Brexit and English Jurisdiction Agreements: A Look into the Post-Referendum Legal Landscape

This blog is by Dr. Mukarrum Ahmed from the University of Aberdeen’s Centre for Private International Law

The initial shock at the UK’s referendum vote must be replaced by a reasoned consideration of how best to respond in an uncertain situation. Will it really happen? When will it happen? Will the continuing EU play hardball in negotiations or will it seek to ensure that the UK becomes a good neighbour? What will the post-Brexit UK and EU look like? One decision for those entering into cross border commercial contracts in the post-referendum legal landscape is what to do about an English jurisdiction provision in the contract. The referendum result hasn’t itself changed anything legally, but it may be necessary to invoke these jurisdiction provisions of a contract in two or more years’ time, when the legal framework might be different.

Jurisdictional Principles

The jurisdiction of the English courts and the courts of other EU Member States in civil and commercial matters is currently governed by the Brussels I Regulation (Recast) or the Recast Regulation (EU Regulation 1215/2012). The Regulation provides that a choice of jurisdiction by the parties should be upheld and that judgments given by the courts of one Member State should be enforced in all other Member States. After Brexit, the Recast Regulation will in all probability cease to apply to the UK, which has led some lawyers in continuing EU Member States to promote the idea that commercial litigation that might have traditionally come to the English courts should instead be diverted to the other emerging European centres of international litigation. English lawyers are naturally perturbed by such a prospect. What the post-Brexit jurisdictional and enforcement landscape will look like is uncertain. Lawyers can debate enthusiastically whether judgments given in proceedings commenced before Brexit will continue to be enforceable after Brexit, whether the 1968 Brussels Convention will be restored, whether the pre-Brussels Convention bilateral treaties between the UK and individual Member States will revive, whether the UK has a right to adhere to the Lugano Convention or, if not, whether one or more of the existing Contracting States will block the UK’s doing so. Interesting though those debates will be, they do not reduce the uncertainty and offer scant help to those who must make a decision now.

The Starting Point on Jurisdiction

The first question is what the jurisdiction agreement in any particular contract is trying to achieve. If a fundamental objective of the jurisdiction clause is to provide a judgment that will be enforceable throughout the EU, then the uncertainties of the post-referendum world come into play (as illustrated in this earlier post by Dr. Jon Fitchen). There is a real risk that, with the departure of the Recast Regulation and the uncertainties over Lugano and other issues, an English judgment will not be readily enforceable in the continuing EU and vice versa. Possible responses where enforceability of a judgment in the continuing EU is an important factor are discussed below.

There are, however, many reasons for a choice of jurisdiction save for the enforceability of the resulting judgment within the continuing EU. For example, the party against whom enforcement is likely to be required may not have any accessible assets in the EU. Most obviously, the party might have assets in the UK or otherwise outside the EU, in which case the issues will be the same pre-Brexit as post-Brexit. In some instances, enforceability might not be a major issue. For instance, a party may have sufficient security against which to discharge its counterparty’s obligations within the jurisdiction. Or a party may conclude that it is more likely to be the sued rather than sue the counterparty. Or enforcement risk may simply not be a big factor for the particular counterparty. In these situations, a jurisdiction clause may fulfil a more defensive role of ensuring that the party can only be sued in a court in which it has confidence. If so, again the considerations may not have changed significantly as a result of the referendum vote. Post-Brexit, a jurisdiction clause in favour of the English courts may not require courts in EU Member States to defer to the English courts in quite the same way or for the same reasons as now, but the counter may be that, if so, the English courts will, contrary to the current position, be able to grant anti-suit injunctions to restrain a party from pursuing proceedings in an EU court. A party with any business, presence or assets in the UK cannot afford to ignore an injunction.

EU Enforceability: Solutions

If enforceability of a judgment throughout the continuing EU is important, there are four solutions in circumstances where, pre-referendum, jurisdiction would have been given to the English courts.

First, give jurisdiction to the courts of an EU Member State or a Lugano Convention Contracting State (Norway, Iceland and Switzerland). This depends upon being comfortable with proceedings in that court, including as to its procedures, costs, speed and outcomes. This is already sometimes done in, for example, security agreements where the security in question is located in another EU Member State.

Second, give non-exclusive jurisdiction to the English courts. This cautious approach hedges the parties’ choice of jurisdiction and allows the position to be reconsidered at the time when legal proceedings are commenced. If at that time enforcement remains important and an English judgment is enforceable in the EU, then the English courts can be used; if, however, an English judgment is not enforceable in the EU, it will allow the use of other courts. A variant of non-exclusive jurisdiction clauses is the asymmetric or unilateral jurisdiction agreement, which is commonly used in cross border finance contracts. This binds one party to sue exclusively in the primary non-exclusive forum, but allows the other party to commence proceedings in that court or in any other court of competent jurisdiction. The French Cour de cassation has cast some doubt on the validity of these clauses under Article 23 of the Brussels I Regulation in Mme X v Rothschild (26 September 2012) and Article 23 of the Lugano Convention in ICH v Credit Suisse (25 March 2015). However, the position has been somewhat ameliorated by the most recent Cour de cassation decision in Apple Sales International v eBizcuss (7 October 2015). Moreover, doubt as to a matter of EU law may be less significant if the UK is outside the EU because the English courts have traditionally enforced these clauses. It could, however, affect EU Member States’ courts’ approach to the jurisdiction clause, but that is in any event a matter of some uncertainty until finally resolved by the Court of Justice of the European Union.

Third, arbitration is a possibility. Arbitration is already commonly used if enforcement is important and the counterparty has assets in a location where an English judgment is not enforceable because of the extensive reach of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. All EU Member States are parties to the New York Convention, which provides for the enforcement in participating states of an arbitral award given in another participating state. An arbitration seated in a participating state, whether the UK, a continuing EU Member State or elsewhere, should therefore be able to give an award enforceable throughout the EU.

Fourth, parties could continue with whatever their current policy is. The massive uncertainties surrounding what Brexit will bring could be treated as meaning that the risks of change are as great as the risks of no change.

EU Enforceability: The Hague Convention on Choice of Court Agreements

There is another possible solution to the problem of enforceability of a judgment throughout the EU. This is to give the English courts exclusive jurisdiction. The potential benefits of this route arise because the EU is a party to the Hague Convention on Choice of Court Agreements. In addition to the EU, Mexico and most recently Singapore have signed and ratified the Convention, which is therefore currently of limited significance in global terms. The Convention does, however, provide that all Contracting States must give effect to exclusive jurisdiction agreements (Articles 5 and 6) and enforce the resulting judgment given by the chosen court (Article 8). The UK is not currently an individual Contracting State to the Convention because the Convention’s subject matter falls within the exclusive competence of the EU. There is divided academic opinion on the issue whether the UK is bound by this international treaty post-Brexit without any need for the UK to ratify the treaty afresh as it might be argued that the UK is only bound by the treaty while it is a Member State of the EU. Assuming the UK would not be bound, the UK would still be entitled to sign and ratify the Convention in order to bring it into force immediately on the UK’s leaving the EU or soon afterwards; the consent of the existing parties is not required. If the UK were to do so, a judgment given by an English court that has taken jurisdiction under an exclusive jurisdiction clause will again be enforceable throughout the EU. This position is not, however, without potential transitional wrinkles. Article 16 of the Convention states the Convention applies to exclusive jurisdiction agreements concluded after its entry into force for the state of the chosen court and that the Convention does not apply to proceedings instituted before its entry into force in the state of the court seised. The Convention has, however, already entered into force in the UK because of the EU’s ratification of the Convention.

Suppose that a contract contains an English exclusive jurisdiction clause but that, post-Brexit, a court in an EU Member State is seised of proceedings falling within the scope of that clause. What will the EU Member State’s court do, assuming that the Hague Convention on Choice of Court Agreements is not applicable?

Post-Brexit, so far as the continuing EU is concerned the English courts will (subject to any future contrary arrangements with the EU) be in the same position as any other courts outside the EU. The commercial expectation might be that the courts of EU Member States would give effect to the parties’ wishes, but it is not entirely clear that this will necessarily be the case. Article 33 of the Recast Regulation provides that courts in EU Member States may stay proceedings in favour of courts outside the EU if three conditions are met: first, the non-EU court was first seised; secondly, the non-EU court can give a judgment capable of enforcement in the EU Member State in question; and, thirdly, a stay is necessary for the proper administration of justice. If these three conditions are met, then the court in the EU Member State can stay, and might generally be expected to stay, proceedings in favour of the court outside the EU. But what if any of these conditions is not met (for example, because the court in the EU Member State was seised first)? It is arguable that, despite the fact that the agreement between the parties has been broken by one party starting proceedings in an EU Member State’s courts, the courts of EU Member States cannot stay their proceedings in favour of the non-EU court. Before Article 33 was added to the Recast Regulation, there was no explicit provision addressing the position of non-EU courts. There is evidence of some Member State court’s practice which gives effect to jurisdiction agreements in favour of non-EU courts under the guise of giving ‘reflexive effect’ to the Regulation’s provisions regarding jurisdiction clauses. However, as the Recast Regulation now specifically addresses the position of non-EU courts, the convenient legal fiction of the doctrine of reflexive effect may be harder to justify in principle.

Ultimately, the Court of Justice of the European Union will have to determine the most appropriate approach in these circumstances. Even if the courts of an EU Member State consider that they have no power to stay proceedings in favour of the English courts despite an exclusive jurisdiction clause in favour of the English courts, the English courts may not be without a pragmatic remedy. Under the Recast Regulation, the English courts cannot grant an anti-suit injunction to restrain a party from pursuing proceedings in the courts of another EU Member State bought in breach of the jurisdiction agreement (Case C-159/02 Turner v Grovit [2004] ECR I-03565). However, if the UK is no longer an EU Member State, its mutual trust constraints will no longer apply and the English courts would again be free to grant, and would generally grant, anti-suit injunctions ordering parties to stop legal proceedings brought in breach of contract. Failure to obey an injunction would constitute contempt of court, which could lead to a fine, imprisonment and, ultimately, sequestration of assets. A party with any presence or assets in the UK would have to comply with the injunction or reconcile itself to the loss of those assets. If, contrary to the assumption made above, the Convention was applicable, the courts of an EU Member State that are seised of proceedings in breach of an exclusive jurisdiction agreement should defer to the English courts according to Article 6 of the Convention. Moreover, the Convention’s system of qualified mutual trust may also permit the use of anti-suit injunctions, the damages remedy for breach of exclusive jurisdiction agreements and anti-enforcement injunctions where such relief furthers the objective of the Convention.

 

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