UK: Brexit: Implications For Rules On Jurisdiction And Enforcement

Last Updated: 17 August 2016
Article by Jonathan Scrine

Summary and implications

Of the numerous commercial issues to get to grips with as the UK prepares to leave the EU, the consequences for intra-EU litigation will not understandably be at the forefront of businesses' minds.

This article looks at the impact of some potential rule changes to be aware of, specifically those affecting the location where claims are heard and the enforceability of court judgments. In a separate article, Stefanie Day discusses the wider implications of Brexit for cross-border litigation in the EU.

Jurisdiction

EU law provides a harmonised system for deciding which member states' courts have jurisdiction over legal proceedings in civil and commercial matters. The courts of a particular member state will have jurisdiction if the parties have agreed that they should do so. Otherwise, the courts of the defendant's domicile will have jurisdiction (subject to some exceptions). This principle safeguards defendants against member states exercising jurisdiction over them beyond their geographical territory.

If proceedings are commenced in the courts of more than one member state, the "court first seised" has priority to decide its own jurisdiction. If jurisdiction is established by that court, any other court is effectively prevented from hearing the claim. The "court first seised" principle is subject to an important caveat which gives priority to the courts of another member state if the parties agreed that it should have exclusive jurisdiction.

When the UK exits the EU, the current rules giving effect to jurisdiction agreements in favour of the English courts will no longer apply. Those agreements are still likely to be upheld by the English courts. However, where proceedings are initiated in one of the 27 remaining member states, jurisdiction will be decided by that member state's national laws. Similarly, the basic principle that a defendant should be sued in their place of domicile will also cease to have effect. It would then be possible for other member states to exercise jurisdiction over UK-domiciled defendants on national law grounds. UK defendants would be compelled to defend themselves before the courts in those member states. The above scenarios, should they transpire, would engender substantial uncertainty.

One potential option is for the UK to accede to the 2007 Lugano Convention between the EU and EFTA states (other than Liechtenstein). This is similar to the existing regime and is also founded on the principle that claims should be heard in the state in which the defendant is domiciled.

Notably, however, the Lugano Convention does not include the caveat enshrined in the existing rules ensuring that the court nominated in an exclusive jurisdiction agreement takes precedence over the one "first seised". This is a significant drawback, as the rule was intended to reduce the ability of a party to delay pending proceedings by purposely initiating parallel proceedings in a member state other than the one nominated in an exclusive jurisdiction agreement. That court would then have priority to determine its own jurisdiction. Without a similar rule in place, there is a risk parties will be able to resort to employing this tactic, which can be extremely costly, time-consuming, and frustrating for counterparties to contend with.

Enforcement

Judgments of EU member state courts benefit from a regime of reciprocal recognition and enforcement. This applies whether or not the parties are based within the EU. Therefore, an English judgment in a dispute between parties domiciled in the US and India will be enforceable in France, for example, just as a French judgment between parties domiciled in Germany and Spain will be enforceable in England. The regime provides a degree of predictability for judgment creditors, as there are limited legal grounds for judgment debtors to contest recognition and enforcement.

Enforcing an English judgment could become a lot harder if the UK fails to enter into an alternative agreement following Brexit. The process would then hinge on the national laws of member states ordinarily applicable to the enforcement of foreign judgments from outside the EU. The procedure for applying to have a judgment recognised or enforced within the EU is likely to become more complicated and protracted as a consequence. In some circumstances, judgment creditors might find that recognition or enforcement of a judgment, which would otherwise have been automatic under the EU regime, can be successfully resisted due to the availability of additional legal defences. Advice on local law and procedure would be needed.

Conclusion

There could be significant commercial repercussions if the UK leaves the EU without arranging to replace the existing rules on jurisdiction and enforcement. However, it is more likely than not that the UK will enter into some form of agreement. Whether or not this will be as advantageous as the status quo remains to be seen.

For the time being, the present uncertainty may start to affect commercial decision-making. Question marks over the enforceability of judgments could influence investment decisions by third-party litigation funders, for whom certainty of recovery is invariably a key concern. This might also end up being the decisive factor for some parties in the choice between litigation and arbitration, the attractiveness of which could be enhanced due to the ability to enforce arbitral awards in EU member states under the 1958 New York Convention, which will be unaffected by Brexit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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