Brexit and dispute clauses in commercial and cross-border contracts
November 2017 | SPECIAL REPORT: PREPARING FOR BREXIT
Financier Worldwide Magazine
November 2017 Issue
Under EU law (Regulation (EU) 1215/2012, known as Brussels Recast), the position is that the courts should recognise the parties’ election of a specific jurisdiction. If there is no election, then generally the country in which the opposing party is based should deal with the dispute. Brussels Recast also provides for the cross-border recognition of judgments from the courts of Member States within the EU.
Brussels Recast has been seen as a significant improvement on the prior regime for determining jurisdiction. Without it, parties had to contend with the cumbersome ‘court first seised’ rule, where the second court to issue had to stay its proceedings until the court first seised had determined whether it had jurisdiction. The rule led to parties racing to issue proceedings in whichever courts had the best tactical advantage for them, often involving would-be defendants artificially issuing claims for negative declarations of liability, parallel proceedings, and additional costs and delay.
Whatever is decided in relation to the composition of UK law following Brexit, it is likely that the courts of England and Wales will continue to respect valid provisions in contracts which confer jurisdiction on them by agreement. Other EU Member States will decide how such clauses will be treated, which could give rise to uncertainty, depending on how jurisdiction clauses are viewed by the courts of different EU Member States. In terms of tactics, there may also be a resurgence in the anti-suit injunction post Brexit, as parties seek to prevent their opponents from pursuing proceedings in breach of any jurisdiction clause.
In any event, while in some cases the courts of a counterparty domiciled in another Member State may be reluctant to cede jurisdiction to the courts of England and Wales even if that is what the parties have agreed, it is generally felt that a similar regime to Brussels Recast will be adopted post Brexit. Internationally, there is unlikely to be any significant change in attitude to choice of jurisdiction clauses.
Will a clause electing the law of England and Wales become uncertain following Brexit?
A key question is, how should an English law governing clause be interpreted post Brexit? Having chosen English law as the governing law under the contract, will the composition of English law change, such that the law envisaged on entering into the contract will in fact be quite different once the UK has left the EU? ‘English law’ or ‘the law of England and Wales’ may mean either the law of England and Wales as it was at the time the contract was entered into, or as it is from time to time. Even if it means the latter, what would be the case where the contract centred on an area heavily influenced by EU law (such as environmental protection, data protection or similar)?
In addition, if there is a compliance with law clause within the contract (these often form part of the ‘boilerplate’ and may not always have been specifically negotiated between the parties), to what law does the clause relate, and if it is EU law, will that remain reasonable and practicable when the UK is no longer part of the EU? Similar complications may arise where certain types of contract (for example, distributorship agreements, licence agreements and the like) may have been drafted with an eye to the EU regulatory framework.
If, post Brexit, the law becomes significantly different from the ‘English law’ in place at the time the contract was entered into, this could arguably have an impact on the enforceability of governing law clauses, compliance with law clauses and potentially regulatory protections, contractual mechanisms and remedies. This could all lead to uncertainty and dispute between the parties.
However, most commentators consider it unlikely that Brexit will have a substantive impact on the enforceability of English and Welsh law governing law clauses. In the general context of commercial contracts, English contract law has been largely unaffected by the proliferation of EU law and key contractual issues such as offer, acceptance, consideration and implications of terms derive principally from English law. In most cases (and depending on the wording of the particular contract) it is presumed that a choice of English law would be interpreted to mean English law as it stands from time to time, subject to any variations, including such variations as may arise from an EU exit. Businesses may nevertheless wish to check their contracts for provisions which they (or their counterparties) may seek to rely on where the UK’s departure from the EU affects the operation of the contract in a way which was not foreseen when the contractual arrangements were made. Apart from areas in which UK law has heavily mirrored EU law, other specific examples include material adverse change, force majeure and termination provisions.
What conflict of law rules are likely to apply?
As to the composition of conflict of law rules following Brexit, the UK government may decide to leave in place the Rome I (Regulation (EC) 593/2008) rules, which allow parties to decide in advance the law that will govern their contractual arrangements, but with the courts of England and Wales (as opposed to the Court of Justice of the European Union) being the final arbiter of how these rules are applied. Alternatively, if Rome I were to no longer apply, the UK courts may revert to applying the rules that were in force before Rome I was implemented – namely, those under the Rome Convention. The Rome Convention is actually very similar in respect of the parties’ choice of law, so the law governing contractual obligations is unlikely to change materially.
Are parties less likely to choose the law of England and Wales to govern contractual relationships?
The answer to this question will depend on how much of a factor the UK’s membership of the EU was to people who use and choose the law of England and Wales to govern their contracts. It may well be that the reasons why parties choose English law to govern their relationships have little to do with the UK’s EU membership.
As one of the oldest and most well-respected legal systems in the world, the law of England and Wales (and in particular its contract law and statutes governing the sale of goods and services and hire contracts) is commonly viewed as reliable – its principles having been developed alongside centuries of commercial activity and reflecting commercial common sense. It is not clear that a Brexit would undermine this, and there is no reason to think that English law will be any less flexible or attractive post Brexit.
It is generally agreed that clients should not be overly concerned about the effects of a Brexit on English jurisdiction and choice of law clauses in commercial and cross-border contracts. There are, however, some key steps which businesses can take to ensure that they are best placed to weather any storm, or to capitalise upon any opportunities, which Brexit may present.
First, businesses should review their contracts to ensure that any governing law, compliance with law and jurisdiction clauses are valid, unambiguous and still workable post Brexit. Second, and similarly, contracts should be checked for references to European legislation or use of European concepts or regulatory frameworks. Third, when negotiating any new contracts, it will be prudent to carefully consider the law which should govern the contract and any laws with which the parties must comply, and to ensure that drafting is suitably clear and specific. Fourth, when it comes to resolving contractual disputes there are, of course, options other than litigation. Indeed, many commercial contracts require parties to attempt alternative dispute resolution (ADR), often via a prescribed method such as mediation or arbitration.
In an uncertain landscape, ADR may become increasingly popular. In particular, arbitration will be unaffected by Brexit, as the UK remains a party to the New York Convention 1958 and arbitral awards will continue to be enforceable across the EU.
Gwendoline Davies is a partner at Walker Morris. She can be contacted on +44 (0)113 283 2517 or by email: firstname.lastname@example.org.
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