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Choice of law and jurisdiction post-Brexit: business as usual so far?

Last week we had two reports from Parliament on justice and Brexit. The House of Lords EU Committee came in first, with its report on 20 March. The House of Commons was not far behind, with the report of the Justice Committee published on 22 March.

Both committees considered extensive written evidence and heard oral evidence on the issues from a range of experts. Both reports identify the problems and risks if the government doesn’t negotiate the continuance of the current rules on choice of law and jurisdiction or, at any rate, acceptable replacements.

These are problems and risks that have been identified by many people in many ways since shortly after the referendum (my blog post in July 2016 about enforcement amongst them). So are clients turning away from English choice of law and jurisdiction clauses as a result?

Of course, there is no empirical evidence to look to, and speculation and assertion at conferences and on blogs is always difficult to evaluate. My own impression, from discussions within and outside my firm, in London and elsewhere, is that whilst there is evidence of lawyers in other countries looking to promote their jurisdictions over the UK by relying on the uncertainties Brexit brings, clients are not generally changing their minds on their preferred dispute resolution clause.

Why might this be the case?

Wait and see

A large part of the reason may well be that we are at a very early stage in terms of exiting the EU. Article 50 has only now been triggered (on 29 March); there is a two year period for negotiations on the terms of exit, but at the end of the two years it may well be that the final position in many areas will still need to be worked out and interim arrangements will have been put in place. So until we see the direction of travel, the thinking goes that there is no need to upset tried and tested dispute resolution clauses.

Encouraging noises

Whilst we don’t know what the ultimate negotiated position might be, the signs are that the government is, or at any rate soon will be, well aware of the importance of ensuring the UK maintains its prominence in dispute resolution. The contribution the legal sector makes to the economy (some £25.7 billion in 2015 according to Law Society analysis) will no doubt play a big part in that. As will the importance to business generally of effective dispute resolution and enforcement of judgments.

The reports from both Houses of Parliament deliver the message loud and clear, the House of Commons Justice Committee saying:

“Protecting the UK as top-class commercial law centre should be a major priority for the Government given the clear impacts on the economy of failure to do so: we recommend that the Government look to replicate existing provisions as closely as possible.”

The House of Lords EU Committee, in similar voice, saying:

“It is clear that regardless of the outcome of the Brexit negotiations, civil justice cooperation of the type dealt with by [EU jurisdiction Regulations] will remain a necessity.”

It is fair to say that statements by the government have not been particularly clear so far. In February, the Brexit White Paper just said, rather delphically, that:

“…we recognise that an effective system of civil judicial cooperation will provide certainty and protection for citizens and businesses of a stronger global UK.”

The House of Lords EU Committee was also unclear as to the government’s plans in this area, despite hearing evidence from the Minister of State for Courts and Justice.

However, with both houses speaking with one voice and echoing submissions made by others to the government (including the Financial Markets Law Committee and the Law Society), there is consensus over what business would like the government to achieve. Importantly, in his evidence to the House of Lords committee, the Minister also confirmed that the important principles of mutuality and reciprocity contained in the current rules would form part of the negotiations with the EU.

Can continuity be achieved?

Of course this cannot be guaranteed, but there are possible routes to achieving continuity or something close to it. Arguably, an effective regime for jurisdiction and enforcement of judgments is as important for individuals and businesses based in other EU countries as those based in the UK.

What are those routes? The first is a deal, similar to that negotiated by Denmark with the EU in 2005 to apply the 2001 Brussels Regulation. However, reaching a similar agreement would likely mean the continued role of the Court of Justice of the European Union (ECJ), which may not be acceptable to the government, unless it makes an exception in this area.

If ECJ jurisdiction is a stumbling block, then an agreement to become a party to the Lugano Convention 2007 may be more palatable. This just requires the UK courts to have regard to decisions of the ECJ. Signing up to Lugano would put in place the EU jurisdiction rules which applied prior to 10 January 2015, so before certain improvements were made, but still a close second place.

Would a continuing role for the ECJ be acceptable for the government? The House of Commons Justice Committee believes it should be:

“We believe that a role for the Court of Justice of the European Union in respect of these essentially procedural regulations is a price worth paying to maintain effective cross border tools of justice.”

As does the House of Lords EU Committee:

“If the Government continues to apply its anti-CJEU stance too rigidly it will severely limit its post- Brexit options for adequate alternative arrangements.”

If no role for the ECJ is possible, there is the Hague Convention on Choice of Court Agreements 2005, which would generally apply similar rules to those we currently have in place, provided the parties chose an exclusive jurisdiction clause. Signing up to that Convention (to which the UK is currently a party as a member state of the EU) would be worthwhile in any event, as it applies to certain non EU states, most notably at the moment Singapore.

The risks if there is no agreement

Another factor businesses may be taking into account is the level of risk they are running if the outcome of the negotiations is that there is no continuation of the current jurisdiction and enforcement rules, and similar provisions are not put in place.

There may be little risk involved where enforcement of a judgment is unlikely to be an issue, as the losing party will almost certainly pay up, or there are assets in the UK. If the assets are in another EU country, checking the position there may well show that an English money judgment at least will be enforced, albeit with more complex procedures involved.

So although the current uncertainty is unhelpful, and a lack of agreement may ultimately disadvantage the English courts in the competition for international business, it may be that the risks are low in many individual contracts.

Evaluating the available options

The realistic choice in many business contexts is not between the UK and another EU state, but between the UK and New York. Whilst English judgments might lose the benefits they currently enjoy around the EU in terms of enforcement, they are not likely to be in any worse a position than New York judgments (and may be in a better position if there is an exclusive jurisdiction agreement and we sign up to the Hague Convention).

As regards arbitration, although it is the only dispute resolution method which will work in practice in many situations (an arbitration award will be enforced under the New York Convention in many countries which will not enforce court judgments, or only subject to onerous conditions and restrictions), it is not every business’s preferred dispute resolution method. This is particularly so where summary resolution and the availability of an appeal are important considerations.

The advantages of English law and jurisdiction

Last but not least, there are the advantages of English law and jurisdiction to weigh in the balance: a skilled, impartial judiciary applying commercial law concepts developed over many years and an adversarial system based on a “cards on the table” approach.

Watch this space

If it is largely business as usual at the moment, will this change? These are early days. Businesses and their advisors will undoubtedly keep a close eye on developments. More attention is already being paid to dispute resolution clauses and what best suits the transaction, rather than a default of adopting what has been used before. That is likely to continue. Ultimately, this may be a good thing; jurisdiction and choice of law clauses rarely get the attention they deserve. If Brexit means more light is shone on these clauses, that may mean that better choices, or at any rate more informed choices, will be made.

Herbert Smith Freehills Anna Pertoldi

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