Brexit: Barnier Calls on Businesses to Review their “Contract Clauses”
29 November 2017
This afternoon (29 November 2017), the EU’s chief negotiator Michel Barnier sent a clear message to “all businesses”. He said, “Whatever the outcome of the current negotiations, there will be no business as usual.” He went on to call upon all businesses to “analyse with clarity their exposure to the UK…including contract clauses”. So what might this mean in practice?
Whilst a review of contracts in light of Brexit gives rise to a myriad of issues, this note focuses on the key changes that may arise in the areas of governing law, jurisdiction and enforcement.
English law and the English courts are often perceived as the governing law and jurisdiction of choice for commercial contracts. The impact of Brexit upon jurisdiction, choice of law and enforcement of judgements in business contracts will therefore be a critical issue for numerous businesses operating within the current single market and beyond. Indeed in a House of Commons Justice Committee Report of March 2017 (the House of Commons Report), it was recommended that protecting the UK as a top-class commercial law centre should be a major priority for the Government in the negotiations “given the clear impacts on the UK economy of failure to do so.”
The ability to fight battles at home and avoid the consequences of less reliable and more expensive litigation can be a key point in any commercial contract negotiation. The present regime in the UK, and indeed the EU, is governed by the Recast Brussels Regulation (EU 1215/2012). First established as an international treaty (the 1968 Brussels Convention), it was superseded by EU law as the Brussels Regulation in 2001, which was then recast in 2012.
The general governing principle is that of party autonomy. Brussels Recast ensures (save in the case of some limited exceptions) that clauses in contracts specifying jurisdiction are respected and that judgments in the UK apply across the EU. It also protects UK residents from being sued in unconnected EU courts. To this end the rules provide that where there is no exclusive jurisdiction clause in a contract, persons domiciled in a Member State should be sued in that State, or in another Member State which is the place for performance of a contractual obligation, or in tort claims, in the courts for the place where the damage occurred. It is most likely that the UK will cease to be a party to the Recast Brussels Regulation when it leaves the EU. There are several reasons for this:
1. Competition: remaining Member States may see this as an opportunity to encourage litigation back to their own Courts that heretofore may have been lost due to the perceived economic benefits of London/English law exclusive jurisdiction clauses; and
2. CJEU: as it seems that the UK will not be subject to the jurisdiction of the European Court of Justice (CJEU) post-Brexit, ensuring consistency of decision making between the UK and the remaining Member States will be challenging, if not impossible.
The outdated original 1968 convention might still apply, but it does not include all Member States. The Lugano Convention 2007 (Lugano II) brings EFTA nations into the Brussels regime, and whilst modelled on Brussels prior to recasting it does not include some updated features such as streamlined enforcement and greater protection for exclusive choice of court agreements. Nevertheless, the UK would need to formally accede to this treaty, which would require the consent of all parties.
There is also a 2005 Hague Convention on Choice of Court Agreements, it applies between EU Member States, Mexico & Singapore. Again, the UK would need to sign up separately – and this only addresses exclusive jurisdiction clauses. Notably the House of Commons Report accepts that this is considerably weaker than the Brussels Regulation. Denmark agreed a bespoke version of the Brussels Regulation with the EU in 2005: however the agreement—gives the European Court of Justice jurisdiction on interpretation— something that the UK government has stated its repeated opposition to in the negotiations.
The House of Commons Report acknowledges that the UK government cannot incorporate the Recast Brussels Regulation into domestic law unilaterally because the Regulation requires reciprocity. It goes on to state that a free standing commitment in UK domestic law would neither require other Member States to return the favour nor provide a mechanism for the resolution of any disputes arising on these matters. It concludes that the government should in any event aim to replicate the Recast Brussels Regulation as closely as possible, and further notes that a limited role for the ECJ for procedural legislation may be “a price worth paying”, despite government’s current intentions.
Some commentators have also raised the question as to whether Brexit will pave the way for anti-suit injunctions becoming available to UK courts again. Anti-suit injunctions are prohibited under the EU regime. They were available when a party to a contract containing an exclusive jurisdiction clause in favour of the UK courts commenced proceedings before a court of another jurisdiction, in breach of the clause. Whilst UK courts would not interfere with the jurisdiction of the foreign court, they could exercise restrictions on a party over whom the court had jurisdiction.
The corollary of course is that remaining EU Member State courts would be free to grant anti-suit injunctions to restrain a party from pursuing a claim before the UK courts, provided that the mechanism is available in the relevant Member State.
Enforcement of judgments, like jurisdiction, is governed by the Brussels Regulation. The key principle is that judgments made by Member State courts will be recognisable and enforceable in other Member States. Although there are limited exceptions to the rule (including public policy, where a judgement is irreconcilable with another judgement and/or in a case where the defendant has not been served), it has provided parties with the confidence that judgements can be enforced regardless of the location of the other party’s assets without resorting to further litigation. The position post-Brexit depends on whether the UK became party to some other regime, such as the Lugano Convention, or negotiates its own agreement with the EU.
3. Choice of Law
In terms of applicable law issues, that is to say, the law which governs disputes (as opposed to questions of about which court hears them), the position as regards choice of law clauses is thankfully more straightforward. It is governed by the Rome Regulation which gives effect to any clause which designates applicable law, whether or not that law is the law of an EU Member State. Therefore, when the UK leaves the EU a choice of law clause in favour of a UK jurisdiction ought to be upheld. The House of Commons Report notes and recommends that the Rome Regulation should be incorporated into domestic law, which unlike the Brussels Regime, does not require reciprocity.
4. So what should businesses do in contract negotiations in this negotiation phase?
It seems unlikely that the existing system, at least insofar as it relates to jurisdiction clauses and enforcement will remain intact post-Brexit.
Our advice at this juncture is simply:
1. review existing material contracts (if there is a belief that a dispute is at least possible) to determine whether Brexit might pose any difficulty particular in terms of jurisdiction and enforcement;
2. include exclusive jurisdiction clauses in all future agreements (on the assumption that at least the Hague Convention is likely to apply);
3. consider including arbitration clauses as the UK is party to the New York Convention 1958 and therefore UK arbitral awards are enforceable in 156 states around the world – and this will not change post-Brexit; and
4. note that in absence of a deal that would prohibit doing so, it may be open to commercial organisations engaging in cross border trade to avail of the anti-suit injunction mechanism.
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