This briefing note advises readers on the immediate considerations for businesses involved in current or future cross-border disputes and anticipates how Brexit will impact both the UK and other jurisdictions in relation to this issue.
On 29 March 2017, the UK government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU. On 26 June 2018 the European Union (Withdrawal) Act 2018 ("EUWA") came into force. The EUWA ends the supremacy of EU law on 'exit day' and converts current EU law into UK law on that date. The EUWA states that 'exit day' will be at 11.00pm on 29 March 2019 (section 20), although this can be subject to amendment.
Against this background the UK government and the European Commission are negotiating how the relationship between them will work following withdrawal. On 19 March 2018 the UK government and the European Commission published a Draft Agreement on the Withdrawal of the UK from the EU and the European Atomic Energy Community (the "Draft Withdrawal Agreement"). The Draft Withdrawal Agreement sets out what will happen on exit day. It also provides for a transition period that will begin on 30 March 2019 (Article 168) and last until 31 December 2020 (see Article 121). During the transition period the majority of current EU law will remain applicable to the UK (exceptions are listed in Article 122). If, by 30 March 2019, the Draft Withdrawal Agreement is not ratified by the European Parliament and Council (under Article 50), and approval is not given by the UK parliament to the terms negotiated by the UK government (under s.13 EUWA, which involves approval both of the withdrawal terms and of a 'framework for the future relationship'), there will be no transition period. If that happens, EU law will stop applying to the UK on 30 March 2019.
There is still much uncertainty regarding what the decision to leave actually means in relation to cross border disputes. Later in this note we set out what we do know will happen to the EU rules and Regulations currently governing this area at the end of the transition period and/or on exit day and also highlight the areas which are still subject to negotiation.
Practical Steps to take right now
In the meantime listed below are some of the practical steps you can take now to help reduce the risks that the decision to leave could give rise to in relation to cross border disputes:
- Parties who are negotiating contracts should think carefully about their dispute resolution and governing law clauses; these clauses should be drafted to make clear which courts are to have jurisdiction in the event of a dispute and which law is to govern the contract. In addition, parties domiciled outside of England & Wales may wish to appoint a process agent in this jurisdiction to accept legal proceedings on behalf of a party that has submitted to the jurisdiction of the English courts, but does not have a registered office within the jurisdiction. Rules which address these issues are currently contained in the Recast Brussels Regulation1 (which address issues of jurisdiction and enforcement) and the Rome I2 and Rome II3 Regulations (which address contractual and non-contractual obligations). The UK government intends that Rome I and Rome II will be incorporated into UK domestic legislation via the EUWA and therefore this area of law should remain largely unchanged on exit day and during the transition period. Arbitration will not be affected by the vote to leave and consideration should therefore also be given as to whether arbitration (if suitable) would provide greater certainty as a method of dispute resolution. Our article "How to Brexit Proof your Boiler Plate Clauses" provides more detail on these issues.
- Parties who are in possession of a court judgment which needs to be enforced in another EU state should take steps to enforce it as soon as practicable. This will ensure that they are able to take advantage of the enforcement mechanism set out in the Recast Brussels Regulation. If the enforcement mechanism under the Recast Brussels Regulation ceases to be available then this could affect the way future English court judgments are enforced in EU member states. Parties should consider taking advice as to how the enforcement of judgments will be dealt with in EU member states where they have a presence or exposure if the Recast Brussels Regulation ceases to apply as between the UK and those member states.
- Proceedings with an EU element which have already been issued or which are issued in the coming months are unlikely to be affected by the vote to leave, at least in the short to medium term, as the relevant EU rules will continue to apply. There may, however, be increased uncertainty in relation to particular types of claims (for example, those based on the EU competition regime) which are based on rules which become part of the Brexit negotiations. However, the UK government and the European Commission have agreed in the Draft Withdrawal Agreement that the EU rules on jurisdiction and recognition and enforcement of judgments will continue to govern any pending judicial proceedings and procedures started prior to the end of the transition period. Likewise, current provisions of EU law that govern judicial cooperation procedures that are on-going at the end of the transition period will continue. This agreement provides parties with some certainty regarding what will happen to litigation that has already commenced prior to the end of the transition period (see Articles 62-65 of the Draft Withdrawal Agreement).
To what extent is EU Law relevant to disputes with a cross-border element?
In order to facilitate access to justice and judicial cooperation between member states, EU law has laid down rules which apply to parties in member states litigating disputes with cross-border elements. The cross-border element may exist, for example, because the dispute arises between parties domiciled in different member states, or because the subject matter of the dispute has a particular connection with a member state, for example, because it is the place where contractual obligations are to be performed.
The four principal areas relevant to parties litigating disputes dealt with by EU rules concern:
- The courts which are to have jurisdiction over the dispute;
- The law which is to govern the parties obligations (both contractual and non-contractual);
- The recognition and enforcement of court judgments; and
- The service of court documents and the taking of evidence.
On the issue of jurisdiction, EU rules lay down detailed provisions that determine which courts are to have jurisdiction and these are now largely contained in the Recast Brussels Regulation4. The general rule is that the defendant should be sued in the courts of the member state where it is domiciled. If, therefore, the claimant is domiciled in England but the defendant is domiciled in Italy, the presumption is that the defendant should be sued in its home state, Italy. The parties are, however, free to agree that the courts of a particular country are to have jurisdiction (and the rules give effect to that choice) subject to various qualifications, for example in relation to disputes about real property or concerning the constitution of companies.
Recognition and Enforcement of Judgments
On the issue of the recognition and enforcement of judgments, the EU rules5 provide a framework which enables a judgment given in one member state to be registered and enforced in another member state, as if it were a judgment of that member state. There are only very limited grounds on which registration and enforcement can be resisted.
With regard to the law governing parties' obligations, the EU rules set out in Rome I6 and Rome II7 provide a framework to harmonise the rules which apply when establishing which law should apply to contractual and non-contractual obligations. Broadly, in matters concerning contractual obligations, Rome I gives effect to the parties' choice of law and provides rules to determine the applicable law where no choice has been made. Rome II provides a similar mechanism for ascertaining the applicable law for disputes arising out of non-contractual obligations, for example, claims in tort.
Service of documents and taking of evidence
The procedure for service of judicial and extra-judicial documents between member states (including Denmark) is also governed by EU rules8, as is the taking of evidence9. The aim of these rules is to improve and expedite the transmission of judicial and extra-judicial documents between member states, and to simplify and accelerate cooperation between member states with regard to the taking of evidence in one member state for use in proceedings in another member state.
Which rules apply to proceedings which are still ongoing after the end of the transition period?
For those seeking to commence litigation with a European dimension, the current rules provide a relatively comprehensive framework setting out how issues relating to jurisdiction, recognition and enforcement of judgments, governing law, the service of documents and the taking of evidence will be dealt with by the courts of member states. While Brexit will change this, the extent of the change is still unclear. However, the current rules will remain in force for the present, during the transition period and after the end of the transition period for disputes in which proceedings have already been issued when the transition period expires10.
Which rules apply to proceedings issued after the end of the transition period or on exit day11?
The UK government presented a White Paper12 to Parliament on 12 July 2018 setting out its proposals to develop and agree the framework for the future relationship with the EU (the “White Paper”)13. The proposals in the White Paper on civil judicial cooperation build on the "Framework for the UK-EU Partnership: Civil Judicial Co-operation (the "Framework") published by the UK government in June 2018. Both the UK government and the EU have previously agreed that options should be explored for maintaining civil judicial co-operation. In the Framework the UK government suggests that this should take the form of a new bilateral agreement covering which law applies to disputes, where cases are heard, ensuring contractual arrangements on where disputes are heard are respected, and ensuring there is cross border recognition and enforcement of judgments14. In the White Paper the UK government says it will seek to participate in the Lugano Convention 2007 (see below) after exit but that it would prefer to build on the principles of the Lugano Convention by exploring a new bilateral agreement with the EU15.
Whether such a new bilateral agreement can be agreed, and if so, what it will contain remains to be seen. The following section explores other known options which may be available if no agreement can be reached.
Jurisdiction and the recognition and enforcement of judgments
In the White Paper the UK government says that it will seek to participate in the Lugano Convention 2007 after exit16. The Lugano Convention is very similar to the Recast Brussels Regulation but it governs jurisdiction and enforcement of judgments between EU member states and EFTA countries (other than Liechtenstein). If that were to happen the position in relation to jurisdiction and the enforcement of judgments would remain largely unchanged between the UK and the EU. If the UK were to fully participate in the Lugano convention without taking further measures, it would lose some of the improvements contained in the Recast Brussels Regulation which have not, as yet, been replicated within the Lugano Convention. In the Framework and the White Paper the UK government recognises this and states that it would like to go beyond existing precedent between the EU and the third countries and that this will take the form of a new bespoke bilateral agreement.
If the UK is unable to reach agreement with the EU on this issue there is a strong view that, as the UK is already a signatory to the Brussels Convention 1968, it could be relied upon to uphold exclusive UK jurisdiction clauses and to support an enforcement application in Europe. At present it covers the enforcement of judgments from Gibraltar and certain dependent territories of EU member states. Following Brexit it would only apply, in addition, to those EU member states which had signed it as members of the EEC, and therefore it would not cover all 27 remaining EU member states. The UK government's position in relation to its future applicability is unknown at this stage.
An alternative scenario would be for the UK to revert to negotiated bilateral and multilateral agreements with other countries. The UK could also decide to ratify the Hague Convention on Choice of Court Agreements which provides a worldwide framework of rules in relation to exclusive jurisdiction clauses and the recognition and enforcement of those judgments based on such clauses in civil and commercial matters. The EU (along with Mexico and Singapore) has relatively recently ratified the Hague Convention, so there is a framework in place regulating these issues which the UK could sign up to. The UK government has indicated its intention to ratify this Convention and refers to it in a Future Partnership Paper17 published in August 2017.
On the issue of the law governing parties' contractual and non-contractual obligations, Rome I and Rome II will be incorporated into domestic law under the mechanism set out in the EUWA. This will create certainty and continuity between the current EU and UK legal frameworks in this area on withdrawal.
The courts of member states will continue to apply the rules set out in Rome I and Rome II to disputes which may have a UK element, as Article 2 of Rome I and Article 3 of Rome II, provide that the law specified by either Rome I or Rome II shall be applied whether or not it is the law of a member state. This means that if a Spanish court was considering the governing law of a contractual obligation, and determined – applying Rome I – that English law should apply to the parties’ relationship, English law would still be applied by the Spanish courts notwithstanding the UK’s status as a non-EU member state.
It is important to note that the EU rules on jurisdiction18, governing law19 and service do not extend to arbitration, and therefore, Brexit will have little immediate impact on this area of dispute resolution. This is also the case with regard to the enforcement of arbitration awards which is governed by the New York Convention and not by the Brussels Recast Regulation.
Service of documents and taking of evidence
The Regulations covering the service of documents and the taking of evidence will no longer apply to the UK following Brexit. For service of documents, the UK is likely to rely on the Hague Service Convention20 (which it became a signatory to before the Service Regulation21 came into effect) for service of documents on member states if they are signatories to the Convention. If not, new bilateral or multilateral agreements will need to be made.
So far as the taking of evidence is concerned, the position will depend on where the evidence is to be taken and used. There are a number of statutes and Conventions which could apply including the Evidence (Proceedings in Other Jurisdictions) Act 1975 and the Hague Convention on the Taking of Evidence Abroad. In the absence of existing reciprocal arrangements, new bilateral or multilateral agreements will need to be put in place.
As with jurisdiction and governing law, the UK may adopt the current provisions in both the Service Regulation and Taking of Evidence Regulation as part of the EUWA. However, this still may leave the UK in a partial 'no man's land' if existing EU member states do not apply principles of mutual recognition and deal with the UK as if it were still an existing member state.
What will be the effect on civil justice cross-border measures?
The civil justice co-operation measures in relation to jurisdiction and enforcement of judgments that presently exist between EU and EFTA member states provide a degree of certainty on important issues that often arise between parties litigating disputes with a cross-border element. Brexit will undermine that certainty although the extent of its impact will depend on the steps taken by the UK Government to address the position and the speed with which it is able to do so.
Generally, disputes between parties who are both based in EU member states, where the subject matter of the dispute 'relates' to an EU member state, are unlikely to be affected by the vote to leave. The Recast Brussels Regulation and Rome I and Rome II will continue to apply to these disputes where relevant, as will the relevant Regulations relating to service of documents and the taking of evidence.
Disputes between parties outside the EU, where the subject matter of the dispute has no connection with a member state, are unlikely to be affected by Brexit. Where relevant, existing common law principles, statutes, agreements and / or Conventions concerning these disputes will continue to apply.
However, disputes where one party is based in the UK and the other party is based in an EU member state, or where the dispute itself has some connection to an EU member state, may be affected by Brexit. Much depends on the specific facts of the dispute, where the proceedings are issued, and more importantly on the outcome of the negotiations between the UK government and the EU. Rome I and Rome II will be incorporated into UK domestic legislation providing continuity in the area of governing and applicable law. The UK government and the European Commission have also agreed that the current EU regime will apply to proceedings which are ongoing or are commenced during the transition period. This will provide much needed clarity for the parties involved in these matters.
The table below sets out each EU Regulation discussed above and its status during transition, after transition and following exit day.
*A transition period will only apply if the European Parliament and Council ratify the Draft Withdrawal Agreement and if the terms negotiated by the UK government are approved by the UK parliament. If this does not happen then EU law will stop applying to the UK on exit day.
**Article 62 of the Draft Withdrawal Agreement
***Article 64 of the Draft Withdrawal Agreement
Overall, the picture remains one of uncertainty even at this stage. There has been some clarity in the position regarding governing law and the continuing application of EU law during the transition period. This is welcome but the whole picture is still to be unveiled.
We intend to update our guidance in this area as the implications become clearer.
Who to contact for further guidance
If you would like more information on the implications of a Brexit please contact Jeremy Sharman, Rachel Glass or Louise Lanzkron
1 Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 2 Regulation 593/2008 on the law applicable to contractual obligations (Rome I) 3 Regulation 864/2007 on the law applicable to non-contractual obligations (Rome II) 4 Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 5 Again, the Recast Brussels Regulation 6 Regulation 593/2008 on the law applicable to contractual obligations (Rome I) 7 Regulation 864/2007 on the law applicable to non-contractual obligations (Rome II) 8 Regulation 1393/2007 on the service in the member states of judicial and extra-judicial documents, commonly known as the Service Regulation 9 Regulation 1206/2001 on cooperation between the courts of the member states in the taking of evidence, commonly known as the Taking of Evidence Regulation 10 This assumes that the Draft Withdrawal Agreement is ratified by all parties in its current form 11 A transition period will only apply if the Draft Withdrawal Agreement is ratified in its current form 12 The Future Relationship between the United Kingdom and The European Union 13 At the time of writing, the White Paper is subject to much criticism within the Conservative parliamentary party and the proposals have prompted two cabinet resignations. However, the government is stating that it still intends to pursue the proposals in the White Paper with the EU. 14 P17 of the Framework 15 Paragraphs 145-148 of the White Paper 16 Paragraph 147 of the White Paper 17 Future Partnership Paper on Providing a Cross-Border Civil Judicial Cooperation Framework 18 Article 1(2)(d) and Recital 12 of the Recast Brussels Regulation 19 Article 1(2)(e) of Rome I 20 Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters 21 Regulation 1393/2007 on the service in the Member States of judicial and extra-judicial documents in civil or commercial matters