European Union: A No-Deal Brexit: The Implications For Disputes

Last Updated: 4 October 2019
Article by Herbert Smith Freehills

As we approach the deadline of 31 October, it is difficult to predict what will happen. But the prospect of a no-deal Brexit – either then or at some later date – remains a very real possibility. In this blog post we consider the implications of such an outcome for commercial litigation involving the English courts. For these purposes, we assume an exit date of 31 October, but the same issues will arise if there is an extension to the current deadline followed by a no-deal Brexit at a later date.

We have also recorded a webinar which explores the issues in more detail, as part of our series of webinars exploring the implications for business of a no-deal Brexit. The series can be accessed here.

Applicable law

When it comes to the law which applies to determine a dispute, very little will change. Currently, in determining applicable law, all EU courts, including the English court, will apply the Rome I or Rome II regulation, depending on whether they are dealing with a question of the law to govern contractual or non-contractual obligations. The starting point under those regulations is that the parties’ choice of law will generally be given effect. It does not matter whether or not the law chosen by the parties, or the law indicated by the rules in the absence of choice, is the law of an EU member state. After Brexit:

  • EU27 courts will continue to apply Rome I and Rome II, and will continue to give effect to a choice of English law to the same extent as currently.
  • The UK government has legislated to incorporate Rome I and Rome II into English law after Brexit, and so the English court will apply the same rules as currently to determine applicable law.
  • And of course the rules that non-EU courts and arbitration tribunals apply to determine applicable law are not affected by Brexit, so again nothing should change.

Jurisdiction clauses and enforcement of judgments

After Brexit, the key EU legislation governing jurisdiction and reciprocal enforcement of judgments, in particular the recast Brussels Regulation, will no longer apply to the UK. Questions of jurisdiction and enforcement as between the UK and the EU27 will then depend, to some extent, on whether the situation falls within the Hague Convention on Choice of Court Agreements 2005.

Before addressing the Hague Convention, however, it is worth pointing out that arbitration with a seat in London will not be affected by Brexit. Arbitration is not regulated by EU law, and the UK and all EU27 states are signatories to the New York Convention 1958. Arbitration clauses will remain effective and arbitral awards will continue to be enforceable in the same circumstances as currently.

Returning to the subject of court jurisdiction and the Hague Convention, the UK is currently party to the Convention by virtue of its EU membership. That will cease if the UK leaves the EU without a deal on 31 October, but in those circumstances the UK will re-join the Convention as a separate party with effect from 1 November 2019. The Convention will then apply to questions of jurisdiction and the enforcement of judgments as between the UK and the EU27 if there is an exclusive jurisdiction clause in favour of either a UK court or the courts of an EU27 state – Hague does not apply to non-exclusive or one-way jurisdiction clauses.

English jurisdiction clauses and judgments:

In general terms, where there’s an exclusive English jurisdiction clause falling within Hague, an EU27 court will defer to the English court to hear the dispute and will enforce any resulting English judgment.

There is however some potential uncertainty over the application of Hague in certain circumstances:

  1. First, where the jurisdiction clause was agreed before exit day. Hague applies only to exclusive jurisdiction clauses agreed after the Convention came into force for the chosen state. The question therefore is whether EU27 countries would treat Hague as having been in force for the UK since 1 October 2015, when it came into force for the EU generally, or only from when the UK re-joins on 1 November. This is something referred to as the “change of status risk”. On the face of it, it's not easy to see why Hague should not be treated as having been in force from the earlier date. However, guidance issued by the European Commission in April 2019 suggests it is taking the view that exclusive English jurisdiction agreements are within Hague only if they are entered into post-Brexit (as explained in this post), although that guidance is not of course binding on the courts that will decide this question in future.
  2. Secondly, due to the UK having suspended its accession to Hague from the original accession date of 1 April 2019 (when Brexit was to take place on 29 March) to the currently anticipated date of 1 November. Some commentators have pointed out that there is nothing express in the Convention about a state’s ability to suspend its accession in this way and have suggested that this may give rise to uncertainty. But in principle it’s difficult to see why this should be a problem, particularly as it seems neither the Hague depository nor the EU nor any of the other contracting states have objected to the suspension.
  3. Third, there is potential uncertainty in relation to issues of jurisdiction where there is no party domiciled in the UK (or another Hague contracting state that isn’t also part of the EU) – so for example if all parties are EU domiciled. In those circumstances, article 26(6) of the Hague Convention provides that the Brussels regime takes precedence over the Convention. The recast Brussels Regulation provides an express power for EU courts to stay proceedings or decline jurisdiction in favour of non-EU courts in only limited circumstances – namely, where the non-EU proceedings are commenced first in time. The upshot is that, if proceedings are started in an EU27 court in breach of an exclusive English jurisdiction clause, and that EU27 court would have jurisdiction under the Brussels regime (for example because the defendant is domiciled there or it was the place of performance of the relevant contractual obligation), there is some uncertainty as to whether the EU27 court is able to defer to the English court (by staying its proceedings or declining jurisdiction) unless the EU27 proceedings were commenced before the English proceedings. The English High Court has found that there is no such power, most significantly in Gulf International Bank BSC v Aldwood [2019] EWHC 1666 (QB) (considered here), and the Court of Appeal has refused permission to appeal against that decision. However, there is no appellate authority, and no CJEU authority, on the point, so it’s certainly possible that a different view could be taken if the point arises in an EU27 court or comes before the CJEU for determination. We understand that, in practice, lawyers in some EU27 jurisdictions take the view that their courts would decline jurisdiction in the face of an exclusive English (or other non-EU) jurisdiction clause in any event.

If the Hague Convention does not apply (either because of the above risks, or because the clause is non-exclusive or was agreed before 1 October 2015) then the EU27 courts will apply their own rules to questions of jurisdiction and enforcement involving the UK. In those circumstances, as noted above, it is uncertain whether an EU27 court would be able to stay proceedings or decline jurisdiction where there is an exclusive jurisdiction clause in favour of the English courts. So far as enforcement of English judgments is concerned, most (but not necessarily all) EU27 countries will enforce foreign judgments even without a specific reciprocal regime, although the type of judgment enforced may be more limited and the procedures involved more time consuming and costly.

What practical steps can be taken if you have an exclusive English jurisdiction clause in your contracts?

  • Obviously if your counterparty is based in the UK, or outside the EU, and has significant assets there, then Brexit isn’t likely to be relevant. But if your counterparty’s assets are all in the EU27, it would be wise to seek local advice as to enforceability of English judgments in the relevant EU27 country (or countries) if Hague doesn’t apply.
  • If enforcement seems problematic, and the contract hasn’t been entered into yet, you may want to think about alternatives, particularly if you’re signing up before 1 November and therefore subject to the change of status risk. Depending on the circumstances, you may decide to go for a non-exclusive English jurisdiction clause, or an arbitration clause, or a jurisdiction clause in favour of an EU27 court – recognising that all of these options have advantages and disadvantages (see this blog post for more detail).
  • If the contract has already been entered into, you may want to think about restating the clause after 1 November so that you can avoid the change of status risk – though obviously that will only be possible if the counterparty agrees.
  • If after Brexit you’re in a situation where proceedings may be needed, and you’re concerned that a counterparty will bring proceedings somewhere in the EU27 in breach of the clause, and Hague may not apply, you may want to get in early and commence English proceedings to have the best chance of being able to nip the EU27 proceedings in the bud. The EU27 court will only have a discretion to stay its proceedings in favour of the English courts, rather than an obligation, but it seems likely that most EU27 courts will respect the parties’ choice of jurisdiction where they are able to do so.

EU27 jurisdiction clauses and judgments:

The English courts will generally respect an exclusive jurisdiction clause in favour of an EU27 (or other) country and enforce judgments given by those countries, subject to limited exceptions. That will be either by applying the current rules, which the UK has said it will do if the EU27 court proceedings were commenced before exit day (see this post), or by applying the Hague Convention, if the proceedings were commenced after exit day but there was an exclusive jurisdiction clause in favour of the EU27 court which was entered into on or after 1 October 2015, or under English common law rules (in which case only money judgments will be enforced).

Other issues relating to jurisdiction

National rules of jurisdiction: Currently, under the Brussels regime, EU courts (including the English court) can take jurisdiction over EU-domiciled parties only in the specific circumstances set out in the recast Brussels Regulation, for example based on the defendant’s domicile, or (in a tort claim) the place where the harmful act occurred. But once the UK is no longer part of the EU, those restrictions will no longer apply. So the English court will be able to take jurisdiction over, for example, an EU27 citizen who is on a brief visit to London, if proceedings can be served personally on that individual during the visit (and subject to the court’s discretion to refuse jurisdiction on the basis that England is not the convenient forum for the dispute). Similarly, an English-domiciled individual or company will be subject to whatever rules of national jurisdiction exist in the various EU27 states.

Anti-suit injunctions: Under the Brussels regime, the UK cannot issue an anti-suit injunction to seek to restrain parties bringing or continuing proceedings in another EU court, as the CJEU held in West Tankers Inc v RAS Riunione Adriatica di Sicurta SpA (Case C-185/07) that this was incompatible with the mutual trust EU member states must accord to one another’s legal systems. But after Brexit, that constraint will no longer apply, and so it seems those sorts of injunctions should be back on the table in respect of EU27 proceedings, particularly where brought in breach of an exclusive English jurisdiction clause.

Permission to serve proceedings out of the jurisdiction: Where the English court has jurisdiction over a dispute under the rules of the Brussels regime, there’s no need to obtain the court’s permission to serve proceedings out of the jurisdiction. That will end after Brexit, though it will still be possible to serve out without permission if there’s an exclusive English jurisdiction clause falling within the Hague Convention and in a limited range of other circumstances. But it seems inevitable there will be many more cases where permission to serve out is needed. The minutes of an October 2018 meeting of the Civil Procedure Rule Committee (CPRC) suggested that an extra cadre of judges might have to be drafted in to deal with permission applications alone. It is not clear whether such arrangements have been put in place.

Other implications for English civil litigation

Methods of service: Where, after Brexit, documents relating to English court proceedings need to be served within the EU27, or vice versa, the EU Service Regulation will no longer apply. Under transitional provisions, however, the Regulation will continue to apply to outstanding requests for documents to be served in the UK, where those requests were received in the UK before exit day. Further, where a party has filed with the English court documents required for service in the EU27, but the documents have not been forwarded to the Senior Master by exit day, the court may treat the request as a request for service under a relevant convention or treaty relating to service (such as the Hague Service Convention) or for service through a foreign government or British Consular authority.

Taking of evidence: The EU Taking of Evidence Regulation will also cease to apply to the taking of evidence as between the English court and courts of EU27 states on Brexit. Under transitional provisions, however, the Regulation will continue to apply to requests received in the UK before exit day. Further, where before exit day the English court has made an order for the issue of a request in another EU state, but the remaining steps have not been taken, the court may treat the order as one for the issue of a letter of request outside the Taking of Evidence Regulation.

Security for costs: Currently, one of the grounds on which a party can obtain security for costs is where the claimant is resident outside the jurisdiction, and not in a state bound by the recast Brussels Regulation, Lugano Convention or Hague Convention. These provisions are intended to protect against the risk of non-enforcement of costs orders in jurisdictions where there is no mutual enforcement treaty with the UK. The provisions will be amended from exit day to remove reference to Brussels and Lugano, subject to transitional provisions to the effect that the existing rules continue to apply in proceedings commenced before exit day. But in fact not much will change in relation to EU27 domiciled claimants because the reference to the Hague Convention will be retained. This may be seen as surprising considering that the reference to Hague is not limited to circumstances where the English court has jurisdiction under an exclusive jurisdiction clause which is subject to Hague – and if the English court’s jurisdiction is established on some other basis then any costs order will not be enforceable against the claimant under Hague. But that seems to be the position based on the published CPR amendments.

References to the European court: After Brexit, the English courts will no longer be able to refer questions to the CJEU for a preliminary ruling. Transitional provisions provide that proceedings that were stayed for such a reference before exit day will continue to be stayed unless or until the court directs otherwise.

Interpretation of retained EU law: The European Union (Withdrawal) Act 2018 preserves existing EU law pending any decision to amend or repeal it. In interpreting this retained EU law, lower courts than the Supreme Court will apply EU case law that pre-dates the withdrawal. The Supreme Court will not be bound by EU case law but it must apply the same test as it would in deciding to depart from its own case law. The UK courts will not be required to apply post-Brexit EU case law but they may look at that case law to assist in interpretation.

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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