United States: Brexit: Governing Law Implications For Contracting Parties And Disputes

The Brexit date of 29 March 2019 is fast approaching, and there is now a distinct possibility of the UK leaving the EU without agreed terms. Our MoFo Brexit Task Force is coordinating Brexit-related legal analysis across all of our offices, and working with clients on key concerns and issues, now and in the coming weeks and months. We are also continuing to provide MoFo Brexit Briefings on a range of key issues. We are here to support you in any and every way that we can.

From a commercial contracting and disputes perspective, Brexit has the potential to impact four key areas: jurisdiction; recognition and enforcement of judgments; service; and governing law. This update note focuses on the last of these areas – governing law. You can find our update notes on the other three areas here.

As with other areas, it is difficult to predict what the exact impact of Brexit will be on these matters until we know what post-Brexit model and terms the UK and the EU will agree, if any agreement is reached at all. In the meantime, uncertainty remains. That said, there are some practical steps that parties entering into or renegotiating contracts can take now to seek to protect themselves from the impact of Brexit and the intervening uncertainty.

Will your choice of governing law be upheld post-Brexit?

The current regime

The Rome I Regulation ("Rome I") and Rome II Regulation ("Rome II") apply to contractual and non-contractual/tortious obligations, respectively, and provide that courts will uphold the parties' choice of law, whether or not the chosen law is that of an EU Member State.

Post-Brexit options

Post-Brexit, Rome I and Rome II will continue to apply in the remaining EU Member States. This means that Brexit should not affect the approach currently taken by EU courts, which will continue to give effect to commercial parties' choice of English governing law in their contracts. Further, while the UK government will need to incorporate Rome I and Rome II into domestic law, it has publicly stated that it will do so. On 13 September 2018, the government published guidance on "Handling civil legal cases that involve EU countries if there's no Brexit deal", in which it noted (among other things) that all parts of the UK would retain Rome I and Rome II, which do not generally rely on reciprocity in order to operate. This intention has now been confirmed by the draft Law Applicable to Contractual Obligations and Non-contractual Obligations (Amendment Etc.) (EU Exit) Regulations 2018, which preserve Rome I and Rome II subject to technical amendments to ensure they remain workable post-Brexit.

What you should do now

Post-Brexit, commercial parties can generally be confident that their contractual choice of English governing law will be respected and enforced in both England & Wales and the remaining EU Member States. However, caution should be exercised in certain cases, for example, in relation to insurance contracts covering "non-large" risks in Member States and unfair competition affecting the market in more than one country, in which a Member State court applying the EU Regulations could reach a different conclusion to a UK court operating under the retained Regulations.

What about arbitration?

The EU rules on governing law under Rome I and Rome II do not extend to arbitration.

Brexit is therefore unlikely to have any adverse impact on arbitration. This could make arbitration an attractive option for contracting parties seeking to obtain certainty – at least until the post-Brexit position becomes clearer.

MoFo Brexit Taskforce

The process of Brexit will take many years, and the implications for our clients' businesses will unfold over time. Our MoFo Brexit Task Force is coordinating Brexit-related legal analysis across all of our offices, and working with clients on key concerns and issues, now and in the coming weeks and months. We will also continue to provide MoFo Brexit Briefings on a range of key issues. We are here to support you in any and every way that we can.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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