Relatively easy cross border enforcement of court judgments has been a quiet success of the EU. Now that we have the UK-EU Trade and Co-Operation Agreement we are able to report on how governing law, jurisdiction and enforcement of court judgments works post-Brexit between the UK and EU.

Although hailed (by both sides) as a success, the deal that has been reached is paradoxically both 1200+ pages long and rather thin. In particular the deal does not specifically address important matters of civil judicial cooperation, which the UK had been keen to include. The impact for civil disputes is therefore effectively a no-deal Brexit, in which we have lost many of the civil judicial cooperation benefits we enjoyed as a member of the EU. That will remain the case unless there is a subsequent, subsidiary agreement on some or all of these issues - including also whether the EU will allow the UK soon to accede to the Lugano Convention.

As to the present position, there are three key areas to consider: governing law, choice of forum, and enforcement of judgments.

Governing or applicable law

What is it and why does it matter?

The governing or applicable law is the law which governs the contractual or non-contractual relationship between parties, which will be applied in determining any dispute arising out of their relations (e.g. the law of England, Germany or France). The applicable law will govern matters including the existence, terms and breach of a contract, and the remedies available for any breach, so it could have a substantial impact on the outcome of a dispute. A clear applicable law for a contract recognised by the relevant courts substantially reduces the risks, costs and complexity of a dispute.

What was the position before Brexit?

As a member of the EU, we applied the 'Rome' instruments - a hierarchy of rules which determined which country's laws govern the parties' relationship. As a result, parties could have a high degree of confidence that an express choice of governing law would be respected across the EU, and that courts would apply consistent rules to determine the governing law in the absence of an express choice. Where the parties had made an express choice of law the 'Rome' instruments set out the limited reasons that the courts could override the express choice of law. There was also a fairly clear hierarchy for non-contract/ tort claims.

What's the position now?

The good news is that the UK has transposed the Rome rules into domestic law, and they become Retained EU Law (for more information, see our article Retained EU Law - a practical guide). So, for now at least, courts in the UK and EU27 will continue to apply broadly the same rules to determine governing law, and the parties' express choice of governing law should be respected and upheld. However, as the UK is no longer bound to mirror changes to the EU's Rome rules, or bound by decisions of the ECJ, there is the potential for the rules in the UK and EU to diverge over time.

Therefore for those drafting and negotiating contracts there is no need for any change in approach - always include a clear applicable law clause, and be aware of the limited exceptions where the courts might override the express choice of law.

Choice of Forum

What is it and why does it matter?

Forum refers to the venue for ultimate resolution of disputes.- That could be identifying which country's courts will hear a dispute (also known as jurisdiction) or alternatively the arrangements for arbitration. Each jurisdiction (or arbitral institute) will have different rules of procedure which may impact on how a dispute is heard, what evidence is available etc. It also determines which court or arbitrator(s) gives the decision that then may need to be enforced.

Courts or arbitration?

There are many factors influencing the choice of forum, i.e. whether to resolve disputes by litigation in national courts, or arbitration. These are outside the scope of this article, but they include for example considerations of confidentiality (court proceedings are generally public, arbitration is generally private), whether a right of appeal is desirable (often arbitration precludes appeal) and the ease of enforcing the court or arbitral tribunal's decision, particularly across borders.

Courts

What was the position before Brexit?

As a member of the EU, the UK benefitted from the Brussels and Lugano regimes - a series of regulations and conventions which laid out rules to determine which country's courts had jurisdiction to hear disputes. Again, these rules first of all respected any choice of court the parties had already made. In the absence of party choice, or for non-contract and tort claims, other provisions then came into play to determine which courts should decide a dispute. These rules provided certainty in cross-border disputes involving EU parties.

What is the position now?

Although there are some transitional provisions to maintain the prior rules for legal proceedings which were commenced before 1 January 2021, for proceedings commenced after this date the UK no longer enjoys the benefits of the Brussels and Lugano regimes, leading to more uncertainty. Now, the position may be governed by the Hague Convention 2005, or by national laws of the EU27.

If a contract concluded on or after 1 January 2021 contains an exclusive jurisdiction clause (i.e. agreement that the courts of a given country shall have jurisdiction to hear disputes, to the exclusion of other courts), that choice should be respected under the rules of the Hague Convention between UK courts and all courts of the EU27. This means that, if there is an exclusive jurisdiction clause, other courts within the UK and the EU27 should decline jurisdiction, largely as before.

However, there are important limitations on the application of the Hague Convention:

  • First, it does not apply to certain categories of dispute, for example consumer claims, employment claims, intellectual property or claims relating to rights in rem in immovable property.
  • Second, it applies only to exclusive jurisdiction clauses. If the parties have agreed a non-exclusive clause (where the courts of two or more different countries may hear a dispute) then the Hague Convention does not apply. If the parties have agreed an asymmetric clause (where party A can only bring proceedings in one country, but Party B has a choice about where to bring proceedings) then there is considerable uncertainty whether the Hague Convention applies (and the UK Court of Appeal indicated recently, earlier this month, albeit obiter, that it would not).
  • Third, there is uncertainty about whether EU courts will respect even an exclusive jurisdiction clause entered into before 1 January 2021. That is because the European Commission's position to date, as expressed in its Notice to Stakeholders, has been that the UK only acceded to the Hague Convention in its own right on this date, and the EU is ignoring the period from 2015 when the UK was a member only by virtue of its EU membership. The EU presently takes the view that there is a gap in the UK's membership, and the Hague Convention only applies to contracts after it came into force in a country - it is now for the local courts in each EU27 country to consider that argument if a defendant takes the point in any claim. It is technically possible of course that that argument could also be run in a UK court, as the view of the UK government, that there has been continuity of membership since 2015, is simply that - a view.
  • Finally the Hague Convention is untested. Most countries which have acceded to the Hague Convention are EU countries, and given EU countries already have the Brussels and Lugano regimes there has been little need for disputes to have tested the Hague Convention.

If, for any of the above reasons, the Hague Convention does not apply, then questions of jurisdiction fall to be decided by national courts, applying national laws. This gives rise to more uncertainty about which courts may hear a cross-border dispute, and an increased risk of satellite litigation (and the return of anti-suit injunction applications, and possibly even abusive litigation tactics, in contract claims between UK and EU parties). It means that, rather than applying consistent rules across the EU, procedures around jurisdiction are likely to be less uniform, and may require more local law advice in other jurisdictions. In extreme cases, it may mean parallel proceedings in more than one EU state, and even inconsistent decisions.

Arbitration

Arbitration is not directly affected by Brexit in the same way as court jurisdiction is affected. In arbitration, the arbitral tribunal's powers are contained in the parties' agreement to arbitrate, and in any arbitration rules (institutional or ad hoc).

However, the position on enforcement (see below) may mean parties wish to consider choosing arbitration as the forum for their disputes.

Enforcement

What is it and why does it matter?

Enforcement is the process of realising a court judgment or arbitral award. In most cases it takes the form of obtaining actual payment of any damages and costs which the successful party has been awarded. Enforcement is a vital consideration in cross-border disputes, where the loser (and its assets) are likely to be situated in another jurisdiction. The winner may therefore need to 'export' a judgment or award obtained in one country and enforce it in another.

Courts

What was the position before Brexit?

The Brussels and Lugano instruments, which determine jurisdiction, also contained provisions for the reciprocal enforcement of court judgments within the EU. This simplified the process of enforcing a judgment from the courts of one EU state in another.

What's the position now?

Although there are transitional provisions which relate to judgments in proceedings which were commenced before 1 January 2021, the Brussels and Lugano instruments do not apply to proceedings after that date. This means that UK has lost valuable reciprocal arrangements with the EU for enforcement of one another's judgments. Whilst it will still be possible to enforce a UK judgment in the EU and vice versa, the process is likely to be less efficient in terms of all of process, time and cost.

Where the Hague Convention applies (see above), judgments given by the courts of one signatory will be enforceable in the courts of another. But this is subject to the limitations on applicability of the Hague Convention, noted above, and is expected to be a costlier and more time-consuming process than enforcement under the Brussels or Lugano rules.

Where the Hague Convention does not apply, then enforcement is subject to national laws in the country where enforcement is sought. For example, to enforce an EU judgment in the UK, the judgment creditor would need to bring a new claim in the UK courts, citing the foreign judgment as proof of debt. Whilst this process has been used for many years in relation to other countries with whom we do not have reciprocal enforcement arrangements, it is a significant step backwards in terms of efficiency, compared to the benefits we enjoyed as a member of the EU. Again, it means there may be less uniformity in enforcement procedures around the EU, and more local law advice will be needed.

That said, there are some pre-1973 bilateral treaties with some of the EU27 states that are likely still to be valid and can be relied on - but as well as being somewhat old law, and possibly a bit out of date as to 21st century courts and processes, again these will always likely be more cumbersome, slower and expensive than the Brussels or Lugano rules.

One exception is Norway - the UK and Norway have concluded a bilateral arrangement which effectively continues the operation of the Lugano Convention as between them.

Arbitration

What was the position before Brexit?

The UK and all members of the EU have acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Each country which has acceded to the New York Convention commits to allowing in general terms for the enforcement of foreign arbitral awards. Most (but not all) countries in the world have acceded to this treaty and therefore for those drafting and negotiating contracts this is a key attraction in using arbitration.

What is the position now?

No change. Brexit has no impact on the New York Convention.

What can I do to mitigate these risks?

First, we should not overstate the risks arising from these changes. The key risk on enforcement for example is not that UK court judgments will be unenforceable in the EU and vice versa, but that the enforcement process will become less certain, less uniform and is likely to be more expensive and time consuming.

To minimise this uncertainty, parties can use express and exclusive jurisdiction clauses in contracts concluded after 1 January 2021, in order to engage the Hague Convention. Parties to contracts concluded between 10 October 2015 and 1 January 2021 may also want to consider restating their exclusive jurisdiction agreement to ensure that the Hague Convention (as interpreted by the EU) would apply. This will give some degree of certainty about how matters of jurisdiction and enforcement will be decided in EU cross-border disputes.

Alternatively, in new contracts, parties can consider submitting disputes to arbitration instead of courts. The New York Convention regime is independent of the EU and unaffected by Brexit, but all EU member states are signatories to it, meaning that it may be simpler to enforce arbitration awards than court judgments. Indeed, this is already a key attraction of arbitration, notwithstanding Brexit.

However, enforceability of a judgment or award is only one factor (though an important one). This tail should not necessarily wag the dog, and parties should consider the other inherent features of litigation / arbitration (or indeed of non-exclusive or asymmetric jurisdiction clauses) as well as the circumstances of any given relationship, rather than applying a one-size fits all approach.

Our experience to date is that typically where pre Brexit a contract would be subject to English law and exclusive jurisdiction, then many people are taking the same approach. However it is important post Brexit to weigh up the decision of what is best for a particular contract and relationship.

Are we expecting any further change?

The UK formally requested to accede to the Lugano Convention in its own right in April 2020. Accession requires the unanimous support of all current members (the EU27 and the EFTA states). Unsurprisingly, the UK's accession was not approved while trade negotiations were ongoing - the EFTA states agreed, but the EU did not. Now that a UK/ EU deal has been struck, it is anticipated that the UK will be allowed to accede to the Lugano Convention, although the attitude of the EU may well be influenced by the wider politics. This would provide access to improved regimes on jurisdiction and enforcement of judgments with the EU, although Lugano is still not as comprehensive as the Brussels regime which the UK is no longer part of.

However, even if approved, there will be a time lag, as there is a three month period between accession being approved and the Convention coming into force.