UK: The Recast Brussels Regulation: Enhancing The Effectiveness Of Jurisdiction Agreements

Last Updated: 30 April 2014
Article by Ian Chetwood and Reema Shour

Reforms to the Brussels Regulation (on jurisdiction, recognition and enforcement of judgments in civil and commercial matters in the EU) apply from 10 January 2015. In an article in our Winter 2014 Shipping E-Brief ("The recast Brussels Regulation: reinforcing the arbitration exception" – see link below), we considered how certain of the changes might affect the interaction between proceedings in court and arbitration. In this follow-up article, we address a different topic: how the recast Regulation is intended to strengthen choice of court (i.e. exclusive jurisdiction) agreements.

Background - jurisdiction under the Regulation

The general rule in the Regulation is that a defendant must be sued in the courts of his country of domicile (Article 2). There are various exceptions – for example, in relation to contract matters (where the defendant may be sued "in the courts for the place of performance of the obligation in question") and tort (where he may be sued "in the courts for the place where the harmful event occurred or may occur") (Article 4). A further exception is where there is an exclusive jurisdiction agreement: an EU member state court will have jurisdiction over a dispute where the parties have agreed that it should do so, provided at least one of those parties is domiciled in the EU (Article 23).

The Regulation also provides for what is to happen if proceedings are started in different EU member states in relation to the same cause of action and between the same parties. In that event, the court first seised takes precedence. The court second seised is required to stay its proceedings - until the first court has determined whether or not it has jurisdiction (Article 27).

The lack of flexibility in the application of Article 27 has proved controversial and been widely criticised, not least since it allows for disruptive litigation tactics to flourish. These include the so-called "torpedo" or "Italian torpedo", where a party prospectively facing a claim takes the pre-emptive step of seeking a declaration of non-liability, usually in his local court, while being fully aware that a court in a different member state is provided for in a jurisdiction agreement. The strategy is aimed at delay and obstruction, and at taking advantage of the strictly applied lis pendens rule in Article 27. In Research in Motion v. Visto Corporation [2008] EWCA Civ153, the Court of Appeal noted that:

"much ingenuity is expended on all this elaborate game playing...A party who fires an Italian torpedo may stand to gain much commercially from it. It would be wrong to say that he is "abusing" the system, just because he fires the torpedo or tries to".

Difficulties have been caused, not least since the automatic stay in Article 27 has operated regardless of whether the "torpedo" proceedings are started with any genuine belief that the court first seised will ultimately retain jurisdiction. Matters have then been compounded by the fact that some courts are unwilling to decide jurisdiction as a preliminary issue, but will only do so at the same time as hearing the substantive merits of the case.

Issues concerning Article 27 were considered by the Supreme Court in London at the end of last year in The Alexandros T [2013] UKSC 70. In that case, proceedings were brought in Greece by assureds against their insurers, for claims in tort based on Greek law that were associated with the insurers' conduct when handling a total loss claim. The insurers then commenced proceedings in England against the assureds, arguing that the Greek proceedings breached English exclusive jurisdiction agreements. One question was whether the Greek and English actions involved the "same cause of action" for the purposes of Article 27, such that they might give rise to irreconcilable judgments. The Supreme Court held that a claim for damages and/or an indemnity for breach of an English exclusive jurisdiction agreement does not involve the same cause of action as (and is not the mirror image of) foreign proceedings said to be started in breach of that agreement.

The relevant reforms

The strict application of the court first seised rule has been relaxed by the re-cast Regulation in situations where there is an exclusive jurisdiction agreement. Article 31(2) of the revised Regulation provides that if the parties have agreed to the exclusive jurisdiction of the courts of an EU member state and proceedings are commenced in those courts, the courts of any other member state in which proceedings have also been commenced shall stay their proceedings. For these purposes, it is irrelevant which set of proceedings was commenced first. It is then for the courts to which exclusive jurisdiction has been granted by the parties to decide whether the jurisdiction agreement is valid and effective.

So precedence to decide on the validity and scope of an exclusive jurisdiction agreement will no longer be given to the court first seised; provided an action is started in the EU court designated in the jurisdiction agreement, the decision on jurisdiction will rest with that designated court.

This revision is welcome and should go some way towards defusing the torpedo and enhancing the effectiveness of jurisdiction agreements.

In addition to this reform of the rules on lis pendens, Article 23 has been amended (becoming new Article 25) so as to extend the scope of jurisdiction agreements. There is no longer a requirement that at least one of the parties must be domiciled in the EU. However, the Regulation does not apply where the exclusive jurisdiction provided for is a non-EU member state court. And it should also be noted that neither new Article 31(2) nor new Article 25 will assist a party in the case of a non-exclusive jurisdiction agreement (although, by Article 25, an agreement as to jurisdiction will be considered to be exclusive, unless the parties have agreed otherwise).

There are also new provisions (new Articles 33 and 34) giving EU member state courts a discretion to stay their proceedings where earlier proceedings have been commenced in the court of a non-EU "third state". The EU court is not obliged to order a stay, but has a discretion to do so having assessed "all the circumstances in the case before it" (Recital 24). Some of the factors that the EU court may consider in deciding how to exercise its discretion are stated to include: connections between the facts of the case, the parties and the non-EU state concerned, how far the proceedings in the non-EU court have progressed by the time proceedings are initiated in the EU member state court, and whether or not the non-EU state court can be expected to give judgment within a reasonable time. The EU court may also take into account any exclusive jurisdiction clause in favour of the non-EU court in deciding how to exercise its discretion. So whilst a jurisdiction agreement in favour of a non-EU member state does not oblige an EU court to stay its own proceedings, it can be a factor influencing that EU court's discretion as to whether or not to grant a stay.

It is worth noting that the recast Regulation expressly provides that jurisdiction agreements are separable from the main contract (Article 25(7)), so that their validity cannot be contested solely on the basis that the main contract is alleged to be invalid. This reflects the English common law position, as confirmed by the House of Lords in an Ince case in 2007, Fiona Trust v. Privalov.

Comment

These reforms follow a long period of consultation. The UK Government's position was that reform was "an important priority" and the UK has opted into the changes.

Our view is that there was a clear case for changes to be made to the Regulation in relation to exclusive jurisdiction agreements and the impact of the court first seised rule. The strengthening of the protection given to exclusive jurisdiction agreements – and in particular the precedence given to the courts chosen by the parties, to decide on the agreement's validity and application - is an overdue change, but one that is most welcome.

http://incelaw.com/ourknowledge/publications/the-recast-brussels-regulation-reinforcing-the-arbitration-exception

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