Brexit and jurisdiction clauses in English law loan agreements

As the Brexit negotiations between the EU and the UK continue fitfully, with the outcome remaining uncertain, the jurisdiction and dispute resolution mechanism provisions of English law loan agreements should be carefully considered.

English law and English courts have been a popular choice in cross-border finance transactions for many reasons, including the considerable experience of English courts in commercial matters, those courts’ judicial independence, and the contract certainty afforded by English law.

None of the reasons that made English law and English courts a good choice before Brexit should be affected by Brexit itself, but to ensure that the benefits of those choices continue in the case of a no-deal Brexit or a Brexit that does not otherwise provide for the continuation of the status quo as regards enforcement of judgments, lenders should discuss the available options with their legal advisors to ensure they make the best decision possible in the circumstances.

In Central and Eastern Europe, when arbitration is not used, we usually see the LMA style jurisdiction provisions, commonly referred to as asymmetric or “one-sided” exclusive jurisdiction clauses. Pursuant to such clauses, the obligors may bring proceedings against the lender only in the English courts, whereas the lenders may bring proceedings in any court of competent jurisdiction, thereby preserving their options until a dispute actually occurs.

Under the European laws currently in place, which have continued to apply during the Brexit transition period, the choice of English law and English courts, as well as the enforcement of English court judgments throughout the EU, has been assured through application of the Rome I and Rome II Regulations (Regulation (EC) No 593/2008 and Regulation (EC) No 864/2007 respectively) as well as the Brussels Regulation (Recast) (Regulation (EU) No 1215/2012).

The Rome I and Rome II Regulations have been incorporated into English law by statute (The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019) and will continue to apply after the transition period ends; however, the Brussels Regulation (Recast) will no longer apply. As a result, the legal basis for the enforcement of English court judgments elsewhere in Europe will rest on other available laws. This is particularly relevant for lenders under English law facility agreements entered into by EU-based borrowers whose assets are outside the United Kingdom. As judgment creditors, lenders will need to be able to enforce that judgment in the countries where the borrower has assets.

One such alternative might come through the UK’s accession to the Hague Convention of 30 June 2005 on the Choice of Court Agreements (the Hague Convention 2005), to which the EU is party. The UK deposited its instrument of accession to the Hague Convention 2005 on 28 September 2020, so that it would become a member in its own right (and not as an EU state) upon expiration of the transition period. The Hague Convention is similar to the Brussels Regulation (Recast), in that it provides a mechanism for enforcing judgments across member countries and requires member state courts to respect the jurisdiction choice made by the parties, but this mechanism only applies to judgments based on an “exclusive” jurisdiction clause, whereby all parties are bound to the exclusive jurisdiction of a member state court. As a result, asymmetric jurisdiction clauses would not be subject to Hague Convention protections.

Another alternative might be the Lugano Convention, which is similar to the Brussels Regulation (Recast), but in addition to the EU member states it includes the EFTA countries Norway, Iceland and Switzerland. The UK is seeking to accede to the Lugano Convention, but accession is contingent on the existing member countries granting approval, which the EU has been reluctant to do.

So what is a lender to do?

Arbitration remains a primary fallback because many countries, including the UK and all EU countries, are signatories to the New York Convention that regulates the enforcement of arbitration awards in member countries. Arbitration may also be combined with provisions permitting lenders to bring an action instead in the courts pursuant to asymmetric or exclusive jurisdiction clauses.

Once the UK joins the Hague Convention in its own right, exclusive jurisdiction clauses may be considered. While this may limit a lender’s flexibility about where to commence proceedings, in many circumstances the certainty an exclusive jurisdiction clause provides may outweigh the loss of flexibility.

If the EU approves the accession by the United Kingdom to the Lugano Convention, then this avenue would most closely replicate the current Brussels Regime and the status quo would largely prevail.

Finally, many countries allow for the enforcement of foreign judgments (including English court judgments) based on their existing national laws or as a result of existing bilateral or multilateral treaties and conventions which remain in force but have not been used in connection with English court judgments since England has been a member of the EU. However, this can only be determined on a case-by-case basis with the assistance of local lawyers in the relevant jurisdictions.

In conclusion, while Brexit will alter the legal framework on which English court jurisdiction clauses and the enforcement of English court judgments currently rests, a number of viable alternatives remain in the legal toolbox for lenders and their legal advisors.