• Orr Litchfield, english
  •       Friday, 19 April 2019   

    No deal Brexit & commercial contract disputes

    With the UK scheduled to leave the EU on 29th March 2019, the draft Withdrawal Agreement negotiated between the EU and UK government rejected comprehensively by the UK parliament and no sign of the EU being prepared to compromise on the key issue of “the backstop” in relation to the UK/Irish border, the prospects of a no-deal Brexit have increased significantly. This note considers what a no-deal Brexit would mean for EU businesses engaged in or contemplating litigation with UK exporters.

    What is a “No deal” Brexit?

    The UK formally triggered Article 50 of the Treaty on European Union on 29th March 2017. This started the two-year countdown to the UK’s exit from the EU. The EU and UK have been seeking to agree the terms of a withdrawal agreement, which would apply during a transition period from 29th March 2019 until 31st December 2020 (unless extended). It was anticipated that the EU and UK would try to negotiate a trade agreement during the transition period. However, without an agreed withdrawal agreement, there will be no transition period and, therefore, no trade agreement prior to the UK leaving the EU at 11.00pm (UK time) on 29th March 2019. If that occurs, there will be a “No deal” Brexit.

    What is the general effect of a “No deal” Brexit?

    With no deal, and in the absence of any other intervening act, the UK will leave the EU on 29th March 2019 and all EU Regulations and other EU legislation (‘the EU Regime’) will be deleted from the UK legal system. In relation to dispute resolution, this will include several of the important rules relating to the management of EU-wide litigation such as the Rome I and Rome II Regulations (on the choice of law applicable to contractual and non-contractual obligations respectively), the Recast Brussels Regulation (which covers jurisdiction, recognition and enforcement of judgments), the EU/Denmark Agreement (which provides special rules in relation to jurisdictional issues and recognition and enforcement of judgments between Denmark and the EU), the Lugano Convention  (which is essentially an agreement between the EU and EFTA countries excluding Liechtenstein (namely Norway, Iceland and Switzerland) that unifies the rules on jurisdiction in civil and commercial matters by effectively extending the 2001 Brussels Regulation to cover these countries), the Enforcement Order, Order for Payment and Small Claims Regulations (which establish EU procedures for dealing with uncontested debts and small claims worth less than €5,000), and EU regulations on Service and Taking of Evidence. All of these operate to make cross-border litigation within the EU much easier.

    Without the EU Regime, cross-border litigation between EU based entities and UK based entities is likely to be less certain, require a greater number of steps to conclude, be more time-consuming and, consequently, be more expensive and carry greater risk.

    What steps has the UK taken to ensure judicial co-operation?

    The UK government passed the European Union (Withdrawal) Act 2018 on 26th June 2018. This Act will repeal the European Communities Act 1972 as at Brexit, but will also adopt into UK law the EU law in existence as at that time including the EU legislative framework which governs the key areas in the management of EU-wide litigation.

    On the face of it, this appears to be a simple and effective solution. Unfortunately, copying the EU law in existence as at the date of Brexit into UK law will not completely resolve the potential problems relating to EU-UK dispute management post Brexit. This is because several of the EU regulations relating to dispute management rely on reciprocal arrangements between EU member states. The UK will no longer be a party to those arrangements after Brexit. Accordingly, even if the UK decides to adopt the EU Regime after Brexit, for the most part, the EU Member states will be under no obligation to reciprocate in respect of the UK. This could lead to a 2-tier system where the UK applies the EU legislative framework in relation to disputes between EU and UK entities in the UK courts but EU member states do not reciprocate by accepting or recognising steps taken under that framework in the UK.

    A logical solution would be for the UK to apply to become a party to the Lugano Convention (which contains provisions similar to the original Brussels Regulation, and to which non-EU countries, including Norway and Switzerland, are currently parties) and the Hague Convention on Choice of Court Agreements (which governs jurisdiction and enforcement of judgments between the EU, Mexico, Singapore and Montenegro) in its own right (as opposed to its current membership via the EU). The UK will need the EU’s agreement to join the Lugano Convention but not to join the Hague Convention. The UK Government has already stated that it intends to join the Hague Convention from 1st April 2019 (as it is unable to do so sooner) but it remains to be seen whether it is, in fact, possible for the UK to join so quickly after Brexit. It is unlikely that the UK can sign the Hague Convention or deposit an instrument of ratification until after Brexit and Article 31 of the Hague Convention provides that it will come into force in relation to a new signatory on the first day of the month following the expiry of three months after the deposit of its instrument of ratification.  Assuming that the UK could sign the Hague Convention and deposit an instrument of ratification over the weekend of 30th /31st March 2019, this means that the earliest that it would come into force in relation to the UK would be 1st July 2019.

    In any event, there will be a gap from at least 11pm (UK time) on 29th March 2019 until 1st April 2019 during which time the UK will not be a member of the Hague Convention. It seems likely that UK courts will ignore the break in the UK’s membership and continue to give effect to jurisdiction clauses and enforce judgments that would otherwise fall within the Hague Convention but there is uncertainty as to whether the EU (or other contracting states) will do so.

    What does this mean in practice in relation to dispute resolution? 

    Applicable law – The rules which determine which laws apply to a cross-border dispute will change very little, whether a dispute is before an EU member state court or the English court. This is because (a) the UK will incorporate the Rome I and Rome II rules on applicable law into English law from the date of exit, (b) the rules will continue to operate in EU member states, and (c) the rules do not require reciprocity to operate.  Therefore, in cases before the English court, a choice of the law of an EU member state (or any other law) to govern contractual or non-contractual obligations will generally be given effect.  Similarly, , in cases before the court of an EU member state, the choice of English law (or any other law) to govern contractual or non-contractual obligations will generally be given effect even though the UK will no longer be part of the EU. The position will effectively remain the same as it is today.

    Jurisdiction, Recognition and enforcement of judgments - The position in relation to jurisdiction is more uncertain and likely to be more complicated. As stated above, the Recast Brussels Regulation and the EU/Denmark Agreement will be deleted from the UK legal system when Brexit takes place and it is unclear whether the remaining EU Member states will reciprocate in respect of the UK if the UK decides to adopt the Recast Brussels Regulation and the EU/Denmark Agreement as part of the EU Regime after Brexit (as it appears that it will do). The Hague Convention only applies where the parties have agreed an exclusive jurisdiction clause, so agreements containing asymmetric or non-exclusive agreements will not be covered.

    In addition, Article 16 of the Hague Convention provides that it only applies to exclusive choice of court agreements concluded after its "entry into force for the State of the chosen Court".  Accordingly, there is an issue as to whether this means that any jurisdiction agreement concluded before Brexit or during the interim period before the UK is treated as having become a party to the Hague Convention is outside the scope of the Convention altogether and is not "revived" on the UK  joining the Convention in its own right.

    If neither the Recast Brussels Regulation nor the Hague Convention applies to a particular agreement then each country will apply its own domestic rules to questions of jurisdiction and enforcement. In relation to the English courts, that means in most cases the English common law rules will apply with the result being that the court will generally respect an exclusive jurisdiction clause in favour of another country and will generally enforce judgments given by other countries, subject to limited exceptions. It seems likely that most (but not necessarily all) EU countries will enforce English judgments in the same way as foreign judgments even without a specific reciprocal regime, although the type of judgment enforced may be more limited and the procedures involved more time consuming and costly. It is also uncertain as to whether EU member state courts would give effect to an exclusive English jurisdiction clause in these circumstances, particularly where proceedings were started in the EU member state before they were started in England.

    Service of documents and taking of evidence - The EU Service Regulation and the EU Taking of Evidence Regulation will no longer apply to the UK when it leaves the EU, as they cannot operate effectively without reciprocity between the UK and the remaining EU countries. The UK government proposes to introduce transitional provisions which mean that the two Regulations will continue to apply to outstanding requests for documents to be served or evidence to be taken in the UK, where those requests were received in the UK before Brexit. Otherwise, the position will depend on domestic provisions in the relevant countries and on membership of relevant conventions such as the Hague service and evidence conventions.

    Arbitration – Brexit will not affect arbitration because the Arbitration Act 1996 (the primary legislation that sets out the framework for arbitration in the UK) is not affected by EU law. Accordingly, it will continue in force after Brexit. The UK will also continue to be a party to the Convention on the Recognition of Enforcement of Foreign Arbitral Awards 1958 (more commonly known as the New York Convention) in its own right. It provides for the enforcement of arbitral awards between parties to the convention. This currently includes 156 jurisdictions, including all EU Member States. In the circumstances, it may be that a no-deal Brexit will result in an increase in the use of arbitration clauses in contracts (and consequent increase in number of arbitrations) because of the additional certainty that choice of law and choice of jurisdiction will be applied and that arbitral awards will be recognised and applied worldwide, not just in the EU.

    Should you be worried if you are involved in a dispute with a UK exporter?

    If you are purchasing goods from an English exporter, it is likely that the English exporter will require a buyer to enter into a contract in English that is governed by English law and subject to the exclusive jurisdiction of the English courts. In such circumstances, whatever the current status of the dispute, it is unlikely that Brexit will give rise to any new issues as the UK government appears to be seeking to maintain the status quo as far as possible. Any court proceedings which have not been concluded by Brexit will be subject to the post-Brexit regime which may give rise to unexpected new issues (over and above the usual ones). The biggest problem is  that the lack of certainty may make the process more time-consuming, slower and, consequently, more costly. Naturally, each case will be dependent upon its own facts.

    Where the contract is subject to the non-exclusive jurisdiction of the English courts or there is no agreement as to jurisdiction, there is less certainty as the Hague Convention will not apply. Less certainty often results in greater risk and cost but may also result in a greater likelihood of parties settling disputes via mediation (or a similar means of dispute resolution).

    If the UK’s adoption of the Brussels regime is not recognised by EU member states and the UK does not become a party to the Lugano Convention then the cross-border enforcement of judgments is also likely to become more complicated. In England, such enforcement of foreign judgments will have to be carried out in accordance with English common law, which requires the judgment creditor to commence a fresh cause of action against the judgment debtor in the English courts with the foreign judgment being the cause of action. This is generally slower than the enforcement of judgments from EU member states under the Brussels regime.

    What steps can you take to protect yourself?

    If you would like certainty and you are a party to an existing contract with a pre-existing English jurisdiction clause then you may wish to consider whether it would be prudent to try to enter into a new exclusive jurisdiction agreement after the UK ratifies the Hague Convention by way of amendment to the existing contract. 

    You may also wish to consider seeking to amend your existing contracts in order to add a suitable arbitration clause, which would avoid the current uncertainty regarding the management of litigation between a party from an EU member state and a party from the UK.

    If you are in a strong enough negotiating position then you may wish to consider seeking to amend your existing contracts to make them subject to the governing law and jurisdiction regimes of another EU country although it is common practice for parties to use the same governing law as the language of the contract for reasons of interpretation.

    If you are proposing to enter into a new contract with a UK exporter, you should consider the above issues regarding exclusive jurisdiction and arbitration in addition to other clauses which may minimise your risks upon Brexit (for example, material adverse change clauses, change control clauses and hardship clauses).

    Another sensible course of action may be to seek advice, in those jurisdictions where court proceedings or enforcement can be anticipated, on whether the courts of those jurisdictions would respect and uphold an exclusive jurisdiction clause in favour of a non-EU, non-Hague Convention, country as that is how the UK may well be treated immediately after Brexit. 

    Need to talk? 

    Whatever stage of the contractual or dispute process you have reached, we can help you to understand the different legal and related commercial issues relating to Brexit, to choose the option that is right for you and to help you develop or minimise risks for your business.

    Contact us

    If you would like more information about the effects of Brexit or would like to discuss a potential or existing contract or dispute, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com

    References to ‘Orr Litchfield’, ‘we’, and ‘us’ are to one or more of the Orr Litchfield members or to one of their respective affiliates (together ‘Orr Litchfield entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Orr Litchfield entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Orr Litchfield entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Orr Litchfield.

     

     

     

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