Managing disputes involving a UK counterparty will become more complex and costly from 1 January 2021. What changes can you make to your contracts to ensure that disputes can be resolved in a timely and cost effective manner?
The UK left the EU on 31 January 2020 entering an implementation period during which the EU Rules on litigating cross-border disputes will continue to apply. The implementation period ends at 11.00pm (GMT) on 31 December 2020 at which point the EU litigation regime, set out under the Brussels Recast Regulation, will cease to apply.
This means that the common set of rules relating to:
- jurisdiction (can I sue in the UK or in Ireland, for example?);
- applicable law (does Irish or UK law apply?);
- enforcement of judgments (can I enforce a UK judgment against a counterparty in Ireland or vice versa?);
- formal service of Court documents; and
- taking evidence from witnesses in a different country, will no longer apply.
A technically complex situation will arise on 1 January. It is possible that at some time in the future, international treaties or conventions such as The Hague Convention or The Lugano Convention will apply to some disputes involving a UK counterparty. Alternatively, Courts in Ireland or the UK may have to apply general international rules (such as "who issued first"). This will without doubt result in delay and more cost and uncertainty.
What practical steps can be taken to minimise the impact?
1. If you have a dispute with a UK counterparty, you should consider issuing your proceedings now before 31 December 2020. Courts in EU countries and in the UK will recognise and enforce judgments from each other obtained after 31 December 2020 provided the proceedings were issued before that date.
2. Review jurisdiction and choice of law clauses in your contract – in many ways, these are the most important clauses in your contract as they affect your ability to enforce your rights. For example, certain countries' legal systems may not enforce caps on liability; certain legal systems may have a different legal basis for calculating damages, such as punitive or compensatory and certain legal systems may be excessively slow or expensive. It is critical to choose a legal system that produces predictable outcomes, is transparent and is supportive of business and commerce.
When choosing jurisdiction/choice of law, you will also need to be aware of the following:
- Does the country have an independent, respected judiciary, including specialist judges?
- Does the system have suitable capacity so as to avoid undue delay?
- Will the Courts readily enforce arbitral awards?
- What are the discovery obligations (for example, in a fraud case the Plaintiff will want full and open discovery/disclosure)?
- Is legal professional privilege respected?
- Costs – what are the likely costs and what are the rules on recovery from your opponent?
- Is third party litigation funding available?
- Are there quality advisers and experts available?
- Is it an attractive location (may be less important given the current availability of remote hearings)?
3. There is likely to be challenges to the UK as a chosen venue internationally for disputes. The UK will argue that the same reasons for choosing the UK still apply and even though there is some risk and uncertainty around enforcement of UK judgments in different countries, this is not enough of a risk to change choice of venue. This remains to be seen.
4. Your choice of law clause should be asymmetrical and not allow several choices. If so, under the Rome Convention, which applies irrespective of EU membership, the clause will be respected. If the clause is not clear cut the local court will have to decide based on "close connection" and conduct of the parties.
5. Issue first – avoid the "torpedo action". This is a strategy whereby a party issues proceedings in a country known to be slow in order to cause maximum delay and stop the counterparty from seeking a quicker route to justice in a different country. If the EU Rules or another regime isn't applicable it may come down to which court was first seised of the case.
6. Consider a clause providing for Arbitration instead of court litigation – Brexit has no impact on arbitration and the New York Convention, which enables court enforcement of arbitral awards, has virtually global application. Arbitration involves the appointment of an experienced lawyer or expert to hear the dispute in private. It is of particular benefit where confidentiality is important or where the dispute would benefit from the decision maker having specific sectoral or technical expertise. Arbitration clauses provide a level of certainty and with this in mind, the popularity of clauses providing for arbitration will likely rise as a result of Brexit.
7. Another key factor in deciding jurisdiction is whether the particular country recognises professional qualifications, including legal qualifications. Under the EU regime, automatic professional recognition applies (subject to certain rules). In the absence of this, it may be difficult for a UK qualified lawyer to practice and manage disputes in an EU member state.
8. Brexit Clause – Brexit contingency planning has led to an increasing number of contracts incorporating a bespoke 'Brexit Clause' to trigger automatic changes to a contract under certain specified circumstances. In order for a Brexit Clause to be effective and indeed enforceable the trigger event must be clearly defined. Examples of common trigger events include if the contract becomes unprofitable for one party by reference to specific pre-agreed margins; if there is a change in law, regulation, or illegality; if changes in regulatory regimes give rise to additional costs over a certain pre-agreed threshold; or if prices change substantially as a result of additional and unforeseen tariffs or taxes, again above a pre-agreed threshold. The inclusion of a well drafted Brexit Clause will allow for renegotiation of a certain aspect of a contract or termination of a contract, as the case may be, upon reaching the trigger event and a disputes can be avoided.
9. Currency Clause – Including a clause which protects against changes in currency value allows for renegotiation or termination of a contract if the exchange rate fluctuates more than a specified percentage over a specified period.
10. Can force majeure apply? In the UK there are estimated to be 240,000 businesses who have never used customs related documents. Goods for shipment will have to be checked for tariff payments and compliance with regulatory requirements. Delay is inevitable. There are some arguments to be made around force majeure or frustration – that unexpected events outside the party's control made the contract impossible to perform or perform on time. However, such arguments are likely to be rebutted on the basis that Brexit has been a long time coming and was not unforeseen. Arguments on force majeure may be sufficient to resist judgment at summary stage but unlikely to succeed at full hearing. You should review your contracts dealing with timing, consequences of delay, what is to occur and where liability is to sit.
11. Compliance with Laws and Regulations clauses – after 1 January a whole new set of laws and regulations will apply in the UK. Under a standard clause there will be an obligation to comply with laws but which laws does the party have to comply with – the EU based laws which applied at the time of entering the contract or UK laws post Brexit? All such clauses should be reviewed to ensure that this is made clear as otherwise disputes are likely to arise.
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.