The Brexit date of 29 March 2019 is fast approaching, and there is now a distinct possibility of the UK leaving the EU without agreed terms. Our MoFo Brexit Task Force is coordinating Brexit-related legal analysis across all of our offices, and working with clients on key concerns and issues, now and in the coming weeks and months. We are also continuing to provide MoFo Brexit Briefings on a range of key issues. We are here to support you in any and every way that we can.
From a commercial contracting and disputes perspective, Brexit has the potential to impact four key areas: jurisdiction; recognition and enforcement of judgments; service; and governing law. This update note focuses on the first of these areas – jurisdiction. You can find our update notes on the other three areas here.
As with other areas, it is difficult to predict what the exact impact of Brexit will be on these matters until we know what post-Brexit model and terms the UK and the EU will agree, if any agreement is reached at all. In the meantime, uncertainty remains. That said, there are some practical steps that parties entering into or renegotiating contracts can take now to seek to protect themselves from the impact of Brexit and the intervening uncertainty.
Will your choice of jurisdiction be upheld post-Brexit?
The current regime
Jurisdiction within the EU on civil and commercial matters is currently governed by the Recast Brussels Regulation. The English Courts (and the courts of other EU Member States) apply the Recast Brussels Regulation to determine which court takes jurisdiction where a defendant is domiciled in an EU Member State or where an agreement confers jurisdiction on an EU Member State court regardless of the domicile of the parties or where the other bases of jurisdiction under the Recast Brussels Regulation apply.
Post-Brexit, the Recast Brussels Regulation, which relies on reciprocity, will cease to apply in the UK. This has been confirmed in the draft Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019. Although it is theoretically possible for the UK and the EU to agree that the Recast Brussels Regulation, or an equivalent arrangement, will continue to apply on a reciprocal basis, this is unlikely. Among other things, it would be contrary to the UK government’s position that the jurisdiction of the Court of Justice of the European Union should end in the UK post-Brexit.
The most likely post-Brexit scenario is that the UK accedes to the 2005 Hague Convention on Choice of Court Agreements (“Hague Convention”) or the 2007 Lugano Convention. Both conventions would provide a predictable framework for signatory states to determine questions of jurisdiction and are similar to the present regime under the Recast Brussels Regulation (although with some important limitations and differences, as set out below). Alternatively, the UK could seek to negotiate an individual treaty (or individual treaties) incorporating elements of one or more of the existing regimes.
The Hague Convention
The UK currently participates in the Hague Convention, which is in force in all EU Member States, Mexico, Montenegro and Singapore, as an EU Member State. Post-Brexit, in the absence of concluding an alternative agreement, the UK plans to re-join the Hague Convention in its own right and does not need the consent of the remaining EU Member States to do so. The Hague Convention is an international agreement pursuant to which the courts of Contracting States agree (among other things) to give effect to certain exclusive jurisdiction agreements in favour of the courts of another Contracting State. The Hague Convention does not apply to non-exclusive jurisdiction clauses (in contrast to the Recast Brussels Regulation and Lugano Convention) or exclusive jurisdiction agreements entered into before 1 October 2015.
The Lugano Convention
The government has previously announced its desire to participate in the Lugano Convention post‑Brexit (although noting its view that the Lugano Convention is limited in scope) and its desire to explore a bilateral agreement with the EU. Contrary to the Recast Brussels Regulation, the Lugano Convention requires only that states have regard to the decisions of the Court of Justice of the European Union. However, in contrast to the Hague Convention, the UK would need the consent of the other signatories (including the remaining EU Member States, Iceland, Norway and Switzerland) in order to accede to the Lugano Convention.
If the UK is able to accede to the Lugano Convention, there are two primary differences with the current regime under the Recast Brussels Regulation that may be of significance to contracting parties:
- First, under the Recast Brussels Regulation, where a contract contains an exclusive jurisdiction clause in favour of an EU Member State, it is for that court to determine whether it has jurisdiction to hear a dispute arising out of the contract. Any proceedings issued in other EU Member States must be stayed until the question of jurisdiction is determined by the parties’ chosen court, if proceedings have also been commenced in that court. The purpose of this is to uphold parties’ choice of exclusive jurisdiction and avoid parallel proceedings being commenced in another EU Member State for tactical reasons. Similar provisions apply under the Hague Convention. In contrast, the Lugano Convention does not give precedence to an exclusive jurisdiction clause, so the question of jurisdiction is always determined by the court first seised of a dispute. If the Lugano Convention is adopted, it is therefore possible that the “Italian torpedo” (by which parties tactically rush to commence proceedings first in a jurisdiction with a slow and complicated judicial process, so as to delay the progress of the substantive proceedings) could rear its head again.
- Second, a jurisdiction agreement will only be effective under the Lugano Convention if one or more of the parties is domiciled in a Lugano Convention Contracting State. This is not a requirement under the Recast Brussels Regulation (meaning that parties outside the EU can nominate the courts of an EU Member State to have jurisdiction in the knowledge that their choice will be upheld in those courts).
No international agreements
If the UK does not to enter into any international agreements, international principles of comity will apply to determine jurisdiction. That is, the courts of the UK and each remaining EU Member State will apply their own rules of private international law to determine if they have jurisdiction over a particular dispute. This would lead to considerable uncertainty and an increased risk of parallel proceedings.
On 13 September 2018, the government published guidance on “Handling civil legal cases that involve EU countries if there’s no Brexit deal”. As the guidance noted, in a “no‑deal” scenario, the UK would “revert to the existing domestic common law and statutory rules”. The guidance further stated that the government will take the necessary steps for the UK to re-join the Hague Convention in its own right. To facilitate this, on 28 December 2018, the UK deposited its Instrument of Accession to the Hague Convention with the Netherlands’ Ministry of Foreign Affairs.
As noted in the guidance, the government anticipates that the Hague Convention would come into force throughout the UK on 1 April 2019, which would potentially leave a two-day gap of coverage after the Brexit “exit day” on 29 March 2019. The Ministry of Justice has drafted regulations (The Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulations 2018 (“2018 Regulations”)) to plug this potential gap. The 2018 Regulations require UK courts to give effect to Hague Convention provisions with respect to choice of court agreements concluded in favour of non-EU Contracting States before exit day, and those concluded in favour of any Contracting State on or after exit day but before the Hague Convention enters into force again in the UK, as if the UK had remained bound without interruption. The Explanatory Memorandum to the 2018 Regulations, however, acknowledges that this solution will only bind the UK courts, and that there is no guarantee that the courts of other Contracting States will reciprocate.
For cases falling outside the Hague Convention, as set out above, the UK will revert to existing domestic common law and statutory rules to determine questions of jurisdiction. With respect to defendants outside England and Wales, this generally requires the court’s permission to be granted to serve the defendant outside of the jurisdiction and can give rise to forum non conveniens arguments on the basis that the courts of another country would be more appropriate to hear the claim. This gives rise to the possibility of parallel proceedings in the UK and another EU Member State, but also reopens the potential for English courts to grant anti-suit injunctions to prevent parties pursuing proceedings in other EU Member States.
What you should do now
Parties entering into jurisdiction agreements in favour of EU Member States in the short-to-medium term may want to consider taking local law advice in their chosen EU Member State and other EU Member States in which it is likely that proceedings could be commenced. In order to cater for the possibility of a “no-deal” Brexit scenario, in which case (as set out above) the Hague Convention would apply, contracting parties should also where possible ensure that any new choice of court agreements that they enter into provide for the exclusive jurisdiction of their chosen courts so that they can benefit where possible from the provisions of the Hague Convention. Parties may also want to consider reaffirming pre-existing choice of court agreements in favour of English courts to ensure that they continue to be given effect by other EU Member States post-1 April 2019.
What about arbitration?
The EU rules on jurisdiction under the Recast Brussels Regulation do not extend to arbitration. In addition, if the Recast Brussels Regulation ceases to apply, parties subject to an arbitration agreement with an English seat will be able to seek an anti-suit injunction from the English courts restraining proceedings brought in an EU Member State in breach of the arbitration agreement, which is not permitted under the current EU regime.
Brexit is therefore unlikely to have any adverse impact on arbitration, which could make arbitration an attractive option for contracting parties seeking to obtain certainty, at least until the post-Brexit position becomes clearer.