The UK Government has clarified that it will not unilaterally continue to apply existing EU civil judicial cooperation arrangements if reciprocity cannot be agreed as part of a withdrawal agreement. Rather, in the event of a “no deal” Brexit, it will repeal certain parts of the legislation underpinning EU civil judicial cooperation mechanisms in the UK. Specifically, it will repeal the arrangements for recognition of jurisdiction and judgments, as well as certain procedures for dealing with uncontested debts and small claims. However, it will continue to participate in the existing arrangements for determining governing law.
Previously, it had been expected that the UK would unilaterally continue to adhere to these mechanisms by virtue of the EU (Withdrawal) Act 2018, which automatically incorporates all EU Regulations into domestic UK law on the date of withdrawal unless specifically excepted or amended by secondary legislation. A special parliamentary scrutiny process has been set up to oversee the making of such legislation.
In its guidance note Handling civil legal cases that involve EU countries if there’s no Brexit deal (the “Guidance”), published on 13 September 2018, the Government stresses that it still considers a “no deal” Brexit to be unlikely, but is setting out its plans for such an eventuality in order to allow businesses to make informed preparations.
The Guidance covers three areas of interest to businesses:
- Governing law
- Jurisdiction and enforcement of judgments
- Cross-border legal procedures for insolvencies, uncontested debts and small claims
No change to governing law
At present, UK courts and other EU courts recognise choice of law clauses by virtue of the Rome I and Rome II Regulations (EC 593/2008 and EC 864/2007) and the Rome Convention (OJ C27, 26.01.1998, p.34) – together, the “Rome Regime”. Clauses are recognised under the Rome Regime regardless of whether the chosen law is that of an EU member state or not, since this regime does not require reciprocity. The Rome Regime also determines the governing law where there is no express choice of law by the parties. However, as the rules for identifying the governing law are complex, in the interests of certainty it is advisable to include an express choice of law clause in all contracts with a cross-border element.
Non-EU courts, including EFTA courts, apply their own domestic conflicts of laws rules or bilateral treaties.
The Guidance states that even in the event of “no deal”, the UK will retain those EU rules that do not rely on reciprocity to operate, including the Rome Regime. There will therefore be no change to existing arrangements regarding governing law.
Hague would replace Brussels and Lugano on jurisdiction
Currently, UK courts and EU courts mutually recognise jurisdiction clauses under the Brussels I Recast Regulation (1215/2012). UK courts and EFTA courts follow a similar regime under the Lugano Convention (OJ L 339, 21.12.2007, p.3). These instruments also provide rules for determining jurisdiction in the absence of an express choice by the parties, as well as streamlined procedures for the mutual recognition and enforcement of judgments within the EU and EFTA countries.
The Government has announced in its Guidance that it will repeal the domestic rules implementing these arrangements if there is no withdrawal agreement. However, the Government also confirms that the UK will accede in its own right to the Hague Convention on Choice of Court Agreements (the “Convention”), which it currently participates in by virtue of its EU membership.
The Convention provides a regime for the recognition of exclusive jurisdiction clauses, and for judgments given pursuant to such clauses, as well as provisions against forum shopping similar to those in the Brussels I Recast Regulation. Any country can accede to the Convention without the consent of the existing member states, and the Government has already laid a draft statutory instrument before Parliament in preparation for the UK’s planned accession. This provides for the UK to continue to apply the provisions of the Convention unilaterally during the expected three-month transition period between the withdrawal date and the Convention coming into effect in respect of the UK in its own right. The current member states are the EU, Mexico, Montenegro and Singapore. To date, none of the EFTA countries (Iceland, Norway, Liechtenstein and Switzerland) have ratified the Convention.
Where there is no exclusive jurisdiction clause, the Convention does not apply. The Guidance notes that in such cases, the English courts will apply common law conflicts of laws rules to decide whether or not to recognise the jurisdiction of an EU court or whether to enforce a judgment given by such a court. Common law rules on conflicts generally recognise a contractual jurisdiction clause, even if non-exclusive, and enforce the resulting judgment by means of a so-called “action on the judgment” without reopening the merits. The common law rules where there is no jurisdiction clause at all are more complex, however, and as at present, the inclusion of an express clause will be preferable wherever possible.
Similarly, where there is no exclusive jurisdiction clause and in the absence of a withdrawal agreement, each EU country will apply its own rules when considering whether or not to recognise the jurisdiction of a UK court or to enforce a UK judgment. Some EU countries view non-exclusive jurisdiction clauses unfavourably as a matter of public policy, especially asymmetric clauses in which one party has the benefit of non-exclusivity and the other does not. The ease of enforcing a judgment that is not based on an exclusive jurisdiction clause will also vary.
Common law rules will also apply when English courts are considering jurisdiction and enforcement of judgments in relation to EFTA courts, and those courts will apply their local rules when considering the same questions in relation to UK courts. The ease of enforcing jurisdiction clauses and judgments in these countries will vary accordingly, although again, non-exclusive clauses are more likely to give rise to difficulties than exclusive provisions.
Arbitration is already commonly used to avoid enforcement issues between jurisdictions that do not have reciprocal enforcement treaties (e.g. between the UK and the US or Singapore). It may now also be considered as an alternative to litigation between the UK and the EFTA countries (Iceland, Liechtenstein, Norway and Switzerland), at least until such time as the EFTA countries join the UK and the EU in acceding to the Convention. Since arbitration is governed by the New York Convention rather than by any EU instrument, the enforcement of arbitration clauses and awards will be unaffected by Brexit.
Changes to cross-border legal procedures
The Guidance explains that, in the event of a “no-deal” Brexit, the UK Government will repeal the majority of the EU Insolvency Regulation. UK courts will nevertheless continue to recognise EU insolvencies provided they meet the criteria under the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), which was incorporated into UK domestic law in 2005. The main requirements of the Model Law are that:
- the debtor must either be present in the UK or have submitted to its jurisdiction; and
- the UK court must be satisfied that the interests of the debtor and creditors will be adequately protected (which is unlikely to present any serious difficulty in most cases involving EU countries).
Poland, Greece, Slovenia and Romania have also implemented the Model Law and would therefore recognise UK insolvency decisions on the same basis. However, the remaining EU countries have not implemented the Model Law and would apply their local rules when considering whether or not to recognise a UK insolvency.
The UK Government will also repeal the legislation implementing the EU Service of Documents Regulation (1393/2007) and Taking of Evidence Regulation (1206/2001) within the UK if no withdrawal agreement is reached. Instead, it would continue to apply the Hague Conventions covering these topics, which almost all EU countries have ratified. Austria, however, has not ratified the Hague Service Convention. As a result, after a “no deal” Brexit, claimants who need to serve UK proceedings on an Austrian defendant will have to do so by diplomatic or consular means unless the defendant has appointed an agent for service of process in the UK.
Finally, in the absence of a withdrawal agreement, the following procedures which deal with small claims and uncontested debts would cease to apply in the UK and would not be replaced:
- The European Enforcement Order
- The European Order for Payment
- The European Small Claims Regulation.
Most substantial businesses are unlikely to have made a great deal of use of these procedures in any event.
The Guidance will be disappointing to UK businesses when compared to the Government’s earlier position paper from August 2017, which we covered in a previous Law-Now. While a unilateral commitment to the existing procedures may have been politically unattractive, it did have the advantage of assuring businesses that choosing the UK as a dispute resolution venue would guarantee a continuity of approach by the courts, regardless of whether or not EU members were willing to reciprocate.
Nonetheless, the practical considerations for businesses are largely unchanged. The key points to note in order to manage any perceived “Brexit risk” for dispute resolution procedures are as follows:
- Including express choices of law and jurisdiction will avoid most difficulties, whether or not a withdrawal agreement is reached. In order to maximise enforceability, the choice of jurisdiction should be exclusive and apply equally to both parties.
- When providing for UK jurisdiction in a contract with an Austrian counterparty, it would be prudent to request the appointment of a UK agent for service of process.
- To avoid any uncertainties regarding enforcement, parties may wish to consider choosing arbitration rather than litigation in contracts between UK and EFTA parties (Iceland, Liechtenstein, Norway or Switzerland) or seek specific legal advice on enforceability in the circumstances of their contract.