On 14 December the European Commission published its proposals for significant changes to the Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels Regulation). After a consultation that closed on 11 February, the UK government decided to opt in to the negotiations and the resulting reforms and a letter was sent to that effect to the Hungarian Presidency and European Commission on 31 March 2011. During a debate in the House of Commons (European Committee B) on 28 March 2011 some strong indications were given as to the position the Government is going to take in relation to some of the key issues raised by the proposals. Please click here for our e-bulletin on the Proposals and here for a link to the Hansard extract of the debate preceding the Government's opt in.

Negotiations are likely to focus on jurisdiction rules applicable to non-EU defendants, the enforcement of judgments across the EU where the judgment raises public policy concerns in the enforcing country and the interface between arbitration and the Brussels Regulation which is a particularly controversial issue amongst the arbitration community. The following sets out the likely direction of the Government's negotiations in relation to these key issues and some further thoughts on the likely impact of the proposed reforms.

Enabling the immediate enforcement of judgments across the EU

Currently, judgment creditors need to go through an enforcement process (known as exequatur) in the enforcing country before they may take enforcement measures against the assets of a judgment debtor. This results in delay and costs for judgment creditors but also puts judgment debtors on notice and allows them to challenge the enforcement on limited grounds before enforcement measures can be taken. For example, in the case of a default judgment the judgment debtor may challenge the enforcement in the enforcing court on the basis that he was given no or insufficient notice to allow him to defend the proceedings. The current rules also allow a consumer or insured to challenge the enforcement of a judgment obtained in the court of a Member State which is not in the Member State of his or her domicile.

The Proposal either abolishes these safeguards or revises them to the detriment of judgment debtors. In particular, in the case of default judgments the judgment debtor would be required to challenge the judgment in the originating court and consumers sued in a foreign court in breach of protective jurisdiction rules (requiring that they are sued at their place of domicile) would have to engage with the foreign proceedings to stop a judgment being entered against them. Most controversially, the Proposal abolishes the right of the judgment debtor to challenge the enforcement of a judgment on the grounds of public policy, for example where a judgment is obtained in relation to a contract which would be considered illegal in the enforcing state. This is likely to be good news for judgment creditors seeking speedy enforcement of judgments, but can give rise to problematic results for judgment debtors who face the enforcement of judgments which have been obtained without their knowledge or based on illegal contracts or as a result of fraud.

The Government has indicated that it will negotiate to retain the public policy defence against enforcement and to establish appropriate safeguards for the judgment debtor, in particular, where there is an allegation of fraud. The public policy issue appears to be a concern raised by a number of Member State governments and the UK Government has expressed confidence that it will achieve an acceptable outcome in this respect.

Loss of the national jurisdiction rules in relation to non-EU domiciled defendants

Currently, English jurisdiction rules are fairly liberal and allow claimants to bring proceedings in the English courts where, for example, a contract is entered into or breached in the jurisdiction or a defendant has been served with proceedings while present in the jurisdiction. These rules are well established and used regularly.

The Proposal abolishes all national jurisdiction rules and replaces them with the often narrower and more rigid jurisdiction rules contained in the Brussels Regulation which currently only apply to EU domiciled defendants. It is likely that the Proposal would result in the complete loss of the English courts' ability to stay proceedings on grounds that another court is a more convenient forum to hear the dispute, which in turn may result in more parallel proceedings and inconsistent judgments.

This Proposal is very controversial and although an overwhelming majority of responses to the MoJ's consultation (86%) suggested that the UK should opt in to the reforms, 100% of responses raised concerns about the extension of the Regulation's jurisdiction rules to non-EU defendants.

The Government has indicated that it will seek to either retain the national rules in addition to the Regulation's rules or to introduce additional jurisdiction rules into the Regulation which would replicate the "lost" national rules. It is not entirely clear what position the Government will take in relation to the English courts' ability to stay proceedings.

Arbitration agreements and the Brussels Regulation

The widely publicised and criticised ECJ decision in West Tankers (please click here for our e-bulletin) has resulted in an unsatisfactory weakening of arbitration agreements. Following West Tankers, EU Member State courts may decide upon the existence, validity and scope of arbitration agreements as a preliminary issue where substantive proceedings are brought in breach of an arbitration agreement. The Member State court at the seat of the arbitration can not stop such proceedings (eg by issuing an anti-suit injunction) and must recognise the finding made by the court seised in breach of the arbitration agreement.

The Proposal seeks to address the problem by providing that proceedings brought in a Member State court will need to be stayed if there is an arbitration agreement and parallel proceedings have been brought either with the arbitral tribunal or before the Member State court at the seat of the arbitration.

The arbitration community is split on the issue as to whether this is the best solution or whether West Tankers should be completely reversed and arbitration entirely excluded from the Brussels Regulation. The absolute exclusion of arbitration would result in two parallel regimes (under the Brussels Regulation and the New York Convention on the recognition and enforcement of foreign arbitral awards respectively) operating independently from one another. The problem with this is that this would not resolve the situation in which a Member State court is faced with requests to enforce a judgment under the Brussels Regulation and an inconsistent arbitral award under the New York Convention.

However, the Government has indicated that it will attempt to negotiate for a fully comprehensive exclusion of arbitration from the scope of the Brussels Regulation and that there is support from other Member States for this approach.

What next?

The Commission's Proposal and the ensuing negotiations are likely to generate a lot of debate. Any reforms are not expected to be agreed and brought into affect until late 2012 or 2013. Herbert Smith has been involved in the MoJ's consultation process and we will continue to monitor developments and provide assistance as and when required. As emphasised by Parliamentary Under-Secretary of State for Justice, Jonathan Djanogly, the Brussels Regulation represents "an important area of law that has significant impacts on daily business and the UK economy as a whole. It is a fundamental building block for EU and global trade."