed. Rome II allows parties to agree the governing law for non-contractual obligations. In the absence of agreement, the law that will ordinarily apply will be the law of the country in which the damage has occurred.

Governing Law – Post-BREXIT

Post-BREXIT, it is possible that the UK may decide to continue to apply the Rome I / Rome II rules, in which case very little would change. It is worth noting that the courts of EU member states will continue to apply Rome I and Rome II, even if the parties to the dispute, or the governing law, are non-European.

The UK could also decide to revert to the rules that were in place before Rome I / Rome II came into effect. For contractual obligations (Rome I), this will be the Contracts (Applicable Law) Act 1990 (implementing the Rome Convention), which respects parties’ choice of law.

For non-contractual obligations, the previous regime, which was set out in the Private International Law (Miscellaneous Provisions) Act 1995, does not give effect to parties’ agreement on governing law.

Arbitration Proceedings

The framework set out above only relates to litigation of disputes. Issues of jurisdiction and governing law in relation to arbitral proceedings, and recognition and enforcement of arbitral awards, remain unaffected by any BREXIT negotiations entered into between the UK and the EU. In relation to the latter, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides an enforcement regime between contracting states, of which there are currently 156. Consequently, in a post-BREXIT landscape, it may be easier to enforce an arbitral award in the remaining EU member states than an English court judgment. At the moment, certainty in relation to the enforceability and recognition of arbitral awards may therefore be preferred by some parties over the potential uncertainty in some areas of litigation.

What to do next

If you are already involved in a dispute with a party from an EU member state (or a dispute which could result in judgment requiring enforcement in an EU member state), it is possible that the dispute will be resolved and / or judgment enforced before BREXIT takes effect. In those circumstances, it should be “business as usual”.

However, if you are involved in proceedings or contemplating proceedings which may be affected by BREXIT, it is important to keep the issues set out above under review. In the short term, you may also wish to (a) enforce any judgments you have obtained without delay; and (b) review existing contracts to identify contracts or clauses which may be affected by BREXIT. For new contracts with parties from EU member states, you may also wish to consider choosing an arbitration agreement for dispute resolution.

This article is part of a series of articles that CMS will be publishing on what BREXIT means for dispute resolution. Keep your eye out for our next article in this series.